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Glass Lewis Implements Changes to its Voting Analysis Model

GLass Lewis & Co. has announced that, effective for annual meetings taking place after July 1, 2012, it has implemented a number of revisions to its proprietary pay for performance quantitative model.  Glass Lewis uses the quantitative model to analyze the degree of alignment between corporate performance and named executive officer compensation.  When making voting recommendations to its subscribers on say-on-pay proposals, Glass Lewis analyzes both the quantitative analysis and a qualitative analysis of the company’s named executive officer compensation program. 

The most significant revision Glass Lewis has made to its pay for performance model is a change in the manner in which peer groups are selected for use in compensation and performance comparisons.  Prior to these revisions, Glass Lewis selected a company’s peer group (which included, on average, 100 peer companies) using a proprietary model that took into account the company’s GICS code, enterprise value and geographic location.  From and after July 1, 2012, peer groups will contain no more than 30 companies and will be determined using a “market-based” approach developed by Equilar.  This market-based approach takes into account a company’s self-disclosed peer companies, the peer companies disclosed by those self-disclosed peers and the relative strength of the relationships and connections between that universe of companies and the subject company.  In its voting recommendation reports, Glass Lewis will now identify the Equilar-determined peer companies used in its analysis and highlight the differences between the Equilar-determined peer group and a company’s self-disclosed peer group.

Glass Lewis also has changed the manner in which it looks at named executive officer compensation for purposes of the quantitative analysis.  Instead of focusing on total compensation paid in the last fiscal year, the new pay for performance model will use the three-year weighted average of total compensation paid to a company’s chief executive officer and other named executive officers for purposes of comparing compensation to the Equilar-determined peer group and the alignment of pay and performance.

Finally, Glass Lewis has modified the manner in which it assigns letter grade rankings to a company’s pay for performance alignment.  From and after July 1, Glass Lewis will no longer force all companies into bell curve, but instead will focus on the actual gap between performance and compensation relative to peers in assigning letter grade rankings.

Posted by Sean Feller and Ron Mueller

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