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Institutional Shareholder Services Updates White Paper on Pay for Performance
Practical Law Legal Update 6-523-5552 (Approx. 4 pages)
Institutional Shareholder Services Updates White Paper on Pay for Performance
by PLC Employee Benefits & Executive Compensation and PLC Corporate & Securities
| Published on 15 Jan 2013 • USA (National/Federal) |
Institutional Shareholder Services Inc. (ISS) issued a revised white paper on its approach to evaluating pay-for-performance alignment, incorporating a defined calculation of "realizable pay" and the revised peer group selection methodology ISS previously announced.
Institutional Shareholder Services Inc. (ISS) recently released an updated white paper on its 2013 pay-for-performance methodology, incorporating changes previously announced to its:
- Peer group selection methodology for its quantitative assessment of CEO pay and performance.
- Qualitative review process, by adding an evaluation of realizable pay to its research report for large capitalization companies.
ISS initially published the white paper on its new approach to evaluating pay-for-performance in 2011 in advance of the 2012 proxy season. The methodology involves:
- An initial quantitative assessment designed to identify companies that have demonstrated significant misalignment between CEO pay and company performance over time. This assessment:
- measures the percentile ranks of a company's CEO pay and total shareholder return (TSR) performance relative to those in a peer group over one- and three-year periods;
- measures the prior year's CEO pay as a multiple of the median pay of its peer group for the same period; and
- compares annual CEO pay trends relative to TSR trends over the past five years.
- If the quantitative analysis indicates significant misalignment, a follow-up, in-depth qualitative review to uncover mitigating factors for or potential causes of the misalignment, which may include a review of some or all of the following:
- strength of performance-based compensation, including a review of the ratio of performance to time-based equity awards and the overall ratio of performance-based compensation to total compensation, with a particular focus on the compensation committee's most recent decisionmaking;
- the company's peer group benchmarking practices;
- results of financial or operational metrics, if any, that trigger cash payments; and
- any special circumstances, such as recruitment of a new CEO.
The revised white paper consolidates changes ISS previously announced to:
- Its peer group selection methodology for the initial quantitative assessment (see Legal Updates, Institutional Shareholder Services Issues FAQs on Revised Peer Group Selection Methodology and Institutional Shareholder Services Releases 2013 Updates to its Proxy Voting Guidelines).
- Its qualitative review process, by adding realizable pay to its research report for large capitalization companies (see Legal Updates, Institutional Shareholder Services Releases 2013 Updates to its Proxy Voting Guidelines and Institutional Shareholder Services Issues New and Updated FAQs).
These updates go into effect for shareholder meetings held on or after February 1, 2013.