Are ISS Recommendations Informative? Evidence from Assessments of Compensation Practices

Ana  Albuquerque; Mary Ellen Carter; Susanna  Gallani

Working Paper | HBS Working Paper Series | 2020

Are ISS Recommendations Informative? Evidence from Assessments of Compensation Practices

by Ana Albuquerque, Mary Ellen Carter and Susanna Gallani

Abstract

Using detailed information from the largest proxy advisor in the U.S., Institutional Shareholder Services (ISS), we examine whether proxy advisors’ assessments of firms’ compensation practices are able to identify poor compensation practices as measured by subsequent performance. While prior research provides consistent evidence of an association between shareholder voting outcomes and proxy advisors’ Say-on-Pay recommendations, the evidence is mixed over whether their recommendations are informative about the quality of firms’ compensation practices. We find that ISS “Against” recommendations and negative assessments are associated with worse future accounting performance, consistent with ISS being able to detect low quality compensation packages. However, workload compression has an effect, as we find that the relation between assessments and future performance only occurs during the off season (i.e. for firms with non- December fiscal year ends).

Keywords: Proxy Advisors; CEO compensation; Say-on-Pay; Institutional Shareholder voting; Executive Compensation; Performance;

Language: English

Format: Print

54 pages

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Citation:

Albuquerque, Ana, Mary Ellen Carter, and Susanna Gallani. "Are ISS Recommendations Informative? Evidence from Assessments of Compensation Practices." Harvard Business School Working Paper, No. 19-085, February 2019. (Revised March 2020.)

Working Paper | HBS Working Paper Series | 2020

Nominal and Opportunity Effects of Managerial Discretion

Wei Cai, Susanna Gallani and Jee Eun Shin

We examine the performance consequences of managerial discretion when compensation payoffs are interdependent; that is, when rewards or penalties given to some employees cause others not to get them. Using proprietary data from a company that gives monthly rewards and penalties based on a combination of objective metrics and subjective performance assessments, we document both a nominal and an opportunity effect of managerial discretion. The former refers to performance consequences associated with workers who receive rewards or penalties due to managerial discretion (actual recipients). The latter refers to performance consequences associated with workers who would have received rewards or penalties had there been no managerial discretion (would-be recipients). Our study is, to our knowledge, the first to provide empirical evidence of performance consequences associated with the opportunity effect of managerial discretion. In additional tests, we explore theory-consistent explanations of our results. Our findings contribute to the literature on subjectivity in performance evaluations and have important practical implications for the design of incentive systems.

Keywords: compensation interdependence; nominal and opportunity effects; Managerial Discretion; performance measurement; Employees; Compensation and Benefits; Management; Decisions; Performance; Measurement and Metrics;

Citation:

Cai, Wei, Susanna Gallani, and Jee Eun Shin. "Nominal and Opportunity Effects of Managerial Discretion." Harvard Business School Working Paper, No. 20-075, January 2020. View Details

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Are ISS Recommendations Informative? Evidence from Assessments of Compensation Practices

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