The importance of selecting the right peer group when benchmarking

https://youtu.be/m2Lqar6uStc

SUMMARY

  • “Performing a salary benchmarking exercise should not be driven by self-interest, like hoping to demonstrate the need for salary increases”
  • Are you selecting correctly the companies that go into your salary benchmarking peer group ? In this episode, learn from a real-life story and remember that industry is not all !
  • “Even if the salary data is technically correct, pay attention to its meaning and its context”
  • If you’re ready to participate to a salary survey, it’s time to really think who your peers are, from a compensation standpoint.
  • Watch the video to get the full training.

Related posts


Inspirational quotes

Use multiple criteria to define a benchmarking peer cut
Use multiple criteria to define a benchmarking peer cut
Salary benchmarking should not be driven by self-interest
Salary benchmarking should not be driven by self-interest
Always check the quality of the work from your consultants
Check the work you receive from your consultants

FULL TRANSCRIPT

Hello everyone, and welcome to this episode. I’m very happy today to tell you a story which happened to me a few years ago.

The background

One day I was called to intervene in a semi-government organization in the GCC . For people who are from outside the Gulf countries, semi-government organizations are companies that are financed by government money, but do apply private law to regulate employee relations. Employees do not have a status of being government employees or civil servants, they have the same rights and duties as employees in the private sector.

This company was, in Compensation & Benefits terms, a relatively small player with about 2 to 3,000 employees in a highly competitive field such as Oil and Gas or high tech. They were not one of the big players in their industry.

I was called in because a few months before that the CEO had asked for an executive compensation survey to take place, whereby his package and that of top management of the organization would be compared to values in the market in order to establish whether they should have a change of package.

Yet the whole exercise had turned out to be a complete failure.

Besides the CEO, a few other roles such as the Chief Legal Counsel, the CFO, the head of Product Division and similar executives positions would be included in the benchmark (around 10 positions).

Let’s be honest. This request had been motivated by self-interest. The CEO believed that he was underpaid, and he wanted to have some data in order to validate that perception and then request a salary increase and a changing package to the Board of the organization. So he turned to his HR Director who was also of the same western nationality, who himself turned to his Head of Performance and Reward, who was also a western expat from the same country.

The initial survey

They went to big Reward consulting organizations and asked for this information to be provided. Crucially, they said “We want to be compared to the biggest organizations in the world because we have big intentions. We are going to be one of the biggest players.”

So imagine, for example, it’s a small IT company and they want to compare their salaries with the likes of Microsoft, Facebook, Google, and Apple, for example, despite not having the same size, international footprint,’ branding power and so on.

To be fair, the C&B consultancy started to tell them “Well, we cannot really compare. Your levels of responsibilities are not the same, even as CEO of your organization, the impact that you have is not the same as that of the CEO of Microsoft, for example. So we can’t really compare.”

Eventually the consultants managed to convince the organization that even though the peer group (the group of companies that those executives’ pay would be compared to) would not change, it would be valued at the 25th percentile, ie in the lowest part of the market. It was a compromise : “Yes, we will compare you to much, much bigger organizations, but we will compare you to the bottom of that specific market”.

The compensation consultancy then performed the exercise and provided a report. And in this report, you had a great graph, which was showing one column for each of those 10 individual executives that were being compared to their peers in those other organizations, and then a representation of salaries from the 25th percentile to the maximum and where that person was positioned in terms of pay.

And of course it looked like they were all underpaid, even compared to the 25th percentile.

How the executives' salaries were looking vs the peer cut
The Execs salaries looked low vs the peer cut market (illustration)

Remember, again, we’re looking at a company which has 2000 to 3000 employees being compared to companies with 200,000 employees globally. They are only in four or five countries and have a lot less revenue and a lot less impact. Obviously, the executives looked underpaid.

So the Head of Performance and Reward put this graph in a nice report which was presented to the Board. And the Board took it at face value. They said “Oh, yes, we see this graph, you’re underpaid. We need to give you a salary increase.”

The Board increased the packages substantially for most of those executives.

Everybody was happy. The Board felt that they had taken care of the interest of top management and prevented a brain drain. The executives were happy with their increase, especially the HR Director and the CEO who had both been working on that benchmark.

The scandal

The only challenge was that just three or four months later, there was an article in the English-language national press. It was a big report on the top highest paid CEOs in the country.

