ISS Announces Pay-for-Performance Methodology Updates for 2017

by Stinson Leonard Street - Dodd-Frank and the Jobs Act
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ISS announced changes to the methodology underlying its pay-for-performance models for companies in the U.S. and other markets to take effect Feb. 1, 2017.

ISS will present relative evaluations of return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth in proxy voting reports issued on companies in the U.S.. The additional financial measures will supplement ISS’ legacy (and continued) use of total shareholder return (TSR) as a key metric for assessing corporate performance in the context of evaluating executive compensation.

Pay-for-performance updates for U.S. companies include the following:

  • A new standardized comparison of the subject company’s CEO pay and financial performance ranking relative to its ISS-defined peer group will be added to ISS’ benchmark policy proxy research reports beginning Feb. 1, 2017. Financial performance will be measured by a weighted average of multiple financial metrics including return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth. The metrics and weightings will be based on the company’s four-digit GICS industry group, and are based on extensive back-testing over multiple years. The financial performance and pay ranking information will be displayed for all companies subject to ISS’ quantitative pay-for-performance screens. While this information will not impact the quantitative screening results during the 2017 proxy season, it may be referenced in the qualitative review and its consideration may mitigate or heighten identified pay-for-performance concerns.
  • 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 test. The RDA measure uses annualized three-year TSR – i.e., the annualized rate of the three 12-month periods in the three-year measurement period (calculated as the geometric mean of the three TSRs). TSR reflects stock price appreciation plus the impact of reinvestment of dividends (and the compounding effect of dividends paid on reinvested dividends) for the period.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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