January 5, 2021 Executive Compensation Executive & Director Pay Design Articles

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Executive & Director Pay Design

Why does defining a peer group take so long and make nobody happy? A "First Question"

Defining a peer group can be challenging. If you’ve ever experienced frustration or disappointment while trying to define one, take a look at our free starter guide for some pointers:

Concept

Determine a company’s path forward for defining and using a peer group

Objectives

  • Define how the “peer group” will be used (e.g., pay levels, pay practices, or both)
  • Construct a group of companies that can be used to meet the company’s purpose for the peer group, if needed
  • Provide detailed disclosure on engagement process and company’s response

Challenges

  • Client may have a limited number of direct competitors either in general or within the similar size range
  • Client may have limited number of comparable companies (e.g., companies with similar characteristics) within the similar size range
  • Proxy advisors will independently define their own “peer group” for the company using their own set of guidelines and methodology when assessing pay and performance alignment
  • Revenue is often the primary size criteria for evaluating the “appropriateness” of peer companies

Initial Checklist

  1. Engage the Committee and management to define how the “peer group” will be used (e.g., pay levels, pay practices, or both)
  2. Outline a set of objective characteristics for which to evaluate potential peer companies (e.g., size, growth, valuation, industry)
  3. Determine whether additional secondary criteria should be used to narrow the universe of potential peers (e.g., geographic footprint, ownership structure)
  4. Acknowledge that no peer group will be perfect and that not all companies in the resulting peer group will necessarily be direct competitors for business or executive talent
  5. Ensure that peer companies are within a reasonable range of the client’s revenue if using for pay levels comparisons
  6. Engage Compensation Committee Chair and management early to ensure buy-in and thorough understanding of the purpose of the peer group and rationale for peer constituents
  7. Confirm disclosure requirements with company’s internal and external counsel

Need some more help?

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