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ISS recently announced important updates to its pay-for-performance tests used for evaluating U.S. companies. In addition to total shareholder return (TSR), ISS will use financial metrics to evaluate company performance relative to the ISS-defined peer group. This is the same peer group that ISS uses for the Relative Degree of Alignment (RDA) and Multiple of Median (MOM) quantitative tests.

Ensuring alignment between pay and performance is challenging enough when a business is performing well. But what about during times of an industry or economic downturn, waning company performance, a shift in strategic business focus, or a period of investment when performance expectations are not as high as in recent years? Today, institutional investors and proxy advisors are hyper-focused on pay-for-performance alignment and, by extension, the rigor of performance goals. Any indication of declining incentive goals year-over-year can bring heightened scrutiny, negative commentary, and can increase the likelihood of an "against" Say-on-Pay (SOP) vote recommendation from proxy advisors. What alternatives exist for a company facing the prospect of performance expected to be lower than the prior year? What should be considered in setting incentive plan goals and what can be expected from shareholder watchdogs who closely examine performance goals and alignment with shareholders?

In the past week, ISS has announced draft updates to their 2017 proxy voting guidelines and updates to their QuickScore (now called QualityScore) governance rating system. This alert provides a summary of the key updates for both ISS corporate governance evaluation processes.

Some companies in the oil and gas, energy, utility, and manufacturing industry sectors have included safety compliance and/or improvement as a performance metric in their incentive compensation plans.Safety as a performance criteria appears frequently in incentive compensation plans for both executives as well as broad-based employee groups.Now, regulators have raised a potential problem with the use of safety as a performance metric.

In today's environment, with annual Say on Pay (SOP) votes, intense external scrutiny and the need to strongly align pay with performance, it is increasingly important for companies to be confident in their executive pay program. The foundation of a sound executive pay program is built on the company's business strategy and talent needs, which, collectively, must be achieved in order to create shareholder value.

To qualify for the performance-based compensation exception under Section 162(m), payment of the compensation must meet several requirements, including that performance goals must be set by the corporation's "compensation committee." The Code defines "compensation committee" as the committee of independent directors that has the authority to establish and administer the applicable performance goals, and certify that the performance goals are met.

Section 409A was added to the Internal Revenue Code (IRC or "Code") as part of the American Jobs Creation Act legislated in 2004. Essentially, Section 409A sets forth certain requirements for the effective deferral of compensation under nonqualified deferred compensation arrangements. Much of the impetus for Section 409A was the ability of certain executives to accelerate the payment of their supplemental retirement arrangements and deferred compensation at Enron immediately prior to the company's demise.

Last month, U.S. regulatory agencies released two sets of new rules affecting executive compensation. One set of the new rules has been developed by the Department of Labor (DOL) and deals with defining who is a fiduciary pursuant to rendering investment advice with respect to an employee benefit plan (subject to ERISA) or an individual retirement account (IRA). The DOL's fiduciary rule is considered to be a Final Rule and will become applicable on April 10, 2017. The second set of rules is a proposal by six U.S. financial regulatory agencies (Securities and Exchange Commission, Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, National Credit Union Administration, and Federal Housing Finance Agency) setting forth new policies and rules pertaining to incentive compensation plans of certain financial institutions.