Compensation consultants

By: Cydney Posner

In October, a group of institutional investors representing $ 849.5 billion in assets sent letters to a number of chairs of compensation committees of public companies requesting information about consultant conflicts of interest. In particular, concerns were raised regarding the possibility that multiple business relationships within a company could compromise the independence of a consultant’s recommendation to the compensation committee. These concerns have become something of a leitmotif of the recent discourse on corporate governance. (See the article attached below from the NYT from April of this year on the same topic.) As the investors themselves contend, these issues "are analogous to those raised in recent years regarding auditor independence. The value of auditor independence is clear, particularly when measured against the accounting scandals at companies where an accountant’s role as auditor conflicted with its often far more lucrative role as consultant." The investors ask whether the committee's compensation consultants provide any other consulting services to the management, the nature of that work, whether the arrangement is disclosed in the proxy statement, whether there is a board policy that prohibiting the provision by the consultant of other services to management or whether the company would be willing to adopt such a policy. gestalt

Stoking the anti-consultant flames, Jeffrey Immelt, CEO of GE, in an interview with the Financial Times posted by CompensationStandards.com, maintained that, with regard to CEO compensation, "in terms of an absolute level, I think that has to be based on the good judgment of the compensation committee, the Board, and the CEO. I don’t think consultants should be involved. I don’t think they necessarily add value from just pure data, but it’s got to be the good judgment. Nothing can replace judgment about how much is too much. So, I would say –no contracts, lots at risk, and the good judgment of the Board and the CEO."

In the new executive compensation rules, the SEC requires disclosure regarding any role of compensation consultants in determining or recommending the amount or form of executive and director compensation, identifying the consultants and describing whether they were engaged directly by the compensation committee or by others, the nature and scope of their assignments and the material elements of the instructions or directions given to the consultants in connection with the performance of their duties. Surprisingly, although several commenters suggested that the SEC require a discussion of other work performed by compensation consultants for the subject company or others, the SEC rejected those comments and did not require that additional disclosure. It remains to be seen whether outside pressures or best or even common practices will now make disclosure of potential compensation consultant conflicts essential.

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