Quick Comments on ISS
ISS recently updated their “performance alignment approach” to better assess how companies are compensating their CEO’s relative to company performance. ISS and shareholders alike are pushing for ways to measure compensation as it relates to company performance. ISS has instituted three measures of alignment between executive pay and performance; relative degree of alignment, multiple of median, and pay-TSR alignment.
1. The relative degree of alignment will measure a CEO’s compensation within a peer group, designated by ISS, to the performance that company had within the same peer group over a one year and three year period. In other words, how did the compensation paid to a CEO rank in relation to performance within the same peer group? 2. The multiple of median approach will measure a CEO’s pay to the comparison peer group by dividing it by the median pay for the group. 3. The measure of pay-TSR alignment will measure the degree to which CEO pay has changed more or less rapidly than shareholder returns over a five year period in order to capture whether or not pay and performance were aligned properly over that period. These three approaches don’t come without their critics as pay and performance have been a hot button for some time now. While ISS claims the new evaluations are a more comprehensive assessment, it appears to us these three approaches are new additional traps to be concerned with. Oh by the way, ISS reserves the right to also further scrutinize companies that narrowly passed say on pay in 2011 as well as apply a qualitative compensation assessment to determine whether a company should pass say on pay.
While pay and performance should have long-term alignment; performance is not the only factor to determine compensation. Directors of companies should continue to use business judgement rule as they see fit to determine how best to compensate their key employees given the significant number of dynamics that face a company each year. In short, the best companies view and compensate their people as a critical investment for the future, not just an expense tied to past performance.