ISS Analytics, the research arm of Institutional Shareholder Services, recently published an analysis urging that its definition of realizable pay was best suited to identify “latent pay for performance issues” such as unduly high pay leverage irrespective of performance. It also notes that CalPERS recently added realizable pay to its analysis. The piece appears to be both a marketing tool for its formulation of realizable pay, as well as a reaffirmation of the value that realizable pay can play in pay for performance analysis.
ISS aptly describes the role of realizable pay as focusing “on pay in the middle of the compensation lifecycle, and it looks at a combination of potential compensation to be realized for the remainder of the performance period and compensation realized up to a specific point in time. In addition, realizable pay neatly ties together grants and outcomes; items measured in realizable pay calculations always tie back to grants made within the same time period.” The Center has often analogized realizable pay to looking at a baseball score in the seventh inning – it gives a good sense of the alignment of pay for performance (when performance is total shareholder return) – for the period so far, recognizing that there is more performance yet to go.
ISS Realizable Pay Methodology. ISS generally analyzes realizable pay over three years, and includes base salary, bonus and annual incentives as reported for those years. In addition:
- For all prospective long-term cash awards made during the measurement period, the earned value of the award (if earned during the same measurement period) or its target value in the case of ongoing award cycles;
- For all share-based awards made during the measurement period, the value (based on stock price as of the end of the measurement period) of awards made during the period (less any shares/units forfeited due to failure to meet performance criteria); or, if awards remain on-going, the target level of such awards;
- For stock options granted during the measurement period, the net value realized with respect to such granted options which were also exercised during the period; for options granted but not exercised during the measurement period, ISS will re-calculate the option value, using the Black Scholes option pricing model, as of the end of the measurement period;
ISS also includes changes in pension and Nonqualified Deferred Compensation as well as all other compensation.
The Center has historically believed that realizable pay can be an effective tool for analyzing aspects of pay for performance, especially the alignment between changes in executive compensation and changes in returns to shareholders over a period of time, typically three years, as well as the comparison of these changes among peer companies. However, the Center disagrees with how the ISS methodology values stock options and the fact that it includes non-performance based pay because these approaches make it more difficult to compare pay and performance across companies. As we discussed in our model disclosures developed with the Conference Board and the Society for Corporate Governance, the Center believes that stock options should be valued using the stock price at the end of the period and non-performance pay should be excluded to facilitate a close comparison.