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2008 Compensation FAQs

Note: The questions and answers in this FAQ page are intended to provide high-level guidance regarding the way in which RiskMetrics Group's Global Research Department will generally analyze certain issues in the context of preparing proxy analyses and vote recommendations. However, these responses should not be construed as a guarantee as to how RiskMetrics Group's Global Research Department will recommend that its clients vote in any particular situation.

Section I: Executive Compensation Section and Related Policies

Determining Peer Companies

Q. How are peer companies determined?

Peer companies are determined using a standard methodology based on revenues and Global Industry Classification Standard (GICS) classifications and are not selected by Equilar. For each company, the methodology identifies 12 peer companies closest in revenue at fiscal year end within the same 6-digit GICS category. If insufficient companies are compiled in the 6-digit GICS category, peer companies will be added from the company's 4-digit GICS category. Top^

Q. What are GICS codes?

The Global Industry Classification Standard (GICS) is a collaboration between Standard & Poor's and Morgan Stanley Capital International. GICS codes correspond to various business or industrial activities, such as Oil & Gas Drilling or Wireless Telecommunication Services. GICS is based upon a classification of economic sectors, which can be further subdivided into a hierarchy of industry groups, industries and sub-industries. Top^

Q. Is the list of peer companies disclosed in the executive compensation section?

A.	The list of peer companies is disclosed in one of the footnotes in the executive compensation section. Top^

Q. Is the same list of peer companies used for a company's allowable cap on an equity plan proposal?

No, the list of 12 peer companies shown in the executive compensation section is not the same peer group used in determining a company's allowable cap calculation on equity plan proposal. The peer group used for benchmarking executive pay is different and narrower than that used for creating the allowable cap calculations for stock-based compensation. Top^

Q. Who can I contact if I disagree with the GICS classification?

A.	ISS does not classify companies into the GICS codes. Please contact Standard & Poor's at 1-800-523-4534 if you believe that a company has been misclassified. Top^

Listing Named Executive Officers

Q. How many named executive officers' total compensation data are shown in the executive compensation section?

The executive compensation section will generally reflect the same number of named executive officer's total compensation as disclosed in a company's proxy statement. However, if six or more named executive officers' total compensation has been disclosed, only five will be shown in the section. Top^

Q. A company's CEO has resigned and there is a new CEO in place. Why does the executive compensation section continue to show the former CEO's total compensation and not that of the current CEO's?

A.	If the former CEO has been with the company for at least 11 months for the past complete fiscal year, his/her total compensation will be reflected in the analysis. The new CEO pay data is likely to be shown in next year's ISS proxy analysis. Top^

Executive Compensation Section

Q. How did Equilar calculate Total Direct Compensation for ISS under the former SEC disclosure rule?

Total Direct Compensation = Cash Compensation + Long-Term Awards + Other Compensation

Cash Compensation = Salary + Bonus
*Salary - base salaries have been annualized for executives that joined mid-year.
*Bonus - as stated in the Summary Compensation Table.

Long Term Awards = Grant Date Present Value of Options + Restricted Stock + LTIP Payouts
*Grant Date Present Value of Options - as calculated by Equilar; please see Black-Scholes Formula.
*Restricted Stock - nominal value as stated in the Summary Compensation Table.
*LTIP Payouts - nominal value as stated in the Summary Compensation Table.

Other Compensation
*Other Annual Compensation - as stated in the Summary Compensation Table.
*Other Compensation - as stated in the Summary Compensation Table. Top^

Q. How does Equilar calculate Total Compensation for ISS under the new SEC disclosure rule?

Total Compensation = Base Salary + Bonus + Non-equity Incentive Plan Compensation + Stock Awards* (full grant date value as taken from the company’s Grants of Plan-based Award Table) + Option Awards** (full grant date value as calculated by Equilar) + Change in Pension Value and Nonqualified Deferred Compensation Earnings + All Other Compensation

Please note that the above calculation of Total Compensation is different from the calculation of Total Direct Compensation (TDC) that Equilar displays on its website. The difference is due to the treatment of non-equity incentive plan compensation. The above calculation uses actual non-equity incentive plan payouts while Equilar uses target cash payouts based on the Grant of Plan-based Awards table. Equilar’s website also shows TDC As Reported but this uses different assumptions for the equity compensation (based on what is disclosed in the Summary Compensation Table).

