On November 16, 2012, Institutional Shareholder Services Inc. (ISS) issued updates to its proxy voting guidelines. The 2013 Corporate Governance Policy Updates reflect key updates in several areas for US companies, including:

The main reason for ISS recommending against a company's say on pay proposal is a lack of alignment between pay and performance. When conducting its evaluation, ISS measures the alignment between chief executive officer (CEO) pay and total shareholder return relative to a peer group. Taking into account feedback from investors and issuers, ISS has adopted a new peer group methodology for analyzing pay-for-performance. The new methodology continues to identify companies whose industry profile, size and market capitalization are reasonably similar to a subject company. However, it goes beyond the current methodology, which is based on a subject company's Global Industry Classification Standard (GICS) industry classification and may not reflect multiple business lines in which a company operates. By comparison, the new methodology:

During the 2012 proxy season, ISS saw more companies disclosing alternate measures of pay in addition to the pay disclosure required to be included in the summary compensation table. Many companies believe that the summary compensation table is an inadequate tool for measuring the alignment of pay and performance because it includes a mix of earned pay and target grant date fair values, ignoring that certain of the compensation taken into account will only be earned if the stock price increases or performance goals are achieved. These companies have increasingly been supplementing their disclosures by including "realizable" total compensation in an attempt to show how performance has affected executive pay. However, because there is no standardized definition of realizable pay, comparisons across companies can be challenging.

Based on feedback received from issuers and investors, ISS is adding realizable pay to its research report for large capitalization companies. Realizable pay will consist of the sum of relevant cash and equity-based grants and awards made during a particular performance measurement period, based on equity award values for actual earned awards or target values for ongoing awards, calculated using the stock price at the end of the performance measurement period. Stock options or stock appreciation rights will be re-valued using the remaining term and updated assumptions, as of the performance period, using the Black-Scholes Option Pricing Model.

ISS will continue its case-by-case approach to voting on golden parachute compensation. However, rather than focusing only on new or extended change in control arrangements, it will:

Features that may result in an "against" recommendation include one or more of the following:

In its new policy, ISS recommends for meetings in 2013 a "vote against" or "withhold" from individual directors, committee members or the entire board as appropriate if either:

The new policy recommends for meetings in 2014 or later a "vote against" or "withhold" from individual directors, committee members or the entire board of directors as appropriate if the board failed to act on a shareholder proposal that was supported by a majority of shareholder votes cast in the previous year.

The application of the new policy will be determined on a case-by-case basis. Board response to a shareholder proposal will generally mean either:

Responses involving less than full implementation will be considered on a case-by-case basis, taking into account:

ISS will determine on a case-by-case basis whether the pledging of company stock as collateral for a loan poses a serious concern for shareholders. It will also consider significant pledging of company stock as a failure of risk oversight for which directors should be accountable (rather than communicating by using a say-on-pay recommendation). The factors that ISS will consider in making vote recommendations for the election of directors at companies with executives or directors who have pledged company stock are:

The US guidelines also reflect updates in the following areas:

The US updates apply to stockholders' meetings on or after February 1, 2013.

ISS also published its 2013 Canadian Corporate Governance Policy Updates, 2013 European Corporate Governance Policy Updates and 2013 International Corporate Governance Policy Updates. ISS will issue revised frequently asked questions (FAQs) in December 2012 to provide additional guidance on some of its new policies. It is possible that this additional guidance will clarify the elements of realizable pay that ISS will consider in its pay-for-performance analysis.

For additional information on the guidelines, see ISS's executive summary.