Governance

Compensation Peer Group

The set of companies a board benchmarks its own executive pay against.

A compensation peer group is the set of companies a board’s compensation committee selects to benchmark its own executive pay decisions against, typically companies of comparable size, industry and business model, chosen with the help of an outside compensation consultant. The committee uses the group to position salary, target bonus and equity grants at a stated level relative to comparable roles. It is a governance choice rather than a neutral fact, which is why its composition and its year-over-year changes draw as much attention as the pay levels it is used to justify.

A compensation peer group is the set of companies a board’s compensation committee selects to benchmark its own executive pay decisions against. The companies are typically of comparable size, industry and business model to the company doing the benchmarking, and the committee usually develops the list with the help of an outside compensation consultant.

Selection combines objective screens and judgment. A committee will often start from companies within a range of its own revenue, market value or assets, in the same or an adjacent industry, and then adjust for business model, geographic footprint and how directly the companies compete for the same executives. Two companies of similar size in the same industry can end up with quite different peer groups because the committees weighed those softer factors differently.

The group is what makes a "competitive" pay claim concrete. Rather than asserting that pay is reasonable, the committee positions each element of the package at a stated level relative to the same role at the peer companies, often describing a target for total pay and a separate target for the mix between cash and equity. A benchmark policy is a statement about where the company intends to sit against its peers, not a rule about what any individual will be paid.

The disclosure is a required part of the pay discussion. The Compensation Discussion and Analysis identifies the companies used for pay-setting, explains the criteria used to select them, and notes any changes from the prior year, so a reader can see the comparator set behind the pay figures rather than taking the benchmarking claim on faith.

Composition is where the most scrutiny lands, because the group is a choice. A committee that draws its peers from larger companies can present its own pay as moderate relative to a set that earns more, and a group that changes materially from one year to the next can shift a benchmarking conclusion without any change to the pay program itself. Investors and proxy advisers read a peer group’s changes the way they read a pay increase.

A company’s self-selected group is not the only comparator that exists. Proxy advisers construct their own peer groups for their pay-for-performance analysis, using published methodologies that screen on index membership, industry classification and size, and their conclusions frequently diverge from the company’s own benchmarking for exactly that reason.

The pay-setting peer group is also different from the comparator used for share performance. The stock performance graph discloses an industry index or a peer group selected for comparing the company’s cumulative shareholder return, and the pay-versus-performance disclosure uses a peer group for its own total shareholder return comparison. Those groups are built to compare investor returns, not pay, and the same company may name one set of companies in each place.

That means a single proxy can contain more than one peer group, serving different purposes. A benchmarking claim in the CD&A, a line on the performance graph and a peer group total shareholder return column can each rest on a different list, so the useful question when reading any of them is which group is being used and what it was selected to show.

How it works

The committee sets the criteria
The committee decides what comparability means for this company — size range, industry, business model, and how directly the companies compete for executive talent.
The consultant proposes candidates
An outside compensation consultant, engaged by and reporting to the committee, typically proposes companies that meet the criteria and supplies pay data for them.
The committee approves the group
The committee makes the selection. Peer group composition is a committee decision, not something prescribed by rule, and the criteria used are described in the proxy.
Pay is positioned against the group
The committee benchmarks salary, target bonus and equity grant values for comparable roles and sets a target for where the company intends to sit relative to the group.
The group is disclosed with its rationale
The CD&A names the companies used for pay-setting, explains the selection criteria, and identifies any changes from the previous year.
The group is revisited annually
Companies enter and leave the group as relative size and business focus change, and each revision is a disclosed governance event in its own right.

In practice

The comparator companies named in a company’s own compensation discussion.

