Institutional Shareholder Services (ISS) has announced its final policy updates for the 2026 voting season (substantially adopting the proposed changes outlined in our previous article). Some of the changes refine existing expectations, while others reflect changes in how companies are evaluated on remuneration, governance and shareholder responsiveness.
While business strategy should always come first when developing appropriate executive compensation programs, companies may need to consider how future disclosures regarding such programs may be affected by evolving ISS policies and investor expectations.
A long-term view of pay-for-performance: Moving to 5 years
One of the most important developments is the amendment to the ISS to extend the pay-for-performance (PFP) period from three to five years. ISS has always considered long-term collaboration, and this expanded horizon has practical implications. Some companies that did not raise significant concerns under ISS's traditional three-year assessment may face new scrutiny if previous pay-for-performance issues that were previously addressed and considered 'past' are re-entered into the analysis.
Given this change, companies should review their five-year pay and performance trajectory and anticipate how the expanded lens of ISS will view past and future decisions. If a five-year forecast could lead to an adverse ISS recommendation, companies may want to discuss how providing some explanation in the CD&A provides a clear, confident, and consistent long-term story despite the five-year optics.
If the vesting period is long enough, time-based shares will be reviewed.
ISS takes a more nuanced stance regarding time-based stock compensation. While performance-based equity remains the gold standard, ISS suggests that time-based compensation may be viewed more favorably if it includes an extended vesting period or a clearly defined retention period.
For companies that rely on time-based equity compensation, CD&A must clearly articulate the strategic rationale for such compensation, for example, its link to leadership retention and continuity or market competitiveness. If these time-based awards have longer vesting periods, proxy statements should emphasize how long-term vesting keeps compensation aligned with long-term business performance and shareholder outcomes.
Increased scrutiny of director remuneration even in non-consecutive years
ISS's 2026 policy reflects increased sensitivity to non-employee director (NED) pay, particularly where standards appear to be too high, questionable benefits are included, or performance awards or severance pay is used inappropriately. (One notable substantive change from the proposed policy is the removal of stock options from the list of problematic non-employee director pay practices, which is welcome news for industries such as life sciences, where stock options may be routinely used in director pay.)
What is new is that the definition of what constitutes a “pattern” of inappropriate pay is now broader. ISS can now operate even if the years in question are not consecutive. This means companies need to review their director pay practices over a multi-year period to ensure that their representatives clearly represent that:
- How does a director's salary compare to other companies in the same industry?
- why that structure is appropriate, and
- Why are unusual elements (such as severance pay and special stock awards) justified?
Tighter requirements under the Equity Plan Scorecard (EPSC)
Regarding equity plan proposals, ISS's updated EPSC approach includes two changes that are important to disclosure.
- Companies must disclose the cash-denominated limits applicable to non-employee director compensation.
- Even if a plan receives a good score overall, ISS may issue a “negative” recommendation if the plan lacks sufficient “positive features” (such as a minimum vesting period, clear performance criteria, etc.).
Companies preparing equity plans for shareholder voting should ensure disclosures that explicitly highlight the plan's structural strengths and address areas where ISS may find safeguards insufficient.
More flexible standards for Seion Pay support
The ISS final rule takes a more flexible view of what is an appropriate response after a low payment decision vote (less than 70% support). Importantly, even if a company does not receive direct feedback from investors, meaningful engagement efforts may be considered responsive, as long as the company clearly explains its support and the rationale behind its decision to change or not change compensation.
Changes to Schedule 13D and 13G filings can make it difficult for companies to identify and connect with the investors who actually drove the payment outcome. In some cases, shareholders who cast influential votes may have lost important positions or been unable to engage by the time support begins. Against this backdrop, investors' silence should not be interpreted as a lack of company effort. In some cases, it may simply reflect that ownership is dynamic, dispersed, or difficult to access.
This update increases the importance of thoroughly documenting your engagement efforts and bringing that story to CD&A. Even outreach that results in limited or no feedback from investors provides appropriate context. Companies must be prepared to disclose:
- Who were they trying to get involved with?
- What topics were raised?
- what they heard (even minimally), and
- How did that feedback influence subsequent decisions?
In practice, this gives companies more room to demonstrate good faith while reinforcing the need for transparent and well-documented engagement stories in an increasingly complex ownership environment.
Get ready now: Practical steps for businesses
For companies to consider ISS's new guidance when drafting their current proxy statements will help reduce the risk of an adverse recommendation.
- We review five years of compensation and performance data to assess what the new PFP horizon looks like through the lens of ISS. If you think ISS will view a five-year PFP differently than a historical three-year test, consider providing a supporting explanation of how the company performed over a longer period of time.
- If time-based equity is a significant part of the program, the disclosure should highlight the rationale and, if applicable, the long vesting period.
- Review director remuneration over the past few years to check for inflated rates or unusual practices. If you find an anomaly, please provide a clear rationale for the anomalous year, not just the previous year.
- If your equity plan seeks shareholder approval, ensure that relevant disclosures highlight positive features and set out specific director remuneration limits.
- Thoroughly document shareholder engagement. Even “failed” efforts can help support positive response evaluations.
ISS's final update in 2026 reflects a broader trend toward a focus on long-term collaboration, transparent governance, and thoughtful shareholder engagement. By drafting disclosures with these changes in mind, companies can position themselves for a successful voting season.
