ISS Focuses On Non-Employee Director Compensation

Non-employee director (NED) compensation will be examined more closely moving forward, according to the 2018 Benchmark Policy Updates from Institutional Shareholder Services Inc. (ISS).

ISS would call for adverse vote recommendations on the re-election of board members responsible for approving/setting NED compensation when there is a recurring pattern (i.e., two or more consecutive years) of excessive NED pay, without a compelling explanation.

“When you look at director compensation, there are not a lot of outliers, meaning people who abuse the system,” TK Kerstetter, CEO of Board Resources LLC, and editor at large of Corporate Board Member says. “The important thing is to make sure that you’re setting director pay within the scope of your peer group.”

“If it looks like you’re excessively rewarding yourself, that makes you susceptible to activist criticism.” – TK Kerstetter

To help prevent receiving a withholding vote on comp committee matters, identifying the right peer group on which to base compensation is key. Typically, the peer group that an organization would use as comparison for executive compensation would be a similar peer group for director pay comparison.

“If you want to go one step further, when you get your equity plan annually approved by shareholders, make sure that the board’s equity plan is outlined in totality there, as well,” Kerstetter says.

The good news for companies is that the ISS will begin examining NED compensation this year, so any adverse recommendations tied to the matter wouldn’t be on tap until 2019.

But that doesn’t mean that boards displaying a pattern of high NED compensation wouldn’t be opening themselves to other potential dangers.

“Because directors are setting their own pay, typically, that makes them more susceptible to scrutiny in the courts,” Kerstetter says. “It can also make you vulnerable to an activist. If it looks like you’re excessively rewarding yourself, that makes you susceptible to activist criticism, as well.”