December 21, 2011

ISS Issues White Paper on “Pay-for-Performance” Test

Yesterday, ISS published its promised white paper that describes the pay-for-performance methodology under which it will implement its 2012 policy updates. ISS will begin to apply this new methodology on February 1st. Here’s an excerpt from a Wachtell Lipton memo by Michael Segal, Jeannemarie O’Brien, Jeremy Goldstein and Timothy Moore (that will be posted later today):

The test is one of the primary methods by which ISS determines whether to recommend for or against a company’s management say-on-pay vote, with companies failing the test being deemed to have a “pay for performance disconnect.” In determining whether there is a “pay for performance disconnect” this proxy season, ISS will measure the degree of alignment between CEO pay and total shareholder return within the subject company’s peer group for a one- and three-year period, as well as the absolute alignment between CEO pay and the company’s TSR over a five-year period.

The white paper specifies that ISS will select 14 to 24 peer companies against which the subject company’s TSR performance and CEO pay will be measured for the one- and three-year periods ending on the last day of the month closest to the subject company’s fiscal-year end. Peer companies will be limited to those in the same two-digit GICS category as the subject company, each with annual revenues (or assets for financial companies) between 0.45x and 2.1x the subject company’s revenues (or assets) and a market capitalization between 0.2x and 5x the subject company’s market capitalization. This list of companies will then be filtered to 14 to 24 companies in the subject company’s six-digit GICS category (or four- or two-digit category if fewer than 14 companies exist in the six-digit category), with companies “closest in size” (presumably based on market capitalization or assets) selected first and larger and smaller companies added to maintain the subject company at or near the median size of the list of peer companies.

“Super-mega” non-financial companies (approximately 25 Russell 3000 companies each with greater than $50 billion in annual revenues and at least $30 billion in market capitalization) will collectively comprise a stand-alone peer group, and ISS will compare their respective one- and three-year TSR performance and CEO pay against the members of that group. In each case, annual revenues, assets and market capitalizations will be determined as of June 1 or December 1 (presumably the relevant year is the year prior to the year in which the proxy is definitively filed).

Now that the white paper has been released, companies can assess how their TSR performance and CEO pay will compare to that of their peers under ISS’ test. Companies should use the criteria set forth in the white paper to determine whether they are likely to have a “pay for performance disconnect” based on these criteria, and, if so, what actions, if any, are advisable to take in light of this analysis.

Yesterday, ISS also announced a new version of its Governance Risk Indicators (GRId 2.0), and issued information about the changes that will become effective in February. Tune in on January 24th for the always entertaining webcast – “Pat McGurn’s Forecast for 2012 Proxy Season: Wild and Woolly.”

If your New Year’s resolution is to consider something new, check out the “Lowell Milken Institute Law Teaching Fellowship” at UCLA School of Law…

Corp Fin Issues Disclosure Guidance for Real Estate Limited Partnerships

On Monday, Corp Fin issued the second installment of its new type of informal written guidance – “CF Disclosure Guidance: Topic No. 3 – Sales Material under Guide 5” – that explains the comments issued most frequently by the SEC Staff when they review sales material from real estate limited partnerships.

PCAOB Re-Proposes Standard on Communications with Audit Committees

Yesterday, as noted in this press release, the PCAOB re-proposed its standard on “Communications with Audit Committees.” Statements from the Board Members are posted (and the re-proposal will eventually be posted on that page too). Jim Hamilton has blogged notes from the Board meeting discussing the re-proposal.

– Broc Romanek