Proxy Advisors Increase Scrutiny of Executive Pay
Proxy advisory firms like ISS and Glass Lewis are tightening their standards for executive compensation ahead of annual general meetings. The firms are placing greater emphasis on pay-for-performance alignment and the integration of ESG metrics into executive pay packages. This increases pressure on companies to provide transparent and clear justification for their C-suite compensation strategies.
- Both ISS and Glass Lewis are extending their pay-for-performance evaluation periods from three to five years, signaling a greater emphasis on sustained, long-term value creation over short-term gains. For its 2026 quantitative analysis, ISS will now assess CEO pay and company performance alignment over this longer five-year window. - Glass Lewis is replacing its A-F letter grading for pay-for-performance with a new scorecard system that provides a numerical score from 0 to 100. This new methodology also incorporates a five-year evaluation period and introduces a qualitative assessment that can only lower a company's score. - While performance-based equity is still preferred, ISS is now taking a more favorable view of time-based equity awards that have long vesting periods (four or more years) or post-vest holding requirements. This change acknowledges that well-designed, long-term time-based awards can also align executive and shareholder interests, especially for companies where setting long-term performance goals is challenging. - An unfavorable recommendation from ISS can significantly impact shareholder voting, reducing support for a "say-on-pay" proposal by an average of 24.7 percent. Key triggers for negative recommendations include one-time or special awards lacking clear performance alignment, discretionary changes to existing pay plans, and insufficient disclosure justifying compensation decisions. - While over 77% of S&P 500 companies incorporated ESG metrics into executive compensation in 2024, the use of specific Diversity, Equity & Inclusion (DEI) metrics has seen a notable drop. This reflects a potential shift away from standalone DEI goals towards broader human capital management metrics amid heightened scrutiny of corporate DEI initiatives. - Average shareholder support for "say on pay" proposals at Russell 3000 companies was 90.8% in the first half of 2025, but certain sectors face greater opposition. The technology and real estate sectors consistently see lower support, with average support in tech hovering below 89% since 2021. - In a significant policy shift, ISS will no longer require companies that receive low "say-on-pay" support (less than 70%) to report specific shareholder feedback if they can demonstrate meaningful engagement efforts. This change acknowledges that some investors may be hesitant to provide direct feedback.
