On July 21, 2011, ISS released a new white paper on peer groups, Executive Pay Through a Peer Benchmarking Lens. The press release announcing the white paper, which contains a link to request a copy, can be found on ISS’s website at:
http://www.issgovernance.com/node/135485
The underlying research was done using ISS’s new executive compensation database (I’ll have more information to share about that late next week). ISS looked at 15,000 proxies filed over the past 4 years. The key findings of ISS’ research were:
- The median number of companies used for benchmarking is 15 companies for FY2010;
- Peer companies are most often 0.5x to 2.0x (about 60% of peer companies) the revenues of a subject company; while peer groups for small-cap companies include larger market cap companies;
- The larger a company, the more likely it is to be appear in peer groups;
- Companies with higher paid CEOs are used more often in peer groups;
- For a sizable portion of ISS’s study companies, it found a “significant misalignment between our measure of relative pay rank and relative performance rank.”
The white paper also looks at total compensation versus 1- and 3-yr total shareholder return (TSR) for peer companies used by Russell 300 companies. ISS found that more than 170 companies’s CEOs received a significant increase (greater than 25%) in total compensation while their performance was below median 1- and 3-year TSRs for Russell 3000 peer companies in the same industry. The white paper did not describe how ISS defined “total compensation.” But, if ISS used the same methodology it uses for its Pay for Performance Policy, it was using a total compensation figure that really represented target compensation, i.e. grant date values, and compared that to actual performance delivered. Personally, I find that to be a problem. If you are looking at the relationship between pay and performance, I think the better approach is to look at pay actually realized and compare that to the performance achieved.