ISS Adds Financial Metrics to Pay-for-Performance Assessment

Posted by Aon Hewitt on Nov 21, 2016 11:00:00 AM

Window to Update 2016 Peer Group Open Nov. 28-Dec. 9

ISS has announced that it will include six relative financial metrics in its pay-for-performance assessment, initially as part of the qualitative aspect, for companies in the U.S. and Canada beginning February 1, 2017. 
  • The quantitative pay-for-performance screen, which has total shareholder return (TSR) as the only measure, remains unchanged this year. The new financial metric information won’t be part of the quantitative screen in 2017, but could be referenced in a qualitative review as a mitigating or aggravating factor, and might be taken into account in the future.
  • Proxy research reports will include a standardized table containing companies’ three-year performance relative to their peers on six financial metrics:
  Return on invested capital (ROIC)   Revenue growth
  Return on equity (ROE)   EBITDA growth
  Return on assets (ROA)   Growth in cash flow from operations.
  • The weight accorded to each metric will vary by four digit GICS industry groups. We are in dialogue with ISS, and encourage companies to be as well, to express our views on the utility or nonutility of certain of these metrics in specific industries.
  • ISS had solicited input from investors, companies and others in its 2016 policy survey, and a substantial majority of both investors and companies favored the additional metrics other than TSR as part of an overall evaluation of corporate performance.
  • ISS will calculate relative three-year performance for each metric as compared to a company’s ISS peer group, and as compared to relative compensation levels, and will determine an overall weighted financial performance metric.
  • ISS will then provide a standardized comparison of financial performance ranking and CEO pay relative to the ISS-defined peer group in the form of a numeric result, which will indicate the alignment between three-year financial metric performance and three-year granted pay. (The use of granted pay, in contrast to realizable/realized pay, carries with it all of the same issues already extant in the existing pay-for-performance assessments.)
  • If a company’s Compensation Discussion and Analysis (CD&A) disclosure has not previously discussed the company’s performance for the year as measured by financial metrics, we recommend considering including such information. Doing so will help explain operating and stock price performance, and its relation to compensation to shareholders, as well as help give context to these new measures that will appear in the ISS benchmark report.
  • ISS’s annual compensation FAQs, generally released in December, will have more detail about these items.
  • ISS also announced that there must be two full years of trading and CEO pay data before it will apply one of its quantitative pay-for-performance screens (Relative Degree of Alignment). That screen is intended to give a view of long term alignment, and ISS will not include it until a newlypublic U.S. or Canadian company has at least two full years of information.
  • ISS’s pay-for-performance tests will also be extended beyond the STOXX Europe 600 Index to any company that is in that index or the local main index of a covered country.
Window to Update 2016 Peer Group Open Nov. 28-Dec. 9
  • ISS pay-for-performance assessments involve comparisons to an ISS-constructed peer group. U.S. companies have a chance to submit their own self-selected peer groups used in setting 2016 compensation in order to inform ISS of their self-selected peers.
  • The window to do so is open November 28 to December 9, 2016. Since ISS began taking these submissions, the overlap between companies’ own peer groups and ISS’s peer group has increased significantly. Only companies that changed peer groups in 2016 need consider participating.
  • Canadian and European companies subject to a pay-for-performance assessment now also may submit self-determined 2016 peers for the first time, and such peers (Canadian- or European-domiciled, respectively, only)(like the ISS-determined peers), and the GICS groups of which they are a part, will be taken into consideration by ISS.
  • The window for submissions by Canadian and European companies is also November 28 to December 9, 2016.

 

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Topics: Corporate Governance