ISS and Glass Lewis disagree on how companies should approach COVID impacts to executive pay, according to a recent Skadden webinar with BlackRock, ISS, and Glass Lewis. Guest panelists included Aaron Bertinetti of Glass Lewis; Rachel Hedrick of ISS; and Jessica McDougall of BlackRock. All three panelists noted that official changes to policies are premature, which will create challenges for companies faced with making decisions in the coming months.

BlackRock: For 2020, the firm will take sector specific realities into account and will be looking at pro-active leadership on executive pay and adjusting to the crisis. BlackRock is engaging with issuers on an ongoing basis but does not anticipate putting out guidance on evaluating 2020 pay in the context of COVID. 

Glass Lewis: Glass Lewis will be looking for thoughtful, pragmatic, and deliberate efforts to account for business interruptions caused by COVID. The firm encouraged issuers to avoid boilerplate disclosures. Further, Glass Lewis is highlighting a more open approach to engagement with issuers.

ISS: ISS anticipates incorporating the shocks of COVID into compensation policy considerations but cannot say if large-scale policy shifts are coming until they hear from investors. ISS specifically noted they will not be seeking additional engagement with issuers and recommends that boards engage with investors first, then ISS. 

BlackRock: Changes to annual plan metrics or the use of sub-annual performance periods are not automatically problematic. The firm will look for strong rationale, duration of the changes, and clear guidance that the board is maintaining a long-term outlook. However, BlackRock stipulated that it prefers companies use discretion after the fact vs. changes in the crisis.

Glass Lewis: Glass Lewis policy will favor the use of discretion over changing existing structures, specifically cautioning against rushed decisions to change compensation structures. Glass Lewis indicated that it does not view changing metrics as practical due to ongoing market volatility and uncertainty. 

ISS: Sympathetic to calendar disarray from COVID, ISS favors a pre-disclosed shift to a new set of goals over use of discretion. Using discretion to pay above target, or changing metrics rather than goals, will be considered problematic, especially if performance is a concern. If switching to semiannual/quarterly goals, ISS will look for disclosure at the time of the change and reduced award opportunities. 

BlackRock: BlackRock highlighted its preference for using operational metrics in the equity awards as opposed to relative TSR performance. When plans are based on operational metrics, there is a bit more flexibility for lowering metrics during crises. Historical behavioral will be a factor as well.

  

Glass Lewis: Changes to in-flight awards will be viewed negatively, and Glass Lewis noted that the "retention argument just does not seem plausible" in the current environment. The board will have a high burden of proof to show why further equity grants are needed, especially "make whole" grants, or enhanced equity awards post-salary/bonus cuts.

ISS: ISS will conduct a case-by-case evaluation of changes but is likely to view midcycle changes negatively. However, for 2020-2022 grants, there will be some flexibility in shifting to a three annual period structure (year-to-year) within these awards. Additionally, ISS noted it will look for enhanced windfall compensation risk driven by equity grant dates. 

The divergent views on several potential actions Compensation Committees may be considering, such as use of positive discretion, changing annual plan metrics, or changing targets, may present difficulties for companies. It is possible, however, that ISS may change its approach if a majority of its investor-clients are aligned with BlackRock.