72% of companies now use talent as a criterion for selecting peer groups, according to a recent Equilar analysis of peer group benchmarking practices in the Equilar 500 (similar to Fortune 500). Peer groups are closely scrutinized by investors and proxy advisors because of the implications for setting target pay and evaluating relative performance; companies are required to disclose not only which peers were selected but also insight into how those peers were selected. It is useful to use industry to consider compensation levels relative to financial performance despite external market volatility which impacts various industries differently.
Other common peer group practices include:
- Peer group size. 16-20 peer companies is the most common, with nearly 41% falling in this range, followed by approximately 29% who use between 11-15. Using too many peers unnecessarily complicates the data and too few peers may result in data anomalies.
- Number of criteria. Companies typically use between 3-6 criteria when assessing peers, with 44% using four or five elements.
- Criteria type. Although industry still leads at 88%, revenue was used by 77% of companies, followed by talent (72%) and market cap (64%), both of which have increased since the last study.
Peer groups received even more recent attention after the SEC’s Pay Versus Performance rule required the disclosure of a peer group against TSR calculation in which employers could choose their proxy disclosed peer group or the index included in the 10-K performance graph under regulation S-K. Early proxy filing data by FW Cook and Compensation Advisory Partners indicated that about 75% of companies chose to use the industry /sector indices to compare TSR.
