November 10, 2016
Pay-for-Performance: ISS Supplements TSR With 6 New Metrics
– Broc Romanek
A few days ago, as noted in this Wachtell Lipton memo, ISS announced changes to its pay-for-performance methodology for companies in the US, Canada, and Europe that will become effective on February 1st. Following feedback from constituents, 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 to supplement ISS’ legacy (and continued) use of TSR as the key metric for P4P.
Pay-for-performance updates for US companies include:
– 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.
ISS’ peer submission window will be open starting on November 28th – and will close on December 9th…