Proxy Season Prep: ISS Changes Affecting Equity Plans

With proxy season approaching, equity plan sponsors should take a fresh look at changes in proxy advisor guidance. ISS has released several 2026 policy updates that could influence vote outcomes on equity plan proposals and executive compensation—especially for companies whose plans fall short on key plan features.

Key Takeaways (2026 ISS Updates)

• ISS added a new “overriding factor” to the Equity Plan Scorecard (EPSC) that may trigger a negative recommendation if the Plan Features pillar scores below 7 points.
• ISS now expects plans to include a limit on cash-denominated awards for nonemployee directors (or exclude directors from participation).
• In most industries, ISS burn rate benchmarks increased for 2026, potentially making share requests easier to support for some companies.
• ISS clarified that executive pay packages heavily weighted toward time-based equity awards may be acceptable if the design includes a 5-year time horizon.
• Proxy advisor influence may shift as regulatory scrutiny increases and some institutional investors reduce reliance on proxy advisors.

ISS 2026 Updates: Equity Plan Scorecard Changes

ISS has announced several updates to its voting policies for 2026 that affect equity compensation. Below is what equity plan sponsors should know now—and what to consider ahead of the 2026 proxy season.

ISS Equity Plan Scorecard Update: New “Overriding Factor” for 2026

ISS has introduced a new “overriding factor” to its Equity Plan Scorecard (EPSC). Under this factor, ISS may recommend voting against an equity plan proposal if the plan’s score in the Plan Features pillar is less than seven points.

In practical terms, this means that even if a plan performs well in other EPSC pillars, weaknesses in key plan features could result in a negative recommendation.

The Plan Features pillar awards points based on the following factors:

• CIC Vesting Disclosure: Disclosure of how equity awards will vest in the event of a change in control. The disclosure must be provided for both service and performance-based awards. If the disclosure isn’t provided, or if vesting is discretionary, no points are awarded for this factor.
• Liberal Share Recycling (Awards): The plan cannot allow shares withheld to cover taxes to be returned to the share reserve.
• Liberal Share Recycling (Options/SARs): Unissued shares in exercise transactions (e.g., net or SAR exercises) cannot be returned to the share reserve.
• Minimum Vesting: Plans must stipulate a minimum vesting period of at least one year.
• Vesting Acceleration: Plans cannot allow discretionary acceleration of vesting (except in the event of death or disability).
• Dividends on Unvested Awards: Dividends earned on awards cannot be paid out prior to the date the awards vest.
• Limit on Cash Awards to Nonemployee Directors: The plan must impose a limit on cash-denominated awards to nonemployee directors.

ISS doesn’t disclose the point values for each of these factors. Since there are only seven, it seems likely that some factors may count for more than one point. Otherwise, plans would need to meet all seven conditions to be assured of a favorable recommendation.

This new overriding factor does not apply to the Special Cases groups (recent IPOs, spinoffs, and bankruptcy emergent companies that do not disclose at least three years of grant data). It applies to any shareholder meetings on or after February 1, 2026.

ISS Equity Plan Scorecard Update: Director Cash Limits

ISS has also introduced a new factor in the Plan Features pillar: a requirement that plans include a limit on cash-denominated awards to nonemployee directors. Like the other factors in this pillar, the scoring for this new factor is binary. If the plan includes this limit (and it is disclosed to shareholders), the plan receives full points for the factor. If the plan doesn’t include the limit (or it isn’t disclosed), the plan receives no points.

If nonemployee directors aren’t eligible to participate in the plan, the plan receives full points for this factor.

ISS Burn Rate Benchmarks Increase for 2026

With some exceptions, ISS increased burn rate benchmarks for 2026 (as compared to the 2025 benchmarks):

• S&P 500: The burn rate benchmark decreased in only two industries (Energy and Health Care). Benchmarks for other industries either increased (four industries) or remained the same (five industries).
• Russell 3000: Benchmarks increased for 14 industries. Benchmarks decreased for six industries and remained the same for three industries.
• Non-Russell 3000: Benchmarks increased in 15 industries and decreased in only seven industries.

ISS Executive Compensation FAQ: Time-Based Awards

One notable update to ISS’s U.S. Executive Compensation Policies FAQ states that an executive pay mix that consists primarily—or even entirely—of time-based awards (full-value awards or stock options) will not raise significant concerns in ISS’s qualitative analysis, provided the awards have a sufficiently long-term time horizon (see question 35 in the FAQ):

A time-based equity award design that utilizes a time horizon of at least five years…will be viewed as a positive factor in the qualitative evaluation.

