ISS Will Not Use Pay Ratio in 2018 Pay Analyses, But Will Insert Relative Financial Performance in Quantitative Review
October 28, 2017
At a recent conference, David Kokell, Vice President of Institutional Shareholder Services (ISS) stated that company-reported pay ratios will not impact ISS’s 2018 pay analysis or say on pay voting recommendations, according to Meridian Compensation Partners. However, ISS will include company pay ratios in its reports, similar to Glass Lewis. It is not clear if ISS will report peer company pay ratios.
Meanwhile, Mr. Kokell also announced that ISS would revamp its relative financial metric assessment that it introduced in 2017 as part of the qualitative say on pay assessment by making it part of the quantitative test. The revised “Financial Performance Analysis” which compares weighted average performance rank (on the metric in question) to CEO pay rank, would apply when the quantitative “Relative Degree of Alignment” test results in the company on the upper end of the range for “low concern” or the lower end of the range for “medium concern.” The revised assessment could result in some companies moving from “low concern” to “medium concern” or vice versa, although Mr. Kokell indicated that based on backtesting the change would apply to the evaluation of less than 5% of the companies. ISS has not yet announced the metrics it will use in the evaluation.
As the Center predicted last year, the greater focus on financial metrics by investors, rather than TSR, led to ISS including this analysis in the qualitative test. The change is also potentially helpful to ISS’s business model, as companies that may be “on the bubble” between low concern and medium concern, may be more likely to subscribe to ISS’s consulting services. The Center will report on the new defined policy when it is announced, which is expected in early December.