How do you communicate and justify your peer group choices to your board, shareholders, and regulators?

1 Define your criteria

Before you select your peers, you need to establish clear and consistent criteria that reflect your business context and objectives. These criteria may include factors such as industry, size, geography, growth, profitability, and talent market. You also need to consider the availability and quality of data for each potential peer, as well as the frequency and transparency of your peer group review. Your criteria should be documented and approved by your board's compensation committee, and communicated to your shareholders and regulators as part of your compensation disclosure.

2 Benchmark your peers

Once you have your criteria, you need to identify and benchmark your peers using reliable and relevant sources of information. You can use public databases, surveys, proxy statements, or third-party consultants to gather and analyze data on your peers' pay levels, structures, and practices. You should also monitor your peers' performance, governance, and reputation, as well as any changes in their business strategy or structure that may affect their comparability. You should aim to have a balanced and representative peer group that covers a reasonable range of size and performance metrics, and avoid cherry-picking or excluding peers based on convenience or bias.

3 Explain your rationale

After you have your peer group, you need to explain your rationale and methodology to your board, shareholders, and regulators. You should provide a clear and concise summary of your peer group selection process, including the criteria, sources, and analysis used. You should also highlight any changes or adjustments made to your peer group over time, and the reasons behind them. You should demonstrate how your peer group supports your compensation philosophy and strategy, and how it links to your company's performance and value creation. You should also anticipate and address any potential questions or concerns that your stakeholders may have about your peer group choices.

4 Solicit feedback

Finally, you need to solicit feedback from your board, shareholders, and regulators on your peer group choices, and be open to dialogue and improvement. You should engage with your board's compensation committee regularly and proactively, and seek their input and approval on any significant changes or issues related to your peer group. You should also communicate with your shareholders and regulators through your proxy statement, annual meeting, investor relations, and other channels, and listen to their opinions and expectations. You should be prepared to justify and defend your peer group choices, but also acknowledge and address any gaps or weaknesses that may arise.

Choosing a peer group for executive compensation is not a one-time or static exercise. It requires ongoing research, evaluation, communication, and adaptation. By following these tips, you can communicate and justify your peer group choices to your board, shareholders, and regulators effectively and confidently.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?