Developing a peer group is a key component of designing your executive compensation plan. It will support in benchmarking executive compensation, designing pay packages, and evaluating company performance. When developing a peer group, consider companies within your industry, companies of a similar size (common metrics include revenue, market capitalization, and assets for financial services industries), location, and companies that are listed as peers of your peers. Consider a peer group of 15-30 companies. Your executive compensation peer group should represent the organizations with which your company competes for talent.
Subscribers to the Executive Compensation Assessor have access to industry, financial, peer group, and location data for public companies throughout the United States, Canada, and Europe. In the example below, we will illustrate how a large soft drink manufacturing company, ABC Soda, in Irvine, California, can use the Executive Compensation Assessor to develop its compensation peer group.
Here’s how it works:
Step 1: Build a list based on competitors within your industry
To ensure that companies within the United States are included in their peer group list, ABC Soda begins their peer group search by setting the location to the United States Average. Since ABC Soda is a large company with $25B in revenue and a $150B market cap, they are looking for peers throughout the United States.
Next, ABC Soda sets their eSIC code to 2086 – Soft Drink and Ice Manufacturing – to filter the list of all publicly-traded U.S. companies, but it shows only the 23 companies that are in their industry. Although these companies are within the same industry, many are significantly smaller than ABC Soda. The challenge is to find the right peer group of companies to make appropriate and competitive executive compensation decisions.
ABC Soda uses the Executive Compensation Assessor’s filters for total revenue and market capitalization to derive a list of comparably-sized companies within their industry. An appropriate range of revenue and/or market capitalization can be reviewed to assess an appropriate peer group within your eSIC code. The range will typically fall somewhere between ½ to 2 times the size of your company. Executive compensation can be inflated if companies in your peer group used for top management compensation decisions are too large.
Step 2: Refine the list to match companies of similar size in your specific industry as well as the general industry
ABC Soda refined the list of all U.S. public companies to two companies that best match their industry and size criteria, so they elect to add Coca-Cola Co. and PepsiCo Inc. to their peer group. ABC Soda knows that they will need to add more companies to their peer group for optimal comparison and benchmarking, therefore they expand their search to the broader industry code of eSIC 2000 – Food and Beverage Manufacturing – throughout the United States and maintain their filters for total revenue and market capitalization. This adds two more companies to their potential peer list: Mondelez International Inc. and The Kraft Heinz Co.
ABC Soda then expands their industry search to all industries so that all U.S. companies that fall within their established revenue range and market cap range will be displayed. They scroll through over 50 financial metrics available in the Executive Compensation Assessor and directly access proxy and 10-K statements to further analyze each company’s performance, pay plan design, business scope, etc., and determine a company’s fit. Companies that are deemed to be a poor fit are removed from the peer list.
Step 3: Finalize you list
Before finalizing their peer group, ABC Soda inspects the reported peer groups of their peer companies in the Company Profile window of the Executive Compensation Assessor and considers companies mentioned in multiple peer lists. These potential peers can be added to the company list for further analyses of financial metrics.
What do you do with this information?
At the end of the process, ABC Soda has 17 companies in their peer group that they can use for benchmarking compensation, designing pay packages, and evaluating their company’s performance. ABC Soda exported the financial information for their peer companies to an Excel spreadsheet and saved their peer list in the Executive Compensation Assessor to automatically populate the list for future analyses.
Stay tuned for future blog posts about how to benchmark executive compensation using your peer group and the Executive Compensation Assessor.
ERI Economic Research Institute compiles the most robust salary, cost-of-living, and executive compensation survey data available, with current market data for more than 1,000 industry sectors.
ERI’s Assessor Series® – Solutions for every compensation decision
