ISS Policy on Performance Award Modifications

Last week, I discussed ISS’s guidance on repricings. For this week's blog entry, I take a look at ISS's guidance on modifications of performance awards.

Adjusting LTI Performance Targets

With respect to long-term incentives, which include most performance-based equity awards, ISS states that it generally does not support modifications partway through the performance period (ISS uses the term “in-flight”), because these awards cover multiyear periods. 

I think ISS makes a good point here. If you are in year one of a three-year performance period, it’s arguably a little disingenuous to rush to adjust that three-year target. Especially right now: in three years, things could look way better—or way worse—than they look now. You might want to wait for more information to adjust those goals.

ISS will evaluate modifications to long-term incentives on a case-by-case basis and will evaluate structural changes to long-term incentive plans (e.g., pivoting from a three-year target to three one-year targets) under its existing policies.

What About Short-Term Incentives?

Short-term incentives are often cash-based (e.g., bonus plans), so they are outside the scope of "things I know about." This is something to keep in mind whenever I write about them, but here goes. ISS encourages companies to disclose any material changes they are making to short-term incentives as those decisions are made (even though disclosure is not required until next year in many cases). Per ISS: "Such disclosures will provide shareholders with greater insights now and next year into the board’s rationale and circumstances when the changes are made." 

What About Long-Term Incentives That Are Reaching the End of Their Term?

Say you are in year three of a three-year performance period and the phrase "nose-dive" is more appropriate than the phrase "in-flight"—is that a short-term incentive, since the performance period ends this year or does ISS still view that as a long-term incentive? Although executives may not have any more time to turn things around for this award than they do for annual bonuses, it is still considered a long-term incentive.

This doesn’t mean companies can’t modify awards in this circumstance, but ISS will give the modification more scrutiny than they would for a short-term incentive. In either case—short-term or long-term—clear and transparent disclosure of the rationale is key. If ISS doesn't understand why the board feels the modification is necessary, it is likely to take a dim view of it.

Who Cares What ISS Thinks?

Unlike repricings, which I discussed last week, modifications to performance targets generally aren’t subject to shareholder approval, so you might be wondering why you should care what ISS thinks. If ISS disagrees with the actions taken by directors, it could recommend that shareholders vote against your next Say-on-Pay proposal (or stock plan proposal) or it could recommend that shareholders vote against the directors on your compensation committee when they are next up for election.

Shout Out

Thanks to Dan Kapinos and Laura Wanlass of Aon for helping me understand the implications for long-term incentives nearing the end of their term and the importance of good disclosure.

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