2025 ISS Policy Survey: Key Takeaways for Public Companies

Key Observations from the Survey

Zayla notes the following observations from the survey results:

• Board of Director Compensation
  • ISS asked participants about its current policy involving outlier board pay practices, which calls for potential adverse vote recommendations that can be triggered after 2 consecutive years of problematic pay practices without compelling associated rationale. Specifically, it was looking for examples of events that participants believed would warrant ISS consideration in one year instead of waiting for a multi-year pattern of behaviors.
  • Interestingly, Zayla notes the question appears to be structured in a way to open the door for ISS to start critiquing director pay after a single year of abnormal practice rather than asking participants if the “pattern of behavior” approach was still appropriate. That said, investor responses were evenly split across the following options:
    • “Inadequate disclosure…in the proxy for unusual Non-Executive Director (“NED”) payments.” (34%);
    • “Excessive perquisites (such as travel), performance awards, stock option grants, or retirement benefits.” (32%); and
    • “Particularly large NED pay magnitude or NED pay that exceeds that of executive officers.” (33%).
  • Given the structure of the question, the trend in answers from investors, and general homogeny in board pay, companies should be prepared for elevated criticisms from ISS at any time should they step outside the norm with board pay design. As a result, proxy disclosures will likely get a little bit longer!
• RSUs vs. PSUs for Executives
  • We’ve all seen the growing media coverage discussing the merits of performance-vesting long-term incentive awards and alternative views of some market participants suggesting time-vesting awards might be more effective pay-for-performance tools than PSUs.
  • ISS may have seen an opportunity with this market dialogue to gain further influence on pay practices of public companies by trying to “stoke the embers in hopes of turning them into flames” by asking survey participants their views on the use of time-vesting award structures.
  • However, responses tended to lean toward the status quo, as 38% of investors and 45% of non-investors noted that time-based awards should only be a part of the LTI award portfolio for executives. As a result, we don’t anticipate a change in ISS policy on this issue nor a change in general market approach to executive LTI awards going forward.
  • If a company does want to consider a change to just time-based awards, note that almost half of investors commented that a 5-year vesting/retention period would suffice replacing performance conditions. Over half of non-investor participants commented that the norm approach was still appropriate for time-based awards – 3 years of vesting and no post-vesting retention period.
    
• Say on Pay Responsiveness
  • Following recent changes to SEC guidance stating that engagement on executive compensation issues with the purpose of changing or influencing control may disallow an institutional investor to file as a passive investor, and instead require the investor to file as an active investor which comes with more onerous requirements, ISS is considering changes to how it evaluates a company’s procedures for responding to low say on pay support.
  • ISS asked how respondents view a scenario where a company states it was unable to obtain feedback on pay programs, noting that some institutional investors have already limited, or stopped altogether, providing feedback on compensation as a result of the new SEC guidance. Both investor and non-investor responses trended the same direction, with the majority of each category indicating that “the absence of disclosed shareholder feedback should not be viewed negatively if the company discloses that it attempted but was unable to obtain sufficient investor feedback.”
• Changing ESG/DEI Metrics for In-Flight Awards
  • ISS asked survey participants about their views on changes to incentive awards with these types of metrics in the context of the changing political climate, executive orders, etc. Changes to in-flight awards really came into focus during the height of the pandemic, with the general view that such changes are not favorable without compelling rationale.
  • Investors were aligned in their views that the current policy should continue – changes to in-flight awards are a general “no go.”
  • By contrast, non-investors were more nuanced in their views, with the majority noting that the removal or change of such metrics for in-flight awards generally should not in and of itself be considered problematic absent other concerns.
  • Given the divergence here, we anticipate ISS will likely continue to view changes to in-flight awards as negative. That said, given the political climate and trends around ESG and DEI considerations, we believe there will be ample examples of companies successfully making their case as to why such metrics were changed in flight and receiving subsequent ISS support (or at a minimum avoiding material criticism).