The Advisors' Blog

A few weeks ago, I blogged about the challenges in pciking relative financial measures. This entry follows up with thoughts about picking a peer group:

Most of my clients struggle with determining the right peer group for performance comparisons. You might say: what do you mean? Don’t you already have a peer group you use for compensation purposes? What’s wrong with those companies? As I have learned, in some – but very limited – cases, the compensation peer group is reasonable for relative financial performance comparisons. For example, it might be reasonable for a specialty chemical company to use a relatively broad chemical group for pay comparisons – but since it only has two true competitors, relative performance comparisons to the entire peer group may be unreasonable as the demand for their products, cost of goods, etc. can be vastly different than the broader peer group.

Similarly, an oilfield services company might have a well-defined peer group, but relative financial performance comparisons should probably be limited to just the capital intensive peers, rather than the entire peer group.

And what about companies with a unique niche or conglomerate status? These companies often defy categorization, and trying to build a relevant peer group can be quite difficult. Some companies might default to a broad index, like the S&P 500, but I think such broad market comparisons are relevant only if you are using relative total shareholder return (as opposed to an earnings, return or growth measure).

– Mike Kesner, Deloitte Consulting