On October 15, 2020, Institutional Shareholder Services, Inc. (“ISS”) published preliminary FAQs1 providing general guidance as to how ISS may assess COVID-related executive compensation decisions as part of its regular pay-for-performance qualitative evaluation for the upcoming proxy season. Based on feedback obtained by ISS during investor roundtables and responses to ISS’ annual policy survey, the FAQs are intended to inform investors, companies, and their advisors on COVID-related executive compensation issues, and have been released ahead of ISS’ regular annual compensation FAQs, which are anticipated to be published in December 2020. 

The FAQs reinforce the premise that ISS will continue to scrutinize COVID-related changes to both short-term and long-term incentive programs, while acknowledging that companies are facing extraordinary circumstances in the midst of the pandemic and current economic downturn. As a result, ISS may view COVID-related changes to be reasonable so long as the business justifications and rationale are clearly disclosed, and the resulting pay outcomes appear reasonable. In addition, the FAQs confirm that if ISS’ quantitative screen results in an elevated concern of a pay-for-performance disconnect, ISS will continue to conduct a more in-depth qualitative review of a company’s compensation programs and pay practices. Companies that have modified or adjusted executive pay programs and practices should begin the proxy planning process now, with a focus on preparing clear and robust disclosure of the rationale, impact, magnitude, terms, and conditions of such changes.

Below is a summary of the preliminary FAQs as well as compensation and governance-related takeaways from recent ISS and Glass Lewis2 updates.

COVID-Related Changes to Bonus/Annual Incentive Programs

ISS anticipates that many companies will make adjustments to bonus/annual incentive programs, including changes to metrics, performance targets, and measurement periods. Other companies may suspend their bonus programs and make one-time discretionary awards instead. Each of these actions would likely be considered problematic pay practices under normal circumstances, but ISS may determine such actions to be supportable so long as companies fully and clearly disclose the justifications and rationale, and the resulting outcomes appear reasonable. Key disclosure items that ISS and investors will be on the lookout for include:

  • Specific challenges resulting from the pandemic and how those challenges rendered the original program design obsolete or the original performance targets impossible to achieve. Disclosure should address how changes are not reflective of poor management performance.
  • Companies making mid-year changes or one-time awards should explain why the approach was taken, alternative approaches considered, and how such actions further shareholder interests.
  • Discretionary awards should have some performance-based element, and companies should discuss the underlying criteria for such awards. Generic descriptions should be avoided (e.g., “strong leadership during challenging times”).
  • Companies should discuss how payouts appropriately reflect executive and company performance, and clarify or estimate how the payouts compare with what would have been paid under the original program design. Above-target payouts under revised programs will be closely scrutinized.
  • If financial or operational targets are lowered below the prior year’s performance levels, discussion of the pandemic’s impact on finances or operations will be expected, along with discussion of how the compensation committee considered corresponding payout opportunities (particularly if such payout opportunities are not commensurately reduced).
  • If the following year’s bonus program design has changed, ISS encourages disclosure of positive changes, which may be a mitigating factor in ISS’ qualitative evaluation.

In addition, ISS may give some credit to temporary salary reductions which decrease total pay overall, but such reductions will be considered more meaningful if target incentive award opportunities are decreased in a corresponding manner.

COVID-Related Changes to Long-Term Incentive Programs

Consistent with ISS’ and Glass Lewis’ previous guidance, ISS generally is not supportive of changes to in-flight long-term incentive awards that cover multi-year performance periods (e.g., fiscal 2018-2020 or fiscal 2019-2021). As ISS views these programs as designed to smooth performance over a long-term period, ISS believes that such programs should not be altered after the start of a performance cycle due to “short-term market shocks.” Thus, any changes to in-flight long-term awards will generally be viewed negatively, particularly for companies that have a quantitative pay-for-performance disconnect.

For long-term award cycles that began in fiscal 2020, ISS said drastic changes should be limited to those companies where the underlying business strategy has fundamentally changed. ISS has indicated it may be more receptive to modest or incremental changes, such as pivoting to relative or qualitative metrics that may be more reasonable in light of uncertain long-term forecasting. However, more significant changes, such as a shift to predominantly time-vesting equity or shorter measurement periods, will continue to be viewed negatively. 

COVID-Related Retention/One-Time/Replacement Awards

ISS will continue to assess retention, one-time, or replacement awards with skepticism, but clear and fulsome disclosure of the rationale for the award, including the magnitude and structure of the award, will help mitigate ISS and investor concern. One-time award best practices include:

  • Demonstrating that the grant of such awards is an isolated practice—and not a replacement for forfeited awards due to the failure to meet performance criteria.
  • Ensuring the awards are of reasonable magnitude.
  • Attaching strong performance-based, long-term vesting conditions that are clearly linked to the underlying concerns the awards are intended to address.
  • Including shareholder-friendly guardrails to avoid windfalls, including limits on termination-related vesting.
  • Describing the specific issues driving the decision to grant the awards, and how the awards further investors’ interests.
  • Avoiding boilerplate disclosure regarding “retention concerns.”
  • Clear explanation as to how such awards do not insulate executives from lower pay, if the awards are granted in consideration of forfeited awards, for fairness considerations, or lowered realizable pay.

