May 9, 2019
How ISS Looks at “Realizable Pay”
– Liz Dunshee
The ISS FAQs for its compensation policies say (Question 27) that research reports show realizable pay as compared to granted pay – and that realizable pay may be discussed in the qualitative view and as a component of the pay-for-performance analysis. This recent memo gives more background about how ISS defines “realizable pay” and whether it will become a more prominent part of the proxy advisor’s analysis in the future. Here’s an excerpt:
Comparing realizable pay to granted pay may serve as a helpful measure to assess a pay program’s alignment with performance as well as the pay program’s “leverage,” i.e., the degree to which actual payouts are disproportionately larger compared to performance achievements. Leverage in pay plan design can serve as a strong motivational factor. However, excessive leverage may lead to excessive payouts and potential a misalignment of incentives. Among the S&P 1500, the ratio of realizable pay to granted pay is distributed in a relatively normal distribution, with median realizable pay figures ranging between 100 percent and 110 percent of granted pay. Approximately 3.7 percent of companies under review have realizable pay figures that are more than double the granted pay levels.
Looking ahead, several questions continue to surround realizable pay. The market does not appear to have agreed on standard definitions, and company disclosures are inconsistent and hard to use. At the same time, there are signs that the measure may be gaining traction with some large investors, as CalPERS recently announced the incorporation of realizable pay in its pay-for-performance evaluation analysis. If usage of realizable pay becomes more widespread, a common definition for the measure may become inevitable. As we argue above, companies and investors can gain significant insights when reviewing pay-for-performance alignment by using realizable pay. However, realizable pay can only serve as another resource in investors’ toolbox for analyzing compensation, and it cannot replace a full and comprehensive evaluation of compensation. ISS Research reports for S&P 1500 companies include realizable pay figures along with comparisons to granted pay.