Expert perspective by Grahall’s Editorial Boards
The August 17th Wall Street Journal article “Picking Big ‘Peers’ to Set Pay” by Cari Tuna effectively outlines the practice by many companies of including “…bigger and more complex rivals in compensation peer groups used as a factor in setting pay, helping to boost executive paychecks.”
Use of peer group comparisons as one aspect of determining executive pay is far from an unusual practice, but without careful consideration it can be easily misused in exactly the way that Ms. Tuna’s article outlines. At Grahall, we distinguish from “comparable” and “aspirational” peer groups and we do not blur the line between these two very different groupings. It is by distinguishing these very different groups that Boards can make informed decisions.
Further, peer group information is just a PIECE of the data that Boards should analyze, and far from the most important. As a corollary, say you have decided to buy a new hybrid car. You would probably want to know that generally a Toyota Prius retails for about $22,000 and a Lexus RX400h for about $40,000. That’s a start, but it doesn’t tell you how much you will pay for your new car.
Directors have two primary responsibilities when it comes to the CEO: 1) providing guidance to the CEO and 2) managing CEO performance (including compensation decisions). Where Boards only use – or heavily rely on peer groups for compensation decisions, those Boards are effectively abdicating their responsibilities. Peer groups show the compensation determined by OTHER Boards for OTHER CEO’s.
Our recommendations for consideration of peer groups are:
1) Keep them large, as small groups create strange anomalies
2) Separate the companies that are comparable from those that are aspirational
3) Never “cherry pick” peers as that creates a subjective rather than objective result
4) Always supplement peer group considerations with other information and insight. Peer groups should never stand alone as the sole data point used to determine CEO pay.
Contact Grahall’s Editorial Director at email@example.com