ISS Announces Changes to Pay-for-Performance Evaluation Methodology

MoneyLeading proxy advisory firm, Institutional Shareholder Services Inc. (ISS), announced Nov. 8 that it would supplement its methodology underlying its pay-for-performance models for companies in the U.S., Canada and Europe, effective Feb. 1, 2017.

While ISS will continued to use the metric of total shareholder return (TSR) in its evaluations, ISS will also take into account six additional financial metrics:

  • return on equity,
  • return on assets,
  • return on invested capital,
  • revenue growth,
  • EBITDA growth, and
  • cash flow (from operations) growth.

The announcement comes after the results of ISS’ 2017 global benchmark policy survey showed that investors would be highly supportive of using metrics beyond TSR to evaluate pay-for-performance.  The survey showed that 79 percent of investor respondents would either support or strongly support the use of additional metrics.

For U.S. companies, in particular, ISS pointed out the following pay-for-performance updates:

  • 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.

In addition, according to ISS, its “peer submission window will be open starting on Nov. 28, 2016, and will close on Dec. 9, 2016, for eligible companies, including those subject to the new pay-for-performance measures.”

This announcement comes as ISS continues to accept comments on its proposed 2017 draft policy changes.  Comments on the proposed changes are due by  ISS will release its final 2017 voting policies the week of Nov. 14 and these policies will apply to shareholder meetings taking place on or after Feb. 1, 2017.

Finally, ISS last week opened its data verification period for its governance rating platform formerly known as QuickScore. The product will be rebranded as QualityScore Nov. 21 and data verification for covered companies will be open until Nov. 11.