Resurrecting History: ISS Lengthens ‘Look-backs’ for P4P Tests

In December 2025, Institutional Shareholder Services (ISS) announced changes to its quantitative tests used to assess CEO pay for performance. Three tests, Relative Degree of Alignment (RDA), Multiple of Median (MOM), and Financial Performance Assessment (FPA), will now use longer time horizons for shareholder meetings starting February 2026.

These changes mean that outcomes on ISS quantitative tests for 2026 might be different than what companies expected under the 2025 methodology. The longer time horizons also suggest that proxy readers will expect the Compensation Discussion & Analysis (CD&A) disclosure to provide context about past pay and performance that companies might have otherwise considered history.

The Changes: Expanded Time Horizons for RDA, MOM, and FPA

RDA, which measures rank in CEO pay versus rank in relative total shareholder return (TSR) performance against peers, moves from a three- to a five-year look-back. MOM, which assesses CEO pay versus the median pay of peer companies, moves to include a three-year window that gets averaged equally with a one-year look-back. FPA focuses on financial performance across four EVA metrics, incorporating EVA performance and CEO pay from five years.

While the RDA and MOM generally apply to every company, the FPA only impacts companies that have an elevated level of concern surfaced by other quantitative tests. In those cases, the FPA could either lower or raise the initial P4P concern.

Concerns and Implications

While some companies may see different outcomes than expected under the time horizons in effect for 2025, pay-for-performance methodology changes like the ones ISS will implement for 2026 tend to affect companies at the extremes of pay or at the margins of performance. We anticipate that most companies will fare no better or worse under the longer timeframes incorporated into RDA, MOM, and FPA in 2026.

Some companies, however, will see effects from the time horizon changes. Farient anticipates cases like the following could produce a different outcome on the ISS quantitative tests this year:

• A new, lower-paid CEO in the most recent years and much higher-paid CEO in the older years. In these cases, the high CEO pay from the past might result in an elevated level of concern and signal a potential pay-for-performance disconnect
• Poor TSR performance except in the most recent year. In situations where stock-price performance turned around only recently, companies will have a harder time avoiding concerns from the RDA test
• Spikes in CEO pay due to triennial equity grant cycles or mega-grants. Companies that provide big stock awards only once during the review period might see the magnitude of those grants spread across more years and not necessarily result in elevated concern levels
• COVID recovery impacts affecting TSR and/or financial performance in 2021. The post-pandemic recovery will be part of the five-year look-back, which could help or hurt companies given potential distortions in stock price, financial performance, or CEO pay over that time. Compensation Committees will need to review the history of their pay programs to understand whether decisions and outcomes from five years ago will influence current test results, as even discontinued legacy pay practices may raise scrutiny

Guidance for CD&A Drafting

Compensation Committees should ensure that the CD&A addresses any pay or performance concerns from four or five years ago which the longer time horizons for these ISS tests might surface. The CD&A may need to include more history and rationale for pay decisions, with reference to five-year performance and pay data, and the disclosure should certainly highlight improvements or adjustments made to better align CEO pay with long-term shareholder value.

Companies must ensure disclosures include clear and accurate details that provide the context necessary for proxy readers to understand any concerns raised by ISS quantitative tests. The CD&A should anticipate questions from shareholders and proxy advisors about legacy compensation arrangements, and provide answers in the current disclosure and not just reference prior proxies.

The CD&A will also need to justify decisions that may appear appropriate in a three-year context but seem less favorable when viewed over five years. Companies may need to provide disclosure that explains the Committee’s rationale for decisions made not just in the most recently completed fiscal year but also over the last five years.

Open Questions and Corner Cases

Whenever proxy advisors make methodology changes, questions always come up about special circumstances and unique situations. Farient identified a couple of scenarios where companies may need to consider how shareholders would interpret outcomes from the updated ISS tests:

• Two to four years of disclosed performance. In its mechanics document, ISS indicates that it will use years of available data for the RDA and FPA tests; for MOM, ISS will use three years if available but otherwise default to one year. New and recently public companies should understand the scope of these tests and whether adverse outcomes may occur
• Legacy performance data for companies coming out of a spin or business divestiture. Depending on circumstances, ISS may attach legacy CEO pay and stock-performance to what might technically be a new company. For example, a public company that spins out several businesses and emerges as a new public entity may be profiled by ISS with pay and TSR of the former firm. Companies facing this kind of situation may need to query ISS to understand which pay and performance figures the quantitative tests will use

Act Now to Avoid Surprises Later

As with every proxy season, companies should review the pay program and CD&A against current shareholder and proxy advisor expectations. This year’s review will need to include a look at pay and performance data for the past five years, not just the last three. More than before, the CD&A will need to address legacy practices and provide clear explanations for pay-for-performance misalignment, whether recent or in the last five years.

By Trey Poore