The Advisors' Blog

When reading through the Don Delves post from a few days ago, I thought about an interesting academic research paper I read recently. The paper – “The Role and Effect of Compensation Consultants on CEO Pay” -is by Brian Cadman, Mary Ellen Carter and Stephen Hillegeist. The paper uses a sample of 880 firms, and attempts to quantify the degree to which consultant conflicts of interest have an effect on CEO pay levels. Specifically, they talk about “rent extraction”, the idea that consultants with broader relationships tend to recommend higher CEO pay levels.

In reading the paper, I thought there were two interesting findings. First, the presence of a compensation consultant (ANY consultant; conflicted or not) was correlated with higher compensation for the firm’s CEO. While this may say more about the firms that don’t hire a consultant than it says about those that do, it is still somewhat troubling.

However, the authors were not able to find “widespread evidence of more lucrative CEO pay packages for clients of conflicted consultants despite anecdotal evidence to the contrary.” This is inconsistent with the findings of the Waxman committee, though the authors of this study did not have the same information available to them (the last time I checked, academics do not yet have subpoena powers). As a result, the authors had to use proxies to determine whether conflicts of interest are likely to exist.

My view is that independence is a lot more about the individual consultants providing services than it is about the firms they work for. If the sophisticated analysis from this paper was combined with the data available to Congress, perhaps the issue of consultant conflicts could be put to bed and we could all move on to talking about something else.

– Jim Woodrum