The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Here’s news from Cooley’s Cydney Posner culled from this news brief:

Here’s some potentially happy news for issuers: a report from BNA indicates that ISS plans to review certain of its methodologies in light of company complaints that ISS negative recommendations on say-on-pay proposals during the most recent proxy season were unwarranted.

First, during a recent webcast, ISS Executive Director Patrick McGurn said that ISS will review the way it values options. More specifically, in SEC filings, companies report the grant date fair value of options in accordance with GAAP, while ISS uses valuations provided by Equilar Inc. However, Equilar valuations tend to be higher because of the volatility measures that it uses. (See, for example, the additional soliciting materials from GE, which contended that, by using the wrong volatility measures, ISS had overvalued the grant date fair value of the CEO’s option by over $7 million.) According to the article, ISS plans to request comment on the issue related to option values from its institutional clients and expects to settle the issue by next year.

The second issue that has frustrated companies is ISS’ methodology in developing peer groups for purposes of evaluating pay for performance. Pay-for-performance “disconnects” were among the most common reasons for negative ISS recommendations. In determining compensation, companies typically evaluate their pay and pay-for-performance statistics relative to selected peer groups. ISS’ concern is that companies inappropriately pack their peer groups with “outsize” companies to inflate comparable compensation and thereby justify otherwise insupportable pay packages. Instead, McGurn believes that companies should be “‘baking in pay-for-performance metrics’ that drive the company’s compensation strategy.” In making its own peer group determinations, ISS uses Global Industry Classification Standard (GICS) codes, a private market industry standard familiar to institutional investors, according to ISS.

Companies argue that ISS’ peer groups exclude many companies that are generally recognized as true competitors and include many companies that are not true competitors and may even be in entirely different and unrelated businesses. (See, for example, the additional soliciting materials from Northern Trust.) Unfortunately, the article suggests that we should not expect much movement in this area: according to McGurn, “I don’t see us moving away from that methodology.” However, he did indicate that ISS “will consider providing clients with a ‘matrix of different ways’ to look at pay-for-performance. A handful of metrics would be available for each company that would help institutional investors judge a company’s pay practices.”