Edited by Randall S. Thomas and Jennifer G. Hill
Chapter 16: Executive Compensation Consultants
Ruth Bender Executive compensation in listed companies is, in many jurisdictions, determined by a compensation committee comprising independent directors. In most large companies, that committee is advised by one or more compensation consultants. The consultants provide advice on the appropriate level of pay and on the types of plan that will be suitable. They model likely outcomes, and advise on a variety of other matters including tax, accounting treatments, regulation and investor sentiment. This use of independent advisors to the compensation committee is not mandatory, but is encouraged by regulators. This chapter discusses the role of compensation consultants, and summarizes research into how they have impacted executive pay. It is structured in three sections. Firstly, we review the role of the executive compensation consultant, considering the reasons that companies use them: their expertise, and their impact in legitimizing the compensation committee’s decisions. In doing so, we examine how the consultants operate, and the factors influencing companies’ choice of consulting firm. In the second section we consider executive compensation consulting as an industry, and review the forces affecting the business of consulting, and the effect that these have on the consulting firms, their clients, shareholders and regulators. The industry is dominated by a few large firms, of which most are multi-business organizations, earning fees from other activities in addition to advice on executive compensation. The main factor determining a firm’s ability to attract executive compensation assignments is its reputation, enhanced by expertise and proprietary knowledge. However, reputation may be damaged due...
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