Recently, Institutional Shareholder Services (“ISS”) released updates to its voting policies for 2025, including new and updated responses to its Compensation Policies FAQs and new Value-Adjusted Burn Rate Benchmarks (based on company size and industry) in its Equity Compensation Plans FAQs. These updates follow the off-cycle update that ISS announced for its Compensation Policies FAQs this past October, which we reported on here. Similarly, Glass Lewis (“GL”) also recently released its annual Benchmark Policy Guidelines for 2025. Consistent with the last few years, this year’s updates by ISS and GL reflect incremental, rather than transformational, changes to their respective policies relating to compensation practices.

ISS COMPENSATION POLICIES FAQ UPDATE

Evaluation of Performance-Vesting Equity Awards. Beginning with the 2025 proxy season, ISS will place greater scrutiny on the disclosure and design aspects of performance-vesting equity. In particular, this greater scrutiny will be applied to companies that exhibit a quantitative pay-for-performance misalignment. ISS also provided a non-exhaustive list of typical considerations it will take into account when reviewing the disclosure and design aspects of performance-vesting equity:

• Non-disclosure of forward-looking goals (highlighting that retrospective disclosure of goals at the end of the performance period will carry less mitigating weight than it has in prior years);
• Poor disclosure of the vesting results at the end of an applicable performance period;
• Poor disclosure of the reasoning for metric changes, metric adjustments, or program design;
• Unusually large pay opportunities;
• Non-rigorous goals if they do not appear to strongly incentivize outperformance; and/or
• Overly complex performance equity structures.

Incentive Program Metrics and Total Shareholder Return (“TSR”). Specifically, ISS clarified that it is agnostic to the use of TSR (or any other specific metric) but noted the importance of objective metrics that increase transparency in pay decisions. In evaluating the metrics of an incentive program, ISS may consider several factors, such as:

• Whether the program emphasizes objective metrics linked to quantifiable goals;
• The rationale for selecting metrics;
• The rationale for atypical metrics or significant metric changes from the prior year; and/or
• The clarity of disclosure around adjustments for non-GAAP metrics.

In-Progress Changes to Existing Incentive Programs. ISS outlined its generally negative view on mid-cycle changes (such as to metrics, performance targets, and/or measurement periods) to existing incentive programs and emphasized the importance of a clear and compelling rationale that explains how the mid-cycle changes do not circumvent applicable pay-for-performance outcomes.

GLASS LEWIS POLICY GUIDELINES UPDATE

Discretionary Equity Award Vesting in the Context of a Change in Control. GL updated its discussion on the treatment of unvested equity awards following a change in control transaction to incorporate its view that companies that allow for committee discretion over such unvested awards should commit to providing a clear rationale for their ultimate decision with respect to how the awards are treated in connection with the change in control transaction. 

General Approach to Analyzing Executive Pay Programs. GL emphasized that its approach to analyzing executive compensation programs was meant to be holistic, noting that there are few program features that alone would lead to an unfavorable recommendation on a say-on-pay proposal. When reviewing unfavorable factors, GL will generally consider (i) a company’s rationale for the factor, (ii) the executive compensation program’s overall structure, (iii) a company’s overall disclosure quality, (iv) the program’s ability to align executive pay with performance, and (v) the trajectory of the pay program resulting from changes introduced by the compensation committee.

LOOKING FORWARD

The ISS updates are effective for meetings held on or after February 1, 2025, and GL began applying its new guidelines on January 1, 2025. Proskauer’s Employee Benefits and Executive Compensation team regularly advises companies on best practices with respect to implementing executive compensation programs, including the potential impact of proxy advisor policies on a company. Please contact a member of the team to assess whether these changes impact your company, and, if they do, what, if anything, should be done to address the impact.