Executive Compensation Peer Groups: Why They Matter & How to Build Them

Informed executive compensation decisions require market context, and good governance practice often involves benchmarking compensation using a defined peer group—particularly among public and mature private companies. 

This article explores why executive compensation peer groups matter, the key considerations for building a strong peer group, and how they differ from other comparator sets.

Why Executive Compensation Peer Groups Matter

A well-constructed compensation peer group serves two main purposes:

1. Benchmarking Pay

Peer groups provide external market data to benchmark both the amount and structure of executive pay. Peer data helps companies understand the guardrails around how much to pay executives in base salary, bonus, equity, or total compensation, as well as common approaches for how to pay (e.g., incentive plan design, mix of cash vs. equity). Without a relevant and reliable market reference, compensation decisions risk being misaligned with business objectives or shareholder expectations.

2. Disclosure

For public companies, executive peer group construction also carries a regulatory component. Companies that are required to file a Compensation Discussion and Analysis (CD&A) must disclose any peer groups used to inform compensation decisions in the covered fiscal year. This makes the peer group subject to investor and proxy advisor scrutiny. Emerging Growth Companies, which are exempt from CD&A requirements, may delay disclosure until they become large accelerated filers, but the peer group still plays a meaningful role in internal decision-making.

Key Criteria for Building a Strong Peer Group

There is no perfect formula, but most successful executive compensation peer groups follow a consistent set of criteria designed to balance statistical robustness with relevance.

Peer Group Size

Peer groups typically include between 10 and 25 companies. A group of less than 10 to 15 companies may lack enough relevant data points to yield meaningful benchmarks, and can also lead to material year-over-year volatility that does not reflect market trends. Larger peer groups provide more stable benchmarking results, but too many companies can dilute the relevance of the closest comparators. 

In practice, few peers align perfectly with every key metric. The goal is to assemble an executive compensation peer group that is reasonable in the aggregate, even if some individual companies are an imperfect match.

Industry & Business Model Similarity

The most effective peer groups include companies in the same industries with similar business models, cost structures, and global or regional scope. These characteristics tend to drive comparable executive compensation practices, as pay models can vary by industry. 

For example, the balance of cash and equity compensation for a SaaS company likely differs compared to an industrials company. Industry is also important for identifying the company’s executive labor market, and companies that compete for the same leadership talent.

While it is preferable to have industry alignment, companies in niche fields may need to expand the definition of labor market competitors to find a sufficient peer sample. Industry classification codes can provide a starting point, but real comparability often comes down to understanding business dynamics beyond the surface level.

Relative Size

Executive pay levels strongly correlate with company size, and executive compensation peer groups should consist of companies with a comparable scale of operations. Among public technology companies, market capitalization is often used as a primary metric to assess relative size because equity awards, a key component to executive pay, tend to scale with changes in valuation. Revenue is another common metric, as it can provide insight into the size of business operations. 

Other indicators, such as number of employees, total assets, or industry-specific metrics, can be used as supplementary measures, depending on the company. Most companies apply a flexible size range, above and below their own market cap or revenue, to ensure a sufficient number of peers can be identified, with the goal of placing the company near the midpoint of the group.

Location

Executive pay models differ by country, driven by variations in regulatory environments, tax structures, investor expectations, and compensation norms. Most peer groups for U.S. companies are limited to other U.S.-based companies with similar governance and disclosure practices, ensuring consistency in the benchmarking process.

Other Considerations

• Peers should be limited to companies with reliable compensation disclosures, which may require filtering out private companies, subsidiaries, foreign private issuers, externally managed companies, recent IPOs, and companies with atypical pay practices.
• There are a variety of analyses that can be employed for identifying potential peers. Some examples include reviewing common peers of key competitors, finding companies that list your organization in their disclosed peer group, or referencing the independent peer groups developed by proxy advisors such as ISS and Glass Lewis.
• Peer groups are typically reviewed annually. Minor refinements each year are normal, but it is unusual to overhaul the group without material changes in business or size. Year-over-year continuity helps maintain stability in benchmarking and avoids the perception that changes are being made to justify pay outcomes. 
• While performance comparisons can inform other areas of compensation design, they are not typically used to construct peer groups, which serve as the basis for setting target pay opportunities. Actual pay outcomes will be determined by performance results.

Why Executive Compensation Peer Groups Are Different

Not all peer groups serve the same purpose. Companies may have multiple comparator sets that serve different functions such as valuation comparisons, performance analyses, or benchmarking broad-based compensation. While it is ideal to have overlap, not all companies from other comparator sets make good executive compensation peers. 

Valuation and performance comparators can serve as good executive compensation peers if they are similar in size and fit the other relevant criteria. However, these groups often need to be expanded with more companies to ensure there is a sufficient sample size to have robust benchmarking data.

Executive compensation peer groups also differ from peer groups used to benchmark broad-based employee compensation, where geography plays a larger role in determining pay and company size is a less relevant metric. The scope of entry- to mid- level roles is often more comparable across company sizes. Executive roles, by contrast, vary more significantly in scope and complexity, so compensation practices are shaped by a national, not local, labor market.

It’s important to level-set internally that the executive compensation peer group is specifically intended for the purpose of setting pay decisions for senior leaders.

Getting Executive Compensation Right

Executive compensation peer groups are more than just a benchmarking tool—they are a foundational input for the compensation-setting process. A well-constructed peer group reflects the external market for executive talent, provides meaningful and defensible benchmarks, and supports sound, competitive pay decisions.

Companies that invest in building a thoughtful peer group will be better positioned to align pay with the market, attract and retain top talent, and meet the expectations of shareholders and governance stakeholders alike.

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This blog was authored by Lauren Spencer with oversight by Jin Fu. Questions and comments can be directed to Ms. Spencer or Ms. Fu at lauren.spencer@fwcook.com and jin.fu@fwcook.com, respectively.

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