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The changing landscape in executive compensation governance
The primary proxy advisor firms, Institutional Shareholder Services (ISS) and Glass Lewis, recently announced changes to their governance evaluation policies and processes for the 2017 proxy season. Taxand USA provides a summary of the ISS changes for 2017, with a focus on those changes relating to compensation and its governance.
ISS has renamed its general corporate governance scoring tool. The 2017 system, called the QualityScore, replaces the ISS Governance QuickScore 3.0. The tool is to identify, monitor and assess governance risk.
The QualityScore appears to be a modification of the previous tool, with only marginal improvements. Like the QuickScore 3.0, the QualityScore evaluates a company on 107 corporate governance factors that fall within four categories or pillars: audit and risk oversight, shareholder rights, board structure, and compensation.
Each factor is assigned a score based on the overall significance ISS attaches to the factor as well as the company’s actual practice. ISS weighs and sums each factor within the four pillar categories, scoring each category independently with scores ranging from 1 (best) to 10 (worst). ISS then assigns one composite QualityScore using the same 1-10 grading system. The overall score and the category scores are relative based on comparisons to other US publicly listed companies.
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As the demands for executive compensation programs focus on business results, human resource executives and committee members should search to strike the right balance between proxy advisors’ recommendations, executive engagement and delivering sustainable business results.