The Advisors' Blog

– Liz Dunshee

Broc’s blogged quite a bit about peer groups and the “law of unintended consequences” – the data becomes useless if everyone wants to pay in the top quartile. That said, peer groups are pretty well-accepted: more than 97% of the S&P 500 say they use them to set executive pay – and ISS has used them for years to measure the alignment of pay & performance. These days, the ISS group typically bears some resemblance to the company group (however, they still aren’t perfect).

But could company selections – and pay decisions – be further improved by looking at the peers that your peer group uses? This “ISS Analytics” article explores that “meta” idea – and finds:

1. 83% of companies are already loosely doing this

2. Companies that aren’t doing this tend to have higher pay levels and lower say-on-pay results

Your first reaction to this article might be, “Who has this much time on their hands?” But if you’re looking for an additional reference point to set or evaluate pay, this could be your ticket. The article concludes:

For companies, crowd-sourced peer networks can provide a powerful tool to identify prospective peers, as well as to identify peers that may have weaker connections to the company. The goal isn’t to radically alter a company’s peer group — but rather, to understand where improvements might be sourced, and to prepare for questions about the justification for including certain peers in the peer set. As investors become increasingly sophisticated in their compensation analyses, we see these questions coming up more often.

And for investors, crowd-sourced peer groups can provide an additional viewpoint to compare compensation practices for a portfolio of companies. The goal isn’t to judge the appropriateness of any individual company’s peer group, or to replace ISS’s existing peer group construction methodology—but rather to provide a comparator group, implied by the “wisdom of the crowd,” to base additional pay analyses upon.

This blog from Exequity’s Ed Hauder discusses how upcoming GICS changes could impact peer groups…