United States: Questioning Recent ISS Study On The Impact Of Board Leadership Structures On CEO Pay

  • ISS did not provide transparency into its backup information and data.
  • ISS seemingly overlooked the reality that a company's performance has a more statistically significant impact on CEO pay than board leadership.
  • ISS was quick to connect some dots but failed to connect them with the kind of precision that is expected of corporate America.

Institutional Shareholder Services ("ISS") published a report in March 2016 arguing that CEO compensation is impacted by companies' board structures. More specifically, ISS argues that CEOs of companies with boards chaired by an "insider" have higher compensation than CEOs of companies with boards chaired by an "outsider."

Given ISS's orientation toward one-size-fits-all corporate governance scorecards—and the fine print found on the last page of the report (warning readers that the information may not be accurate and that anyone who relies on the information does so at his or her own risk), we decided to dig into the report's findings before accepting its conclusion. We think that our caution was warranted.

Generally, the report does not provide much transparency into its underlying data, which makes it difficult to analyze. Our requests for the backup information received no response. Nonetheless, we were able to use the data included in the report to rerun some of the calculations.

The report separates S&P 500 companies into four board categories—those chaired by: (i) an individual deemed by ISS to be an "insider," (ii) the CEO of the company, (iii) an individual deemed by ISS to be an "affiliated outsider," and (iv) an individual deemed by ISS to be an "independent outsider."

The report then concludes that:

  • The average total compensation of CEOs in the insider and combined role categories is higher than the average total compensation of CEOs in the affiliated outsider and independent outsider categories, and
  • Therefore, board structure has a significant impact on CEO pay.

Although the ISS report does not identify the companies it assigned to each of these categories, ISS does provide the identity of four companies in the "insider" category, and describes the compensation of these CEOs as being high outliers.

Removing these so-called outliers from the "insider" category reduces the average total compensation for the "insider" category from $15.6 million to $11.8 million. In short, when the outliers are removed from the "insider" category, the resulting "insider" category's average annual compensation is reduced by almost 25 percent and is almost equal to the average annual compensation of the "affiliated outsider" category.

We reviewed the proxies of the so-called "outliers" and discovered a few facts relevant to the conclusions drawn that were not mentioned by ISS:

  • One outlier's stock price increased 1600 percent over the five-year period ended December 31, 2014.
  • Another outlier's revenues almost doubled since its CEO took leadership and 98 percent of the CEO's 2014 compensation was put at risk with stringent performance based measures.
  • A third outlier decreased its then-CEO's compensation three years in a row, and ultimately split the CEO position into two roles in response to shareholder feedback obtained in outreach efforts.

We believe that our findings demonstrate the danger in trying to adopt a one-size-fits-all approach to corporate governance and compensation practices. Public company boards and compensation committees use many types of information when making compensation decisions (feedback received through direct shareholder outreach efforts, performance measures, long-term strategies, etc.). Any report that attempts to identify a single reason for compensation variances among public company CEOs will, in our view, inevitably fail to account for valid variances.

The first two of the so-called outliers described above, for example, adhered to ISS's top corporate governance compensation policy—creating a meaningful link between pay and performance—by providing a large portion of their executives' compensation packages in the form of performance-based/at-risk awards. The compensation packages of those CEOs have proven to create an effective incentive to maximize the value of their respective companies, as evidenced by the companies' strong performances. Yet the strong performances, which resulted in high compensation, are not taken into account in ISS's analysis.

The report also fails to acknowledge that a company's revenue has a more statistically significant impact on CEO pay than does the category applicable to the company's chair. In addition to testing the impact of the identity of the board chair on CEO pay, the report also analyzed the impact of:

  • Three-year "indexed" total shareholder return of the company versus the S&P 500,
  • Company revenues (averaged over the three-year period),
  • The CEO's tenure, and
  • Whether there was a change in CEO during the course of the three years.

According to the report, in order to be statistically significant, the t-statistic of a variable must be greater than 2 or less than -2. Of the five variables tested, only two of the variables had t-statistics that were statistically significant: the chair code at -2.53 and the company revenue code at 5.36—more than two-and-a-half times greater. Any student of statistics would not "bury the lede" by focusing on a variable of lesser significance.

The authors of the ISS report nonetheless jump to the conclusion that "insiders" are not the best monitors of shareholder interests in the boardroom. This conclusion is unsupported as well as unfair, particularly given that, under stock exchange rules, CEO pay is set solely by independent directors and may not be set by "insiders." In fact, CEO chairs cannot even serve on compensation committees. 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Lizanne Thomas
Robert A. Profusek
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions