The Advisors' Blog

– Broc Romanek

Here’s an excerpt from this Compensia memo about the “newish” pay-for-performance methodology from ISS:

For 2017, ISS discloses the current rankings of each of the seven enumerated financial metrics, but not their weighting. For 2017, ISS ranks the performance measures for technology and life sciences companies as reflected in the table at the bottom of this page.

Several of these rankings are at odds with the financial metrics that many technology and life sciences companies use in their incentive programs. For example, numerous small, mid, and large-cap companies, use top-line metrics such as revenue, bookings, and TSR in their incentive plans consistent with their growth profiles and business strategy. These metrics are currently ranked at the bottom of the list for technology and life sciences companies. Conversely, in our experience, ISS’ favored metrics (ROIC, ROE, and ROA) are not commonly used by technology companies. In a recent Compensia review of the performance share award practices of approximately 130 public technology companies, only one of these companies used one of these return metrics, 36% disclosed the use of revenue, and 55% used relative or absolute stock price goals (either as the sole metric or in combination with other metrics).

While ISS may change these rankings in 2018, it is important to note that, in any given year, ISS’ view on the relative importance of these metrics may not match a Board of Directors’ long-term objectives for its executive team, creating obvious potential for a disconnect.