ISS voting policy and QualityScore proposed updates impact executive and director pay, and E&S proposals 

October 31, 2025

Proxy advisor Institutional Shareholder Services (ISS) announced proposed updates to its US benchmark voting policies for the 2026 proxy season with impacts for executive and director pay and diversity. The changes respond to shifts in the regulatory landscape and the evolving views of investors and, in some cases, offer more flexibility to the proxy advisor to assess a company’s unique circumstances. The comment period runs through November 11.

Separately, ISS Sustainability Solutions, the sustainable investment arm of ISS STOXX, announced the release of annual methodology enhancements to its Governance QualityScore solution for global institutional investors. And, ISS STOXX introduced two new governance research services to give institutional investors more flexible options to support their proprietary investment stewardship programs. 

While companies and investors may welcome the added flexibility of the proposed policies and new governance services, the changes are likely to inject more uncertainty into the proxy season.

Background

As part of its annual policy development process, ISS sought input from companies, institutional investors, directors, and other stakeholders to understand their views on, among other things, several pay and governance topics (see Proxy advisors gear up for 2026: ISS launches policy survey, Glass Lewis previews methodology changes). The proxy advisor released the survey results in September (see ISS releases results of annual global policy survey) and proposed updates on October 30. ISS didn’t address all of the pay, governance and diversity, equity and exclusion (DEI) topics covered in the survey (e.g., director overboarding) and it covered some not included in the survey (e.g., the time horizons of quantitative pay-for-performance (P4P) assessments and equity plan scorecard (EPSC) factors).                                                                 

Executive compensation

Performance- vs time-based equity awards. To reflect evolving investor views, ISS would take a more flexible approach to its evaluation of equity pay mix in its P4P qualitative review. Currently, ISS expects a majority of equity grants to have performance-based vesting. The drawbacks of this approach were discussed at the SEC’s June roundtable where some panelists expressed concerns that long-term incentive programs had become too one-size-fits-all in order to satisfy proxy advisor guidelines (see SEC roundtable: SEC lays the groundwork for significant changes to executive pay disclosure). Under the proposed updates, ISS would continue to evaluate a company’s equity program case by case in the context of company-specific factors and would view well-designed and clearly disclosed performance equity plans as a positive factor. But, under the more flexible approach, time-based awards with extended time horizons would also be viewed positively.

Say-on-Pay (SOP) responsiveness. ISS assesses compensation committee responsiveness when a company receives low SOP support (less than 70%) by reviewing proxy disclosure of shareholder engagement efforts, including the feedback received and how the company responded. Failure to respond can trigger a negative SOP vote recommendation the following year. However, 2025 SEC staff guidance has made 5% shareholders more cautious when they engage with companies because they could lose their status as “passive” vs “active” investors. Recognizing this, under the proposed update, ISS wouldn’t penalize a company for failing to engage with shareholders if it discloses sufficient attempts to do so but would continue to assess the company’s actions in response to the low vote and its explanation as to why such actions benefit shareholders. The update would also clarify factors ISS considers (e.g., board turnover) when there is low SOP support in connection with unusual circumstances (e.g., proxy contests, mergers, or bankruptcy).

Long-term alignment in P4P evaluation. To better align with how investors assess a company's long-term performance when evaluating compensation relative to peers, the proposed updates would lengthen the time horizons for three of ISS’s four P4P quantitative screens:

• Relative Degree of Alignment (RDA). The degree of alignment between the company's annualized TSR rank and the CEO's annualized total pay rank within a peer group, each measured over a five-year period (vs a three-year period).
• Multiple of Median (MOM). The multiple of the CEO's total pay relative to the peer group median would be measured over one- and three-year periods (vs the most recent fiscal year).
• Financial Performance Assessment (FPA). The rankings of CEO total pay and company financial performance within a peer group would be measured over five years vs three years.

No changes are proposed for the Pay-TSR Alignment (PTA) screen, which already has a five-year time horizon. ISS believes lengthening these time horizons will help assess sustained value creation and better smooth out short- to mid-term fluctuations, unusual one-time events, and external factors ― while also maintaining an assessment of pay quantum over the short term.

