Dec 02, 2019
David Teigman comments on the new proxy voting recommendation guidelines by Institutional Shareholder Services and Glass Lewis that are coming into force for the 2020 proxy season.
Excerpts from “Proxy Advisors Offer Key Comp Focuses for 2020,” Agenda, December 2, 2019:
Several compensation experts say this year’s policy changes were scant. For example, David Teigman, partner in the executive compensation and benefits practice at law firm Cadwalader, Wickersham & Taft, says, “For matters related to compensation, I view the changes in the 2020 guidelines for both ISS and Glass Lewis as incremental, as opposed to a more significant change to their framework.”
In its 2020 proxy guidelines published in October, Glass Lewis made its expectations clear that compensation committees should provide a “robust” discussion when making any midyear adjustments to short-term incentive plans.
And when a company receives less than 80% support for say on pay, Glass Lewis wants a detailed explanation of shareholder engagement activities. “Absent this disclosure, Glass Lewis may recommend against the say-on-pay proposal,” Teigman points out.
Teigman says that, as it relates to Glass Lewis’s updates, the calls for more details on shareholder engagement could, as a result, mean that “many companies may seek to enhance their disclosure.”
“With its focus on certain disclosure elements, Glass Lewis seems to be not only focused on the quantum of pay but is also trying to understand the reasoning behind the compensation-related decisions,” says Teigman. “Companies will continue to have to balance more disclosure with the fact the disclosure should be as clear as possible,” he tells Agenda.
Companies with “evergreen” equity plan provisions should be prepared for negative vote recommendations from ISS. An evergreen feature automatically replenishes an equity plan’s share reserve on an annual basis without needing to seek additional shareholder approval. Comp professionals agree this will impact only a small segment of companies, particularly those that have recently gone public.
Teigman says ISS’s update about the evergreen provision is the result of “some ripple effects” from the tax reform introduced in late 2017. In its policy updates, ISS “has directly linked this change with the repeal of the former ‘performance-based compensation’ exception to the compensation deduction limits under Section 162(m) of the Internal Revenue Code,” he notes.
“To qualify for that exception, equity plans needed to be approved by shareholders at least every five years; now that the exception is repealed, ISS is highlighting the concern that companies have less incentive to require more frequent approvals of equity plans,” he says. This is “exacerbated in scenarios where the equity award reserve is automatically replenished.”
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