Ellason lens on… ISS Benchmark Voting Policy 2025 – consultation

ISS has launched a consultation on proposed changes to its 2025 Global Benchmarking Voting Policies. The consultation is open until 2 December 2024 and ISS encourages responses, which can be submitted via email, from investors, companies and other market participants. We anticipate ISS will announce the final policy changes in mid-December, with the updated polices taking effect for general meetings held on or after 1 February 2025.

The changes proposed for the UK primarily reflect the recent updates outlined by the Investment Association (IA). The main divergence from the IA proposals is in respect to dilution limits. Unlike the IA and Glass Lewis, ISS is not proposing to completely remove reference to the ‘5% in 10 years’ dilution limit for discretionary share plans. ISS acknowledges that this limit is considered good market practice by many investors and, for schemes that exceed this limit, companies will be expected to provide a clear rationale and explain why it is considered appropriate. However, when evaluating new or amended LTIPs, ISS has proposed removing the 5% limit from the list of factors considered when making its voting recommendations. ISS has also not aligned with the IA’s updated guidance on executive shareholding levels, instead retaining the Pensions and Lifetime Savings Association’s recommendation of a 200% of salary minimum level.

We summarise the other proposed changes to the Benchmark Policy Guidelines for the UK below:

• Adoption of the IA’s principle that long-term incentives should be appropriate for a company’s individual circumstances, support the company’s strategic objectives, and take into account the remuneration structures of the wider workforce.
• Removal of previously-held positions that: remuneration has become too complex; the introduction of a new share award scheme on top of existing plans is likely to be viewed sceptically; and firms should avoid operating multiple long-term incentive plans.
• Updates to the wording around comparator groups to align with the IA Principles (that comparator groups used for performance purposes should be appropriate for the company and its industry, and clearly disclosed and explained by the remuneration committee).
• A slight softening in the wording around benchmarking, recognising that companies are expected to explain pay decisions in the context of the talent markets they are recruiting from whilst continuing to caution that benchmarking alone should not be the primary driver for the pay decision.
• Updates to the malus and clawback section to align with the requirements of the 2024 UK Corporate Governance Code to improve disclosure and enforceability.

Recognising the updated QCA Code, and the recommendation to put remuneration reports and policies to advisory shareholder votes, ISS are also proposing a number of changes to how they assess smaller companies (e.g. FTSE Fledgling, AIM companies), including:

• Voting against policies or remuneration reports where incentive awards are not subject to a performance or vesting period of at least three years.
• Incentives awarded in the year are not conditional on the achievement of performance hurdles.
• Inadequate explanation of significant salary increases.
• New Executive Directors without a service contract, or with a notice period exceeding 12 months.
• Payment of guaranteed or transaction bonuses to Board members without sufficient rationale.

Ellason commentary: The proposed updates are broadly aligned with those reflected by the IA in its Principles of Remuneration, reflecting the change in market sentiment on the need to be flexible around remuneration structures to help ensure the competitiveness of UK companies. However, unlike the IA, ISS has chosen not to provide any specific recommendations or guidance on the use of hybrid schemes. We look forward to the final update from ISS in December.