Peer groups are a central component of how executive pay programs are set and assessed. Ideally, a well-constructed peer group helps boards establish appropriate pay levels and governance practices and demonstrates to shareholders how the program helps a company compete for executive talent. However, inappropriate use of peer group comparisons can contribute to a cyclical compensation “arms race,” whether inadvertently or by design.

In the United States for example, many companies select aspirational peers based on ambitious growth targets or set pay levels above the peer median based on the relative perceived worth of their executive team. Companies have also become adept at using peer comparisons to illustrate purported retention risks that necessitate additional compensation. These factors appear to have contributed to a feedback loop in the benchmarking process, with executive pay in North America rising at a rate that has raised concerns for some investors and market watchers.

As a result, company benchmarking practices face heightened scrutiny, and investors commonly employ independent peer groups when assessing pay programs, with Glass Lewis’ peer group methodology being one such alternative. This article examines some common practices and pitfalls in peer group construction and usage based on our research and explains how Glass Lewis applies a “proven peer” methodology to reduce the benchmarking echo-chamber effect.

Peer Group Selection Practices

Companies and their external compensation consultants incorporate numerous factors when creating peer groups, most commonly industry classification and size based on market capitalization, revenue and assets. Other considerations may include business model comparability, brand recognition and complexity of operations, amongst others. Unsurprisingly, direct rivals with whom companies perceive their greatest competition for executive talent are highly prevalent in disclosed peer groups.

Where industry is a common primary filter, size is often used to protect against the inclusion of companies at different developmental stages or with materially different scopes of business. When there are insufficient numbers of direct business competitors or appropriately sized competitors, it is sometimes necessary to branch out to other sectors of the economy, making size and complexity important filters in the initial selection process. A large passenger airline for instance, might rely on the inclusion of transportation/distribution, hotel/leisure, machinery/aerospace/defense and retail companies to construct a peer group large enough for meaningful comparison.

Peer Benchmarking Hazards

Regardless of the specific criteria, peer groups can serve to illuminate and provide useful context, or to distort the pay environment to create an artificial gap. Throughout the last eight years of Glass Lewis’ North American issuer engagement program, companies have frequently demonstrated a thoughtful process for their peer group selections. However, in reviewing thousands of Say on Pay and equity grant proposals, Glass Lewis has also identified many instances where the peer group appears to have been constructed expressly to justify excessive quantum.

For instance, Axon Enterprise, Inc. justified a 2023 special CEO grant proposal of nearly $400 million by pointing to a list of other companies that granted their founders similar awards. Their list included some that had granted the awards just prior to their initial public offerings, despite Axon being a publicly traded company for 22 years. After receiving pushback from shareholders, the company replaced its proposal in 2024 with a smaller CEO mega-grant of $175 million and other large grants to the remaining named executive officers, again citing grants at companies that appear fundamentally unalike. The company achieved a slim 50.01% support for the grant at its 2024 AGM.

In its 2022 proxy statement, The Trade Desk, Inc. disclosed a target award to its CEO valued at approximately $818 million. Prior to the disclosure, this Russell 3000 company with $44 billion in market capitalization appeared only 14 times in other companies’ selected peer groups. Despite its market capitalization subsequently halving to only $22 billion, its popularity as a peer doubled, to 28 instances. Of 17 new companies that added The Trade Desk, Inc. to their selected peer group following the announcement, 13 had excessive granting practices that raised concerns at Glass Lewis, and four did not fit into the same size bracket in terms of market capitalization, asset base, revenue and/or employee count.

Situations like these fuel shareholder skepticism of the role of peer comparisons within the pay setting process. Of course, genuine retention concerns exist, and pose real problems for companies and their boards. However, since the beginning of the COVID-19 pandemic, the slew of special one-off grants justified on the basis of staying competitive against peers has made it difficult for shareholders to distinguish real flight risks from pay one-upmanship.

Glass Lewis Proven Peers

Over the last eight years of Glass Lewis’ extensive engagement with companies and investors, we have gained a deep understanding of investor and issuer sentiments on peer groups. We found that:

  • Investors tend to favor industry-based peers, followed by country-based peers.
  • Public companies tend to prefer their self-disclosed peers, stemming from the unique position they feel they hold in the market.

After listening to investors and issuers, we developed a peer group methodology using a “proven peer” approach in 2020. Under the methodology, the company’s self-disclosed peers are tested against the independent views of other companies, investors and fundamental analysis.

These tests begin with a robust peers-of-peers analysis to incorporate important factors like unique headwinds and business models or misclassification of a company’s industry. The potential peer pool is broadened through reviews of GICS industry peers to incorporate investor views of firm operations, and a look at country peers to account for market-relative compensation and performance. The resulting pool of potential peers is assessed based on corporate revenue, market capitalization, and assets, with weightings applied based on source and frequency of confirmation. Finally, peer rankings are created based on a strength-of-connection methodology, with the aim of obtaining 15 peers.

By incorporating the industry, size and country considerations that are important to investors, our methodology reduces the “echo-chamber” and pay “ratcheting” effects that can result from peer-of-peer approaches focused solely on how companies reference one another in public disclosures.

After implementing this methodology in 2020, Glass Lewis assessed resulting changes in the distribution of pay-for-performance grades, finding that the methodology appeared to successfully eliminate outsized and inappropriate peers, and produced a normal bell-shaped distribution with less skew towards positive grades. The review also illuminated Glass Lewis’ discretionary approach to pay evaluations based on both quantitative and qualitative assessments, highlighting how often analysts recommended in favor of say-on-pay proposals despite a low pay-for-performance grade. Our approach has not changed fundamentally in the years since. In 2023 for instance, companies receiving “D” and “F” pay-for-performance grades nonetheless received favorable say-on-pay recommendations from Glass Lewis 68.4% and 34.7% of the time, respectively.

By building on the value of self-selected peer groups to incorporate not only the company’s industry, but also its size and complexity, we believe our hybrid approach reflects both the reality of how companies choose their peers, and investor preferences for industry and country-based comparisons, enhancing the integrity and independence of our peer assessment and pay analysis.

More About Glass Lewis Peer Groups

  • Glass Lewis peer groups are updated twice a year in the summer and winter. Our summer submission window for issuers with meetings between October and February is now open – find out more.
  • Read our recent Special Report on peer groups for more data on peer group usage to set and justify pay, and how Glass Lewis’ peer methodology helps investors gain perspective on the competitiveness of US compensation programs.