ExecuCite Blogger Archive

ExecuCite.com provides a compensation database to extract company specific compensation data. In this article, you will discover how to create a company peer group and conduct a peer compensation analysis. The goal is to identify the most competitive compensation package and use it during employment negotiations.

ExecuCite.com members can conduct compensation searches for the top five highest paid executives within a particular company. Often, public companies provide compensation data for many more executives than they are required to report. In 1992, the SEC adopted amendments to the executive officer and director compensation disclosure requirements (Reg. Section 229.402, Item 402 of Regulation S-K) applicable to Proxy Statements, Annual Reports on Form 10-K, and Registration Statements (i.e., Form S-1 [IPO]). According to the SEC, these amendments were designed to furnish a more understandable presentation of the nature and extent of compensation to executive officers and directors.

The following steps are required to generate an accurate compensation analysis. Compensation professionals, corporations and attorneys follow these same steps to generate compensation solutions. Please note there is no limit to the amount of time and information gathering that can occur in a compensation review. The more information you feed into the analysis, the more accurate your decision-making will become.

Step One: Identify Target Companies: Target companies are those companies you are looking to obtain employment from. These are companies that are relevant to your particular background and experience. If you know your target companies proceed to Step Three.

If not, then select the industry classification from the Industry Look Up Tool in the Compensation Database. This tool is based on the SIC classification system. This search will generate a list of companies that you should print out for further research. Proceed to Step Two.

Or you can Select the SIC Code Lookup tool in this folder. Each SIC code covers a wide range of companies, many of which you would not think belonged to a specific classification. Locate the SIC code number that best matches your industry. Then go to the Company Profiles Database within this folder or at the top main menu and use the Fast Search bar. Enter the SIC code number(s) and examine the search result for the various companies that fall under the classification. Print out the list of these companies for further research. Proceed to Step Two.

Step Two: Obtain Company Specific Information: At this stage you need to identify the differences and similarities between each company within your target group. First, obtain the Gross Revenue for each company by choosing the Latest SEC Files in the Company Profile. You will find the gross revenue in the Form 10-K or 10-KSB (Annual Report), under Item 6. Repeat this process for each company in your grouping. Also examine the list of subsidiaries for each company (Form 10-K) and any additional company information provided for within the company filings. You can obtain limited financial information about subsidiaries, which are not required to report to the SEC unless they are registered public companies.

The SEC filings are arranged in chronological order, starting with the most recent filings. A review of the company filings is a critical step in understanding your target companies. You should also check the SEC enforcement actions for company specific information.

Step Three: Locate Company Specific Compensation Data: In the Compensation Database, locate each company within your target group. Print out this information for further research. As you will discover, each company may only list the top five highest paid executives. However, some companies provide additional information on lower tiered executives. If you do not find the position title you are seeking, you will need to extrapolate what the competitive compensation level is by examining smaller companies within the same industry.

Step Four: Compare Target Companies Across Peer Group: Begin comparing the companies in your peer group, by looking at the gross revenue and size of each company. Next, examine the base salary and total compensation paid to each executive within the position title you are searching for in the peer group. Compare any current offers on the table with the data in your peer group. The closer your offer is to the actual data in your target group, the closer you are to understanding how the target company has arrived at your offer, i.e. the same way you just did! If you believe your valuation is higher than any current offer, you will need to locate companies that support your position. Continue fine tuning your peer group list until you arrive at the correct balance of companies. Peer group compensation analysis is not an exact science, although it is the most predominant method used by public corporations.

Step Five: Locate Contracts and Compensation Plans: In the Company Profiles database, research which executives are provided employment contracts and which are not. Examine the employment contracts to determine the type of provisions each company uses. Start with the most recent contracts and work backwards. You should identify the term of years, for cause and for good reason termination provisions, and severance among others. These contracts will provide an excellent insight into the management philosophy of the company.

If your research indicates the company is in transition, you will need to uncover the company’s change-in-control agreements. You may need to craft such a provision into your employment agreement.

Next, examine the compensation plans offered by each company. Not all companies are alike. The most obvious difference amongst companies during the 2004-2005 period is the increase in the amount of restricted stock awarded and the decrease or elimination of stock options. Also look at whether the company operates a 401k pension plan or a Cash Balance plan.

You can also examine the company’s compensation philosophy set forth in the Annual Report (Form 10-K) and Proxy Statement (Form Def14A). But a word of caution, this pronouncement is a typical boilerplate reassurance designed for investors.

Mark Carey
Founder & CEO
ExecuCite.com © 2005.