Institutional Shareholder Services Inc. (“ISS”), the influential proxy advisory firm, recently released their 2016-2017 Global Policy Survey results. These results show some interesting findings related to executive compensation and may signal the future of ISS policies concerning pay for performance and say-on-pay frequency.
Pay for Performance Metrics
Currently, ISS uses total shareholder return (“TSR”) as an initial quantitative pay-for-performance screen to identify companies with potential pay-for-performance misalignments. Respondents in the survey (consisting of institutional investors, corporate issuers, consultants, and other advisers) were asked whether other financial metrics might be more appropriate to identify pay-for-performance misalignments.
79% of respondents supported the use of additional metrics other than TSR. The top 3 most popular alternative financial metrics, as chosen by investors, were:
- Return on investment metrics, such as ROIC (47%)
- Return metrics, such as ROA or ROE (35%)
- Earnings metrics, such as EPS or EBITDA (26%)
With investors in favor of alternatives to TSR, it is interesting that the Securities and Exchange Commission proposed rules last year that would require companies to disclose TSR as part of its pay-for-performance disclosures. These proposed rules would require companies to report for the most recently completed 5 fiscal years: (i) the relationship between executive compensation actually paid and cumulative TSR; and (ii) the relationship between the company’s TSR and the TSR of a peer group. The ISS survey results appear to illustrate a disconnect between the proposed SEC disclosure rules and what investors consider important in terms of analyzing pay-for-performance issues.
ISS also surveyed respondents regarding the preferred frequency of advisory “say on pay” votes. Say on pay votes are conducted every 1 to 3 years and provide shareholders an advisory vote on the executive compensation of the company. A majority of investors (66%) favored annual say on pay votes with 11% and 7% favoring biennial and triennial votes, respectively.
Every 6 years companies must provide shareholders an advisory vote on the frequency of say on pay votes. Many companies last held these say on pay frequency votes in 2011 which means that many companies will have to hold frequency votes again in 2017.