Just last week we were presenting at the annual NASPP conference on the increasing scrutiny of director compensation from shareholders, investors, plaintiffs, the SEC, and proxy advisors. This week it seems that the trend is set to continue, as Institutional Shareholder Services (“ISS”) launches its 2018 Benchmark Policy Consultation, seeking public comment on proposed new voting policies for 2018, including a new draft U.S. voting policy on director elections and non-employee director pay.

The proposed new voting policy on director pay would “explicitly provide for adverse vote recommendations for board committee members who are responsible for approving or setting non-employee director compensation when there is a pattern (i.e., two or more consecutive years) of excessive non-employee director pay magnitude without a compelling rationale or other mitigating factors.”

This proposal comes following ISS’s publication on October 19th of the results of its Policy Application Survey for 2017-2018, which it cites as evidence that investors strongly prefer an adverse vote recommendation for directors where a pattern of excessive non-employee director pay levels has been identified at a company. In the Policy Application Survey, ISS reminds us that, under the ISS U.S. Benchmark Voting Policy, a pattern of excessive director compensation may call into question director independence.

Because the policy would seek to penalize only a “pattern of excessive non-employee director pay,” if adopted, it will not impact voting recommendations in 2018. Instead, negative recommendations will be triggered only subsequently after a pattern of excessive pay has been identified in consecutive years. ISS also notes that it intends to focus on “director pay outliers,” and suggests that the policy change would therefore have a minimal impact on most boards.

Although ISS welcomes comment on any aspect of its proposed director pay policy, it seeks particular input on the following three areas:

  1. The circumstances in which large non-employee director pay magnitude would merit support on an exceptional basis (e.g., one-time onboarding grants to new directors);
  2. The board members that should be held accountable for approving or setting excessive director pay (if the proxy disclosure does not identify such board members); and
  3. Whether ISS should include outsized pay packages provided to certain directors (e.g., board chairs or lead directors) when calculating average/median pay.

In the other components of its proposed U.S. voting policy updates, ISS seeks comment on factors it should consider when assessing shareholder proposals requesting disclosure on a company’s gender pay gap, as well as comments on a proposed update to its policy on director elections where a company has adopted or renewed a poison pill that has not been approved by shareholders.

The consultation period on the proposed policy updates is open until 5:00 p.m. (Eastern time) on November 9, 2017. ISS intends to use the results of the consultation to finalize its benchmark voting policies for the 2018 proxy season, which will apply to shareholder meetings on or after February 1, 2018. Comments from interested parties, including investors, issuers, and other market constituents, may be submitted to policy@issgovernance.com.


Sinead Kelly is a partner in Baker McKenzie’s Compensation practice in San Francisco. She advises on U.S. executive compensation and global equity and has practiced in the compensation field since 2005. In her practice, Sinead counsels U.S. and non-U.S. public and private companies on all aspects of equity and executive compensation plans and arrangements, including plan design, drafting, administration and governance. In this regard, Sinead advises on and assists companies with compliance with U.S. federal and state securities and tax laws relating to compensation arrangements, as well as with preparing SEC disclosures, complying with stock exchange rules and addressing non-U.S. tax and regulatory requirements. She has been repeatedly recognized by Legal 500 as a leading lawyer for Executive Compensation and Employee Benefits.