The Advisors' Blog

Yesterday, I shared that the ISS peer group submission window for off-season meetings is opening next week. For folks not involved in this process — and often the lawyers are not — I thought I would share this Pearl Meyer blog about how these groups are constructed and why they might change year-over-year.

First, the blog says to start with basic screens using this criteria to guide initial selection.

Primary Criteria:

– Industry Alignment: Start by selecting companies within your industry or closely related sectors. Comparable market conditions and business dynamics ensure relevant comparisons.

– Company Size: Appropriate relative size is critical, but the types of measures used for comparison can vary by industry. The most common focus is revenue, but other metrics such as assets, market capitalization, enterprise value, and employee count may be just as important (and in some cases more so). Once the key metric(s) are established, an appropriate size range should be set, typically 0.5x to 3.0x depending on the metric. Striking this balance ensures meaningful comparisons without skewing results.

Secondary Criteria:

– Geographic Scope: While geography matters less for executive roles than lower-level positions, local market comparisons may still be a relevant consideration.

– Competition for Talent: Include companies that directly compete for your executive talent. In some cases, this may include companies that do not compete in the same industry.

– Business Complexity and Stage: Consider the complexity of operations and the company’s life-cycle stage—whether they’re startups, mature entities, or undergoing rapid growth or restructuring.

– Performance Stability: It’s important to look at the financial stability and performance. Otherwise, reliable benchmarks can be distorted by underperforming organizations.

– Peers of Peers: Most public companies disclose their peer groups, and reviewing them can provide valuable insights into industry practices. Looking at disclosures of direct competitors can uncover commonly referenced peers and identify companies that list your own as a peer.

But the process shouldn’t end with analytical screens. It says “personal insight and experience” needs to be the next layer to ensure that all business or talent competitors are considered for the peer group, even where they may not pass these analytical screens. Size-wise, it says to generally aim for 12 to 20 companies.

Why would a company’s peer group change in future years? The blog emphasizes that this is an ongoing process, and the group will require regular review and discussion, with changes being necessary from time to time due to M&A and shifts in the company’s market position.

– Meredith Ervine