CEO Pay Increases Slow, ISS Intensifies Scrutiny
Board awareness of the relationship between total shareholder returns (TSR) performance and CEO pay has increased in recent years, in part due to the influence of proxy advisory firms—including Institutional Shareholder Services, or ISS. ISS evaluates pay-for-performance alignment using a proprietary model that is heavily dependent on the TSR-CEO pay relationship, the “quantitative evaluation.” Board sensitivity to TSR and annual pay decisions is evident as the alignment between the two continues to strengthen.
Testimony to this, in 2015, approximately 40% of CEOs received a decrease in pay as REITs posted muted TSR. Further, last year, CEO compensation at the largest 50 REITs (by enterprise value) increased at the slowest pace since the 2008 financial crisis, with CEO pay increasing by 5% at the median. This is in contrast to CEO pay increases which averaged 9% since 2010.
Notable this proxy season, as CEO pay has become more aligned with TSR performance, fewer REITs have triggered a “misalignment” under the ISS quantitative evaluation. However, a positive quantitative result has not consistently translated into a positive ISS say-on-pay voting recommendation, due in large part to an intensified focus on the other qualitative factors. For example, ISS has expanded its attention to the rigor of performance goals and to annual incentives that pay out above target in a year with negative TSR (notwithstanding the fact that such payouts did not trigger a pay-for-performance misalignment); additionally, a handful of REITs have received a negative ISS voting recommendation due solely to poor disclosure.