Here’s some news (thanks to compensationstandards.com and Compensia): the structure of the GICS code is changing. “Who cares?” you say. Yep, that’s what I said when I first heard about these changes. (Well, that’s what I said once I figured out that the “Global Industry Classification Standard” (GICS) code is not the same thing as the “Standard Industrial Classification” (SIC) code, a four-digit classification system developed in the 1930s that the SEC uses to classify companies; the SEC requires each company to identify its primary SIC code on the facing page of registration statements. No, SIC codes are not changing.) However, it turns out that the GICS code, a 10-digit classification system developed by MSCI and S&P for use by the global financial community, is employed not only for creating financial indices, but is also critical to the development by proxy advisor ISS of its compensation peer groups and other compensation-related analyses. So, GICS codes matter: for those companies affected, the structural changes could have a significant impact on assessments by ISS of their executive compensation programs. The changes will be effective on September 28, 2018.
According to the press release, the changes involve communications and media companies as well as internet retail companies. More specifically, under the revised structure, a “Communications Services” Sector (formerly “Telecommunication Services”) is being expanded to now comprise “companies that facilitate communication and offer related content and information through various media,” including telecommunications companies, internet access providers, and media, entertainment and interactive media and services companies. Some of these companies were previously classified under the Consumer Discretionary Sector, the Internet & Direct Marketing Retail Sub-Industry or the Information Technology Sector. These changes reflect the recent evolution in modes of communication as well as the integration of telecom, media and internet companies.
In addition, companies that offer online marketplaces for consumer products and services are being reclassified under the Internet & Direct Marketing Retail Sub-Industry under the Consumer Discretionary Sector, regardless of whether or not they hold inventory. According to the press release, “[a]l of these e-commerce companies are dominant players in the Internet Retail Industry, targeting the same consumers and competing with one another.” Here is a link to the ISS FAQs.
In this article, compensation consultant Compensia considers the potential impact of these changes. Most signficantly, the composition of peer groups for benchmarking and pay-for-performance comparisons will be affected. But beyond that, the reclassifications may also affect other areas where GICS sector comparisons may be involved, such as relative TSR, non-employee director pay, employee stock plans, quantitative screening for alignment of CEO comp in connection with say-on-pay analyses, and calculation of “QualityScore,” which takes into account GICS-based industry norms. Compensia concludes that, although some changes will have only a nominal impact, “other changes may have significant ramifications for how companies will be evaluated for comparative purposes (for example, moving internet retail companies from the ‘Information Technology’ sector to the ‘Consumer Discretionary’ sector).” Compensia suggests that companies affected may even want to reassess their own compensation peer groups. To assist companies in considering the impact, Compensia includes as an exhibit a list of prominent tech companies affected by the changes and their old and new classifications.
