ISS Goes After “Too Modest” Annual Incentive Targets

Despite (or perhaps because of) a generally positive Say on Pay season, ISS is publishing a new series questioning whether companies are softballing annual plan targets, given that more than 70% of S&P 1500 CEOs achieved at or above target in 2022.

ISS’s Evidence: Key signs cited in the report were the fact that despite market volatility over the past five years, the percentage of CEO bonuses paid out at or above target remained fairly steady, along with the fact that about half of companies achieved payout at or above target for two consecutive years.

Size Matters. ISS found that S&P 500 CEOs were more likely to achieve threshold and target payouts than mid- and small-cap companies, asking, “Are S&P 500 constituents outperforming their smaller counterparts, or are they setting more easily attainable goals?”

One Size Fits All. ISS’s methodology for assessing rigor of incentive plan goals is clear – a company’s history is compared to a standard formula requiring that:

• Threshold should be achieved 8-9 times out of 10 (80-90%)
• Target should be achieved 5-6 times out of 10 (50-60%)
• Maximum should be achieved only 1-2 times out of 10 (10-20%)
• If target is achieved in one year, next year’s goals should be more rigorous, making achieving target again less likely 

Since CEOs have consistently received target payouts more than 50-60% of the time, ISS reasons, compensation committees must not be setting sufficiently rigorous goals. Further, this differs by industry – as the study points out, financial services executives were much more likely to achieve at or target payouts than automobile CEOs in 2022, leading ISS to question whether companies are “leveraging quantitative techniques” and whether “shareholders are paying attention” to the details of plan design. 

Bottom Line: Because the study is authored by ISS Corporate Solutions, it purports to “report the facts and reserve judgement for others,” but it’s clear that this will be a focus for the proxy advisor going forward. Companies should expect more scrutiny of goal-setting and payout curves in the coming proxy seasons, especially as much of the low-hanging fruit of Say on Pay voting (egregious pay practices, etc.) has already been plucked.