Compensation Committees Need to Check Whether Their Companies’ GIC Will Change (And Consider the Impact)

Today, I am taking the easy way out by linking to important posts by fellow bloggers Liz Dunshee and Mark Borges. After the close of business on September 28, 2018 the Global Industry Classification Standard (GICS) will change for many tech, media, communications, and e-commerce companies. S&P Dow Jones Indices and MSCI Inc. announced these changes last November, stating:

[T]he Telecommunication Services Sector is being broadened and renamed as Communication Services to include companies that facilitate communication and offer related content and information through various media. The renamed Sector will include the existing telecommunication companies, as well as companies selected from the Consumer Discretionary Sector currently classified under the Media Industry Group and the Internet & Direct Marketing Retail Sub-Industry, along with select companies currently classified in the Information Technology Sector.

Another important change being made to the GICS structure is the reclassification of online marketplaces for consumer products and services regardless of whether they hold inventory to the Internet & Direct Marketing Retail Sub-Industry under the Consumer Discretionary Sector. All of these e-commerce companies are dominant players in the Internet Retail Industry, targeting the same consumers and competing with one another.

So, who cares about what industry classification is assigned to you by some third-party you have never heard of? ISS does. ISS uses GICS for creating your company’s compensation peer group and applying its pay-for-performance assessments. Here’s an excerpt from the Borges/Compensia piece:

Although it is difficult to predict how the pending reclassifications will affect the analysis of a given company’s specific situation, we envision that changes could occur in these areas of ISS focus:

  • Summary of a company’s total shareholder return performance (on a one-, three-, and five-year basis) relative to companies with similar GICS classifications;
  • Construction of peer groups for purposes of pay benchmarking and relative “pay-for-performance” comparisons;
  • Review of the relative alignment of the compensation of a company’s CEO as part of its quantitative screen for evaluating an executive compensation program in connection with formulating Say-On-Pay proposal voting recommendations;
  • Review of the compensation arrangements for the non-employee members of a company’s Board of Directors relative to the competitive market for purposes of identifying “excessive compensation” practices;
  • Review of new or amended employee stock plans to determine the shareholder value transfer and gross burn rate relative to companies with similar GICS classifications; and
  • Calculation of a company’s “QualityScore,” which considers specific corporate governance and executive compensation-related policies and practices relative to GICS-based industry norms.

This entry has been created for information and planning purposes. It is not intended to be, nor should it be substituted for, legal advice, which turns on specific facts.