Peer Group Analysis

Computerworld -

	A Comparison How organizations use peer group analysis to determine compensation They compare peer firms by: Industry 87% Geography/local 83% Geography/regional 69% Size 67% Geography/national 60% Performance criteria 8% Base: 783 SHRM members Source: 1999 Strategic Compensation Survey, compiled by The Society for Human Resource Management in Alexandria, Va., and Arthur Andersen in Chicago.

When Amy Glynn founded the Womens Executive Network last year, she encountered a common challenge facing most executives these days: attracting qualified workers.

The right compensation package would be key to luring skilled employees to her Boston start-up, Glynn says. But like any CEO, Glynn knew she couldn't be overly generous. She had to make competitive offers that were in line with what other companies were tendering.

"You could give away the farm if you don't know what you're doing," says Glynn.

Glynn and her chief operating officer, Beth Fehmel, used data collected from other start-ups that were similar in size and geographic location to determine how much they should offer prospective employees in their Boston, New York, Los Angeles and San Francisco offices.

Glynn and Fehmel used what is referred to as peer group analysis, a vague term that has been circulating for several years.

Scoping Out the Competition

Companies most commonly use peer group analysis to evaluate compensation plans at other organizations and make sure theirs are competitive - an important strategy considering today's tight labor market.

Companies identify their peers using factors such as industry, number of employees and geographic location, and then study the practices of those peers to make sure their own pay is up to snuff.

"Peer group analysis is part of establishing a compensation strategy," says Sandra L. Gaffin, a partner in the Miami office of Arthur Andersen LLP. "What you're saying is, this is how you want to position yourself in the labor market."

While peer group analysis is primarily used to evaluate compensation, the application isn't limited to pay. Companies employ the practice to analyze everything from financial performance to inventory control and marketing strategies.

Apples to Apples

A key step in making those informed decisions is to find appropriate peers.

Companies start by identifying others in their industry, Gaffin says. For example, high-tech firms compare themselves with other high-tech firms, retailers with other retailers, biotechnology companies with other biotechnology companies and so on.