This newly-published post from ISS reveals the leanings or positions it is likely to take on changes in companies' compensation practices as a result of the repeal of the IRC §162(m) performance-based compensation exception.
Key takeaways include:
- Although it expects fewer equity plan proposals to be presented for shareholder approval going forward, ISS won't change its framework for analyzing any such proposals, and cautions companies against removing "shareholder-friendly features" like discretion limitations and award caps simply because they are no longer required under §162(m).
- ISS won't change its framework for analyzing pay for performance (P4P). Changes that reduce transparency and objective P4P alignment - e.g., "material shifts away from performance-based compensation, less transparent disclosure of performance metrics and goals, selecting metrics and setting performance goals later in the performance cycle, and issuing in-the-money stock options" - will be viewed negatively in its evaluation.
- IRC §162(m) established certain minimum standards and safeguards for incentive pay that investors now view as good or best practice, and that ISS would expect companies to retain notwithstanding repeal of the performance-based exception, e.g., awards conditioned on pre-established performance goals, objective payout formula, individual award caps, limitations on upwards discretion. That said, based on investor sentiment and its associated influence on ISS policy, ISS appears amenable to some level of payout discretion provided it is exercised "judiciously and is well-explained."
- Acceleration of payouts in 2017 to take advantage of the §162(m) performance-based compensation exception's deduction before the new tax law kicked in won't likely be viewed by investors as problematic provided the awards were payable in early 2018; however, investors would likely object to acceleration of awards that were payable later this year and beyond.
According to the post, ISS won't publish its official policy in response to the tax code changes until the IRS clarifies particular provisions via interpretive guidance.
Access numerous additional resources on the executive compensation-related implications of the Tax Act changes to §162(m) here.