*Stock Awards - Grant date value as reported in the Grants of Plan-Based Awards Table for any stock awards, including time-vested awards and performance shares. If the grant date value is not reported, the number of target units/shares multiplied by the closing stock price on the grant date will be calculated.

**Option Awards - Grant date present value of options using Black-Scholes Option Pricing Model as calculated by Equilar. Top^

Q. What is Equilar's Black-Scholes methodology?

Variable	Item	Source	Comments
C	Option Value	Calculated	N/A
S	Stock Price	Proxy	N/A
E	Exercise Price	Proxy	N/A
?	Volatility	SunGard	Historical three-year stock price volatility measured on a daily basis from the date of grant. If a company has not been publicly traded for at least three years, Equilar measures volatility from the IPO date through grant date.
q	Dividend Yield	SunGard	Cumulative dividends for the 12 months prior to the option grant date divided by stock price (adjusted for stock splits over the period).
r	Risk Free Rate	SunGard	U.S. Government Bond Yield on the date of grant corresponding to the term of the option. For example, if the option has a 10-year term, the risk free rate is the 10-year U.S. Government Bond Yield on the date of grant.
t	Term/Expected Life	Proxy	Full term of the option.
e	Base of Natural Logarithm	N/A	N/A
ln	Natural Logarithm	N/A	N/A
N(x)	Cumulative Normal Distribution Function	N/A	N/A

Top^

Q. Why is the stock awards figure different from the company's disclosed figure under the new SEC disclosure rule?

The stock awards figure in the executive compensation section shows the full grant date value rather than the amortized value over the requisite period. The full grant date value is reported in the Grants of Plan-Based Awards table. If the full grant date value is not reported, the target number of units/shares under equity incentive plan is multiplied by the closing stock price on the grant date. Top^

Q. Why is the option awards figure different from the company's disclosed figure under the new SEC disclosure rule?

A.	The option awards figure in the executive compensation section is the estimated present value of options calculated using Black-Scholes Option Pricing Model under full-term assumptions. See question number three under Executive Compensation for the detailed Black-Scholes methodology. Top^

Q. Why is the total compensation figure different from the company's reported figure?

All pay elements, with the exception of stock awards and option awards, are taken from the company's most recent proxy statement. The stock awards figure is the full grant date fair value as disclosed in the Grants of Plan-Based Awards Table and the option awards figure is calculated under full-term assumptions using Black-Scholes Option Pricing model. Another possible difference could be due to base salary of a newly-hired or appointed executive who join mid-year. Top^

Q. Are salaries annualized?

Equilar annualizes salaries for all executives who join mid-year. Wherever possible, Equilar attempts to take salary figures directly from the employment agreement or offer letter. When this is not available, we calculate an annualized base salary based on the executive's start date and the fiscal year end date. If a specific date is not disclosed, we assume the start date is the middle of the month in which the executive joined. Top^

Executive Compensation Related Policies – Pay for Performance Policy

Q. With respect to the Pay for Performance policy, how does ISS define total direct compensation under the new disclosure rules?

The Pay for Performance policy states that if a company has negative one-year and three-year fiscal total shareholder returns, and its CEO also had an increase in total direct compensation from the prior year, it would require closer scrutiny. If more than half of the increase in total direct compensation is attributable to the equity compensation, ISS may recommend a vote against the equity plan in which the CEO participates. The pay for performance policy requires a careful examination of the situation and does not result in an automatic withhold from the compensation committee members and/or an against vote on the equity plan proposal as detailed below.

The pay-for-performance policy first identifies companies with negative stock performance for the one-year and three-year fiscal periods, coupled with an increase in total pay for the CEO. The policy then compares the company's stock performance against its industry group (which is the four-digit GICS and six-digit GICS groups, with emphasis on the six-digit GICS). The comparison of a company's stock performance against its four-digit GICS and six-digit GICS groups allows shareholders to gauge if there has been a widespread economic downturn for the industry. If a company had sustained negative stock performance and did not under-perform its industry group, this company is unlikely to trigger a withhold vote on the pay-for-performance policy.

