Tuesday, December 11, 2012

ISS Issues FAQ on Peer Groups and Executive Compensation Issues

A proxy advisory firm has issued FAQs on selecting a company’s peer group for purposes of analyzing executive compensation. The Institutional Shareholder Services (ISS) said that its new peer group methodology focuses on identifying companies that are reasonably similar to the subject company in terms of size, industry profile, and market capitalization. The peer group will contain a minimum of 14 and maximum of 24 companies based on such factors as the GICS industry classification of the subject company. Proxy advisory services have become de facto corporate governance standard setters in recent years.

The basic principles of the new methodology are that peers should come from similar industries and be of similar size. If the standard methodology fails to yield the minimum number of acceptable peers, ISS will supplement the peer group to reach the minimum. For super mega-cap companies, ISS will use the standard methodology to identify as many peers as possible for these very large companies rather than create supermega peer groups, as was done in 2012. When the standard methodology appears to have produced inappropriate peers, ISS will apply manual judgments to build a peer group.