ISS has announced the updates to their corporate governance policy for the 2014 proxy season.

No Surprises

There aren’t any surprises, at least when it comes to executive and stock compensation. ISS didn’t make any changes specific to stock compensation and the only change that relates to executive compensation is that they’ve changed the Relative Degree of Alignment measure to be a three-year calculation only, rather than a weighted average of the one and three-year calculations.

Six Degrees of Kevin Bacon

The Relative Degree of Alignment measure doesn’t have anything to do with Kevin Bacon (although it might be argued that it would be a lot more interesting if it did).  Instead, as I noted in my blog on ISS’s proposed changes (“ISS Policy Changes for 2014,” October 29, 2013), it simply compares the company’s TSR ranking among its peers to its CEO pay ranking.  Ideally (from ISS’s perspective, that is–your CEO might feel differently), your company will have a high TSR ranking and a CEO pay ranking that is equal to or lower than its TSR ranking.  A low TSR ranking and a high CEO pay ranking will result a negative RDA and probably a lot more attention from ISS than you’d like.

What’s Changed

The old calculation averaged the one-year RDA and the three-year RDA with a respective weighting of 40/60.  The new calculation is just the three-year RDA.

Why Change?

Because the most recent year was included in both the one-year and three-year calculations, the prior RDA measure placed significant emphasis on this year. By eliminating the one-year RDA measure, the most recent year will be deemphasized in favor of the longer three-year period. As a result, short-term changes in TSR and CEO pay rankings will have a smaller impact on this aspect of ISS’s analysis. ISS also notes that the longer term calculation will help alleviate timing mismatches in pay for performance that result from equity awards being issued early in the fiscal year, before the corresponding performance year.

No Burn Rates Yet

The burn rate tables aren’t available yet.  I expect them some time in mid to late December. Hmmm, maybe I’ll be able to get three blog entries out of this whole policy update.

Don’t Miss Your Chance to Update Your Peer Group with ISS

The companies that ISS considers to be your peers are critical for the RDA measure as well as numerous other analyses that ISS performs.  ISS will consider your self-selected peers when constructing your peer group. You have until December 9 to let ISS know which companies are in your self-selected peer group.  For more information see, ISS’s Peer Group Methodology FAQ. You can submit your peers and any other feedback you have for ISS on your peer group at http://www.issgovernance.com/PeerFeedbackUS.

More Information

For more information, see the NASPP alert “ISS Announces 2014 Policy Changes.”

– Barbara