On November 8, 2016, Institutional Shareholder Services Inc. (ISS) issued a press release summarizing changes to its pay for performance analysis models for companies in Canada, the U.S., and Europe.
This summary provides an overview of the key elements of the changes to ISS’s pay for performance methodology in Canada. The full press release contains additional details.
Key Changes to the Canadian Pay for Performance Methodology
Peer Group Creation: ISS’ peer group construction methodology will now incorporate information from each company’s self-determined peers for pay benchmarking purposes. Selected peers and the GICS industries that those peers are part of will now inform ISS’ peer group formation process. ISS will continue to focus on determining which companies are sufficiently similar based on industry and size (based on one or more of revenues, assets, and market capitalization). Only companies domiciled in Canada will be considered, company selected peers that are not based in Canada will not be considered.
Submission of Company Defined Peer Groups: Companies subject to ISS’ pay for performance tests with annual general meetings between February 1, 2017 and September 15, 2017 will have the opportunity to inform ISS of the company’s self-selected peer group, including changes for the 2017 proxy season. This is the first time Canadian companies have been able to formally submit their peer group information to ISS.
Canadian Companies can submit their peers to ISS from November 28, 2016 to December 9, 2016
Going forward, Canadian companies will have two opportunities to submit their peer groups to ISS, once in the middle of the year and once late in the year.
Comparison of CEO Pay to Financial Performance: A new standardized comparison of CEO pay and financial performance vs. the company’s ISS defined peer group will be added to ISS’ policy research reports beginning on February 1, 2017. Company financial performance will be measured based on a weighted average of multiple metrics. The metrics considered and their weightings will vary based on the company’s 4 digit GICS industry group. Metrics that will be considered include:
- Return on Equity (ROE)
- Return on Assets (ROA)
- Return on Invested Capital (ROIC)
- Revenue Growth
- EBITDA Growth
- Cash Flow from Operations Growth
Information from this analysis will not impact the results of ISS’ quantitative screening process during the 2017 proxy season, but the results may be considered in the qualitative review of a company and may mitigate or raise pay for performance concerns.
Financial performance and pay ranking information will be published for all companies subject to ISS’ quantitative pay for performance screens.
Relative Degree of Alignment (RDA) Assessment: The RDA assessment will now only be considered in the Quantitative concern level when the subject company has at least 2 years of pay and TSR data.
Timeframe for Changes
Changes to ISS’ pay for performance methodology will take effect on February 1, 2017 for Canada, the U.S. and Europe and will impact the analysis of proxies released after this date.