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Problematic Pay Practices
Practical Law Glossary Item w-001-9174 (Approx. 3 pages)
Glossary
Problematic Pay Practices
Executive pay practices that may result in a negative vote recommendation by Institutional Shareholder Services (ISS) on proxy items including:
- The advisory vote on executive compensation.
- Equity plan approval.
- The selection of board members.
ISS's evaluation of pay practices is based on five global principles:
- Aligning pay and performance.
- Avoiding pay-for-failure.
- Maintaining compensation committee independence.
- Providing clear and comprehensive shareholder disclosures.
- Avoiding inappropriate pay to non-executive directors.
ISS issues guidance on applying these principles through annual voting guidelines and regularly updated frequently asked questions (FAQs). Specific practices that ISS has identified as contrary to a performance-based pay philosophy and therefore problematic include:
- Egregious employment contracts.
- Overly generous new hire packages for new chief executive officers.
- Abnormally large bonus payouts without justifiable performance linkage or proper disclosure.
- Egregious pension or supplemental executive retirement plan (SERP) payouts.
- Excessive perquisites.
- Excessive severance or change in control provisions.
- Excessive reimbursement of income taxes on executive perquisites or other payments.
- Dividends or dividend equivalents paid on unvested performance shares or units.
- Repricing of underwater stock options or stock appreciation rights without prior shareholder approval.
For more information on the pay practices that ISS has identified as problematic, see U.S. Executive Compensation Policies FAQs (Updated March 16, 2016) (Q&As 56 & 57). For ISS's latest proxy voting guidelines, see Legal Update, ISS Releases 2017 US Proxy Voting Guidelines.