ISS’s preliminary compensation-related FAQs highlighted largely incremental changes to the compensation voting policies which will become effective on Feb. 1, 2020. However, a much-anticipated explanation of how the Economic Value Added (EVA) metric will be utilized going forward has not yet been published.
Changes to the ISS Primary Quantitative Pay-for-Performance Screens: The thresholds that trigger concern on two of ISS’ three primary screens—Relative Degree of Alignment (RDA) and Pay-TSR Alignment (PTA)—will change. The Multiple of Median (MoM) thresholds will remain the same for 2020. ISS is also introducing a three-year view of CEO pay vs peers as a measure of long-term pay on a relative basis. This will be “informational” on the 2020 reports but will likely be incorporated into screenings in future years.
Changes to the ISS Secondary Quantitative Pay-for-Performance Screens: The Financial Performance Assessment for 2020 will be based on EVA metrics rather than the GAAP metrics used in 2019, though by popular request, GAAP metrics will still be displayed for informational purposes. The EVA metrics are: EVA Margin, EVA Spread, EVA Momentum vs. Sales, and EVA Momentum vs. Capital.
Changes to the US Equity Plan Scorecard: Starting in 2020, “evergreen” provisions in the stock plan (i.e., provisions providing for automatic share funding additions, typically on an annual basis, over the life of the equity plan) will be considered an overriding factor leading to an “against” recommendation as opposed to simply a negative factor.
Overall, the change to the primary screens should provide companies with a bit more leeway as a slightly lower score will not trigger an elevated score. It remains to be seen if EVA will be opaque or if investors and issuers will be able to evaluate the accuracy of scores. Investors, and issuers, have expressed trepidation about EVA, but ISS is moving ahead (as expected). ISS has stated it will publish an updated Pay-for-Performance Mechanics white paper on its website. The paper will detail the introduction of Economic Value Added (EVA) into the Financial Performance Assessment secondary screen of ISS’ pay-for-performance quantitative screen for US and Canada markets and is expected in December 2019. The Center will report on the white paper and additional FAQs as they become available.
ISS Preliminary 2020 U.S. Compensation-Related FAQs (Institutional Shareholder Services)