ISS, proxy advisor to institutions invested in publicly-held companies, has issued changes in its methodology for evaluating executive compensation in connection with recommending shareholder voting under the SECs “Say-On-Pay” advisory procedure. The big take-away is this: ISS is retreating from primary reliance on TSR (total shareholder return) and is considering other factors based upon its own policy survey of both investors and companies.

The test in assessing executive comp has been two-fold: a quantitative test which compares a company to its peers economically, and then a qualitative assessment which presumably accounts for differences between companies (for example, an executive doing a great job on a turnaround may have much weaker statistics than an executive in a more robust company, and thus the turnaround executive may appear to be over-compensated).

Compensation committees (and ultimately full boards) now will have to consider the following additional standards: return on equity, return on assets, return on invested capital, revenue growth, EBITDA and cash flow.

Some interesting factors: in the ISS survey the “least important” metric both for investors and companies was “economic profit,” which is indeed excluded from the list of new financial measures; investors were most heavily in favor of ROIC, and companies most favored earnings per share or EBITDA. When you think about it, these are expectable results; companies are managed by people who often have been economically rewarded, in option plans and otherwise, by robust earnings, while investors want to know their ultimate bottom line: what is their return on their invested capital?