COVID-Related Changes to ISS’ Responsiveness Policy

Companies receiving less than 70% support on their advisory say-on-vote proposals will continue to be subject to ISS’ responsiveness policy, which examines three factors:

  1. Disclosure of shareholder engagement efforts.
  2. Disclosure of specific feedback received from dissenting shareholders.
  3. Any actions or changes made to compensation programs and practices to address shareholders’ concerns.

However, ISS has acknowledged that companies may be unable to implement changes to pay programs and practices in response to shareholder concerns amidst a pandemic, and expects specific disclosure as to how the pandemic has impeded the company’s ability to respond to such concerns. Furthermore, if changes are delayed, or do not fully address shareholder feedback, the company should disclose a longer-term plan on how it intends to address shareholder concerns.

No Changes to ISS’ Equity Plan Scorecard (EPSC), Problematic Pay Practices (PPP), or Option Repricing Policies

ISS notes that there are no COVID-related changes to its EPSC, PPP or option repricing policies. For annual meetings held on or after February 1, 2021, however, the passing EPSC score for S&P 500 companies has increased to 57 points (up from 55 points), and the passing score for Russell 3000 companies has increased to 55 points (up from 53 points). For all other companies, the passing score remains 53 points. ISS will continue to oppose option repricings which occur within one year following a drop in a company’s stock price. Furthermore, if an option repricing is undertaken without prior shareholder approval, ISS may recommend votes against members of the compensation committee who approved the repricing. 

Key Compensation Takeaways

  • While ISS appears to be understanding of COVID-related changes in pay programs and practices, including the use of discretion and reasonable adjustments to short- and long-term incentive programs, companies should be prepared to clearly and fully describe the rationale behind such changes to garner ISS and investor support.
  • Generally, ISS and shareholders may be more forgiving of changes to short-term incentive programs, while adjustments to long-term incentive programs will be scrutinized more closely.
  • Glass Lewis warns in earlier guidance, “trying to make executives whole at even further expense to shareholders and other employees is a certainty for proposals to be rejected and boards to get thrown out.” If pay and performance are misaligned, companies should anticipate heightened scrutiny from ISS and Glass Lewis as to the reasonableness of compensation changes and outcomes. Compensation changes and outcomes should be consistent and in proportion to the impact on shareholder interests.
  • Companies in the S&P 500 and Russell 3000 seeking shareholder approval of an equity plan should prepare for a higher EPSC score to obtain ISS’ recommendation for an equity plan proposal.

We expect ISS to publish a summary of its final policy updates in November and its detailed FAQs in mid-December. 

Launch of U.S. Diversity and Governance QualityScore Indices; ISS Foreshadows Benchmark Voting Policy Changes

On October 20, 2020, ISS’ responsible investment arm announced the launch of two investable equity indices.3 The ISS ESG U.S. Diversity Index selects companies with boards and named executive officers composed of individuals demonstrating broad racial, ethnic and gender representation, and the ISS ESG Governance QualityScore Index is a set of sector-neutral indices of well-governed companies and responsible market participants based on their ISS ESG Governance QualityScore as well as ISS assessments. 

The launch of these indices is consistent with ISS’ focus on diversity and ESG matters. ISS proposes revisions to its benchmark voting policy to further board diversity and board oversight of material environmental and social risks.4 Beginning in 2022, for companies where there are no identified racial or ethnically-diverse board members, ISS proposes to recommend voting against the chair of the nominating committee (or other relevant directors on a case-by-case basis) for companies in the Russell 3000 and S&P 1500. In addition, ISS has proposed that significant risk oversight failures related to environmental and social concerns may, on a case-by-case basis, trigger vote recommendations against board members. ISS’ final benchmark voting policy will be published later this year.

Contact Information

Womble Bond Dickinson regularly advises publicly-traded companies on executive and director compensation and related corporate governance matters. If you need assistance or have any questions regarding the issues discussed in this alert, please contact Jane Jeffries Jones at (704) 331-4953 or jane.j.jones@wbd-us.com, or the Womble Bond Dickinson attorney with whom you usually work for more information.


1 ISS U.S. Compensation Policies and the COVID-19 Pandemic Frequently Asked Questions (October 15, 2020).
2 Everything in Governance is Affected by the Coronavirus Pandemic. This is Glass Lewis’ Approach (March 2020), view here.
3 First-of-its-Kind Diversity Index to Integrate Ethnicity Alongside Gender for U.S. Company Directors and Executives (October 20, 2020), view here.
4 Proposed ISS Benchmark Policy Changes for 2021 (October 14, 2020), view here.