Want high pay for low performance? Then hire a US compensation consultant

Because Guerdon Associates prides itself on independence of thought and impartial advice, we feel brave enough to report on research that may otherwise be regarded as a shot in the big toe.  Recently, a report was published that showed US companies that hire compensation experts tend to pay their top executives more.  But that does not translate into higher shareholder returns.

The Corporate Library (itself a US based consulting company) said it analysed executive pay data disclosed earlier this year by 1,323 companies that used compensation consultants. This was the first year in which the US Securities and Exchange Commission forced companies to identify their compensation consultants.

The findings indicate that compensation consultants are associated with companies that pay at levels higher than the market median. These higher levels of pay are in general not associated with higher levels of shareholder return.

In analysing CEOs’ base salaries, the Corporate Library report found companies that used some consultants paid their top executives much more than comparable companies.

For example, companies that hired Pearl Meyer & Partners paid their CEOs 18.6 percent above the median salary of peer companies, the report said. Companies that used Towers Perrin paid their top executives 16.6 percent more while those that hired Hewitt Associates paid 15.2 percent more and those with Mercer Human Resource Consulting paid 14.8 percent more, it said.

For CEO pay comparison, the report created 40 groups of companies based on market capitalisation and industry.

To be fair, the study’s results were based on one year of data, which may not give a complete picture.

The Corporate Library report also said it found no relationship between the creation of shareholder value and a company’s use of compensation consultants.

The Corporate Library report did not look at potential conflicts of interest.

Does this happen in Australia?  Because few companies name their advisers, this is difficult to assess. Guerdon Associates’ opinion is that companies in Australia benefit from receiving external advice on executive remuneration matters because this allows them to make informed decisions on pay.  At the same time, Australian governance requirements, including board leadership by an independent chairman, make abuse less likely.

© Guerdon Associates 2024
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