During the 2019 proxy season, ISS identified almost 100 companies as having excessive non-employee director pay. Given the two consecutive year component of the policy, these companies are now at risk of receiving against recommendations for their directors at their 2020 annual meeting, absent a change to their pay practices or disclosure of a compelling rationale. We encourage these companies to carefully consider the following:
- their 2020 proxy disclosure regarding outlier director pay determinations, and
- the potential impact an against recommendation could have on shareholders' support for the directors responsible for setting non-employee director pay.
How does ISS determine what constitutes excessive pay?
Generally, individual total non-employee director compensation in the top 2% of all comparable directors will be considered excessive, with comparisons being made within the two-digit GICS group and within the same index. ISS recognizes that board leadership positions such as non-executive chair or lead independent director often receive higher pay than other directors. Accordingly, directors in these leadership positions will be compared against other directors with the same leadership position within their index and sector.
For sectors where there is not a pronounced difference in pay magnitude between the highest paid directors and the median director, ISS may consider this narrow range to be a mitigating factor.
What disclosure is sufficient to offer a "compelling rationale" for the pay in question?
While ISS will evaluate a company's disclosed rationale on a case by case basis, it has indicated that the following circumstances, if within reason and adequately explained, would be sufficient to avoid an against recommendation notwithstanding high non-employee director pay:
- Onboarding grants for new directors that are clearly identified as one-time in nature
- Payments related to a corporate transaction or special circumstances such as special committee service, requirements related to extraordinary need, or transition payments made to a former executive for a limited period
- Payments made in consideration of specialized scientific experience, which may be necessary in certain industries such as biotech or pharma)
With respect to payments paid to a director in connection with consulting or service agreements, ISS has indicated that companies should disclose the following so that it can assess a company's rationale for such payments:
- The services provided under the agreement that go beyond typical director responsibilities
- The agreement's term
- The additional benefits the agreement provides to shareholders.
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