Quelling Executive Comp Criticism

Executive compensation appears to figure as a campaign issue this year. Both presidential candidates have weighed in on the matter and appear to agree that shareholders should vote to approve on executive compensation packages. Shareholders aren’t so sure though: only a sliver of numerous say-on-pay proposals have been approved by shareholders so far this year.

The defeat of these proposals is stimulating other ideas. One involves treating compensation consultants – many of whom hail from firms that offer a wide range of human resources-related consulting services – a bit more like public accounting firms when it comes to defining “independence.” The idea is that companies would be required to publicly disclose all of the fees that they pay to the consulting firms they hire for executive compensation consulting services. The disclosure would let investors decide for themselves whether independent compensation consultants really are independent.

“Executive compensation consultants are drawing a significant amount of blame for excessive executive pay, but in most instances it is not justified,” says Bruce R. Ellig, a board adviser and author of The Complete Guide to Executive Compensation (McGraw-Hill, 2007). Ellig, who identifies independence as an important issue, believes that boards can help lessen the criticism by taking the following actions:

• Assure that the external consultant performs no other work for the company or its management without the express written consent of the board’s compensation committee. Violation would result in the immediate termination of the consultant.

• Permit management to hire its own consultant to work with the compensation committee consultant.

• Advise both consultants that if either attempts to disrupt a harmonious working relationship, both will be fired.

• Report the names of both consultants and their companies in the Compensation Discussion & Analysis (CD&A) section of the proxy. Include the dates when they were first appointed, as well as the dates and reasons for termination if they are no longer serving as consultants. The fees for each executive compensation consultant should also be reported, along with the total of all other fees paid to each consultant’s organization and a description of the services provided.