Excessive non-employee director pay

Under the proposed updates, ISS would recommend voting against members of the board committee that approves director pay for unreasonable or problematic non-employee director pay in the first year of an occurrence or in the event of a pattern identified across non-consecutive years. This would supplement ISS’s current policy to issue adverse vote recommendations only if there are issues for two consecutive years without a compelling rationale (cautionary language in proxy reports is provided in the first year). ISS would continue to identify companies with outlier non-executive director pay by comparing pay levels to those of other companies within the same index and 4-digit GICS industry group. Providing directors with excessive pay, problematic perquisites, performance awards, stock options, or retirement benefits would each be a problematic pay practice although the identification of one of these practices wouldn’t guarantee an adverse recommendation. For example, pay identified as marginally exceeding the relevant threshold in the absence of other escalatory factors or a multi-year pattern would continue to receive only a warning.

Equity plan scorecard

The proposed updates include two changes to how ISS evaluates equity plan proposals under the EPSC:

• Adding a new scored factor under the plan features pillar to assess whether plans that cover non-employee director awards disclose cash-denominated award limits. Limits help companies defend against lawsuits charging excessive director pay and are considered best practice. For 2026, the factor would apply only to the S&P 500 and Russell 3000 EPSC models.
• Introducing a new negative overriding factor where ISS would automatically recommend voting against an equity plan proposal if the plan lacks sufficient positive features under the plan features pillar, despite an overall passing score. For 2026, the factor would apply only to S&P 500, Russell 3000, and non-Russell 3000 EPSC models.

Positive plan features are: transparent disclosure around change-in-control vesting; prohibiting discretionary vesting; prohibiting liberal share recycling; requiring minimum vesting periods; prohibiting paying dividends (or equivalents) unless and until an award vests; and, if the proposed updates are adopted, including cash-denominated award limits for non-employee directors.

Environmental and social (E&S) shareholder proposals

In general, the proposed updates focus less on diversity, equity and inclusion (DEI) than might have been expected based on the survey questions. The only DEI-related change would replace ISS’s current policy to generally support certain E&S-related shareholder proposals (unless specific conditions warrant otherwise) with a fully case-by-case approach. The four categories of E&S-related shareholder proposals that would be affected are diversity and equal opportunity, political contributions, human rights, and climate change/greenhouse gas emissions. 

ISS Sustainability Solutions, the sustainable investment arm of ISS STOXX, a provider of data-centric research and technology solutions, released methodology enhancements to its Governance QualityScore solution for global institutional investors. Four new compensation factors for US companies address CEO vesting periods for the following equity awards: time-based options and/or stock appreciation rights, time-based restricted stock, performance-based options and/or stock appreciation rights and performance-based restricted stock.

ISS STOXX introduced two new governance research services to give institutional investors more flexible options to support their proprietary investment stewardship programs. To understand a specific shareholder’s concerns, companies may need to engage with them if they use these more customized services instead of relying on ISS’s benchmark recommendations.

• Gov360 delivers impartial research reports on global portfolio company shareholder meetings through data and analysis to support investor decision-making on voting items. The service doesn’t include vote recommendations but allows institutional investors to leverage ISS STOXX’s governance data to inform their independent vote decisions. Where investors take advantage of this flexibility, companies will no longer be able to rely on securing the firms’ support by adhering to their benchmark policies in designing their pay programs and making pay decisions. Voting outcomes will depend on multiple and sometimes overlapping investor policies and internal stewardship divisions.
• Custom Lens provides tailored research reports to give investors flexibility to customize data, analysis, and recommendations based on their proprietary voting policies and ISS STOXX will apply client-specific criteria to enable investors to showcase their custom policy recommendations and rationales along with the supporting data and analysis within a single document.

These services will make it harder for companies to presume they have shareholder support if they adhere to ISS’s benchmark policies in designing their pay programs and making pay decisions and, together with other developments, will significantly impact how companies navigate the proxy season. For example, in 2027 Glass Lewis will transition away from its standard benchmark proxy voting guidelines (see The end of Glass Lewis “benchmark” voting recommendations). Also, three large asset managers — BlackRock, Vanguard, and State Street — are dividing their proxy voting functions into distinct teams with separate decision-makers, policies and approaches, and passive fund managers are introducing “voting choice” or pass-through voting programs.  

The public comment period will close November 11. Final updates, including more details on how they will be applied, will be released before the end of November and be effective for annual meetings held on or after February 1, 2026. The final policies could cover topics not included in the proposals.

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.