This qualitative analysis is part of ISS’s evaluation of executive pay, which can affect ISS’s vote recommendations for Say-on-Pay proposals and director elections. In addition, if ISS’s evaluation reveals a pay-for-performance misalignment or problematic pay practices, it could result in a negative recommendation for an equity plan proposal, even if the plan otherwise earns a passing score under the Equity Plan Scorecard.

Companies can achieve the five-year time horizon by subjecting the awards to a vesting schedule of at least five years (ratable vesting over five years is acceptable) or by using a combination of vesting and post-vesting (post-exercise, in the case of stock options) holding periods that equal at least five years.

If relying on a post-vest (or post-exercise) holding period, the requirement must apply to at least 75% of the net shares acquired upon vest/exercise.

Companies that struggle to establish appropriate performance targets may now have more flexibility to rely on time-based awards more heavily in executive pay packages. Of course, individual investor opinions may differ from ISS guidelines.

Are Proxy Advisors Losing Influence?

One topic discussed during the NASPP webinar “ Equity Comp in 2026: Navigate What’s Next” is the possibility that proxy advisor influence may diminish in the future. The panel noted several developments affecting proxy advisors.

Executive Order Affects Proxy Advisors

In December, the Administration issued an Executive Order requiring the SEC, FTC, and DOL to take a closer look at proxy advisory firms. Most of the order is focused on DEI and ESG priorities, but it also requires proxy advisors to register as investment advisors and asks the FTC to look for unfair or deceptive practices at these firms.

State Regulation of Proxy Advisors

Some states, most notably Texas, have enacted legislation regulating proxy advisors (or are in the process of doing so). The states enacting these laws are typically politically conservative states, and the legislation is generally focused on DEI and ESG priorities (e.g., the Texas law requires proxy advisors to disclose if voting advice is based on nonfinancial information).

Both ISS and Glass Lewis have sued Texas alleging that its law is unconstitutional.

Institutional Investor Sentiment

J.P. Morgan recently announced that it will no longer be relying on proxy advisors and will instead rely on an in-house tool that uses AI to aggregate and analyze proxy data. Other investors may follow suit.

Planning for the Future

Many common features of equity plans offered by public companies are a result of proxy advisor guidance (e.g., the near universal use of three-year performance periods). If proxy advisor influence is diminished, this may be an opportunity for more flexible plan design — but it may also introduce uncertainty into the equity planning process.

Companies may need to work more closely with proxy solicitors and their major investors to ensure passage of Say-on-Pay proposals and equity plan proposals.

Six Steps to Take Before Filing Your Proxy

If you are submitting an equity plan proposal to shareholders, here are six steps to take to ensure the plan is received favorably by your shareholders. Be aware that, for many companies, this isn’t a do-it-yourself project. You may need a compensation consultant to help you assess how your plan will be viewed by proxy advisors or a proxy solicitor to help you reach out to your investors.

• Know Your Investors: Knowing how your major investors are likely to feel about the proposal is the most critical step as it will guide both the design of your plan and the disclosures you make about it. Do your advisors rely on ISS and Glass Lewis recommendations? Do they have their own guidelines and what are their hot-button concerns?
• Know Your ISS EPSC Result: Although proxy advisor influence may be diminishing, many investors still rely on their recommendations. If this is the case for your company’s major investors, you’ll want to know whether you can count on a favorable recommendation from ISS.
• Don’t Forget About Glass Lewis: This blog focuses primarily on ISS because their evaluation process is more transparent than Glass Lewis’s analysis. But Glass Lewis’s opinion of your plan could be important to the success of the vote.
• Check Your Disclosures for Completeness: Make sure you disclose the details necessary for proxy advisors and investors to fully evaluate the plan. Missing information can result in negative evaluations.
• Watch Out for Equity Plan Dealbreakers: Proxy advisors and investors often have a list of dealbreakers that result in a negative recommendation or a vote against the plan (e.g., see question 37 in ISS’s U.S. Equity Compensation Plans FAQ). Know what the dealbreakers are and eliminate them from the plan or prepare a good explanation for why you are keeping them.
• Avoid Problematic Pay Practices/P4P Misalignment: Executive pay practices that are considered problematic or pay packages that aren’t aligned with company performance are likely to be dealbreakers for proxy advisors and many investors.   

More Information

The NASPP webinar “Equity Comp in 2026: Navigate What’s Next” includes an excellent discussion of recent developments affecting proxy advisors and how this might affect company practices.

Also check out our webinar “Navigating a New Era of Shareholder Priorities” for a discussion of shifting perspectives at proxy advisors.