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Institutional Shareholder Services Releases White Paper on Pay for Performance
Practical Law Legal Update 4-516-9888 (Approx. 4 pages)
Institutional Shareholder Services Releases White Paper on Pay for Performance
by PLC Corporate & Securities and PLC Employee Benefits & Executive Compensation
| Published on 20 Dec 2011 • USA (National/Federal) |
Institutional Shareholder Services (ISS) published a white paper on its new approach to evaluating pay for performance alignment.
On December 20, 2011, Institutional Shareholder Services (ISS) published a white paper that provides more information on its new pay-for-performance methodology in advance of the 2012 proxy season. The key goals of the new methodology are to:
- Measure the alignment between executive compensation and company performance over multiple time horizons.
- Use multiple measures to assess this alignment.
- Provide more information about pay-for-performance concerns to investors and companies.
The new approach to evaluating pay for performance in 2012 involves:
- An initial quantitative assessment.
- If necessary, a follow-up, in-depth, qualitative review.
The initial quantitative assessment has two components:
- A relative evaluation that ranks CEO pay and performance relative to peers over three years. This evaluation involves two measures:
- a comparison of the percentile ranks of a company's CEO pay and total shareholder return, compared to a peer group, over one- and three-year periods. The one-year period result is given a 40% weighting and the three-year period result is given a 60% weighting; and
- expression of the company's CEO pay in the past year as a multiple of the median CEO pay of the peer group for the same period.
- An absolute evaluation of annual CEO pay trends relative to total shareholder return trends over the past five years.
ISS highlights the following criteria in its relative evaluation:
- Peer groups are selected for comparing pay and company performance within a group of companies that are reasonably similar in terms of industry profile, size and market capitalization, not for benchmarking pay.
- The evaluation is focused on disclosed pay and equity grants, which should be aligned with the company's performance trends or, if not, should be performance based, rather than the amounts that are actually paid.
The quantitative component is designed to identify companies that have demonstrated significant misalignment between CEO pay and company performance over time. In particular, ISS will look at whether the results for any one of the three measures on its own triggers a high concern for a pay-for-performance disconnect or whether the results of the three measures taken together collectively trigger high concern.
For those companies that appear to have a misalignment between pay and performance, ISS will conduct a qualitative assessment that may include a review of some or all of the following:
- Strength of performance-based compensation, including a review of the ratio of performance to time-based equity awards and the overall ratio of performance-based compensation to total compensation, with a particular focus on the compensation committee's most recent decisionmaking.
- The company's peer group benchmarking practices.
- Results of financial or operational metrics, if any, that trigger cash payments.
- Any special circumstances, such as recruitment of a new CEO.
This follow-up qualitative assessment is designed to uncover mitigating factors or potential causes of the misalignment.
For more information on changes for the 2012 proxy season, see Legal Update, Institutional Shareholder Services Releases 2012 Updates to its Proxy Voting Guidelines.