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Member Blog: “What are companies like us doing?” – Revisiting compensation peer groups

by Fred Whittlesey, Cannabis Compensation Consultants

Central to most discussions about executive compensation – not unlike any business discussion – is the question “what are other companies doing?” In compensation analyses, this guides the selection of data, typically for companies of a similar size in the same industry. Inherent in this approach is that a list of companies defines the landscape of business competitors, including competition for talent. Boards of Directors want to know – and are required to know – marketplace norms, trends, and practices as elements of their approving executive compensation.

Executive compensation in peer companies provides a guideline for determining appropriate pay levels and program design – what the other companies are doing. But these groups are typically determined by business-based characteristics – revenue, market cap, industry code, etc. In the rapidly evolving cannabis sector, these criteria may not yield a meaningful comparison group.

Most importantly, no data from a talent competitor aspect is typically included as a metric, though companies mention “talent competitors” as a criterion for inclusion in their “peer group” as we call it. 

Peer Group Pressure

Proxy advisory firms (e.g., ISS, Glass Lewis) encourage and provide specific guidelines for the development of peer groups for executive compensation comparisons among public companies. In fact, they not only prefer but expect this process and disclosure. But their process may not make sense for every company as it focuses on market cap, revenue size, and industry code.

The problem for cannabis companies is:

  1. There is no industry classification code for cannabis companies (with the exception of some suppliers that may serve multiple industries)
  2. Most cannabis companies have not disclosed benchmarking peers
  3. Size constraints are moot when #1 and #2 don’t exist.

And, none of this peer selection process gets to the root of the purpose: Identifying talent competitors to help guide the design of compensation programs to attract valuable employees from those competitors and keep employees from defecting to those competitors.

Complexities of a Cannabis Peer Group

Some of the largest cannabis companies are issuing proxy statements that parallel the norms for large mature companies in the U.S. For a cannabis company, constructing a peer group is a challenge given the characteristics of vertical integration of the business, merger and acquisition activity, and – most importantly – the breadth of occupational categories represented by these firms’ employees.

Here, for example, is the peer group disclosed by Canopy Growth – two sets of companies from four industry sectors – cannabis, fast moving consumer goods, specialized pharmaceuticals, and technology:

This is the most complex peer group structure I have seen among the hundreds and hundreds of companies’ disclosures I have reviewed.

The cannabis sector poses this challenge: Covering some or all of the subspecialties that are under one roof with a group of similar companies, when there may be no similar companies

Some Recent Examples

“High Times… hires President”

“Cannabis producer Tilray taps ex-Molson, Revlon employees for Executive roles”

When Tilray or High Times recruits for executive positions, who are their “talent competitors” as recruiting targets? Tilray does not disclose a peer group in its latest SEC filing that would require disclosure of such.

Interestingly, Molson Coors, Pharmaca, Revlon, Goldman Sachs, GE, and Apple have never included a cannabis company as one of their peers. That is likely because Tilray (drug manufacturers – specialty and generic) and High Times (not a public company) would not fit the criteria for those companies’ peer groups.

    • The peer group disclosed by Revlon (household and personal products) includes Hain Celestial (packaged goods), Clorox (household and personal products), and Tupperware Brands (packaging and containers).
    • Molson Coors’ peer group includes The Hershey Company (confectioners) and J.M Smucker Company (packaged foods).

Yet Molson Coors, Revlon, and other non-cannabis companies are rapidly losing executives to cannabis companies – the definition of talent competitors.

Let’s Try Peering Backwards

Maybe the current process is backwards. As cannabis companies face a limited supply of talent with cannabis experience, they will find the talent from diverse industries and then, perhaps, compile a list the companies from where those new executives came. That would indeed be a talent competitor peer group.

What would that look like? Based on publicly-available information about the previous employer of the executives in these cannabis companies, we can “peer backwards” into what their cannabis-relevant talent pool looks like.

What About Your Company?

