Executive Pay and "Independent" Compensation Consultants

A new study from Kevin Murphy and Tatiana Sandino is the first to analyze the compensation consultant data from publicly traded corporations.  Kevin J. Murphy & Tatiana Sandino, Executive Pay and "Independent’" Compensation Consultants (2008). Since 2006, the Securities and Exchange Commission has required that public companies report any role that compensation consultants play in determining or recommending the amount of exeuctive or director compensation. 

Based on their analysis of 938 proxy statements, Murphy and Sandino present several interesting findings:

• Executive and director pay is higher at companies where consultants provide pay advice. CEO pay is 20.5% higher. Median CEO compensation is $1.5 million in companies not using consultants, $3.0 million in companies that purchase surveys but do not directly retain consultants, and $4.2 million in companies that retain consultants.

• Incentive-based pay is a larger component of the executive pay packages in companies that use consultants. Equity-based pay accounted for less than a quarter of CEO pay for companies without consultants, but nearly half of CEO pay for companies with consultants.

• Surprisingly, there is no evidence that pay is higher when the compensation consultant provides additional services or is positioned to provide additional services in the future. Murphy and Sandino speculate that this may be because consultants are wary of the reputational and legal hazards of blatant attempts to curry favor.

• Compensation is about 9% higher in companies where the consultant works exclusively for the compensation committee versus where the consultant works directly for and with the CEO and/or his direct reports. A possible explanation is that the compensation committee may retain their own consultant to provide legitimacy in cases where CEO pay appears to be excessive.

• Companies may use multiple pay consultants from different firms to justify or legitimize pay packages that are unusually generous. A company using three or more consultants pays almost 25% more to its CEO than a company using only one consultant. The authors observed that companies can mix and match recommendations from multiple consultants to create a single generous package or ignore recommendations that do not fit with expectations.

In sum, although conflicts of interest do not appear to explain why companies using compensation consultants pay more, the study suggests that the company, directors, and executives may be using compensation consultants to justify higher levels of pay.

The Race to the Bottom has covered executive compensation extensively. Please visit our Executive Compensation page for additional posts on this topic.