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ISS Announces 2017 Updates to Its Pay-for-Performance Methodology
Practical Law Legal Update w-004-4507 (Approx. 5 pages)
ISS Announces 2017 Updates to Its Pay-for-Performance Methodology
by Practical Law Employee Benefits & Executive Compensation
| Published on 08 Nov 2016 • USA (National/Federal) |
Institutional Shareholder Services Inc. (ISS) announced changes to the methodology underlying its pay-for-performance models for US, Canadian and European companies. The changes take effect on February 1, 2017.
On November 8, 2016, Institutional Shareholder Services Inc. (ISS) announced changes to the methodology underlying its pay-for-performance models for US, Canadian and European companies. The policy updates for US companies include changes to:
- How ISS assesses financial performance when evaluating pay-for-performance.
- The companies subject to the Relative Degree of Alignment (RDA) assessment, one of three quantitative measures evaluated in ISS' initial quantitative pay-for-performance review.
Assessment of Financial Performance
When evaluating CEO pay-for-performance and the alignment of executive compensation with company performance, ISS currently assesses a company's financial performance by evaluating its total shareholder return (TSR) as compared across a GICS code-related peer group. Starting on February 1, 2017, ISS' proxy voting reports will include a new standardized comparison of a company's CEO pay and financial performance ranking relative to its peer group. These reports will measure financial performance using a weighted average of other financial metrics, in addition to TSR, including:
- Return on equity.
- Return on assets.
- Return on invested capital.
- Revenue growth.
- EBITDA growth.
- Cash flow (from operations) growth.
The ISS announcement explains that financial performance and pay ranking information will be displayed for all companies that are subject to ISS' quantitative pay-for-performance screens. This information will not impact the quantitative screening results during the 2017 proxy season, but it may be referenced in the qualitative review and it may mitigate or heighten identified pay-for-performance concerns.
ISS added these additional financial metrics in response to feedback from institutional investors, companies, and other market constituents. According to ISS' 2016-2017 global benchmark policy survey:
- 79% of investors support or strongly support using metrics beyond TSR for pay-for-performance evaluations, 19% of investors were neutral about the idea, and only 3% were opposed or strongly opposed.
- 68% of issuers support or strongly support the inclusion of additional financial metrics and only 11% of issuers oppose or strongly oppose their inclusion.
Relative Degree of Alignment (RDA) Assessment
ISS also announced that the Relative Degree of Alignment (RDA) assessment will only be considered in the overall quantitative concern level when the subject company has a minimum of two years of pay and TSR data. Companies that only have one year of data will receive an N/A (not applicable) concern for their RDA assessment.
Peer Submission Window
For eligible companies, including those subject to the new pay-for-performance measures, the ISS peer submission window will open on November 28, 2016, and will close on December 9, 2016. Peer submissions will be handled by the ISS Corporate Solutions' (ICS) Governance Analytics platform.
ISS will provide additional instructions on the peer submission window in the coming days.
For more information on proxy advisory firms and on ISS proxy voting recommendations, see Practice Note, Developing Relationships with Proxy Advisory Firms and Handling ISS Proxy Voting Recommendations Checklist.