Problematic Pay Practices - as identified by ISS

(based on its U.S. compensation policies, as updated December 6, 2019)

On at least an annual basis, those who make executive compensation decisions for public companies should check their practices against the guidelines published by ISS and other proxy advisory firms.  The table below reformats, but generally tracks, the U.S. Compensation Policy FAQs that ISS most recently updated on December 9, 2019. All references are to FAQ #43 unless another is noted. 

​When reviewing the table below, directors should first aim to determine whether their company has executive compensation structures that involve problematic practices.  The best companies avoid or eliminate such irritants to shareholders, unless there are solid business justifications for them.  For instance, the payment of tax gross-ups for golden parachute taxes is generally criticized. Nevertheless, tax gross-ups may be justifiable under some circumstances, such as when executive compensation is being restructured, to be more performance-based, in anticipation of a corporate sale.  Overall, boards should be careful to identify (and to justify) any problematic pay practices, because ISS and others will likely scrutinize them if incumbent directors do not.​

  Nature of


  Problematic Practice

Employment ContractsEgregious contracts containing multi-year guarantees for –
  • salary increases,
  • non-performance based bonuses, or
  • equity compensation.

See also: 409A Diagnostic Checklist for Employment Agreements

New CEO's PayOverly generous new-hire package [evidenced by] --
  • sign-on awards that are excessively large or insufficiently performance-based,
  • problematic termination-related vesting provisions, or
  • any of the problematic pay practices listed in ISS policy.
Bonus Payments
  • Abnormally large payouts without justifiable performance linkage or proper disclosure.
    • Includes performance metrics that are changed, canceled, or replaced during the performance period without adequate explanation of the action and the link to performance.
    • Includes incentive payouts despite failure to achieve pre-established threshold performance criteria
  • Multi-year guaranteed awards that are not at-risk due to rigorous performance conditions. [See also FAQ #51]
  • Significant shifts away from performance-based compensation to discretionary or fixed pay elements.
  • Investors do not expect boards to reward executives when performance goals are not achieved, whether by lowering or waiving goals (a problematic pay practice) or granting other awards to compensate for the absent incentive payouts. [FAQ #49]

Retention Awards

[FAQ 49]

  • Companies that grant special retention awards of cash or equity to executives when regular incentive plan goals are not met should provide clear and compelling rationale in their proxy disclosure.
  • Such awards should be conservative and should be an isolated/non-routine occurrence.
  • The awards should also include performance conditions and limitations on termination-related vesting, as these will strengthen alignment of pay and performance going forward and avoid "pay for failure" scenarios if the executive is not retained.  
Egregious payout [potential from]:
  • Inclusion of additional years of service not worked that result in significant benefits provided in new arrangements.
  • Inclusion of performance-based equity or other long-term awards in the pension calculation.

Perquisites or Tax Gross-ups
  • Perquisites for former and/or retired executives, such as lifetime benefits, car allowances, personal use of corporate aircraft, or other inappropriate arrangements.
  • Extraordinary relocation benefits (including home buyouts).
  • Excessive amounts of perquisite compensation, or tax gross-ups.

Severance and Other Change in Control (CIC) Benefits
  • Excessive termination or CIC cash severance payments exceeding 3 times base salary plus target/average/most recent bonus (or that include equity gains or other pay elements in the calculation basis).
  • Problematic Good Reason termination definition -- i.e., one that presents windfall risks such as definitions triggered by potential performance failures.
  • New or materially amended arrangements that provide for CIC payments without loss of job or substantial diminution of job duties (such as by problematic Good Reason definition, single-trigger or modified single-trigger), where an executive may voluntarily leave for any reason and receive the change-in-control severance package.
  • New or materially amended employment or severance agreements that provide for --
    • excise tax gross-ups, including modified gross-ups would be treated in the same manner as full gross-ups;
    • "problematic Good Reason" definition (as described above).
  • Excessive payments upon an executive's termination in connection with performance failure.
  • Liberal CIC definition combined with any single-trigger CIC benefits. 
  • The automatic full vesting of equity awards upon a CIC (i.e. single trigger) is viewed as a poor practice. Vesting acceleration should require both a CIC and qualifying involuntary termination event (i.e. double-trigger). [FAQ #63]
  • ISS considers windfall potentials when evaluating equity award treatment upon a CIC. Factors considered include, but are not limited to: . . . [continued in FAQ #63]

