Management Say-On-Pay Proposals (U.S.)

Background and Overview

Based on ISS' 2012-2013 policy survey results, executive compensation continues to be the perennial top governance topic for investors. Misalignment between pay and performance, problematic pay practices and board responsiveness are among the key drivers for companies receiving low support on their say-on-pay proposals.

ISS' pay for performance evaluation begins with a preliminary quantitative screen of company pay and performance relative to an ISS-selected peer group.  For ISS' purposes, these peer groups are designed not for pay benchmarking or stock-picking, but rather to compare pay and company performance within a group of companies that are reasonably similar in terms of industry profile, size, and market capitalization. ISS' current peer group methodology focuses on the subject company's GICS industry classification, which may not reflect multiple business lines in which many companies operate. As a result, some ISS peer groups omitted competitors of the target company and/or included firms that did not reflect a connection to the target considered appropriate for performance and pay comparisons.

During 2012 proxy season, investors also saw more companies disclosing alternative measures of pay beyond the granted pay disclosed in the summary compensation table. Companies are providing a diverse set of "realizable" total compensation, which endeavors to show how executive pay has been affected by performance. While grant date pay in the Summary Compensation Table shows the intent of the pay decisions of the Compensation Committee, it does not necessarily reflect the final payouts of performance-based awards or changes in value due to gains or losses in the company's stock price.

Based on the ISS' 2012-13 policy survey, measures of pay that reflect the company's performance — both standardized calculations and measures of such pay provided by the company — are favored by both issuers and investors as potentially appropriate for consideration in a pay-for-performance evaluation.

Another practice that is increasingly raising investor concerns is the pledging of company stock by company directors and officers, which ISS highlighted as a concerning practice beginning in 2012. Pledging of company stock as collateral for a loan may have a detrimental impact on shareholders if the officer is forced to sell company stock, for example to meet a margin call. The forced sale of a significant amount of company stock may negatively impact the company's stock price, and may also violate company insider trading policies. In addition, pledging of shares may be utilized as part of hedging or monetization strategies that would potentially immunize an executive against economic exposure to the company's stock, even while maintaining voting rights. In ISS' 2012-13 policy survey, 49 percent and 45 percent of institutional and issuer respondents, respectively, indicated that any pledging of shares by executives or directors is significantly problematic. Only 13 percent and 20 percent of institutional investors and issuers, respectively, responded that pledging is not a concern for them.  Therefore, both investors and issuers view pledging of company shares as a problematic practice.

Key Changes Under Consideration

Summary of proposed changes:

  1. Use company's selected peers as an input to its peer group methodology, while maintaining an approach that includes company size and market capitalization constraints.
  2. Potentially incorporate a comparison of realizable pay to grant date pay as part of the qualitative evaluation of pay-for-performance alignment.
  3. Add pledging of shares as a factor that may lead to negative recommendations under the existing problematic pay practices evaluation.

ISS Proposed Executive Compensation Evaluation Policy (excerpt):

Note that proposed changes are highlighted.

Vote CASE-BY-CASE on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation.

Vote AGAINST Advisory Votes on Executive Compensation (Management Say-on-Pay—MSOP) if:

  • There is a significant misalignment between CEO pay and company performance (see pay for performance evaluation below);

  • The company maintains significant problematic pay practices (see problematic pay practices below);

  • The board exhibits a significant level of poor communication and responsiveness to shareholders.

Pay for Performance Evaluation

ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period.  With respect to companies in the Russell 3000 index, this analysis considers the following:

  1. Peer Group Alignment:
    • The degree of alignment between the company's TSR rank and the CEO's total pay rank within a peer group, as measured over one-year and three-year periods (weighted 40/60).

      (The peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group and company's selected peers' GICS industry group with size constraints, via a process designed to select peers that are closest to the subject company in terms of revenue/assets and industry and also within a market cap bucket that is reflective of the company's.)

    • The multiple of the CEO's total pay relative to the peer group median.
  2. Absolute Alignment — the absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years — i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period.

If the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of non-Russell 3000 index companies, misaligned pay and performance are otherwise suggested, analyze the following qualitative factors to determine how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests: 

  • The ratio of performance- to time-based equity awards;
  • The overall ratio of performance-based compensation;
  • The completeness of disclosure and rigor of performance goals;
  • The company's peer group benchmarking practices;
  • Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers;
  • Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards);
  • Realizable pay compared to grant pay; and
  • Any other factors deemed relevant.

If a significant portion of the CEO's misaligned pay is attributed to non-performance-based equity awards, and there is an equity plan on the ballot, ISS may recommend a vote AGAINST the equity plan. Considerations in voting AGAINST the equity plan may include, but are not limited to, magnitude of pay misalignment, contribution of non-performance-based equity grants to overall pay, and the proportion of equity awards granted in the last three fiscal years concentrated at the named executive officer level.

Problematic Pay Practices related to Non-Performance-Based Compensation Elements

Pay elements that are not directly based on performance are generally evaluated CASE-BY-CASE considering the context of a company's overall pay program and demonstrated pay-for-performance philosophy. Please refer to ISS' Compensation FAQ document for detail on specific pay practices that have been identified as potentially problematic and may lead to negative recommendations if they are deemed to be inappropriate or unjustified relative to executive pay best practices. The list below highlights the problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:

  • Repricing or replacing of underwater stock options/SARS without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options);
  • Excessive perquisites or tax gross-ups, including any gross-up related to a secular trust or restricted stock vesting;
  • New or extended agreements that provide for:
  • CIC payments exceeding three times base salary and average/target/most recent bonus;
  • CIC severance payments without involuntary job loss or substantial diminution of duties ("single" or "modified single" triggers);
  • CIC payments with excise tax gross-ups (including "modified" gross-ups)
  • Pledging of company stock

Proposed Peer Group Methodology Summary

The proposed peer group methodology maintains its focus on identifying companies that are reasonably similar to the subject company in terms of industry profile, size, and market capitalization.

