Investors to ISS: Bring Back Time-Based Equity

In a surprising turn of events, less than half of investors agreed with ISS’s current approach to time-based equity awards, according to the just-posted results of ISS’s 2024 policy survey.

What’s going on: As previously reported, ISS and Glass Lewis mysteriously included the same question in their policy surveys this year – should they rethink their long-standing requirement that the majority of long-term incentives be performance-based? Most onlookers assumed that this was a result of pressure from Norges Bank and other European investors who notoriously view performance awards as overly complex and insufficiently correlated to long-term shareholder value.

However, the results to the policy survey show that a not insignificant number of American investors are also willing to be convinced.

• Only 43% of investors agreed that ISS should continue to consider a preponderance of time-based equity to be a negative factor (and only 20% of non-investors held this view).
  
  
• Of those who suggest revising the current approach, 66% of investors and 58% of non-investors consider a 5-year vesting period sufficient to mitigate pay-for-performance concerns.
  
  
• However, 68% of investors added that a post-vesting holding period should also be required.

Other findings: Only about half of investors agreed with ISS that discretionary annual incentives are de facto problematic, and less than half of investors agreed companies should be setting Scope 3 emissions targets. HCM mandates were even less popular – only 22% of investors said they would support a shareholder proposal requiring EEO-1 disclosure, let alone items like pay gaps or hiring/retention/promotion data.

The bottom line: This could be a major step in the battle against increasing homogeneity of pay, especially for companies whose business model is more aligned with time-based equity rather than the now standard three-year performance metrics. However, it will be critical to avoid the pendulum swinging all the way in the other direction where PSUs become villainized (as is hinted at in the survey). 

Look out for a Center webinar on this topic in the very near future.