Tax ReimbursementsExcessive reimbursement of income taxes on executive perquisites or other payments (e.g., related to personal use of corporate aircraft, executive life insurance, bonus, restricted stock vesting, secular trusts, etc; see also excise tax gross-ups above)
Stock Awards
  • Dividends or dividend equivalents paid on unvested performance shares or units.
  • Repricing or replacing of underwater stock options/stock appreciation rights without prior shareholder approval (including cash buyouts, option exchanges, and certain voluntary surrender of underwater options where shares surrendered may subsequently be re-granted).
  • The automatic full vesting of equity awards upon a CIC (i.e. single trigger) is viewed as a poor practice. Vesting acceleration should require both a CIC and qualifying involuntary termination event (i.e. double-trigger). ISS considers windfall potentials when evaluating equity award treatment upon a CIC. Factors considered include, but are not limited to:[continued in FAQ # 61].
  • Stock plans with a liberal CIC definition (e.g. low % or occurrence before CIC closing) coupled with single trigger vesting upon the CIC "are likely to receive a negative recommendation" (FAQ #63).
Internal Pay DisparityExcessive differential between CEO total pay and that of next highest-paid named executive officer (NEO).

Director Compensation (Excessive)

[FAQ 66]

  •  ISS may issue adverse vote recommendations for those board members responsible for approving/setting NED pay when there is a recurring pattern of excessive NED pay magnitude without a compelling rationale.
  • Negative recommendations will be triggered only where a pattern of excessive NED pay is identified in two or more consecutive years.
  • To determine outlier cases, ISS will compare individual non-employee director pay totals to the median of all non-employee directors at companies in the same index and industry. The purpose is to identify a pattern of extreme outliers, which historically has represented pay figures above the top 2% of all comparable directors. 
Externally-managed issuers (EMIs)
Insufficient executive compensation disclosure by EMIs such that a reasonable assessment of pay programs and practices applicable to the EMI's executives is not possible.


 [FAQs 53-56]

  • Agreements that are extended or new will face the highest scrutiny and weight in ISS' analysis.
  • Material amendments will be considered an opportunity for the board to fix problematic issues, but as part of the holistic analysis.
    • Note that if an individual becomes party to a pre-existing arrangement (for example, an umbrella severance plan) as a result of becoming a named executive officer at the company, that arrangement will be considered "new" for that individual and therefore will trigger the policy.
  • If a problematic pay practice is present in a separate plan or agreement, ISS may view the modification of an employment agreement as involving the opportunity to remove that problematic practice.
  • ​Automatically renewing/extending agreements (including agreements that do not specify any term) are not considered a best practice, and existence of a problematic practice in such a contract is a concern. However, if an "evergreen" employment agreement is not materially amended, its automatic extension will not on its own result in an adverse vote recommendation.
    • An amendment is considered "material" if it involves any change that is not merely administrative or clarifying.
  • The policy relevant for "new or extended executive agreements" applies to any and all agreements or plans under which the executive whose contract is being entered into or modified is covered. In other words, ISS may view entering into a new executive agreement (or modifying an existing agreement) as also being a modification or extension of the executive's separate arrangement that contains a problematic provision. To avoid triggering the problematic pay practice policy, the new or modified agreement should include a removal of the executive's entitlement to the problematic pay practice under the separate agreement.
  • If a problematic pay practice provision is included in a new or modified agreement, the company can remove that provision from the agreement and disclose this action in a public filing.
Miscellaneous Actions
  • Other pay practices that ISS may deem problematic in a given circumstance, but not covered in the above categories.
  • Any other provision or practice deemed to be egregious and present a significant risk to investors.

Time of ISS Consideration

(actions after fiscal year end)

[FAQ 50]

  • For problematic provisions (excise tax gross-ups, single-trigger severance, etc.) contained in a new/materially amended executive agreement, ISS will generally issue an adverse recommendation when such provisions are disclosed by the company, even if the problematic agreement was entered into or amended after the most recent fiscal year end.
  • For example, if a company with a calendar fiscal year discloses a new problematic agreement entered into in February following the FY end, ISS will generally recommend against the current say-on-pay proposal.

Note also:

FAQ 69 [New in 2017] PAY RATIO

  • For this first year of mandated disclosure, the CEO pay ratio will not have any policy implication (i.e., it will not impact vote recommendations). ISS will continue to assess the CEO pay ratio data as it becomes available . . .

See generally:annual proxy statement planning for a comprehensive discussion of issues to address when preparing executive compensation disclosures.