By Ross Kerber

(Reuters) -Top proxy advisory firm ISS recommended Tesla shareholders vote against ratifying CEO Elon Musk's $56 billion pay package, calling the compensation excessive in a rejection of the plan set by the electric vehicle maker's board.

In a report sent by a representative late on Thursday, Institutional Shareholder Services also recommended a vote against Tesla director James Murdoch, but backed votes for director Kimbal Musk, Elon Musk's brother, and for the company's proposed move to change its state of incorporation to Texas from Delaware.

The move follows a similar recommendation for a vote against Musk's pay package by proxy advisory firm Glass Lewis last week.

The vote is seen as a referendum on Musk's leadership, as investors worry that the billionaire entrepreneur is distracted by his other ventures and that his often controversial comments are weighing on the reputation and sales of Tesla.

Tesla did not respond to a request for comment.

The massive compensation arrangement, the biggest for a corporate CEO in America, set rewards based on Tesla's market value and operational milestones. But in January, a Delaware judge voided the plan, and Tesla subsequently sought to move its state of incorporation to Texas.

Unusually, Tesla put the 2018 pay plan up for a re-ratification vote at its upcoming annual meeting on June 13.

PROXY INFLUENCE

While the recommendations from the big proxy advisory firms play a role in focusing attention on certain issues at corporate annual meetings, their exact influence on votes is up for debate and criticism.

A recent University of Utah study found their recommendations can have a significant impact on votes but also found the firms themselves may only be channeling the views of investors, their customers.

Tesla responded to Glass Lewis' recommendations in a securities filing earlier this week, saying Musk is creating wealth for Tesla stockholders and has "skin in the game."

In recommending votes against Musk's pay, ISS wrote that "although the structure of the grant's performance hurdles arguably contributed to, as well as reflect, the company's significant financial growth during the performance period, the total award value remains excessive, even given the company's success."

"In addition, the grant, in many ways, failed to achieve the board's other original objectives of focusing CEO Musk on the interests of Tesla shareholders, as opposed to other business endeavors, and aligning his financial interests more closely with those of Tesla stockholders," ISS' report said.