April 29, 2016
In scrutinizing last month's ISS report, which concluded that S&P 500 companies with a combined CEO and board chair role averaged $2.9 million higher CEO pay than companies which separated CEO and board chair positions, the Jones Day law firm found the report masked the conclusion that the size of CEO pay is more closely correlated with the size of the company than the leadership structure. Jones Day found that when the outliers identified in the report were removed from the data, the average total compensation reported by ISS for "insider chairs" dropped from $15.6 million to $11.8 million. In addition, the firm reported that the outliers included one company whose stock price increased by 1,600 percent over the five-year period ending December 31, 2014, and another outlier's revenue increased by 98 percent, with CEO compensation closely linked to performance measures. None of these facts were clearly disclosed by ISS. In fact, the law firm's analysis pointed out that ISS had identified that company size had a correlation more than two and a half times greater in explaining the size of CEO pay than whether the chair was independent. The firm also points out that CEO pay must be set by independent outside directors, regardless of whether the CEO is also the chair—contradicting ISS's conclusion that firms with combined CEO chairs are not the best monitors of shareholder interests (i.e., pay) in the boardroom. Jones Day concludes: "In our experience, compensation committees work hard to ensure an appropriate level of pay and linkage to performance. To blindly follow ISS's conclusion would require shareholders to oust from the board the very leaders who have made many of these companies attractive investments in the first place and who have carefully applied the very principles that ISS espouses."