How to Build an Effective TSR Peer Group

Why Peer Group Selection Matters

The choice of peer group is arguably the single most consequential decision in relative TSR plan design. A poorly constructed peer group can reward mediocre performance or penalise genuine outperformance.

Principles of Good Peer Group Design

1. Similar size — companies should be within a reasonable market capitalisation range
2. Similar industry — peers should face similar economic drivers
3. Sufficient size — at least 12-15 peers for statistical robustness
4. Investable universe — peers should be companies your shareholders could alternatively invest in

Common Approaches

Index-Based Peer Groups

Using an index (e.g., ASX 200 or S&P/ASX 300) as the peer group is simple and objective. However, it mixes companies from vastly different industries.

Custom Peer Groups

Hand-picked peers allow precise matching on industry, size, and geography. The downside is subjectivity — boards may unconsciously (or consciously) select peers that make the hurdle easier to achieve.

Hybrid Approach

Many companies use a sector sub-index (e.g., ASX 200 Financials) as a starting point, then adjust for relevance. This balances objectivity with industry alignment.

Common Pitfalls

• Survivorship bias: Peers that delist during the measurement period need consistent treatment
• Too few peers: Small peer groups amplify the impact of individual outliers
• Cherry-picking: Governance advisors and proxy firms will scrutinise peer group changes
• Ignoring geography: Mixing domestic and international peers can introduce currency effects

Our Recommendation

Start with your sector index, remove companies less than one-third or more than three times your market cap, and review annually for relevance. Document your methodology clearly for remuneration report disclosures.