The Advisors' Blog

Last Thursday, Connecticut Treasurer Denise Nappier issued a press release stating that four companies have recently agreed to their requests for information – which were posed in the guise of shareholder proposals – on one of two issues:

– Consultant independence – specifically, how much the executive pay consultant is paid for non executive pay work, and

– The reason for the perceived pay inequity between the CEO and the other named executives.

Let’s address these issues one at a time:

1. Consultant Independence: It is certainly true that consulting firms that perform large amounts of non-executive pay work for management will have a difficult time giving independent advice on executive pay to the board – especially if that advice might not please management. However, that does not mean that non-independent consultants give bad advice. Nor does it mean that independent consultants give better advice. Some of the best consultants work for non-independent firms and there are a few independents who are not the sharpest tools in the shed.

Nappier states that, now that all of a consultant’s fees are disclosed, “Shareholders will finally have the information they need to make an informed decision on whether the company’s compensation policies and practices adhere to high standards of professional ethics and best practices.” This is a non-sequitur. Independence or non-independence (and disclosure thereof) does not equate to “high standards of professional ethics and best practices”. If Arthur Andersen had disclosed all of its fees received from Enron, would that have made their advice any more ethical?

The point here is that consultant independence, while an important issue, is a bit of a red herring. The main problem our industry (compensation consulting) suffers from is not a lack of independence, but a lack of standards. Despite Jesse’s work on Compensationstandards.com, there is no agreed on set of principles and standards defining what constitutes “high standards of professional ethics and best practices” in executive compensation design and practice, or in corporate governance over executive pay.

The accounting industry lacked standards in the 1950s and 1960s and the FASB was formed. Perhaps we need a similar industry principles setting body for executive pay. If we don’t do it, the government will, and they won’t do it well.

2. Pay Inequity: In her release, Nappier offers a very coherent argument for why we should care about pay equity or inequity. She states that when the CEO is paid three times or more the pay of the next highest paid executive, that may be a sign of inadequate succession planning. Based on my experience, that is probably true. If there is even one likely internal candidate, the company will often have to pay him or her 50% to 60% of the CEO’s pay. I think Nappier may be on to something here.

– Don Delves