Peer groups have long been the standard tool for analyzing executive compensation opportunities, but in the current environment they can serve in a variety of ways other than benchmarking pay levels. Prompted in part by expanded proxy disclosure requirements, companies are turning to peer groups as an important means to assess incentive plan practices. To do so, they are expanding their criteria for peer group selection beyond size and industry to capture key – and often unique - characteristics that are more relevant to pay for performance comparisons.
This article examines the use of more multidimensional peer groups that encompass less common factors, such as financial and operational characteristics. It discusses how such a peer group can help in conducting pay and performance comparisons, choosing incentive metrics, and calibrating performance goals and payout slopes. Examples are giving of nontraditional factors for peer group selection and their potential use in supporting programs and, ultimately, building shareholder support.
