Results of ISS' 2012-2013 Policy Survey

A Preview of Key Executive Compensation Issues for the 2013 Proxy Season: Results of ISS’ 2012-2013 Policy Survey

October 11 2012

ISS recently released the results of their annual survey of institutional investors and companies on emerging corporate governance issues.  ISS considers the survey a critical component of its annual policy review and formulation process.

Similar to last year’s results, both investors and companies believe that executive compensation will be the top governance topic for the coming proxy season.  Unfortunately, also consistent with last year’s findings, there remains a significant difference of opinions between investors and companies with respect to executive compensation practices.  Some of the key results include:

Peer Groups: Investors and companies differ in their views regarding selection of peer groups for ISS’ pay-for-performance tests.  A majority of investors (67%) believe ISS should continue to create its own peer group and provide the company’s peer group as an alternative view, while only 24% of companies agree with this approach.  The bulk of responding companies (74%) believe that ISS should either use the company’s selected peer group exclusively, or use the company’s selected peers subject to ISS standards for peer company size.  The good news here is that only 15% of investors and 2% of companies believe ISS should continue to create its own peer group without any reference to the company selected peers.  Based on these results, we believe ISS may incorporate an additional pay-for-performance test utilizing the company’s selected peer group.  However, we expect the primary comparison for the pay-for-performance evaluation will remain the peer group developed by ISS.

Peer Groups – Selecting Peers: The policy survey asked for feedback regarding the importance and relevance of six factors in selecting ISS peers.

  • Peer is within a specified size range of the target company
  • Peer is in the same Global Industry Standard (GICS) group as the target company
  • The target company’s size is near the median of the selected peers
  • Peer is within the same GICS group as one or more of the target company’s published peers
  • Peer is included in the target company’s published peer group
  • Peer has chosen the target company as a peer.

The majority of companies (82%) believe the most critical factor in determining ISS peers is whether the peer is included in the company’s selected peer group.  However, less than half of investors (42%) deem this to be very or somewhat relevant.  Both investors (84%) and companies (74%) overwhelmingly agreed that a specified size range to determine peers is either very relevant or somewhat relevant.

A majority of investors (74%) also agreed that GICS is a very relevant or somewhat relevant factor, while companies were less likely to agree on the importance of GICS as 60% believed that GICS is not a relevant factor. A minority of investors (39%) and companies (40%) consider whether the peer has chosen the target company as a peer to be very or somewhat relevant.

Measuring Pay: ISS asked investors how likely they are to consider performance metrics other than total shareholder return (TSR) as a factor in the voting decision on say-on-pay.  A substantial majority (84%) of investors are very or somewhat likely to factor in performance metrics other than TSR.  As a strong proponent of the need for investors to assess financial and operational performance in addition to TSR when determining whether to support a company’s say-on-pay proposal, we are delighted to see that investors are interested in taking a more holistic approach on this issue.

Measuring Pay – Granted vs. Realized/Realizable Pay: A particularly hot topic in the executive compensation governance arena, ISS asked investors and companies their views on the appropriate way to measure and analyze pay in a pay-for-performance context.  Exactly half of the investor responses indicated that both granted and realized/realizable pay should be considered in ISS’ quantitative evaluation.  Investor’s next highest response (25%) was for the use of granted pay in a quantitative evaluation, but consideration of realized/realizable pay in a qualitative evaluation to determine overall pay-for-performance.  Focusing exclusively on granted pay or realized/realizable pay received very little support from investors (12% and 13% in favor, respectively).  Companies’ views are quite divergent on this issue, as none of the four ISS suggested responses received more than 29% of the vote.  In fact, three of the four responses received between 27% and 29% support.  Each of the three most popular responses incorporate the consideration of realized/realizable pay in some context, suggesting that companies have a desire to move away from a focus on granted pay only.

Measuring Pay – Considering Realized/Realizable Pay: A majority (56%) of investors believe that both a standardized calculation of realized/realizable pay as developed by ISS and calculations of realized/realizable pay as provided by the company are appropriate.  Interestingly, company responses slightly favor a standardized ISS calculation (36%) over either a company calculation (26%) or assessing both standardized ISS and company calculations (29%).

Pay for Failure: ISS requested comment on the following six actions in the context of a CEO terminating employment at a time of significantly lagging shareholder returns.

  • Severance settlement when the executive is stated to be retiring or resigning
  • Immediate acceleration of all unvested equity upon termination without cause
  • Cash severance exceeding 3x base salary and target bonus
  • Cash severance exceeding 1x base salary and target bonus
  • New severance agreement entered immediately prior to departure
  • Large pension/SERP payouts

The survey indicates an overwhelming response from both investors and companies that view cash severance exceeding 3x base salary and target bonus and new severance agreements entered into immediately prior to departure to be problematic. However, exceeding 1x severance is not viewed as a problem by a significant portion of investors (64%) or companies (89%).

Investors and companies differ on the appropriateness of a severance settlement when a CEO is retiring or resigning and an immediate acceleration of all unvested equity.  Most investors see these actions as an issue, while less than half of companies deem these actions to be problematic.

Since “large” pension/SERP payout is not defined, it is difficult to attribute too much weight to the responses.  However, investors’ responses indicate a significant pension/SERP payout is a potential issue (81% said yes this was problematic), while only 33% of companies see this as an indicator of pay for failure.

Parachute Proposals: ISS asked investors which of the following four change-in-control provisions are considered problematic with respect to voting on say-on-pay or say-on-golden parachute proposals.

  • Excise tax gross-up provisions in existing agreements
  • Single-triggered equity
  • Modified single-triggered cash severance
  • Excessive golden parachute payments as a percent of transaction equity value (e.g. exceeding 6%)

Investor responses indicate significant concern with each of the four provisions as a strong majority, ranging from 63% up to 74%, depending on the specific provision, voted that the provisions are problematic for both proposals.

Pledging of Shares: Large portions of both investors (49%) and companies (45%) found any pledging of shares by executives or directors to be “significantly problematic.”  A slightly smaller percentage of investors (38%) and companies (35%) were concerned if pledging involved a “significant amount of shares (e.g., >500,000 or a value exceeding 10% of the company’s market value).”

The complete study can be found here.

Key Takeaways: As companies formulate their shareholder outreach programs to ensure a positive 2013 Say on Pay vote, it is important to recognize and understand the key issues from the investor’s perspective.  Materials should be tailored to acknowledge this perspective, and where company policy differs from known or anticipated investor positions, clear and convincing rationale describing how the company’s position is in the best interests of shareholders should be provided.

These results also suggest that there are may be modifications to ISS voting guidelines in critical areas such as peer group selection, performance evaluation and the assessment of realized/realizable pay.  As the survey represents a significant part of ISS’ annual policy review, we will likely see some of these issues incorporated into the draft 2013 policy updates which will be released in October.  Stay tuned.

About Steven Hall & Partners
Steven Hall & Partners is an independent compensation consulting firm, specializing exclusively in the areas of executive compensation, board remuneration, non-profit compensation and related governance issues.  By focusing solely on this critical and complex segment of the human resources arena, we are able to provide our clients with the highest quality expertise and best counsel available on a practical basis.  For more information, please visit and follow us on Twitter @SHallPartners.

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