The Advisors' Blog

– Mike Kesner, Deloitte Consulting

ISS published its GRId 2.0 ratings last Monday and updated its technical document too. ISS determined the ratings using its updated GRId scoring system, which examines a company’s board structure, compensation, shareholder rights and audit, and 2011 proxy data as a “trial run” for their new approach. Consistent with the prior GRId System, compensation, by far, has the most evaluation criteria (41 questions in all), including a number of new questions for 2012. The GRId 2.0 score will be updated once 2012 proxies are filed.

ISS not has released the scoring system it is using in calculating a company’s score, so it is impossible to figure out what steps a company can take to move from a high risk to a medium or low risk rating without purchasing ISS’ GRId Analytics for $28,000.

Based on my review of several GRId 2.0 reports, it appears there is a short-circuit in the scoring system. Some companies appear to have very solid pay practices, but received a “high risk” score on one of the four pay for performance questions resulting in a very low GRId score (e.g. 5 of 100). Other companies appear to pass pay-for-performance with flying colors, yet received a high concern on GRId because they did not have holding periods or specific minimum vesting periods in the equity plan and they had employment contracts with excise tax gross-up (in this case a score of 21 of 100).

I also noted companies with very high results (92 of 100) that were lacking holding periods, allowed share recycling, had excise tax gross-ups, permited option repricing without shareholder approval, did not have a hedging policy and allowed the cash buyout of underwater options.

My conclusion based on this review is there might be something wrong with the scoring system since companies with very similar pay practices and pay-for-performance can receive very different scores.

So what to do?

If you have not already done so, check your preliminary GRId 2.0 to make sure it is correct based on your 2011 proxy. ISS made a number of errors – and it is important that companies identify these errors early.

If you have already subscribed to GRId Analytics, you should evaluate how actual – or potential – changes to your pay practices may influence your 2012 GRId score. If you have not already purchased GRId Analytics, you may want to ask your ISS representative when they plan on publishing the scoring system so you can evaluate which changes will most positively impact your GRId score.

It is important to note that any changes you might make (like adopting minimum stock option vesting requirements or committing not to enter into future employment agreements with an excise tax gross-up provision) need to be discussed in this year’s proxy – or filed in an 8-K – to document the change.