The Advisors' Blog

While the compensation consultant is not bound by an official code of professional conduct like an accountant or lawyer, a high standard of professionalism demands that consultants serve as more than a source of black-and-white answers or even a voice independent of management.

Unlike the oversight provided by the audit committee, most decisions made by the compensation committee are not right nor wrong – but primarily matters of judgment and degree. When appropriate, the consultant must also function as a brake on the decision-making process.

Committees are well served by a consultant who will take the initiative to say to members, “There are some important issues here that you’re overlooking and should be considered before you make a decision.” It is the consultant’s duty to try to persuade members to factor in new information when needed, even if doing so may end up increasing costs or result in a delay, but to do so without being rigid or demanding.

For example, if management and the committee are overly focused on how increased earnings should be reflected in pay levels, the consultant may need to point out that the organization’s return on capital employed ranks at the bottom of its industry. So yes, the compensation consultant can serve as a “reality check” for its client.

– Dave Swinford