May 27, 2020
Compensation Peer Group Evaluation During Crisis
– Lynn Jokela
Not to overload the compensation committee, but another item that companies may want to add to the committee’s agenda, if they haven’t already, is a review of their compensation peer group to determine whether changes should be made. As the economic fallout from Covid-19 continues, companies may find that it no longer makes sense for certain companies to be in their compensation peer group.
Each company has its own methodology for selecting peers and the process to make changes varies. The ISS identified peer companies often overlap with a company’s peers but may not line up exactly and recently, ISS issued a memo with suggested peer group strategies for companies to consider. The memo notes that shareholders are quick to scrutinize executive compensation and 2020 pay decisions, including the peer group used, will be no different.
ISS lists common selection criteria for identifying compensation peers, company size being one. Due to recent swings in the market, the memo suggests some companies may want to look at data using a longer time horizon to help smooth out comparisons. Here’s an excerpt:
– Market Capitalization: Rather than using spot-price market cap values, utilize a market cap based on the 200-day average price for a more reliable and less volatile measure of company size.
– Revenue: For revenue or other measures of company size, rather than using the most recently disclosed quarterly or yearly values, look at revenue data over a longer-term period such as 2-year or 3-year averages for a helpful approach to approximate the company’s size under normal conditions. Additionally, analyst estimates of future financials, when available, can help shed additional light on where certain peers are headed and whether they will remain valid comparisons in the coming year.
– M&A, Spinoff, Bankruptcy Activity: Some existing peers may no longer be in operation due to merger, acquisition, or spinoff activity, or are at risk of no longer being viable standalone companies, in which case those could be considered candidates for removal; and these factors can be added as peer screening criteria.