ISS further examines the compensation committee report or the compensation discussion & analysis (CD&A) to understand the source of increase. Is the increase attributed to performance-based compensation like performance-based stock or time-based restricted stock? The compensation committee report or the CD & A should provide enlightening and meaningful disclosure with respect to the committee decisions on executive pay and the underlying rationale for increases in pay despite weak financial conditions. Boilerplate language in the report is strongly discouraged. ISS defines total direct compensation as the sum of all pay components. Specifically, it is the sum of base salary, bonus, non-equity incentive plan payouts, stock awards (based on full grant date value for restricted stock or target award value for performance shares), stock options (based on Black-Scholes Option Pricing Model and full-term assumptions, change in pension value and deferred compensation and all other compensation. Top^

Q. Under the Pay for Performance policy, if the increase in year-over-year compensation is due to the assumptions in pension calculation, will it result in unfavorable vote recommendations on compensation committee members and/or the proposed equity plan?

Generally not. However, we could envision scenarios where the change in pension value and deferred compensation was significantly higher due to a special arrangement where the executive has received additional pension years, which may result in withhold vote recommendations from the compensation committee. Top^

Q. A company recently adopted a new omnibus stock plan that permits the repricing of stock options. Shareholders approved the omnibus stock plan at the company's annual meeting. Subsequently, the company decides to conduct an option exchange program and is not seeking prior shareholder approval as the omnibus stock plan has been approved by shareholders. The terms and conditions of the option exchange program were not revealed in the plan proposal or plan document. What is ISS' position on this situation?

ISS does not oppose options repricing or option exchange programs as long as shareholders have a voice in such programs. ISS believes that the company should disclose the terms and conditions of the proposed option exchange program and seek approval from shareholders. By not seeking prior shareholder approval, ISS will generally recommend a vote to "WITHHOLD" from the compensation committee who approves the option exchange program and will continue to recommend an "AGAINST" vote on the company's omnibus stock plan that permits repricing of stock options or stock appreciation rights. Top^

Executive Compensation Related Policies – Options Backdating

Q. Last year, ISS recommended withholds at several companies that were alleged with options backdating. Will ISS continue to recommend WITHHOLD this year on this issue?

Generally, ISS would only recommend WITHHOLDS on companies that did not file their proxy statements last year and/or companies that have classified boards where we could not recommend WITHHOLD on the relevant directors. Companies that had received WITHHOLD vote recommendations would not receive the same vote recommendation this year for options backdating issue. Top^

Executive Compensation Related Policies – Poor Pay Practices Policy

Q. Why was the category of poor disclosure added to the Poor Pay Practices Policy?

The category of “poor disclosure” has been added as a result of general ISS Research feedback. Additionally, this topic received considerable attention in first year feedback provided by the SEC and other investor advocates under the new disclosure rules. Please see the 2008 policy updates for more information. Top^

Q. Why will ISS consider issuing withhold vote recommendations in situations where the company has been warned of the poor pay practice and the item(s) are not contractually bound?

A.	In these instances, ISS’ concerns are noted in the company’s previous analysis. The company has had ample opportunity to review pay practices in light of ISS’ analysis, review their stated competition and/or general market and make appropriate adjustments. Top^

Executive Compensation Related Policies – Advisory Vote Management Proposal

Q. How will the factors be weighted in evaluating U.S. company advisory votes on pay?

The U.S. factors do not have any specific weightings. All aspects will be considered in the context of the company’s particular circumstances and the board’s disclosed rationale for its practices. In most cases, AGAINST recommendations would likely result only when there is a preponderance of negative compensation factors. Top^

Q. How will ISS evaluate the U.S. factors in making advisory pay vote recommendations?

For the Relative factors, ISS will consider:

the company’s rationale for using particular metrics in its incentive plan, particularly how they relate to its business strategy;
whether the disclosed peer group(s) used to set pay targets are appropriate for the company’s size, industry, and lifecycle stage;
whether pay trends are in line with company performance trends (especially as measured by long-term shareholder return); and
whether any excessive disparities between pay levels for the CEO and other NEOs indicate structural concerns that could be detrimental to long-term shareholder value.

