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New SEC Rules Put Spotlight on Selection of Compensation Peer Groups

New proxy statements will include a list of the companies selected for peer group benchmarking, and HR executives must be prepared to field questions about the selection process.

May 18, 2007
Related Topics: Compensation Design and Communication
The role of the independent compensation consultant and the HR executive’s relationship with that consultant will be more closely scrutinized under the Securities and Exchange Commission’s new executive compensation disclosure rules. The new proxy statements will include a list of the companies selected for peer group benchmarking, and HR executives must be prepared to field questions about the selection process.

    "The quality of the peer group is critical to the credibility of the story that the data tell," says Diane Doubleday, leader of Mercer’s global executive remuneration business. The external compensation consultant usually drives the peer group selection work with input from the whole management team, including HR, and HR often serves as the contact point.

    Doubleday notes that more companies are looking at using more than one peer group.

    "The committee may need a broad peer group to make it credible as a basis for measuring performance, but this peer group may be too large for the purposes of comparing pay," she says. Also, there is a trend toward using performance measures that gauge performance relative to that of competitors operating under the same economic and business conditions. This approach draws more attention to the issue of selecting the right competitor companies for comparison.

    Peer group selection came under heightened scrutiny when the New York Stock Exchange disclosed that it had paid chairman Richard Grasso $140 million in total compensation based on a peer group that included much larger financial organizations. Experts agree that compensation committees and consultants are now selecting peer groups more carefully, with greater attention to choosing companies of similar size.

    Shareholder criticism also arises when the peer group includes companies from outside the industry that historically pay higher levels of executive compensation. Some companies, such as Hewlett-Packard, have recently shifted from blended or cross-industry peer groups to groups composed only of companies in the same industry. As shareholders compare the peer groups selected by different companies, scrutiny of the peer group selection process will grow, and the work of the compensation consultant will become more critical.

    Doug Jensen, vice president and U.S. executive compensation practice leader at the Hay Group, notes that some of HR’s strategic input in executive compensation issues has shifted over to the outside compensation consultant.

    "But HR still represents management in tying executive compensation to other programs and the corporate culture," he notes. "The consultant’s work is primarily through the HR executive, but all members of the management team, the general counsel and the HR executive will be involved in making recommendations to the board."

    "HR needs to be sure that the role of the outside compensation consultant is structured so that the consultant has a collaborative relationship with the HR executive but does not put the HR executive into a position of potential conflict," Doubleday notes. "On the other hand, to say that HR is part of management and therefore should not be part of executive compensation discussions is to take this concern too far."

Workforce Management, April 23, 2007, p. 28 -- Subscribe Now!

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