No credible alternative to the use of peer groups exist, so companies are unlikely to soon stop using the research tool, an executive compensation specialist said April 30 at the 2013 WorldatWork
Total Rewards Conference in Philadelphia.
Peer-group selection is central to the pay analyses that are performed by Institutional Shareholder Services Inc., said Timothy J. Bartl, president of the Center on Executive Compensation in Washington. Some critics claim, however, that companies can “game the system” by using one peer group to compare pay and another peer group to compare performance, he said.
Data on a company’s peer group can be used to assess the competitiveness of executive compensation and to gain insight into its performance in relation to market competition, Bartl said.
Peer-group data also can help a company analyze a market by determining its total pay competitiveness, Bartl said. The data can be used to establish appropriate compensation based on individual and business performance, executive experience, and career potential, he said.
Peer-group data can be used as part of a company’s benchmarking process to target peer-group compensation, but the company should disclose how the data was used, Bartl said.
Most investors agree that size is a relevant factor in choosing peers, Bartl said. According to a 2013 policy survey by the Institutional Shareholder Services, 84 percent of investors and 74 percent of issuers think the size of the peer group matters, he said.
Different approaches exist for selecting a peer group, Bartl said. For example, when a company’s competitors differ from industry competitors, dual peer groups often are used, he said.
“For very large companies, few industry peers will share the same size and scope, so pay may be compared with appropriately sized peers outside the industry,” Bartl said.
Whatever peer group a company uses, it must be prepared to “clearly disclose and explain the rationale for each peer group to investors,” Bartl said, adding that investors often look for consistency between the two groups.
By Kristin Washington