Surprise ! The name of the CEO of that company was one of the top 10 in the whole country. It was actually number 4, and that was his salary before the increase that he had received as a result of the peer comparison that had just been performed.

There ensued a hushed scandal. The government was keeping an eye on the company (remember : the company is owned by the government) and started to ask : “If the CEO the fourth highest paid person in the whole country, how can we say that he wasn’t well paid and give him an increase ?” (Fair question).

Eventually the CEO had to resign, the HR Director had to resign, and the Head of Compensation had to resign. Board members were told to go and be board members in other entities.

Now the company figured they needed to look at what’s really happening in the organization. That’s when they reached out to me in order to perform an audit of their Total Rewards practices. Were they paying where they were saying they were paying? Were they lagging behind market, paying at market, or above market?

Lesson 1

I ended up working for nine months with that organization, and it was a very successful assignment at the time.

The lesson that I want to highlight here is that if you are going to do a salary survey and you are going to do a peer cut, you have to be really, really careful of who you compare yourself with.

Aspiration is not necessarily reality. And yes, I might be a small IT organization and I want to be the next Facebook, or I want to be the next Microsoft, but I’m not there yet. I’m only a small startup and comparing myself and having aspirations in terms of business is good, but for pure Compensation and Benefits purposes, it is not going to be so good.

So when you’re looking at your peers to select which ones to include in the peer cut, the industry is not the only thing to take into account. The aspiration is not the only thing. You really need to look at the fact whether these organizations are relatively similar or in the next step in evolution compared to you, not some big-shot dream comparison.

Lesson 2

The other thing is to always be careful of the work that is provided by the consultants that are working for you.

Obviously, when I first joined that client and they told me the history, I went back to the report that had been produced on executive compensation by the big consultancy. I called their Director, and asked to meet.

In terms of culture, the Director at the big consultancy was very supportive of her team and she defended their work.

But she also did not recognize that they had made a mistake. I asked her : “How could you present such results that show that the CEO is underpaid ? If you have more than five minutes of experience in this country, you would know that CEO level of pay was very, very generous. You knew that this guy is not underpaid. So how could you present that report?”

She responded : “I assure you of something, the data is correct. There is no mistake in the calculation”.

I replied “I’m not challenging the quality of the calculations. I’m pretty sure you can do a ratio and a graph properly, but you did not do your due diligence as a consultant.

You should have put a warning on the graph, maybe something in red to highlight : “These numbers look like the CEO is underpaid, but it is our understanding that even though we are comparing to the 25th percentile of the market, the peer group is still not representative of what we should be comparing to. These packages are at the top of the local pay market. We don’t recommend any change in compensation for these executives”.

You knew that the CEO was very well-paid and it was your duty to look at the absolute value and compare it to the general market in the country” (even if it wasn’t a specific ask in the survey).”

As a result the big consultancy was banned from the organization and not invited to submit any proposals for a significant number of years.

Moral of the story : even if data is technically correct (it has been calculated properly, and there is not an error), you have to pay attention to the meaning of the information and to the context of that data. Try to make sure that it makes good sense, because sometimes you can lie with statistics. You can induce different reactions based on things that are technically correct, but which are actually profoundly not correct in terms of meaning and in terms of decision-making.

I hope that you don’t have to face that kind of situation.

The CEO, the HR Director, the head of Compensation all had to leave and the Board was not in such a good place either. There was a lot of mistrust in the organization and they had to redo the benchmarking  work and take somebody else external (in that case, that was me), in order to bring back some calm and some confidence in what was happening in the organization.

By the way, I performed a new benchmark to compare data for the whole organization, not just for the executives. Benchmarking should not be driven by self-interest. We participated in multiple surveys. We looked at qualitative aspects in terms of incentive design : are they fit for purpose? Are we fitting with where we want to be in terms of pay vs the market ?

I hope that you found this story interesting and useful, and that you will remember to always be careful, when you participate to salary surveys, and to make sure that you do use data that is actually relevant for your organization, so that it can drive the right kind of decisions.

Thank you so much, and I hope to see you again next week.

Pics for quote images : Photo by Markus Winkler on Unsplash – Photo by Luke Chesser on Unsplash

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Comments

  1. Betzi Miriyam Kuriakose says

    Excellent read.

  2. Nice Article Thanks for share this.

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