We have previously encouraged our readers to focus on the size of their director pay packages and the processes their boards undertake in setting director compensation. Prior focus on these issues was recommended largely as a way to mitigate the risk of litigation for excessive pay. In their current U.S. Compensation Policies FAQ, Institutional Shareholder Services Inc. (“ISS”) has given boards yet another reason to focus on director compensation. In the FAQ, ISS indicates the following:
- In evaluating non-employee director pay, ISS will look for “reasonable practices” that “adequately align the interests of directors to those of shareholders.”
- A director pay program should incorporate “meaningful” stock ownership and/or holding requirements.
- A “meaningful” annual limit on annual director pay is a positive feature.
- It is a problematic pay practice for non-employee directors to receive performance-based equity awards, retirement benefits and other perquisites.
- Transparent disclosure of director pay decisions should be provided, including a disclosure on each pay element.
ISS may recommend a “no” vote if it finds a recurring pattern of two or more consecutive years of excessive non-employee director pay without a “compelling rationale.” ISS has indicated that it is looking for outliers, which are issuers that have historically paid their directors in the top 5% of all comparable directors.
We continue to believe that our public company clients should familiarize themselves with the applicable case law and proxy advisor guidance in this developing area.