Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Wednesday, January 10, 2018
Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS publication by Mr. Mishra.
Following the implementation of mandated advisory shareholder votes on executive compensation under the Dodd-Frank Act of 2010, investors have regular opportunities to opine on executive pay programs. Investor feedback on the issue of pay-for-performance has indicated a preference for a focus on long-term alignment, board decision-making, and pay relative both to market peers and company performance. As a result, ISS’ approach to evaluating pay-for-performance comprises an initial quantitative assessment and, as appropriate, an in-depth qualitative review to determine either the likely cause of a perceived long-term disconnect between pay and performance, or factors that mitigate the initial assessment.
The initial quantitative screens are designed to identify outlier companies that have demonstrated significant misalignment between CEO pay and company performance over time. The screens measure alignment on both a relative and absolute basis, and over multiple time horizons. The screening process applies to constituents of the Russell 3000E Index, a collection of the largest 3,500 (approximate) equity securities traded on U.S. stock exchanges. Beginning with annual meetings on or after Feb. 1, 2018, the quantitative screen includes a new financial performance assessment that measures on a long-term basis the relative alignment between CEO pay and key financial metrics. Before this 2018 model change, the financial performance assessment was limited to ISS’ qualitative evaluation.
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