At the risk of shooting ourselves in the foot, we thought it best to report recent research on consultant use and executive pay. The research was based in Britain, and was made possible as a result of changes to its Companies Act in 2003.  Under these changes, companies are required to name compensation advisers in their annual reports.  Theoretically, this also includes any internal company advisers, including the CEO and remuneration manager, as well as external advisers.  Boards considering a policy of using only independent remuneration advisers may wish to consider these findings.

Controlling for variables such as company size, industry sector, share price volatility, etc, the research found that use of an external pay consultant makes no difference to levels of executive remuneration.  However, there is some slight evidence to indicate that companies that hire the same consultants for remuneration work and for services in other parts of the company pay CEOs more than companies that do not use the same consultant for remuneration work and other work. 

However, sometimes there are efficiencies in using the same consultant firm for executive pay advice and other advice, such as actuarial work, or human resources systems work. 

In Australia, larger companies sometimes face issues that their counterparts in the UK do not.  The size of the Australian market means that there are few specialists advising on board and executive remuneration matters.  Unlike Guerdon Associates, most of the firms employing these specialists also tend to provide a broad base of services in related areas, such as executive search, tax, accounting, audit, law, and human resources.  A large company may have need to use all these service providers at some point over a given period, depending on their needs and these firms’ specialities.  So there are few, if any, firms that would meet a strict definition of “independence”.  That is, most or all have provided advice to management at some time over a given period. 

So, rather than a hard and fast policy of consultant independence, Australian companies could consider two practices:

• replicating the practice of their UK peers, and naming their adviser; and
• describing the fees or nature of other work done by the consultant for the company in the 12 month period.

Disclosure will let the market decide if there has been a conflict of interest and  the extent of its materiality.

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