Based on ISS's new policy designed to capture and analyze "significant outliers" of director pay, more than 100 companies in the Russell 3000 were flagged this year for having high director pay, according to ISS's most recent proxy season review. High director pay is defined by ISS as compensation within the top three percent of all directors in the company's sector and index, using separate thresholds for non-executive chairs and lead directors to reflect the higher pay typical of those roles.
According to ISS, about half of the companies flagged by the initial screen were deemed to have provided acceptable rationales for the high pay levels, including explanations such as onboarding grants for new directors, special service on a committee or special service related to a specific event. ISS has stated that two consecutive years of high director pay may result in voting against the directors responsible for setting pay, so 2020 will be the first year in which directors responsible for setting pay may receive adverse recommendations if the company is flagged for outlier pay two years in a row.
The ISS review further warned against "questionable severance payments," noting that several companies had been flagged in 2019 for making large severance payments to executives who were described as having left the company voluntarily, through resignation or retirement. Concerns were also raised again about the long-term impact of changes to 162(m), with ISS noting that as expected, the number of proposals seeking approval of equity plans has plummeted as companies are no longer required to do so every five years. ISS has alluded in the past to the possibility of altering its Shareholder Value Transfer calculations such that the number of shares companies can successfully request is reduced, requiring more frequent requests for approval to shareholders.
While median say on pay support is still over 95% annually, the review noted that the number of say on pay proposals receiving less than 70% support rose to a new high in 2019 -- 8.4%. This means that those companies will receive additional scrutiny from ISS in 2020 under its "responsiveness policy" that reviews whether the company has reached out to investors and made changes consistent with that feedback. Failure to do so could result in a vote against directors.