Your company – in the cannabis sector – is hiring a new C-level executive, maybe even a CEO. Your company did not disclose a peer group because it has not thought about a peer group. Your company is vertically integrated – cultivation, extraction, distribution, branding, retail – so it is simply a matter of finding a candidate with experience in all of those, or some of those…or one of those?

Let’s continue “peering backwards” – looking at where executives have come from and having a compensation program that keeps our company off of the next company’s “from” list.

What would that look like? Based on publicly-available information about the previous employer of the executives in these cannabis companies, we can “peer backwards” into what their cannabis-relevant talent pool looks like:

Peering Backwards

Company CEO CFO
Tilray Silicon Valley Bank (SVB) Primo Water Corporation
Canopy Growth Constellation Brands

Montana Mills

 Gallo Winery

Pepsico
Charlotte’s Web Kellogg Company Crocs

Orbitz

Financial services, water dispensers, consumer products, bakeries, wine, soda and snacks, cereal, shoes, travel – not the usual mix of talent sources.

Cannabis Companies Finding Their Tribe

One will hear that the cannabis sector is in the “Wild West” phase, which is sort of like saying that a 14-year old is in the Wild West phase of adulthood. The only norms appearing are those carried over by the large consulting firms accustomed to consulting to mature companies. The entrepreneurial companies in the cannabis sector need not worry about self-appointed third-party opinions of their executive compensation practices – until they grow up. They can pursue practices that make sense for their business strategy, talent sourcing strategy, dispersion of locations, and other business-driven factors.  

As we research executive compensation in the cannabis sector, we find a blend of compensation practices from these diverse industries, defying the notion that there is a “norm” or a “median” in the cannabis sector. Understanding executive pay in cannabis companies, for now, requires understanding executive pay in perhaps dozens of industries.

As cannabis companies grow, they will face the need for some additional structure and processes around executive compensation. But many of these companies are, and will continue to be, Smaller Reporting Companies, Emerging Growth Companies, Controlled Companies, TSX-V listed, or in another category with lesser disclosure requirements and lesser pressure from proxy advisers and institutional shareholders. With more of a grassroots shareholder base, they will have more maneuvering room in compensation design, less concern about the “optics” of a given executive compensation action or program, and more opportunities for the compensation program to fit the business, not fit a third-party’s unsolicited opinion of compensation. This is already leading to greater creativity and innovation in compensation design among cannabis companies.

Fred Whittlesey is the founder and President of Compensation Venture Group, SPC (CVG) – a Washington Social Purpose Corporation – operates as Cannabis Compensation ConsultantsTM and maintains a database of cannabis companies’ peer groups, executive pay levels, and executive hire sources. Fred Whittlesey is the founder and President of CVG, and with more than 35 years of experience in compensation, has worked for hundreds or companies across the industries that collectively comprise the cannabis sector – agriculture, biopharma, retail, distribution, manufacturing, marketing, branding, REITs, financial services, and technology.

Committee Blog: Transacting in Equity – The Basics

by Charlie Christopher, VP, Finance, Cirrata
NCIA’s Finance and Insurance Committee


“A prudent man must seek to satisfy himself about the means to an end.
This demands that he must revisit, again and again,
the very elemental principles of his craft independent of how others think and act.” – Tony Deden

In businesses of all sizes it is common to transact in a number of currencies other than cash. The focus of this piece is on transactions involving common equity, the most fundamental unit of business ownership. The first section establishes a framework for how to view equity as currency, and what differentiates equity from other mediums of exchange such as cash. The second section introduces the process for creating reasonable projections based on sound logic. The third section demonstrates a somewhat novel application of concepts, and provides an example of the flexibility that can be introduced into the process. The conclusion is a reminder that these concepts can easily be misused, and that nothing should replace common sense when dealing with extreme uncertainty.

