On November 8, Institutional Shareholder Services (ISS), a leading proxy advisory firm, announced a number of updates to its 2017 pay-for-performance evaluation process for US and Canadian companies. The updates include the following:
- Relative Financial Performance Evaluation for U.S. and Canadian Companies. For shareholder meetings held on or after February 1, 2017, ISS will supplement its total shareholder return metric (TSR) with an analysis of six additional financial measures to evaluate performance in the context of its executive compensation assessment. Specifically, ISS will compute a company’s three-year performance, relative to its ISS peer group, of: (1) return on equity, (2) return on assets, (3) return on invested capital, (4) revenue growth, (5) growth in earnings before interest, taxes, depreciation and amortization; and (6) growth in cash flow from operations. These metrics, along with relative compensation levels and an overall weighted financial performance metric (which reflects the alignment between three-year financial performance and three-year granted pay), will be displayed in a new standardized table in ISS’s proxy research report for the applicable company. In 2017, these calculations will be used solely in ISS’s qualitative pay-for-performance evaluations and will not affect quantitative analysis of a company’s performance. ISS has left open the possibility that such metrics will be extended to quantitative evaluations in 2018 or beyond.
- Relative Degree of Alignment Test. ISS’s (existing) “relative degree of alignment” test (which measures long-term alignment of CEO compensation and TSR relative to peers) will only apply to companies with at least two full years, rather than one full year, of trading data and financial results as a public company.
- Peer Groups for Canadian Companies. For Canadian companies subject to ISS’s quantitative pay-for-performance screens, ISS will change the way it constructs company-specific peer groups. When creating an ISS peer group for a specific Canadian company, ISS will now incorporate the company’s self-determined peer group (much like it has for US companies since 2013).
- Peer Submission Window for U.S. and Canadian Companies: US and Canadian companies that hold shareholder meetings between February 1, 2017 and September 15, 2017 may submit self-determined peer groups for the most recently completed fiscal year during the period from November 28 to December 9.
Also on November 8, ISS announced changes to its pay-for-performance and peer group construction methodologies for European companies.
For the full text of ISS’s announcement of the above-described updates, click here. ISS has indicated that it will publish additional information regarding the announced updates in the coming weeks.