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Who/how will decide what a peer company is?

Currently each company defines their peer group for TSR purposes. It is usually a mix of industry matches and company size matches. But, this may not be enough for shareholders in the long run. They may call for some kind a rules around how a peer is determined. They may even call for prescribed peer groups.

ISS already creates their own peer groups, which almost never match the companies peers groups. This requires companies to do every calculation at least twice. Once for their own peer group and once for something they feel represents the ISS peer group.

The other significant problem with TSR is that the correlation to company performance is different for every company. If you are a market mover in your industry you may have a stronger correlation between individual company performance and TSR. If you are a market follower in your industry you may have a weaker correlation between individual company performance and TSR.

Many companies blindly set their plans to TSR without understanding this and end up with awards that can be a poor reflection of performance.

Will a correlation factor of TSR to a key financial metric ever be tracked and become a part of the analysis to determine a peer group?

TSR is a great metric for shareholder alignment but is often not the right metric if you want to be aligned to actual performance. The best approach may be a balance.

A further argument, were any necessary, for either remaining private, or going public offshore.


You are very very on point. When looked at across hundreds or thousands of companies, TSR is a fairly stable metric. When looked in small groups or individual companies it can border on providing misinformation. This will be made even worse if a company has specific TSR goals (that may have been previously acceptable to shareholders) that do not align with the current averages that are being used to measure for the proxy.

TSR as a standalone metric and goal for long-term incentives has often been shown to provide no more of a link to actual performance than stock price. When this is the case there is very little argument that "performance-based equity" is different than normal employee stock options (and stock options provide better tax planning flexibility.)

I believe that TSR is usually best used as a thresholding mechanism than should be combined with one or two other performance metrics. Too much for this comment thread, but something I do love to talk about.


The topic of going or staying private has become very hot over the lest several years. And, as long as investors are willing to keep putting money into "unicorns" ("start-ups" worth more than $1Billion) I am sure we will continue to see companies hold out as long as possible.

This might sound a little cynical but ID'ing peer companies is ripe for all sorts of manipulation. I would say it's done quite a bit in determining executive compensation. That aside---look at the faulty assumptions people make when comparing revenues per employee. Depends on whether a company is mfg or not----mature or start-up,type of industry,etc. Just saying I'm not sure that these new requirements will actually reveal true performance. Seems like the more we try to "clean things up " the more potential manipulation we see.

Peer companies are one of the major concerns of this new rule (another is linking the lions share of executive pay effectiveness to a single metric...TSR). Peer groups are the ultimate game of compromise in executive compensation. Those who want to pay the executives more want larger high performing companies. Those who think executives are paid too much want smaller less volatile companies.

Then people look at the mix and hope that a company fits at least somewhere in the middle. Since high flyers and low flyers get added to most lists showing at least middling performance can be a forgone conclusion.

And, of course, the peer groups used for this exercise are unlikely to match peer groups the company or shareholders use for other measurements.

The full text of the SCE proposal can be found here: http://www.sec.gov/rules/proposed/2015/34-74835.pdf

It's 129 pages. Fascinating what it takes to get a single page of a new rule completed.

good discussion, nice to have the LinkedIn alert. Think about it - there will likely now be at least 4 separate disclosures in the proxy covering CEO/NEO stock compensation (the biggest piece by far) – SCT, GPPA, PVP and supplemental realized pay summaries, and still there is disagreement on how values should be reported. Two further points – One, CEOs & their teams leading broadly held public companies control at most a third of their company’s share price change, this has been shown over & over again by studies & analyses, begs the question on TSR as the metric for PVP disclosure. (It also raises the question of whether they are paid excessively via stock-based incentives, a discussion for another day.) Two, PE capital investment far exceeds public infusions of capital via IPOs or shelf registrations, so maybe this will all solve itself one day via the ongoing decline in the number of public US companies.

Hi Don,

You make several excellent points. It seems as if all of this will theoretically make a few investors lives easier without really changing the end game much (if at all).

While I think the IPO market will continue to remain viable, I think you are already seeing some of the fallout of the combination of readily available money and pushback against regulations. Not much else can explain the growing pool of $1BILLION+ "unicorn companies.

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