ROCKVILLE, MD (November 8, 2016) –
Institutional Shareholder Services Inc. (ISS), a leading provider of
governance and responsible investment solutions to the global financial
community, today announced changes to the methodology underlying its
pay-for-performance models for companies in the U.S., Canada, and Europe
to take effect Feb. 1, 2017.
feedback from institutional investors, companies, and other market
constituents, in proxy voting reports issued on companies in the U.S.
and Canadian markets, ISS will present relative evaluations of return on
equity, return on assets, return on invested capital, revenue growth,
EBITDA growth, and cash flow (from operations) growth. The additional
financial measures will supplement ISS’ legacy (and continued) use of
total shareholder return (TSR) as a key metric for assessing corporate
performance in the context of evaluating executive compensation.
of these six financial metrics will provide our clients a more robust
analysis when gauging executive compensation relative to company
performance at portfolio companies,” said Roy Saliba, ISS’ Head of
Global Compensation Products. “Against the backdrop of a rapidly
shifting landscape for executive pay, we are committed to providing our
clients with the most comprehensive pay-related analytics and responding
to the evolving needs of the marketplace.”
respondents to ISS’ 2017 global benchmark policy survey were highly
supportive of using metrics beyond TSR for pay-for-performance
evaluations, with 79 percent answering that they support or strongly
support the use of additional metrics. Nineteen percent of investors
were neutral about the idea, and only 3 percent were opposed or strongly
opposed. Similarly, issuers strongly supported the use of additional
metrics, with 68 percent responding that they support or strongly
support the inclusion of additional financial metrics, while only 11
percent of issuer respondents opposed or strongly opposed their
inclusion. A breakdown of survey results is available
Pay-for-performance updates for U.S. companies include the following:
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.
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
Pay-for-performance updates for Canadian companies include the
the U.S. market, a new standardized comparison of the subject
company’s CEO pay and financial performance ranking relative to its
ISS-defined peers is being added to the ISS benchmark policy proxy
research reports beginning Feb. 1, 2017.
The ISS peer
group construction methodology will now incorporate information from
each company’s self-determined peers for pay benchmarking purposes.
Those peer selections, along with the GICS industry groups that those
peers are selected from, will inform ISS’ peer group construction
process. The methodology will continue to maintain a focus on
identifying companies that are considered sufficiently similar to the
subject company in terms of industry and size (based on one or more of
revenue, assets, and market capitalization). In assessing Canadian
issuers, only companies domiciled in Canada are included in the ISS
peer construction process and that approach will also apply to a
company’s self-disclosed peers so that any identified peers not
domiciled in Canada will be excluded.
subject to the ISS Pay-for-Performance test and with annual general
meetings between February 1, 2017 and September 15, 2017 will have an
opportunity to inform ISS of changes to the company’s self-selected
peer groups for the 2017 proxy season, since ISS must construct peer
groups for the upcoming 2017 season prior to the companies’ new
disclosures becoming available.
with the updated U.S. methodology, the RDA concern level 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.
Pay-for-performance updates for European companies include the
pay-for-performance test will be extended beyond the STOXX Europe 600
Index to cover any company that is a constituent either of the STOXX
Europe 600 Index or of each covered country’s local main index. The
expanded coverage, which will now include more than 1,100
European-based companies, will ensure a consistent application of the
quantitative tests across covered universes and will align the
European coverage of pay-for-performance assessments in ISS benchmark
research coverage with that for ISS QualityScore.
investor and corporate feedback after the first year of ISS
pay-for-performance assessments in Europe, ISS’ peer group
construction methodology will now incorporate information from
companies’ self-determined pay benchmarking peers. Information
regarding selected peers, as well as the GICS industry groups that
those peers are selected from, will inform ISS’ peer group
construction process. As in the U.S. and Canadian markets, the
methodology will continue to focus on identifying companies that are
considered sufficiently similar to the subject company in terms of
industry and size (based on one or more of revenue, assets, and market
capitalization). Only companies domiciled in Europe are included in
the peer construction process and that approach will also apply to the
inclusion of company self-determined peers.
must construct peer groups for 2017 before companies’ new disclosures
are available, European companies covered by the ISS
pay-for-performance model and with annual general meetings between
February 1, 2017, and January 31, 2018, will have an opportunity to
inform ISS of changes to company self-selected peer groups for the
2017 annual meeting season.
Pay-for-Performance factors are now a part of the Remuneration Pillar
in ISS QualityScore and will reference the pay-for-performance results
from the RDA, Multiple of Median (MOM), and Pay-TSR Alignment (PTA)
tests that can be viewed on each company’s ISS benchmark research
report. For newly covered companies, the pay-for-performance questions
will apply only after the first ISS benchmark research report is
published for these companies where a pay-for-performance analysis is
included. For the first year, these factors are included in ISS
QualityScore for reference purposes only.
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. To streamline and consolidate company
workflow onto a single platform, peer submissions will be handled via
ISS Corporate Solutions’ (ICS) Governance Analytics platform, which is
the same location companies visit to download their complimentary ISS
proxy research analysis and to verify data underlying their equity plans
and ISS QualityScore. Additional instructions for companies on the peer
submission window will follow in the coming days.
peer submission window marks the extension of this facility to European
and Canadian companies for the first time. Moving forward, European
companies will see their peer submission window opened annually late in
the year, while Canadian and U.S. corporations will have theirs opened
twice annually, once late in the year and once during the middle of the