Window to Update 2016 Peer Group Open Nov. 28-Dec. 9ISS 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.
- 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.
About Aon Hewitt
Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement, and health solutions. We advise, design, and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability, and wellness. Aon Hewitt is the global leader in human resource solutions, with over 35,000 professionals in 90 countries serving more than 20,000 clients worldwide across 100+ solutions. For more information on Aon Hewitt, please visit aonhewitt.com.
* * * * *
Client Alerts are prepared by Aon Hewitt’s Global Technical Shared Services team. Questions regarding executive compensation governance issues may be sent to us via the contact us page.
This article provides general information for reference purposes only. Readers should not use this article as a replacement for legal, tax, accounting, or consulting advice that is specific to the facts and circumstances of their business. We encourage readers to consult with appropriate advisors before acting on any of the information contained in this article.
The contents of this article may not be reused, reprinted, or redistributed without the expressed written consent of Aon Hewitt.
© 2016 Aon plc. All rights reserved.