The Problem

Valuing any business is hard. Valuing a start-up is even harder still, not because of process, but because of the ambiguity associated with the output. When a valuation is based on multiple layers of high variance variables then the resulting distribution of value is rightfully broad. This poses a major challenge for operators and investors trying to agree on fair terms, and it can lead to irreparable damage to a young company.

Imagine for a second that you, and everyone else, have a crystal ball that can see the future with just enough variance to keep things interesting. How would that change the way you think about your equity? Would you be offering the same equity deals to your entire team? Would you be flexible with investors interested in your business? Of course not, you would look into the future every morning, update your projections and you would transact in equity in a similar manner to how you would with cash. Even though we do not have a crystal ball in the real world, it stands that to transact in equity with absolutely no opinion of value is the equivalent to being indifferent between paying $.10 or $100,000 for the same product or service.

Equity is a form of currency. It has value. However, its value has a built-in variance that rewards beating expectations, and punishes missing expectations. This is why equity awards are typically used to incentivize contributions that can increase the odds of achieving the former. The act of issuing the reward, in theory, immediately increases the value of the firm through the alignment of incentives. The common exaltation of the aforementioned qualitative attributes of the incentive over the quantitative attributes is also why the standard practice of ignoring a non-cash expense like share-based compensation is so indefensible. The value creation may be real, but to deny that a currency has transacted to create that value is to double count the benefit to shareholders.

The Process

Valuing a business begins from the top down and ends from the bottom up. Top down refers to projections based on the broader market while bottom up refers to firm specific capabilities extrapolated into the broader market. A common mistake operators make is to build up based on capabilities with no regard for how the aggregate ecosystem will react to the sum of all fundamental behaviors in the ecosystem. Starting from the top-down with a defensible position regarding both the size of the addressable market and the number of competitors participating in the market provides parameters for the business’s potential revenue.

Arguing for market share using a top-down analysis is fundamentally flawed if it does not reflect the true capacity of the business. A bottom-up analysis reflecting firm-specific capabilities should be compared to the top-down analysis for reasonableness. Ultimately, bottom-up analysis drives operating assumptions, and operating assumptions are the inputs to nearly every valuation technique.

I subscribe to the theory that posits that the variance in all of the assumptions can be quantified using an appropriate discount rate. In other words, if I’m uncertain and find my forecasted outcome to be highly unreliable I may choose to use a much higher discount rate to calculate the present value of the business than for a business with lower variance assumptions. When valuing a start-up company, I consider the corresponding ultra-high discount rate to cloud too much insight. For start-ups I first calculate a probability of firm failure in each of the forecast years and multiply my operating assumptions by the cumulative probability of success, I then use a more reasonable discount rate as if the firm was not highly speculative. This allows start-ups in the seed stage to more easily defend increases in value before launch. For example, the filling of a major executive leadership position justifies a small reduction in the probability of failure. Thus, your first executive hire has a reason to have received a higher percentage equity award than your last hire, even though the dollar value of the award might be equal. The process facilitates fair negotiations among all shareholders who may commit under vastly different circumstances and with different information. All too often this doesn’t take place, and the animosity that can develop as a result is as real as it is avoidable.

Valuation is admittedly more art than science. Many astute readers will point out that markets don’t operate in the orderly, fundamental matter I’ve proposed. Those critics are absolutely correct. It is a fair caution that not only are the trappings of certainty intoxicating, but sometimes simply observing how others are transacting is sufficient to make decisions. The market is often wrong, but it’s also often right. Remember to update your assumptions as new information becomes available.

Charlie is a Co-Founder of Cirrata where he lends his extensive knowledge from being both an entrepreneur as well as a securities analyst. As VP of Finance, Charlie combines his skills to assist clients through the application process, ongoing operations, and exit strategies.
Prior to joining Cirrata, Charlie co-founded a luxury women’s ready-to-wear label where he oversaw two separate rounds of funding as CFO. He has consulted numerous clients in the cannabis, construction, music, financial services and software industries in which his primary focus was on information systems, optimization, cash forecasting, securities offerings, licensing and capital allocation.

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