For the Design factors, ISS will consider:

whether a substantial proportion of the CEO’s total compensation package is tied to company performance, and
whether any nonperformance-related elements are particularly excessive.

For the Communication factors, ISS will consider:

how effectively the CD&A describes and explains the company’s pay program, based on clarity and comprehensiveness of the disclosures, and
whether the board demonstrates responsiveness to substantive investor input regarding its executive compensation program. Top^

Q. Will recommendations for advisory votes on pay be based on the amount of compensation reported for top executives?

Pay levels alone will not determine recommendations. If reported pay is deemed to be excessive relative to company performance and/or to peer benchmarks, the company’s pay practices would be closely scrutinized to ascertain whether they contributed to the disconnects and warrant a negative recommendation for the advisory pay vote. Top^

Q. One of the five global principles addresses director pay. Will ISS’s analysis of U.S. company advisory votes on pay consider non-employee directors’ compensation?

At this time, outside directors’ pay will not be specifically considered in recommendations for U.S. company votes, although it is a factor in some other markets. ISS’s U.S. voting policies generally are aligned with the principle of paying directors appropriately to reflect their time, efforts, and expertise, and not compromise their independence. Top^

Q. If ISS were to recommend a vote AGAINST on management’s Advisory Vote proposal, would ISS recommend a vote to WITHHOLD/AGAINST the company’s compensation committee too?

Generally, ISS may recommend a vote AGAINST management’s Advisory Vote proposal for the first year and WITHHOLD/AGAINST compensation committee members for the second year if they fail to address the poor pay practice. However, depending on the unique circumstances of the company, ISS could potentially recommend a vote AGAINST management’s Advisory Vote proposal and WITHHOLD/AGAINST compensation committee members if the company’s executive compensation is very problematic. Top^

Financial Data: Total Shareholder Return and Revenue

Q. Where does ISS obtain a company's 1-year fiscal total shareholder return, 3-year fiscal total shareholder return and revenue?

A.	ISS obtains all financial data in the executive compensation section from Standard & Poor's Research Insight. Top^

Q. How does Research Insight calculate 1-Year fiscal Total Shareholder Return (TSR)?

A.	The one-year total shareholder return is the annualized rate of return reflecting price appreciation plus reinvestment of monthly dividends and the compounding effect of dividends paid on reinvested dividends over a one-year period. Top^

Q. How does Research Insight calculate 3-Year fiscal Total Shareholder Return (TSR)?

A.	The three-year total shareholder return is the annualized rate of return reflecting price appreciation plus reinvestment of monthly dividends and the compounding effect of dividends paid on reinvested dividends over a three-year period. Top^

Q. How does Research Insight calculate company revenue?

A.	Revenue is the gross sales (the amount of actual billings to customers for regular sales completed during the period) reduced by cash discounts, trade discounts, and returned sales and allowances for which credit is given to customers. Top^

Q. How does Research Insight calculate company net income (loss)?

A.	Net income or loss is reported by a company after expenses and losses have been subtracted from all revenues and gains for the fiscal period including extraordinary items and discontinued operations. Top^

Q. Why is the CEO pay as percent of a company's revenue showing NA?

A.	If a company's revenue is zero or negative, the CEO pay as percent of a company's revenue will be NA. Top^

Q. Why is the CEO pay as percent of company's net income showing NA?

A.	If a company's net income is zero or negative, the CEO pay as percent of a company's net income will be NA. Top^

Section II: Shareholder Value Transfer, Allowable Cap & Burn Rate

Q. In the stock option overhang carve-out policy, what does ISS consider as sustained positive stock performance?

ISS generally looks for positive 5-year total shareholder return (TSR) as well as positive year over year performance for the past five years on a fiscal year basis at the time of the analysis. Exceptions may be made if stock performance was negative for the first two years and then positive for the remaining three years. A comparison of the company’s five-year TSR against its four-digit GICS group can be helpful. Top^

Q. How does ISS define high overhang cost in applying the stock option overhang carve-out policy?

High overhang cost means that outstanding options and stock awards (“C” shares) exceed the company’s specific allowable cap. Overhang does not include remaining shares under existing equity plans. If the company meets all of the other conditions to be eligible for a carve-out, the cost of the company’s equity compensation program will be calculated excluding the carved out shares. Top^

Q. How does ISS determine the size of the carve-out in the stock option overhang carve-out policy?

The size of the carve-out is determined by re-calculating the cost of the company’s overhang excluding in-the-money and vested options outstanding in excess of six years. The percentage reduction in shareholder value transfer cost attributable to the carved out shares from the cost of overhang represents the size of the carve-out. Top^

Q. What does ISS look for with respect to the distribution of awards to executives vs. other employees (concentration ratio) in the stock option overhang carve-out policy?

