ISS Updates 2017 Pay-for-Performance Methodology for U.S. Companies: Quantitative Test Continues to Be Based on Relative TSR But 2017 Reports Also Will Show Relative Financial Performance Based on Six New Metrics; Peer Group Submission Window Opens November 28

Sullivan & Cromwell LLP - November 15, 2016

Institutional Shareholder Services, the proxy advisory firm, has announced updates to its pay-for-performance methodology for U.S. companies. Effective February 1, 2017, ISS proxy research reports will display a measure of the company’s financial performance relative to peers based on a new weighted combination of six financial metrics—return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth and cash flow (from operations) growth—each over a three-year period.  The relative financial performance measure will not affect ISS’s quantitative analysis of relative pay-for-performance for 2017, which will continue to assess CEO pay against relative three-year total shareholder return (TSR), but may be considered in ISS’s qualitative assessment.  ISS announced that neither measure will apply unless companies have at least two years of CEO pay and trading or financial data.

ISS also announced that the online peer group submission window for issuers will be open from November 28 through December 9, 2016 through its Governance Analytics platform. In light of the expanded use of peer group metrics under the updated policy, companies should take necessary steps to ensure that ISS’s peer group construction incorporates the most updated list of peers used by the company in setting compensation.