Information on Developing an Appropriate
Relative TSR Peer Group

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The development of an appropriate peer group is one of the most fundamental and important objectives for any company’s HR strategies. With respect to a Relative TSR performance award, the selection of a peer group will not only affect the amount of targeted compensation, but it also can affect the actual compensation delivered.

In light of this, we believe there may be situations in which the competitive peer group for purposes of developing target incentives may differ from the peer group used for determining Relative TSR payouts. While it is important to have some logical consistency with other publicly disclosed peer groups (e.g., the CD&A group used for named executive officer compensation assessment), the Relative TSR comparators don’t have to be identical. Companies that are not confident in using a closely defined group such as the CD&A peers can address this challenge by choosing a broader index of comparator companies to represent the more diversified portfolio of their typical investor. Because stock price is easy to track and analyze, very large comparator indices (e.g., S&P 100, Russell 3000) are possible with Relative TSR whereas they are administratively impracticable with other operational/financial metrics.

We believe it is critical that in designing Relative TSR plans, companies should select comparators that are appropriately correlated by stock price – an assessment rarely performed when assessing peer groups for other compensation purposes. Since future payouts will be calculated as a function of the company’s stock performance against comparators’, TSR alignment to the peers should be meaningful. Such alignment is not the only factor in assessing the right comparator group for a Relative TSR program, but it is a critical one that is often overlooked and should be added to traditional peer group metrics (revenue size, market capitalization, industry, etc.). Radford has developed the PeerPicker analysis as an objective statistical approach to assessing this alignment.

Radford has developed PeerPicker – a patent pending tool developed to comb through the historical stock prices of over 3,400 public companies and summarize the "Top-20" statistically correlated companies by stock price. The analysis often leads to engaging discussions on overlap – or the absence of overlap – between PeerPicker results and your historic compensation peer groups. See an example of a PeerPicker Report here.

Test your company and get your #1 statistically correlated comparator by stock price here - Coming soon!. For a complete report, contact Terry Adamson at tadamson@Radford.com.