ISS Slammed for Using Inappropriate and Inconsistent Peer Comparisons

Despite ISS’s well-publicized refinement and explanation of its process for defining the comparator companies it uses to judge whether pay and performance are aligned, a Wall Street Journal article this week reports that more companies are challenging ISS’s peer determinations in public filings to explain their position to investors.  The article notes that “disputes between publicly held companies and [ISS] over how these peer groups should be chosen are playing a big role in shareholders’ advisory votes on pay this year."  An ISS recommendation carries significant weight with investors—influencing between 25 percent and 35 percent of the vote, the article states.  According to consulting firm Semler Brossy, as of last week, 52 companies had filed supplemental proxy materials so far this year, compared to 27 last year, and exactly half of those have involved disputes about peer groups, compared with just over a quarter in 2011.  The article uses Marriott International as an example.  ISS recommended investors vote against the lodging company’s say on pay resolution, saying that its pay should not be compared with the pay of major competitors such as Hyatt Hotels Corporation or Starwood Hotels.  Rather, ISS chose AutoNation, Penske Automotive Group, Icahn Enterprises and Genuine Parts Co. as “appropriate” peers.   In its supplemental filing, Marriott states “we do not believe investors view these companies as similar in size and industry sector to our lodging management and franchise business.  One selected peer, Penske Automotive Group, has a market capitalization that is less than 20 percent of Marriott’s and another, Icahn Enterprises LP, is not a Russell 3000 company.”  Ironically, the median compensation for the peer group selected for Starwood, a much smaller company, was more than 22 percent higher than ISS’s selected peers for Marriott.  In the end, shareholders saw through the ISS analysis and more than 87 percent approved the Marriott say on pay resolution—much better than many other companies receiving a negative ISS recommendation.