A.	ISS will calculate the concentration ratio in the past fiscal year, defined as total equity grants to the top five executives divided by total equity grants to employees and directors. Concentration ratios greater than 50 percent to named executive officers may be concerning. Top^

Q. My company has a secondary offering since the record date and has a significant increase in common shares outstanding. Will ISS use the more recent common shares outstanding figure or the record date figure?

A.	ISS will generally use the more updated common shares outstanding figure if the company discloses the secondary offering and the updated figure in its proxy statement. Top^

Q. My company made a burn rate commitment in 2006 for the 2007, 2008 and 2009 fiscal periods. My company would like to seek shareholder approval for a new equity plan in 2008. Is the company still subject to the burn rate policy in 2008 when we request shareholder approval for a new equity plan in 2008 or do we automatically pass the burn rate test due to the burn rate commitment in 2006?

A.	The company is still subject to the burn rate policy in 2008. The 2006 burn rate commitment resulted in a positive vote recommendation in 2006. Top^

Q. What is the application of the burn rate policy on a company that has been recently acquired?

A.	For companies that have been acquired, we would generally use the three-year average burn rate data for the acquirer. For companies that have merged in a merger of equals, we would generally average the three-year average burn rate for both companies. Top^

Q. My company is interested in adopting an on-going Transferable Stock Option (TSO) program. Does ISS support such program?

Transferable stock options have been marketed as potentially the next generation of equity awards. Shareholders should have a voice in such programs as the newness of such program may spark off an unprecedented trend in the marketplace. The authority to transfer stock options to a third-party financial institution without revealing the mechanics and structure of the program is insufficient for ISS to recommend a vote "FOR" the equity plan proposal. ISS has detailed the TSO policy for an on-going TSO program and a one-time TSO program in the 2006 Policy Updates. In 2007, ISS has removed the forfeiture calculation for all award types. Therefore, the details and the structure of an on-going TSO program must be disclosed in order for shareholders to understand the potential implication and for ISS to model the appropriate cost of the program. The specific criteria to be considered in evaluating these proposals continue to evolve and may include, but not limited, to the following: eligibility, vesting, bid-price, term of options, transfer value to third-party financial institution, employees and the company, among others. Top^

Q. Are repriced options counted in the burn rate calculation?

A.	ISS generally will not include repriced options in the year which they were granted if (1) the company requested shareholder approval for the option exchange program, and (2) the company provides a breakdown of repriced options and regular options for that particular year. Top^

Q. A REIT company has a significant number of outstanding operating partnership units. How will ISS treat these outstanding operating partnership units?

A.	ISS will treat these outstanding operating partnership units as convertible equities. Starting in 2007, all convertible equities are no longer part of a company's market value calculation. Top^

Q. Are company 401(k) matches or qualified employee stock purchase plan (ESPP) shares denominated in company stock included in the overhang of the shareholder value transfer model and the burn rate analysis?

A.	No, these shares are generally not included in the shareholder value transfer model and the burn rate analysis. Top^

Q. How does ISS treat deferred shares or units?

When calculating shareholder value transfer for an equity incentive plan proposal all shares available for future grant or outstanding as deferred shares under deferred compensation plans or arrangements will be included in the shareholder value transfer analysis. The only exception to this is in cases where a deferred compensation program is in place solely for non-employee directors to receive their fees or retainers in lieu of cash and there is no company match or premium applied to compensation received in the form of equity. Deferred stock units that are payable in stock are also included in the shareholder value transfer analysis. The rationale is to capture all equity compensation provided to executives in the shareholder value transfer calculation, including compensation that is in addition to or in-lieu of cash compensation. Please note that this policy has been in place for a number of years and that this is not a new policy. Top^

Section III: Shareholder Proposals

Q. For performance-based equity shareholder proposals, if a company does not disclose the performance metric of the performance-based equity program, ISS would vote for the shareholder proposal regardless of the outcome of the first step to the test. Does the term "performance metric" refer to the performance measure (e.g., return on equity) or the specific financial targets for that metric (e.g., return on equity of 15%)?

