Guiding principles for formulating a peer set that will withstand heightened scrutiny and promote rational pay decision making.

Given heightened scrutiny by investors and greater exposure of executive pay decisions due to new proxy disclosure rules, it is in the best interest of your company to develop an appropriate and durable set of peers that can withstand this scrutiny. Equally important, a relevant and well-crafted peer set will assist your company in making rational pay decisions.

To this end, we have provided our set of guiding principles—and one critical rule—for valuating potential peer companies.

• Guiding principle 1: Relative per company scope should be reasonable
• Guiding principle 2: Industry focus and operational profile should reflect your business
• Guiding principle 3: Competition for resources should be considered
• Guiding principle 4: Attainability and quality of peer company pay data should be assessed
• Guiding principle 5: Appropriate number of peer companies should be determined
• Guiding principle 6: Relative peer company performance should be evaluated in the peer selection process—but not used as a selection criterion
• Guiding principle 7: Sometimes peer organizations outside of the realm of the other guiding principles are appropriate

Republished with permission from Directors & Boards^® Second Quarter 2007.

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