By Cydney Posner

Another article in the NYT today calls for action with respect to conflicts of interest affecting compensation consultants. Given that shareholders seem to be rejecting "say-on-pay" proposals recently, the author suggests that the SEC take a "more modest" approach by addressing the problem from another direction. The argument is that conflicts can arise when a company’s board or compensation committee uses the same compensation consultant for executive pay design as well as other services, such as human resources management and outsourcing advice. Similar to the lucrative fees earned by auditors for non-audit services, the fees earned by consultants for services outside of pay design can be substantially higher than the amounts earned for basic pay design services. As a result, "there is a risk that compensation gurus will put together cushy pay packages in order to snare more lucrative gigs elsewhere in the corporate empire." The column cites a Congressional inquiry that found that, in 2006, consultants to 113 of the 250 largest U.S. companies provided compensation consulting and other services to those companies, but, in 26% of those cases, were nevertheless identified in SEC filings as "independent." To allow stockholders to assess the independence of the process, the author urges the SEC to revisit the decision it made in 2006 as part of the new executive compensation rules, which required companies only to identify their consultants, but not, as the author advocates, to disclose their payments for pay design and any other services. (Note, however, that to address auditor conflicts, regulators adopted both enhanced disclosure requirements and expanded prohibitions on conflicts.) Positing another ironic conflict, one of the commentators cited in the article suggests that consultants are so averse to disclosure of their compensation that they could instead become advocates for say-on-pay proposals for executive compensation, which would involve more fees.

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