Farient Analysis: ISS Targets Executive and Director Compensation in U.S. Policy Changes

Executive compensation is in the crosshairs of ISS. According to the proxy advisor’s newly published 2026 policy updates for the U.S. market, there are several notable changes that compensation committees and their professional advisors should review carefully.

ISS’ compensation-related policy changes are:

• Long-term alignment in pay for performance (P4P) evaluation: ISS is extending the horizon for the Relative Degree of Alignment (RDA) test and Financial Performance Assessment (FPA) from three years to five years, and incorporating the three-year CEO Multiple of Median (MoM) test into its “concern” level
• P4P qualitative review: ISS is adding factors to its P4P qualitative review, including one relating to time vs. performance in the equity mix. New or clarified factors include:
  • Requirements for vesting and/or retention in equity awards that demonstrate a long-term focus.” This addition provides more flexibility when the performance LTI mix is <50%, and time-based awards use longer-term vesting
  • An addition addressing the overall ratio of performance-based compensation to fixed or discretionary pay
  • A clarification that realized pay outcomes may be considered alongside realizable and granted pay
• Equity Plan Scorecard (EPSC) enhancements: ISS is adding a factor to the Plan Features pillar under its EPSC model that assesses whether the equity plan includes cash-denominated award limits for non-employee directors. ISS is also adding an overriding factor that will automatically recommend a vote “against” the equity plan proposal if the plan lacks sufficient positive features
• High non-employee director pay: ISS is no longer requiring two or more consecutive years of excessive director pay to issue adverse recommendations for committee members responsible for setting BoD pay. The change would allow for adverse recommendations in the first year of occurrence if considered highly problematic, or when a pattern emerges across non-consecutive years
• SOP responsiveness: Recent SEC guidance on 13-G (passive) versus 13-D (active) filing status for institutional investors may create difficulties for companies to obtain feedback from shareholders. This policy change allows more flexibility for companies to demonstrate responsiveness to low SOP support

Unanswered Questions

While final FAQs with greater details are expected from ISS any day, Farient principals collaborated on questions raised by the policy updates. They are condensed as follows.

• Is ISS playing catch-up with Glass Lewis (GL)? GL announced its plan to extend the time horizon on its P4P quantitative model from three years to five years for 2026. While ISS’ change to a five-year Relative Degree of Alignment (RDA) may have long been in the works, it is possible that ISS is now reacting to GL’s model announcement. Institutional investors have long expected long-term alignment between pay and performance
• How would the new five-year RDA time horizon impact ISS assessment? Like GL’s new proposed P4P model, ISS’ five-year time horizon has not previously been used. When viewed over a longer period, pay and performance comparisons can often become unwieldy, especially if companies change leadership, restructure, or change peer groups. While institutional shareholders will likely welcome this longer-term perspective, it could introduce significant noise in the data, making it incumbent on issuers to provide greater explanations
• What are the new RDA model thresholds? The five-year RDA is likely to have similar thresholds to the three-year RDA, but ISS could still introduce some new surprises when its P4P Mechanics document is released (also expected later this month)
• To mitigate a lack of majority PSU LTI mix, what is considered sufficient “long-term focus” for restricted stock? ISS’ policy survey from earlier this year showed investors preferred three-year vesting plus a two-year post-vesting retention requirement, while non-investor respondents preferred allowing for greater flexibility such as five-year vesting without a holding requirement. ISS has not announced what qualifies as “long term,” but it seems likely post-vesting holding requirements will be part of the expectation
• Will the equity plan model’s new overriding factor matter? Very few company equity plan proposals fail, including those that receive “against” recommendations from ISS. Unlike Say on Pay voting results, equity plan recommendations from ISS have historically carried little weight as investors understand the need for companies to grant stock to employees across all levels (not just executives). To pass the ISS tests, companies may choose to modify certain plan features that align with ISS expectations but otherwise do not restrict their existing grant practices
• Will director pay receive increased scrutiny? Two policy changes aim to address excessive non-employee director pay. It is possible that recent high-profile cases of extremely high pay for directors at certain companies raised alarms among investors prompting ISS to take a fresh look at how its policies could rein in excess director compensation. In such cases, ISS’ policy targets directors on committees that set director pay with adverse recommendations
• How might U.S. regulator pressure influence ISS’ final policy? As was the case in the first Trump Administration, proxy advisors are being targeted by the federal government. Recent reports of potential executive orders and new regulations could limit ISS and GL’s influence. GL has announced that it will switch to custom policies from its benchmark or “house” policies, which appeared to be a bid to avoid regulatory and political scrutiny. ISS notes its policies are “apolitical,” but regulators may not see it that way

Farient Recommendations

• Assess the P4P model changes and simulate results to determine if there are areas of concern for your company. While methodologies and thresholds are not yet fully known, companies and their advisors can model five-year RDA and three-year MoM to assess risk
• Review the equity plan model changes, especially if you plan to request additional shares from shareholders soon. Review your company’s dilution, burn rate, and other factors to determine risks and how many shares your company needs to meet employee awards while still passing proxy advisor and investor scrutiny
• Weigh your director compensation versus market (i.e., peers or similarly sized public companies) to ensure levels are competitive, not excessive, and align with best practices
• Prepare for more robust disclosures if you anticipate needing to address P4P alignment or other concerns. For example, your company may need to explain the impact of changes in executive leadership (CEO changes in particular) on P4P, or the reason for not using longer-term vesting on Restricted Stock Units (RSUs) if Performance Share Units (PSUs) are not a majority of the LTI, or why certain directors received extra board fees this year
• Develop a shareholder and proxy advisor engagement strategy. Depending on the situation, engage with shareholders and proxy advisors to understand their views and explain your company’s compensation program

 

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By Brian Bueno

Brian Bueno is the Director of Sustainability at Farient Advisors.