Each year, Institutional Shareholder Services (ISS) seeks feedback from institutional investors, public companies (“issuers”) and the consulting and legal community on emerging corporate governance, executive compensation and other issues as part of its annual policy formulation process. Issuers and their advisors are collectively referred to as “non-investors” hereafter. Possibly reflecting concerns about the influence of ISS policies, 72% of Survey respondents were issuers, while only 28% of respondents were investors, generally large institutional shareholders.
The Survey was intended to provide feedback to ISS on a wide range of questions, including the metrics used in ISS quantitative pay-for performance model, Say on Pay frequency, director tenure and board refreshment, and director overboarding related to Executive Chairs.
Metrics Used in ISS Quantitative Pay-for-Performance Model
The Survey asked whether ISS should incorporate financial metric(s) other than total shareholder return (TSR) into ISS’s quantitative pay-for-performance model as a better way to identify potential pay-for-performance misalignment. Both investors (79%) and non-investors (68%) support using metrics other than TSR to measure pay-for-performance alignment.
As shown in the following chart, among investors, capital productivity metrics are the most favored other financial metrics for measuring pay-for-performance alignment. A strong minority of non-investors support the use of earnings metrics.
|Financial Metric||% of Respondents Favoring Use of Metric in Measuring Pay-for-Performance Alignment|
|Return on investment metrics (such as ROIC)||23%||47%|
|Return metrics (such as ROA or ROE)||18%||35%|
|Earnings metrics (such as EPS or EBITDA)||38%||26%|
|Cash flow metrics (such as OCF or FFO)||20%||25%|
|Economic profit metrics||9%||22%|
|Revenue metrics (such as total revenue or
According to ISS, some investors and non-investors believe that the most appropriate metric(s) would depend upon company-specific or industry-specific factors.
Frequency of Say on Pay Vote
The Survey asks respondents whether they favored annual, biennial or triennial Say on Pay proposals. A large majority (66%) of investors and a plurality of non-investors (42%) favored annual Say on Pay votes. However, one-half of non-investors disagreed, as they believe that the appropriate frequency is a triennial vote (19%) or that it depended on the company (31%).
Director Tenure and Board Refreshment
The Survey asked respondents to identify which director tenure factors would indicate concerns with a board’s nominating and refreshment processes.
A slight majority of investors (53%) believe that the absence of any newly appointed independent directors in recent years as indicative of a problem. Over two-thirds of investors (68%) believe that a high proportion of long-tenured directors is problematic, while a bare majority (51%) of investors believe that lengthy average director tenure is a concern.
Only 34% of non-investors believe that tenure is not a concern. However, no consensus exists among non-investors as to what director tenure and refreshment factors are a cause for concern. The vast majority of non-investors do not believe that the absence of newly appointed independent directors, a high proportion of directors with long tenure or lengthy average director tenure would be cause for concern.
The following chart summarizes investor and non-investor responses.
|Director Tenure Factor||% of Respondents Believing Director Tenure Factor is Problematic|
|A high proportion of directors with long tenure||31%||68%|
|Absence of any newly appointed independent directors in recent years||26%||53%|
|Lengthy average tenure on the board||19%||51%|
|Tenure is not a concern||34%||11%|
Director Overboarding (Relating to Executive Chairs)
The survey asked about the overboarding standard that should apply to an Executive Chair. Investors and issuers disagreed on the appropriate standard. A majority of investors (64%) believe that ISS should adopt the same standard that applied to a sitting CEO (i.e., no more than three total board seats). In contrast, the majority of non-investors (62%) believe that the more lenient standard applied to a non-executive director (i.e., no more than five total board seats) should continue to apply to an Executive Chair.
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The Client Update is prepared by Meridian Compensation Partners’ Technical Team led by Donald Kalfen. Questions regarding this Client Update or executive compensation technical issues may be directed to Donald Kalfen at 847-235-3605 or firstname.lastname@example.org.
This report is a publication of Meridian Compensation Partners, LLC, provides general information for reference purposes only, and should not be construed as legal or accounting advice or a legal or accounting opinion on any specific fact or circumstances. The information provided herein should be reviewed with appropriate advisers concerning your own situation and issues.