Are ISS Recommendations Informative? Evidence from Assessments of Compensation Practices

Using detailed information from the largest proxy advisor in the U.S., Institutional Shareholder Services (ISS), we examine whether its assessments are able to identify a firm’s 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 for firms with non-December fiscal year-end. This is consistent with resource constraints during the busy proxy season influencing ISS’s ability to identify poor compensation practices.