ISS FAQs on pay and governance clarify 2026 voting policy updates 

January 12, 2026

Proxy advisor Institutional Shareholder Services (ISS) published its 2026 Proxy Voting Guidelines along with several sets of FAQs and whitepapers with additional information. The policy changes were highlighted in policy updates published in November. Key pay and governance topics covered in the November release include equity compensation mix, say-on-pay (SOP) responsiveness, pay-for-performance (P4P) assessments and excessive director pay (see ISS final voting policy updates: Key implications for the 2026 proxy season). 

The Executive Compensation FAQs and Procedures & Policies (Non-Compensation) FAQs offer more information on these and other topics, such as ISS’s views on acceptable time horizons for time-based awards. They also cover new topics such as executive security protections and excluding shareholder proposals from proxy ballots.

The 2026 changes are more extensive than in recent years, reflecting the evolving political and regulatory climate and shifting investor views. They are effective for annual meetings held on or after Feb. 1, 2026. 

The Executive Compensation FAQs cover the mix of performance-based vs time-based equity awards, board responsiveness to a low SOP vote, time horizons for P4P assessments, and executive security protections. 

When a company receives low SOP support (less than 70%), ISS reviews proxy disclosure of shareholder engagement efforts — including feedback received and company actions — to assess compensation committee responsiveness. Failure to respond can trigger a negative SOP vote recommendation the following year. Given SEC staff guidance stating 5% shareholders could lose their status as “passive” vs “active” investors if they engage with companies, shareholders may be less likely to provide specific feedback on executive pay. To address this development, ISS has tweaked how it evaluates responsiveness as follows:

• If a company discloses meaningful engagement efforts but states it was unable to obtain specific feedback (or that it received only neutral or positive feedback), ISS will continue to assess company actions taken in response to the vote, and the company's explanation as to why its actions benefit shareholders.
• Even without specific shareholder feedback, ISS will generally view the absence of any meaningful positive company actions as insufficiently responsive, as the low support for the proposal is proof of investor concerns.

Factors ISS will consider in assessing a company’s response include disclosure of details on the breadth of engagement, specific feedback received from investors, meaningful actions taken to address the issues that contributed to the low level of support and whether the issues raised are recurring or isolated.

If a company demonstrates poor responsiveness, ISS will generally recommend a vote against the SOP proposal and compensation committee members (or limit the adverse recommendation to the SOP proposal if the board has demonstrated limited (but not robust) responsiveness). In cases of multiple years of poor responsiveness indicating a systemic problem around board stewardship and oversight, ISS may recommend against the full board.

ISS has updated its FAQs to reflect the longer time horizons for three of its four P4P quantitative screens to align with how investors typically assess a company's long-term performance when comparing pay relative to peers:

• Relative Degree of Alignment (RDA) and Financial Performance Assessment (FPA) will be measured over five years (vs the previous three years).
• Multiple of Median (MOM) will be measured over one- and three-year periods (vs the most recent fiscal year).

There’s no change to the Pay-TSR Alignment (PTA) screen, which already has a five-year time horizon. More details are available in the Pay-for-Performance Mechanics whitepaper and Peer Group FAQs.

The longer time horizons could resurface P4P issues from four or five years ago (e.g., high CEO pay and poor TSR performance) that would have been excluded under the three-year horizons. So, companies should simulate ISS’s P4P assessments using the new time horizons and look at older proxy reports to see the pay figures ISS used for those years. 

According to a new FAQ, ISS isn’t likely to be concerned by relatively high security-related perquisite values if a company discloses a reasonable rationale for the costs. ISS acknowledges that security-related protections are likely to increase in both prevalence and value given recent security threats to executives. The FAQ states that disclosure of an internal or third-party assessment, and a broad description of the security program and its connection to shareholder interests, would generally mitigate concerns except in the case of outliers where an adequate rationale isn’t provided in proxy disclosure.

The Procedures & Policies (Non-Compensation) FAQs addressing policies and procedures cover excessive non-employee director pay and the exclusion of shareholder proposals.

ISS updated its FAQs to reflect that it will recommend voting against members of the board committee that approves director pay for unreasonable or problematic pay in the first year of an occurrence or in the event of a pattern identified across non-consecutive years absent a compelling rationale or other mitigating factors. This supplements ISS’s current policy to issue adverse vote recommendations only if there are issues for two consecutive years without a compelling rationale.

A new FAQ addresses situations where a company excludes a shareholder proposal from its proxy ballot in compliance with the recent SEC announcement that it will allow companies to exclude most proposals, and will not be issuing no-action letters (see Evolving rules on proxy advisors, engagements and proposals shake up 2026 proxy season playbook). ISS won’t analyze whether a proposal was properly excluded but expects companies to explain the basis for exclusion and it may view the failure to present a clear and compelling argument as a governance failure. In these cases, ISS may highlight the exclusion for clients in its reports or, in rare cases, recommend voting against agenda items, such as individual directors, committee members, or the full board.

The Equity Compensation Plans FAQs reflect the updates ISS made to how it assesses equity plan proposals. Two of the changes were included when ISS released its 2026 updates: a new negative overriding factor and a new factor in the plan features pillar. The FAQs cover these additions as well as tweaks to the scoring of factors and updated burn-rate benchmarks. For more information, see ISS's 2026 equity plan assessment methodology.

After several years of modest changes, the 2026 executive compensation updates reflect meaningful changes in select areas that companies should be aware of for the upcoming proxy season. However, it’s unclear if ISS recommendations will carry the same weight as they have in prior years as the Trump administration, Federal Trade Commission, business groups and some states continue to try to reduce the influence of proxy advisors on pay and governance matters. Also, ISS and Glass Lewis are modifying their business models to accommodate individual investor priorities, and many fund managers are restructuring their investment stewardship functions and changing how they use proxy advisors or eliminating them entirely. For example, JP Morgan announced it will replace proxy advisor services with a proprietary AI-based platform for portfolio company votes, according to a WSJ article.

The potential waning influence of proxy advisory firms and their new flexibility on certain matters, such as the use of time-based equity awards, may be welcome news for companies. But given these developments, companies can’t rely on proxy advisor voting guidelines to secure shareholder support for SOP and other matters. Instead, companies need to stay up to date on fast-changing investor voting policies and patterns, and proactively engage with investors to understand their pay and governance priorities and concerns. For guidance on how to approach the 2026 proxy season, see Preparing for 2026: Ten tips for compensation committees and HR teams.

Note: Mercer is not engaged in the practice of law or accounting, and this content is not intended as a substitute for legal and accounting advice. Accordingly, you should secure the advice of competent legal counsel and accountants with respect to any legal or accounting matters related to this document.