The Most Wonderful Time of the Year (Peer Groups)

Fred Whittlesey
Compensation Venture Group

"There'll be scary ghost stories
And tales of the glories of...
Long, long ago"


-Edward Pola and George Wyle
as performed by Andy Williams (1963)
"It's the Most Wonderful Time of the Year"


Yes, it's the most wonderful time of the year - Compensation Committee season!

As Committees gather to review 2011 and plan for 2012, we have a record number of scary ghost stories this year - with the first year of say-on-pay, several dozen failed votes, and a handful of lawsuits, all rooted in ghosts of decisions of Compensation Committee meetings past.  With that comes the inevitable yearning for the glories of long, long ago.  Not so long ago, really.  Maybe five years since Compensation Committee decisions starting getting really complicated, with the past year attaining a new level of complexity.

These discussions typically commence with the topic of the peer group.  Is the peer group still relevant?  Did we lose many peers over the past year due to M&A activity?  Have we considered the peer group criteria of external parties?  Have we used the "right" industry codes and metrics to define the group? Did we use a defensible process for determining our peer group?

We've moved from a time of shareholders and proxy advisers merely opining on pay versus peers, to one of their opining on the peers themselves.  The media have caught on to this topic, with the Tootsie Roll story in the Wall Street Journal back in 2009, and more recently the Washington Post "Cozy Relationships" article.

Thank goodness, Institutional Shareholder Services has come along with their annual holiday treat, their 2012 Policy Updates.  The U.S. policy updates are a particular treat, with ISS informing us that they are going to extend their helpfulness by not only critiquing companies' peer groups as disclosed in the proxy statement, but now creating a personalized peer group for them:

"The peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for financial firms), and GICS industry group, via a process designed to select peers that are closest to the subject company, and where the subject company is close to median in revenue/asset size. The relative alignment evaluation will consider the company’s rank for both pay and TSR within the peer group (for one- and three-year periods) and the CEO’s pay relative to the median pay level in the peer group."

This will purportedly help ISS to assess "peer group alignment" for the pay-for-performance assessment. The magic number of "14-24 companies" must be a scientifically-derived improvement over the range of "15-25 companies."

We also have on our holiday wish list the proposed guidance from the SEC on clawbacks, the CEO pay ratio, and the CEO pay-for-performance analysis.  They never let us down with these year-end pronouncements.

These rules will put still more pressure on the peer group process as various parties - including the media - opine on the CEO pay ratio versus other companies and the CEO pay-for-performance analysis versus other companies (and maybe yet another peer group).  We'll see companies publish supplemental tables to push back on the SEC's required disclosures, all of this rooted in the peer group issue.

That is the ghost of Compensation Committee meetings future.  Happy Holidays.