International Paper Co. Hones Use of Peer Groups

05/10/05
By: Loren Fox, Base and Bonus

International Paper is improving its unusual, one-year-old strategy to rely on two different peer groups to benchmark its two key performance measurements.

One peer group is used to measure return on investment, while another is used to measure total shareholder return. International Paper has expanded its shareholder return peer group from 10 to 18 companies.

Using two peer groups for comp and performance comparison is unusual. Most companies use one, says Paul Dorf, managing director of Compensation Resources. "When you use more peer groups, you start raising questions," he says.

At International Paper, executives' annual bonuses are based on return on investment (ROI) relative to the peer group, as well as improvement in ROI and operational goals. For long-term incentive comp, 75% is based on ROI and 25% on total shareholder return (TSR).

So the company compares ROI to an 11-company ROI peer group, and its TSR to an 18-member peer group. It started using two separate but overlapping peer groups in 2004. Both include paper and forest-products companies, such as Georgia-Pacific and Weyerhaeuser. This year, it expanded the TSR peer group from 10 members by including other basic-materials companies, such as DuPont and Alcoa, and the S&P 100 Index and the S&P Materials Index.

The $25.5 billion paper-products maker made that change to reflect the broader competition for investors' dollars among similar large-cap, basic-materials industry stocks.

"If you just use your industry, in one sense that's a fair measurement. But in another sense, you're competing for capital with a much larger group of companies," says Donald McHenry, a member of International Paper's management development and compensation committee.

So the company competes against a smaller group of peers on internal performance, while it competes with a larger group for investor dollars. "So we measured ourselves in terms of those who are in the paper industry, but we also measure ourselves in terms of companies where we're competing for capital," McHenry says.

In 2004, International Paper's stock underperformed its rivals' as well as the S&P 100 Index.

Peer groups have become a hot-button issue in recent years, thanks in part to last year's revelation that the nonprofit New York Stock Exchange compared the compensation of then-CEO Dick Grasso to that of the chiefs of huge, blue-chip companies. Indeed, the Conference Board is leading a working group that's expected to release a set of best practices for comp consultants in May, and use of appropriate peer groups is one issue that will be addressed.

International Paper is also unusual in naming all the companies in its peer groups. A recent study of 100 proxies by Equilar found that only 2% named all peer group companies used for benchmarking. But disclosure is slowly improving. "Disclosure is growing. Peer groups are being looked at with a much finer microscope," Dorf says.

And International Paper plans to stick to its peer groups when making comparisons. "These standards came out of our work in the last two, three years. These are not a thing that you change because the metrics may not come out the way you like in a particular year," McHenry says.