The term "performance metric" refers to both the performance measure and the various financial targets for any payouts to be made. It is necessary to disclose the minimum, target and maximum financial targets in order to receive the various levels of payouts. For example, a ROE of 10% will result in zero payment, a ROE of 15% will result in 100% of target payment and a ROE of 20% or more will result in 150% payment. Top^

Q. What is ISS' policy on shareholder proposals requesting clawbacks or recoupment of unearned management bonuses or equity?

In voting shareholder proposals requesting clawbacks or recoupment of bonuses or equity, ISS generally considers the following, but not limited to the following factors, on a case-by-case basis:

the coverage of employees, whether it applies to all employees, senior executives or only employees committing fraud which resulted in the restatement;
the nature of the proposal where financial restatement is due to fraud;
whether or not the company has had material financial problems resulting in chronic restatements;
the adoption of a robust and formal bonus/equity recoupment policy.

If a company's bonus recoupment policy provides overly broad discretion to the board in recovering compensation, generally vote FOR the proposal.

If the proposal seeks bonus recoupment from senior executives or employees committing fraud, generally vote FOR the proposal. Top^

Q. What is ISS' policy on shareholder proposals requesting a board disclose the company's relationships with its executive compensation consultants or firms?

A.	ISS generally votes FOR shareholder proposals seeking disclosure regarding the company's, board's, or committee's use of compensation consultants, such as company name, business relationship(s) and fees paid. Top^

Q. What is ISS' policy on the advisory vote on executive pay (say-on-pay) proposals?

A.	ISS generally votes FOR shareholder proposals that call for non-binding shareholder ratification of the compensation of the named executive officers and the accompanying narrative disclosure of material factors provided to understand the summary compensation table. Top^

Q. What is ISS' policy on the pay-for-superior performance proposals?

In voting shareholder proposals requesting the board establish a pay-for-superior performance standard in the company's executive compensation plan for senior executives, ISS generally considers the following, but not limited to the following factors, on a case-by-case basis:

What aspects of the company's annual and long -term equity incentive programs are performance driven?
If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates disclosed to shareholders or are they benchmarked against a disclosed peer group?
What are the company’s target positioning on short-term and long-term incentive programs?
Can shareholders assess the correlation between pay and performance based on the current disclosure? Top^

Q. What is ISS’ policy on 10b5-1 Plan proposals?

Case-by-case depending if the company has adopted any or all of the following principles:

Adoption, amendment or termination of a 10b5-1 plan must be disclosed within two business days on Form 8-K;
Amendment or early termination of a 10b5-1 plan is allowed only under extraordinary circumstances, as determined by the board;.
Ninety days must elapse between adoption or amendment of a 10b5-1 plan and initial trading under the plan;
Reports on Form 4 must identify transactions made pursuant to a 10b5-1 plan;
An executive may not trade in company stock outside the 10b5-1 Plan;
Trades under a 10b5-1 plan must be handled by a broker who does not handle other securities transactions for the executive.Top^

Q. What is ISS’ policy on share buyback holding periods proposals?

ISS will generally vote against proposals where executives are prohibited from selling company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock, primarily due the broad generality of the proposal and the potential duration of the share buyback. However, ISS generally would support this proposal when there is a pattern of abuse by executives exercising options or selling shares during periods of share buybacks.Top^

Q. What is ISS’ policy on anti tax gross ups proposals?

A.	Case-by-case depending on the type, amount and extent of gross-ups provided to executives. ISS believes that tax gross-ups for executives are not an efficient use of corporate assets. Top^

Q. What is ISS’ policy on internal pay equity proposals?

A.	Case-by-case depending on the company’s practice and disclosure on internal pay equity in setting and determining compensation of named executive officers. Top^