Remuneration consultants and CEO pay increases

Recent US research has considered the impact compensation consultants have on CEO pay, using US data for the period 2006 to 2012.  This spans the introduction in July 2009 of the requirement for companies that purchase other services from their compensation consultants to disclose fees paid for both compensation consulting and those other services; if the consultants are retained to solely provide advice on pay, fees do not have to be disclosed.


These requirements resulted from concerns that conflicts of interest among multi service compensation consulting firms led to higher CEO pay – a survey of six leading and allegedly “conflicted” consulting firms  (conducted for the US House of Representatives Committee on Oversight and Government Reform Chairman Henry Waxman and published in December 2007) showed that CEO median salaries at companies that hired them for the most work were 67 percent higher than the median pay of CEOs at companies that did not use “conflicted consultants” (see HERE).


The 2009 US disclosure requirements prompted many companies to change their compensation consultants and greatly increased the number of specialist firms in the industry solely providing executive compensation consulting services, with several new independent firms established by consultants previously employed by the big multi service firms.


In Australia, introduction in 2011 of a requirement to disclose the remuneration and other work undertaken by remuneration consultants did not lead to an increase in the number of independent firms because of the narrow definition of “remuneration recommendation” that triggers fee disclosure, including exemptions for legal, accounting and actuarial advice (see HERE). Hence these firms did not hive off or reduce their executive remuneration consulting businesses.


After the US rule change, companies that switched to specialist consultants paid their chief executive officers (CEOs) 9.7% more in median total compensation than a matched sample of firms that remained with multi-service consultants. But in the US, unlike Australia, many “independent” firms are hired by management, and not boards, to provide advice. So while still regarded as “independent” for the purposes of this study, they are independent in label only, given that their fees and tenure are still management determined. In addition, the study found that the “independent” consultants were often the same individuals that provided advice in previous years, when they were with the multi-service firms. In effect, nothing changed. The same individual providers remained, with many of them still hired directly by management, maintaining a cooperative “referral” business relationship with the former multi-service employers, while the multi-service firms found a way around not disclosing fees by hiving off their executive remuneration consultancies, which continued to be hired by management.


Supporting the view that the “independence” label can only apply to exclusive board consultants, the study found that US compensation consultants retained solely by the board are associated with 12.9% lower median pay levels than a matched sample of companies with management-retained consultants.


However, there is a nugget for those that believe all a company need do to ensure an executive pay increase is hire a pay consultant. The study did find that CEOs at firms that start hiring compensation consultants experience a 7.5% increase in median pay relative to a matched sample. The authors attributed this to the likelihood that consultants were hired when it was realised or suspected there was a pay problem, and that therefore a pay increase was more likely to resolve the problem.

The study also found that “independent adviser” turnover was higher when the CEO received relatively lower rates of increase.


The study can be found HERE.

© Guerdon Associates 2024
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