Peer company (as disclosed) Ticker ADI	Analog Devices
Peer company (as disclosed) Ticker AMD	Advanced Micro Devices
Peer company (as disclosed) Ticker AVGO	Broadcom
Peer company (as disclosed) Ticker CDNS	Cadence Design Systems
Peer company (as disclosed) Ticker KEYS	Keysight Technologies

Marvell's own disclosed compensation peer group includes ADI, AMD, AVGO, CDNS, KEYS and KLAC — the board's stated comparators, not a set we chose.

See MRVL’s full page →

Where it appears

The Compensation Discussion and Analysis: The named companies used to benchmark pay, the criteria used to select them, and any changes to the group from the prior year.
The description of the compensation consultant’s role in the CD&A: Which consultant advised the committee, whether it provided other services to the company, and how the peer group was developed.
The stock performance graph and its accompanying disclosure under Item 201(e) of Regulation S-K: The industry index or peer group used to compare the company’s cumulative shareholder return — selected to compare investor returns, not pay.
The Pay Versus Performance table under Item 402(v) of Regulation S-K: The peer group used for the company’s peer group total shareholder return comparison, which may or may not be the same list used for pay-setting.

Company-selected peer group vs. proxy adviser peer group

Two comparators appear in the same pay discussion, and they are built differently by different parties for different purposes.

	Company-selected peer group	Proxy adviser peer group
Who selects it	The compensation committee, usually with an outside consultant	The proxy adviser, applying its own published methodology
Basis of selection	Size, industry, business model and competition for talent, weighed as the committee judges them	Index membership, industry classification and size screens applied consistently across companies
Stated purpose	Setting and justifying the company’s own pay levels	Assessing whether pay and performance are aligned against a comparable set
When it changes	Whenever the committee concludes the group no longer fits	On the adviser’s own schedule, as companies move into and out of its screens
Where a reader finds it	Named in the proxy’s Compensation Discussion and Analysis	In the adviser’s published report or voting recommendation
Direction of pressure	Can be drawn from larger companies, which makes the company’s own pay look moderate	Not shaped by the company at all, and can fit an unusual business model poorly
Effect on the vote	Frames the pay levels shareholders are asked to approve	Feeds directly into the adviser’s say-on-pay recommendation

Common misreadings

Treating the peer group as objective or rule-prescribed — it is a committee judgment, and the criteria behind it are disclosed precisely because they are a choice.
Confusing the pay-setting peer group with the group used for the total shareholder return comparison in the performance graph or pay-versus-performance disclosure — the two are built to compare different things and often contain different companies.
Reading the peer group as a ranking of the company’s competitors — it is a benchmarking set selected for pay comparison, which is not the same as a list of the companies it competes with most directly.

Frequently asked

What is a compensation peer group?

It is the set of companies a board’s compensation committee uses to benchmark its own executive pay decisions, generally chosen for comparable size, industry and business model. The committee uses the group to position salary, target bonus and equity grants relative to comparable roles, and the group is named in the proxy’s Compensation Discussion and Analysis.

Who chooses a company’s compensation peer group?

The compensation committee chooses it, typically with the assistance of an outside compensation consultant engaged by the committee. Because no rule prescribes which companies belong in the group, the selection reflects the committee’s judgment about comparability, and the criteria it applied are described in the proxy.

Is the peer group disclosed?

Yes. The Compensation Discussion and Analysis identifies the companies used for pay-setting and explains how they were selected, including changes from the prior year. A reader can therefore see the comparator set behind a benchmarking claim rather than having to accept the claim on its own.

Can a company choose peers that make its pay look lower?

Companies can and sometimes do select peers from larger or higher-paying companies, which makes their own pay appear more moderate by comparison. That is why composition and year-over-year changes draw scrutiny from investors and proxy advisers. The selection is a judgment the committee must explain, not something a rule constrains.

Is the compensation peer group the same as the peer group in the stock performance graph?

No. The compensation peer group is built to compare pay, while the group or index in the stock performance graph and the pay-versus-performance disclosure is built to compare shareholder returns. The same company may name different companies in each place, and the two lists can overlap without being the same set.

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