When to Deviate From ISS's Policies on Comp

Compensation committees are being advised to be mindful of proxy advisory firms, particularly ISS, but not to forget that compensation design should be tied to business strategy.

Deborah Lifshey, Managing Director in the New York office of compensation consultancy Pearl Meyer & Partners, said in a recent National Association of Corporate Directors webcast that there is a tendency to focus on ISS because it is the proxy advisory service with the most influence over institutional shareholders.

ISS typically recommends voting against 10% of the plans put on ballots, lowering the passing rate by 23% to 26%, so it has an impact. “But the impact is not determinative of the voting outcome,” Lifshey said.

Shareholders went along with ISS recommendations in only 17% of those votes.

“So getting an against vote from [the proxy advisory firm] is bad, but it is not death,” Lifshey said. “You can get around [it] by trying to do some shareholder outreach, looking at your other major shareholders and appealing to their policies if they are not strictly following ISS.”

Steven Van Putten, Managing Director at Pearl Meyer & Partners, said in another recent webcast carried out in conjunction with the NACD that often one of the first questions a client asks is if the incentive program will raise a flag with ISS, Glass Lewis and other shareholder advisory groups.

“It is not to say that those aren’t important considerations, but it is how those considerations are used in determining compensation program design. Our view is that it should inform program design, but it should not necessarily dictate how the compensation program is structured,” Van Putten said. “Rather we believe that business strategy and leadership strategy should be the key drivers of compensation philosophy, which in turn drive program design and get delivered in terms of results.”