On December 20, ISS published its white paper laying out in detail the pay for performance methodology it will implement under its 2012 policy updates. The goal of the white paper is to help both institutional clients and the companies in which they invest more fully understand ISS’ pay-for-performance methodology in advance of the 2012 proxy season.
The key goals of the new methodology are to:
- Measure the alignment between executive compensation and company performance over multiple time horizons.
- Use multiple measures to assess this alignment.
- Provide more information about pay-for-performance concerns to investors and companies.
The new approach to evaluating pay for performance in 2012 involves an initial quantitative assessment, and if necessary, a follow-up in-depth qualitative review. The quantitative component is designed to identify companies that have demonstrated significant misalignment between CEO pay and company performance over time.
The initial quantitative assessment is comprised of an evaluation that ranks CEO pay and performance relative to peers over three years comparing the percentile ranks of a company's CEO pay and total shareholder return with reference to a peer group, over one- and three-year periods. The one-year period result is given a 40% weighting and the three-year period result is given a 60% weighting. The quantitative assessment also includes an expression of the company's CEO pay in the past year as a multiple of the median CEO pay of the peer group for the same period, and an absolute evaluation of annual CEO pay trends relative to total shareholder return trends over the past five years.
If the analysis reveals a company has a misalignment between pay and performance, ISS will conduct a qualitative assessment intended to determine the causes of the misalignment that may include a review of:
- 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.
- Any special circumstances, such as recruitment of a new CEO.