Institutional Shareholder Services (ISS) on November 21, 2018 issued “preliminaryFAQs addressing a few, but not insignificant, changes to its compensation policies for 2019.  Unfortunately, these FAQs did not provide much-anticipated guidance on performance awards, following the Tax Cuts and Jobs Act’s elimination of the “qualified performance-based compensation” exception to the general deductibility disallowance under Section 162(m) of the Internal Revenue Code for compensation exceeding $1 million payable to “covered employees” of publicly traded companies.  ISS states in the FAQs that it anticipates providing more comprehensive guidance on its 2019 compensation policies in mid-December.

According to the FAQs, the following policies are effective for shareholder meetings that occur on or following February 1, 2019:

EPSC Changes.  The FAQs left the general equity plan scorecard (EPSC) methodology framework intact, but made the following noteworthy changes.

CIC Vesting Factor.  The change in control (CIC) vesting factor has been revised to provide for points based on whether the company discloses the vesting treatment of the awards, regardless of the actual substantive vesting treatment that the company elects to apply.  Under the pre-2019 ISS policies related to the CIC vesting factor, companies were allocated points for this factor if equity awards did not vest automatically upon a change in control of the company unless the awards were not assumed or, in the case of performance awards, the equity awards vested pro-rata based on the actual performance attainment level and/or the time elapsed in the performance period as of the date of the change in control.

Under the ISS policy for 2019, if the company’s plan discloses the CIC vesting treatment for both time-based and performance-based awards, full points will be awarded. However, if the plan is silent on the vesting treatment or if the plan provides the company with discretion to determine the vesting treatment, the company will not be allocated any points.  Many companies have elected to forego the points attributable to the CIC vesting factor because they prefer to retain the discretion and flexibility to make the determination regarding the CIC vesting treatment at the time of the change in control, so the change to this factor may not influence a company’s decision on whether to comply with this policy.

Excessive Share Capital Dilution.  An additional negative overriding factor has been added for the S&B 500 and Russell 3000 EPSC models that will be triggered when the company’s equity compensation program is estimated to dilute shareholders’ holdings by more than 20 percent (for the S&P 500 model) or 25 percent (for the Russel 3000 model).  Note that this policy appears to focus on share capital dilution rather than voting power dilution.

EPSC Scores.  The passing scores for all EPSC models will remain the same as they were for the 2018 proxy season, but ISS will reallocate weighting/points among some of the individual factors within each EPSC model.

Suspension of Adverse Director Compensation Recommendation Policy. ISS will delay until 2020 the policy it introduced for the 2018 proxy season providing for a potential adverse recommendation for the board committee responsible for approving or setting non-employee director compensation where there is an established pattern of excessive pay levels without a compelling rationale or other mitigating factors.  In addition, recent feedback has led ISS to revise, and provide additional transparency on, its methodology for identifying companies with non-employee director compensation that would result in a negative recommendation.

Although the ISS policies that are contemplated under the preliminary FAQs do not appear momentous, the FAQs that ISS is expected to issue later this month may provide the guidance issuers are anxiously awaiting to help them make decisions on the elimination or modification of the Section 162(m) and performance-related provisions in their equity compensation plans or cash-based bonus plans.


Victor Flores is a partner in Baker McKenzie’s Employment & Compensation Practice, with a focus on Executive Compensation and Employee Benefits. Victor advises global US and non-US companies – both public and private – on all aspects of executive compensation and benefits matters, including the corporate, securities and tax law, and ERISA issues arising in the implementation and administration of compensation programs. He regularly helps clients with the design and implementation of equity and non-equity based incentive compensation programs and nonqualified deferred compensation programs. Victor also has extensive experience advising on compensations and benefits issues in mergers and acquisitions, corporate reorganizations, private equity and other corporate transactions.


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.