Peer Groups: A Balance of Precision and Perspective

The second installment of Pearl Meyer’s Executive Compensation Essentials series, explains one of the most foundational - and nuanced - components of executive pay design: selecting the peer group. Getting this right requires a thoughtful balance of analytical rigor and practical insight.

The Science: A Structured, Data-Driven Approach

Selecting peer companies starts with evaluating a range of key criteria, primarily industry and size.

• Depending on the industry, appropriate size comparisons might be based on annual revenue, total assets, market capitalization, or employee count. For example, financial services firms often use total assets, while industrial and service organizations may rely on revenue.

Beyond these primary factors, secondary considerations help tailor the group:

• Geographic scope
• Talent market
• Business complexity and life-cycle stage
• Performance stability: Avoid companies with inconsistent or poor performance, as they may not offer reliable compensation benchmarks.
• Considering peers of peers can uncover useful additions.

The Art: Applying Strategic Judgment

Internal perspectives, industry experience, and practical context round out the decision-making process. For example, a significantly larger direct competitor may be a desirable benchmark but not an appropriate peer. While you may reference this company’s compensation practices, when it comes to choosing a peer, a different company/industry of similar size may make more sense.

Refining the Peer Group: Ensure relevance and balance by evaluating the group as a whole.

• Start with the most obvious peers and expand as needed to achieve a robust group—typically 12 to 20 companies – avoiding peers that distort the data.
• Assess your company's position within the group across key metrics. Many companies aim to be near the median in terms of revenue or market cap.
• Use market data to supplement insights.

The Bottom Line: Peer groups are not static. They should be revisited regularly with the Compensation Committee. As markets evolve, companies grow, and talent dynamics shift, your peer group must evolve accordingly.