When setting remuneration policies across your organisation, an important step is the process of benchmarking. While gathering and reviewing data on what, why and how other companies are paying may seem onerous at first, the benefits are irrefutable.
Let’s take a closer look with a focus on executives.
What is benchmarking?
Benchmarking is a method used by boards and management to compare a company’s desired remuneration policy to those of other similar companies within the market, and note any significant gaps or disparities. The process provides a guideline upon which to base remuneration.
Why is remuneration benchmarking important?
Having defined benchmarking methodology can help your organisation maintain (or develop) its reputation as an employer of choice. Companies are only able to offer a competitive salary if they’re aware of what the competition is offering, after all. It also provides you with insight into where your key talent may be sourced from, or lost to.
Public company shareholders push for boards and remuneration committees to have logical and transparent benchmarking processes to aid with annual director and executive salary reviews. In fact, Section 208 of the Corporations Act (section 211) requires remuneration of public company directors to be ‘reasonable’. Although the Act does not specifically define ‘reasonableness’ it would be inferred the remuneration quantum and structure would be appropriate based on market comparable roles.
How to benchmark remuneration for public company executives
Remuneration benchmarking begins with the selection of a peer group of market comparator companies.
Selecting a Comparator Group
There are typically 3 common criteria upon which a peer group of companies is defined and understanding them is key for implementing an effective benchmarking process.
- Complexity – Organisations of a similar size and stage of development are generally chosen for comparison by companies and shareholder groups. Market capitalisation is the most common measure of complexity used, while revenue and assets may also be considered. Stage of development refers to how old or established a comparator is (e.g. start-ups vs mature companies).
- Industry – The benchmark roles may relate to a particular industry/skill set and therefore industry segregation may be important e.g., Metals and Mining Global Industry Classification Sector (GICS)
- Geography – Size and location of operations may be a key selection factor when defining a benchmarking comparator group (e.g. domestically focused, single location companies may not be comparable to significant international operations).
Step 1 – Create a potential list of peer companies using a primary criterion
Once you have defined your criteria for selection, you can then undertake a first screen for a peer group using primary criterion to recognise complexity (e.g., market capitalisation) and industry (e.g., based on the Global Industry Classification Standards (GICS)).
In addition to industry peers, research has shown a strong correlation between company size and executive remuneration levels. Note for businesses with many different lines of business, GICS matches can be erroneous and the peer group may need to be expanded to other industries.
The peers from the industry are typically sorted to include those that are within a reasonable range, usually 0.5x to 2x the Company market capitalisation.
Step 2 – Refine the peer company list to a final comparator group
Ideally the peer group developed in Step 1 should be refined to 15 to 20 companies to avoid any statistical bias. Retaining a larger peer group also improves the likelihood of obtaining market data for positions that are not always disclosed, such as head of human resources or chief commercial officer.
Refining the peer company list can be undertaken objectively (i.e., avoiding ‘cherry picking’ of companies) in various ways including:
- Select e.g., 10 companies immediately above and 10 companies immediately below the company market capitalisation; and / or
- Apply a secondary criterion to filter such as industry subsector (e.g., for a gold producer may remove non-metalliferous companies), revenue (e.g., include companies with revenue between X and Y)
Comparator Group Data Analysis
Once the Comparator Group has been defined, for each role (e.g., Chief Financial Officer), review the various elements of remuneration.
Compare base pay, short-term and long-term incentives separately. Organising your comparators in consideration of market positioning by remuneration will provide you with a range from low (e.g., 25th percentile), mid (e.g., 50th percentile) and high (e.g., 75th percentile).
Once you have defined the market range, you can then proceed to compare areas like scope of responsibility against your own organisation. This will help you determine whether your desired remuneration policy achieves its goal of being on par, above average, exceptional or otherwise.
Now you have developed a procedure by which to undertake this process each year. One that will satisfy shareholder requirements and assist you with attracting and keeping key talent.
Remember, comparator groups should be reviewed annually to ensure they have not inched out of your peer group as they have grown or shifted business focus.
We’re ready to help
The Reward Practice assists companies to develop benchmarking methodologies and other remuneration strategies. We can provide you the benchmarking information you need quickly, in an easy to read report.
Contact us now to find out how we can help move your organisation forward.
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