Maxwell Murphy
Senior Editor

J.C. Penney’s board of directors fought back against governance firm Institutional Shareholder Services’ call to vote against two of its compensation proposals.

The back and forth began Monday, when ISS published a note saying the peer group Penney uses to determine compensation levels for top executives was “aspirational,” as it included companies like Nike, Walt Disney, Target and PepsiCo, which have much higher revenues than Penney. Penney fired back in a Tuesday filing that its peer group “reflects the market within which we compete for talent,” and noted that its new president came from Target, its new chief technology officer came from PepsiCo and a new executive vice president of strategy worked at both Disney and Nike before coming to Penney.

ISS selected its own peer group for Penney based on companies whose sizes were more similar, including four automobile-related companies in the 14-company group. Penney said that “simply makes no sense,” and shows that ISS’s methodology is flawed.

An ISS spokesman declined to respond to Penney’s criticism. It also recommended shareholders vote against Penney compensation in last year’s say-on-pay vote, but 72% of votes were cast in favor of the pay packages, according to Penney.

With the recommendations, Penney becomes the latest company to suffer the disapproval of ISS over its peer group. The firm often uses different methodologies than companies when determining the appropriate peers by which to measure the compensation of named executives.

ISS said holders should vote against Penney’s 2012 long-term incentive compensation pay, plus vote against the current compensation of executives in the non-binding advisory vote known as say-on-pay. Most companies now hold say-on-pay advisory votes as required under certain regulations in the Dodd-Frank Act that went into effect in January 2011, and ISS said holders should say no on pay because of the “excessive” retirement package given to former Penney CEO Myron Ullman.

Penney said in the filing that, given the management changes last year, “its executive compensation decisions in 2011 were necessary to ensure that the company and its leadership team could hit the ground running in 2012.”

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