The proposed methodology incorporates information from companies' self selected pay benchmarking peer groups in order to identify and prioritize GICS industry groups beyond the subject company's own GICS classification. The methodology draws peers from the subject company's GICS group as well as from GICS groups represented in the company's peer group, while maintaining the approximate proportions of these industries in the final peer group where possible. The proposed methodology additionally focuses initially at an 8-digit GICS resolution to identify peers that are more closely related in terms of industry. Finally, when selecting peers, the methodology prioritizes peers that maintain the company near the median of the peer group, are in the subject company's peer group, and that have chosen the subject company as a peer.

Other proposed changes include using slightly relaxed size requirements, especially at very small and very large companies, and using revenue instead of assets for certain financial companies.

Intent and Impact

The proposed revisions take into account feedback from both investors and issuers based on ISS' 2012-13 policy survey and in-person and telephonic roundtable discussions. 

Peer Group Methodology

The following outcomes are observed between the new and current peer group methodology:


New Methodology

Current Methodology

GICS precision — 8-digit






GICS precision — 2-digit

The average company has more than 80% of peer selections drawn from the company's 8-digit GICS group or the 8-digit GICS groups of self-selected peers

No peer groups have members based on 2-digit GICS

Only 40% of peers are drawn from the company's 8-digit GICS

12% of peer groups have members based on 2-digit GICS

Similarity with company's selected peers

42% of companies have a potential ISS peer group that overlaps at least 50% of their own


On average, an ISS peer group contains 44% of company's chosen peers

20% of companies have a potential ISS peer group that overlaps at least 50% of their own

Size comparison

Over 90% of peer groups maintain the subject company within 20% of the peer group median size by revenue.

82% of peer groups maintain the subject company within 20% of the peer group median size by revenue.

Realizable pay

ISS is considering adding realizable pay in the qualitative review of the management say-on-pay for large cap companies. Realizable pay will consist of the sum of relevant cash and equity-based grants and awards made during a specified performance period being measured, based on equity award values for actual earned awards, or target values for ongoing awards, calculated using the stock price at the end of the performance measurement period. Realizable pay consideration may mitigate or exacerbate CEO's pay for performance concerns.

Pledging of company stock

According to a recent CFRA study (Review of Pledged Insider Pledged Share Disclosure, May 17, 2012), one or more executives or directors have pledged shares, for margin accounts or other loans, at approximately 15 percent of companies in the Russell 3000 Index.  The study found that pledged shares at some companies exceed 50 percent of the company's total market value.  A second CFRA study found that the total dollar value of pledged shares exceeds $1 billion at some companies (Pledged Shares — A Further Look, June 25, 2012).

The following table shows the summary statistics of the 450 companies that have one or more executives/directors who pledged company stock in a margin account, as of May 2012.


Pledged Shares Value ($ in MM)

% of market value




90th percentile



75th percentile






50th percentile



25th percentile



There are 60 — 70 companies that have one or more executives/directors who have pledged company stock aggregating approximately 5 percent of market value, or approximately $110 million.

There are 50 companies that have one or more executives/directors who have pledged company stock aggregating approximately 10 percent of market value, or approximately $200 million.

While pledging policies are not tied to compensation, a substantial portion of shares owned by most executives and outside directors are delivered under compensation programs. As such, the say-on-pay proposal appears to be a reasonable mechanism for shareholders to initially communicate objections to such policies.

Request for Comment

Please feel free to add any additional information or comments on the proposed policy change.  In addition, ISS is specifically seeking feedback on the following:

Peer Group Construction

  • Are there additional or alternative ways that ISS should use the company's self-selected peer group to inform its peer group construction?
  • Since company size is highly correlated with levels of executive pay, what is a reasonable size range (revenue/assets) for peer group construction?
  • Are there additional factors that investors should consider in peer group construction for pay-for-performance evaluation?

Realizable Pay

  • How would you define realizable pay?
  • Should stock options be considered based on intrinsic value or Black-Scholes value, and what is the rationale for your choice?
  • What should be an appropriate measurement period for realizable pay?  One year, or three years, or five years or others?

Pledging of Company Stock

  •  What would you consider a "significant" level of pledging of company stock that causes concern for investors?
  • If pledging raises concerns significant enough to warrant voting action, should this action be directed at the (i) management say-on-pay proposal (if available), (ii) the board, or (iii) members of one of the board committees (e.g., audit, governance, compensation - please specify)?
  • Would you consider a company's remedial actions on pledging such as a commitment not to pledge in the future, commitment to unwind their positions within a reasonable period) be sufficient to address concerns?
  • Are there additional factors that investors should consider for the case-by-case analysis?

To submit a comment, please send via e-mail to Please indicate your name and organization for attribution. While ISS will consider all feedback that it receives, comments will not be published without attribution.

All comments received will be published as received, unless otherwise requested in the body of the e-mail submission.