ISS 2019 proxy voting guidelines
On 19 November 2018, ISS updated their proxy voting guidelines for EMEA and this is effective for Meetings on or after 1 February 2019. The main changes impacting the UK:
Target Bonus
The target bonus should typically be set at no more than 50 percent of the maximum bonus potential; any payout above this level at target should be supported by a sufficiently robust explanation.
ISS state that voting recommendations would not be set mechanistically around this point but would be considered alongside a number of other inputs, e.g. the overall quantum of the bonus and wider remuneration package, and historical pay-performance alignment and past remuneration committee behaviour, among other factors.
LTIPs
Performance periods longer than three years are encouraged. Share awards should be subject to a total vesting and holding period of five years or more, in line with the recommendations of the Code. In addition, when there has been a material decline in a company's share price, remuneration committees should consider reducing the size of LTIP awards at the time of grant.
ISS comment that this policy change takes account of recent changes in market practice, as the majority of FTSE 350 companies now have a five-year release horizon for LTIP awards. This is typically structured as a performance period of three years, followed by a two-year holding period for any vesting shares. The 2018 UK Corporate Governance Code recommends a total vesting and holding period of five years as a minimum standard.
They also argue that if long-term incentive grant sizes are held constant in percentage of salary terms following a material decline in share price, this has the effect of driving up the underlying number of shares required to fund the award. Consequently, if the company's share price subsequently recovers from relative lows, this may result in significant gains which were not necessarily envisaged at the time of the award, and may not be reflective of underlying performance.
Approval of a new or amended LTIP
The scheme is operating within dilution limits that are aligned to the relevant UK market standards. Namely, no more than 10 percent of the issued share capital should be issued under all incentive schemes in any rolling 10-year period, and no more than 5 percent of the issued share capital should be issued under executive (discretionary) schemes in any rolling 10-year period, in line with the guidelines established by the Investment Association;
ISS believe this policy update provides a clarification that the dilution limits for new or amended long-term incentive plans should be set in line with Investment Association (IA) guidelines. This change removes any ambiguity about which limits should apply and references the relevant market guidance set by the IA, which are widely understood and implemented by most listed companies.
Shareholding
Post-employment shareholding requirements are becoming increasingly common. The Code states that the remuneration committee should develop a formal policy for postemployment shareholding requirements encompassing both unvested and vested shares.
ISS state that the policy update also recognises that post-employment shareholding requirements are increasingly popular – a trend that is expected to continue following the positive endorsement from the FRC in the 2018 version of the Code.
NED fees
The fees payable to NEDs should not be excessive relative to similarly-sized companies in the same sector.
ISS state the UK and Ireland Proxy Voting Guidelines have not included an option to vote against the remuneration report in cases where non-executive directors' fees are considered excessive, relative to similarly-sized companies in the same sector. This update provides the flexibility to reflect on the magnitude of NED fees within the scope of the remuneration report.
