Good News from ISS: Less Arbitrariness, Better Motivated Executives
ISS adopts relative performance measurement — analogous to the Obermatt Bonus Index. Less sandbagging, no punishment for uncontrollable events, and better motivation for executives.
We usually have mixed feelings about the proxy advisor ISS. It is therefore all the more welcome that ISS will in future assess the appropriateness of executive compensation relative to a peer group. The method ISS uses corresponds exactly to the Obermatt Bonus Index, which our clients have been using successfully for years.
No Sandbagging in Budget Negotiations
For once, ISS has done something good for company management. This breaks the link between the internal budget and bonuses, bringing an end to "sandbagging" aimed at increasing bonuses. The result is leaner, more realistic budgeting processes.
No Punishment for Events Beyond Managers' Control
For internal reasons or, more frustratingly, external reasons beyond managers' control, bonus programs often fail to pay an amount that reflects actual business performance. This leads to dissatisfaction. External performance measurement avoids this problem, because managers are not pitted against one another in budgeting processes and are not penalized for matters outside their responsibility.
Better Motivation and Stronger Incentives for Growth
We can see the results of external performance comparisons in sports: top performance, the highest motivation and, just as importantly, the greatest satisfaction among competitors. With the new ISS Pay-for-Performance Test, companies can now benefit too.
For more than 10 years, we at Obermatt have maintained that consistently aligning company management and compensation with profitable growth and shareholder return, both measured relative to a peer group, provides the foundation for lasting business success. ISS now confirms our approach, as this year's Nobel laureate in economics, Bengt Holmström, did earlier.
We Help Our Clients Take the Initiative
We understand that companies may feel at the mercy of ISS. Our suggestion is therefore to take the initiative yourself. You can proactively select your company's peer group, define the metrics and, above all, the adjustments, and then present your performance against that peer group, including through backtesting, and compare it with your own experience of the business's development. This creates a transparent basis for the future, including communication with shareholders and incorporation into long-term compensation.
We expect the new ISS rules to prompt a reassessment within your executive management team and with your board of directors. At Obermatt, relative performance measurement has been one of our core business areas for more than 10 years, and our databases contain metrics for several tens of thousands of companies. We are therefore ideally positioned to support you on this exciting path.
