Glass, Lewis and Co., LLC ("Glass Lewis"), an
independent proxy advisory service, recently modified its
methodology to evaluate the alignment between executive pay and
company performance for purposes of making say-on-pay voting
recommendations. As discussed below, the changes include
identifying smaller peer groups, creating a new model for
determining pay-for-performance grades, utilizing fewer performance
metrics, and measuring compensation with a three-year weighted
average. These changes became effective with Glass Lewis's
recommendations for public companies holding annual shareholder
meetings on or after July 1, 2012.
Peer Groups. Under the former methodology,
Glass Lewis developed a peer group of approximately 100 peer
companies based upon enterprise value, industry sectors and
geographic location. Now, they will utilize Equilar's
Market-Based Peer Group. The new peer group will consist of up to
30 companies based upon the target company's self-disclosed
peer group, the peers of the self-disclosed peers (i.e.,
"peers of peers"), the companies that use the target
company as a peer (i.e., "incoming peers"), and the peers
disclosed by incoming peers. The composition of the peer group will
now be disclosed to the target company. In its Proxy Paper, Glass
Lewis will disclose the specific companies that comprise the peer
Performance Metrics. Performance will continue
to be measured as the three-year weighted average of the
performance of the company relative to the peer group. In
determining company and peer performance, however, the change in
stock price and change in book value per share will no longer be
considered. Glass Lewis will consider total shareholder return,
change in operating cash flow, earnings per share growth, return on
equity and return on assets.
Measuring Compensation. Glass Lewis will now
consider the three-year weighted average of total compensation for
the CEO and named executive officers, rather than the one-year
total compensation for these executives.
Grading Pay-for-Performance. Glass Lewis
assigns a letter grade (A through F) to companies as scores for
pay-for-performance. In determining the letter grade, the
company's relative performance percentile ranking is compared
with the relative ranking of the company's CEO and named
executive officer pay against the peer group. The difference in the
two percentiles is used to determine the letter grade assigned by
Glass Lewis. Unlike the former model used by Glass Lewis, there
will be no forced curve under this new model, and instead the
letter grade will be assigned based on the relative level of
compensation and performance against peers.
This article is presented for informational purposes only
and is not intended to constitute legal advice.
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