March 29, 2012
Evaluating the ISS Test of CEO Pay for Performance: A Comparison of Pay Opportunity and Realizable Pay
– Broc Romanek, CompensationStandards.com
Recently, Pay Governance released its study entitled “Evaluating the ISS Test of CEO Pay for Performance for Say-on-Pay Votes: A Comparison of Pay Opportunity and Realizable Pay” – below are some excerpts from a related press release:
Proxy advisors – such as ISS and Glass Lewis – provide Say-on-Pay recommendations that guide institutional shareholders in their voting. The single most powerful determinant of whether their recommendations will be positive or negative is the overall alignment of CEO pay to company performance – measured primarily by Total Shareholder Return (TSR). Many large companies receive “high concern” or “medium concern” ratings for pay-for-performance alignment – and in more extreme cases, “against” recommendations for Say-on-Pay votes from Institutional Shareholder Services – despite the reality that, when properly measured, their pay programs exhibit true alignment. This may adversely affect the outcomes of Say-on-Pay votes.
Pay Governance found strong alignment of a company’s TSR with realizable CEO pay. Realizable pay is the sum of actual cash compensation earned, the aggregate value of in-the-money stock options the current value of restricted shares, actual payout from performance share or cash plans, plus the estimated value of outstanding performance share or performance contingent cash. The alignment between pay and performance found in these measurements is directly linked to the substantial amounts of stock-based incentives in these compensation packages. Other assessment methods cannot provide this clear linkage of pay and performance because the time period used to measure pay opportunity is usually not concurrent with the one used to measure performance. […]
Using both tests, approximately 86 percent of the companies exhibited the same levels of alignment versus misalignment of pay with performance. In more than 10 percent of the cases, however, the opportunity-based test found misalignment (high pay opportunity with low TSR) when pay was actually aligned with performance.