Several years ago, the SEC approved exchange rules requiring the comp committee to review the independence of a comp consultant before retaining that consultant. The requirement was prompted by concerns about how other lucrative services provided to the company might influence the consultant’s advice to the board. But, is the potential impairment of consultant independence by fees for other services the right issue to focus on here?
A recent study from the American Accounting Association study suggests that it isn’t. Instead, the study found that the amount of fees the consultant receives for its advice to the comp committee may have a greater influence on its CEO comp recommendations than other services that it provides to the company. This excerpt from the press release announcing the study explains:
The new research suggests that since 2009 the reward to EC consultants for sumptuous CEO pay packages has had less to do with gaining access to additional company services (in other words, with cross-selling) than with securing repeat EC consulting at high fees. Researchers Jeh-Hyun Cho of Arizona State University, Jeong-Hoon Hyun of NEOMA Business School in France, and Iny Hwang and Jae Yong Shin of Seoul National University, Korea, write that among multi-service providers they “find no evidence that CEO pay is higher when non-EC fees are higher, providing no support for the cross-selling hypothesis.”
In contrast, among the same group they “find strong empirical support for the repeat-business hypothesis suggesting that consultants receiving higher EC fees recommend higher total [CEO] compensation in an effort to secure future engagement with clients.”
The study says that for every 1% increase ($1,770) in the average consultant’s fee, CEOs reap an additional $4,474 in pay. The authors suggest that one reason for the link between higher fees and higher comp is that comp consultant fees are rarely a significant issue for the board during the retention process because the amount is relatively small in the grand scheme of things. In addition, many firms have spun-off executive comp practices from their broader business, effectively taking cross-selling off the table as an area of potential concern.
-John Jenkins, TheCorporateCounsel.net June 17, 2020
