September 3, 2008
Do the “Independents” Protest Too Much?
– Eric Marquardt, Towers Perrin
I think Frank Glassner’s recent post only tells one side of the independence story – the one that boutique consultants want to be told. But it fails to note that the majority of the Fortune1000 companies (61% in 2007, according to the Equilar data) continue to use full-service consulting firms in some capacity for advice on executive pay either in addition to or in lieu of a firm that consults only on executive compensation.
In virtually all cases, these companies have carefully examined the “consultant independence” issue and concluded that the depth and breadth of resources and expertise offered by full-service firms can’t be replicated in most cases by smaller, so-called independent firms. They have concluded that any potential conflicts of interest in the full-service firms can be effectively and appropriately managed. Many have speculated that even greater potential conflicts could result from smaller firm’s dependence on business from any particular client.
A more balanced perspective can be found in several recent academic studies that squarely rebut the notion that potential conflicts of interest at the leading full-service consulting firms play any meaningful role in the escalation of executive pay. Unlike the Waxman Committee’s highly partisan December 2007 majority report on the consultant independence issue, these more recent studies by researchers at The Wharton School, the University of Southern California and Stanford bring more rigor and objectivity to the analysis of consultants’ influence on executive pay decision-making.
Among other areas, the researchers examined the potential conflicts of interest inherent in all advisory firms, full-service and boutique (e.g., the need to sell repeat business as well as to cross-sell other services), and concluded that potential consultant conflicts play no significant role in companies’ decisions about executive pay.
No credible evidence suggests that full-service executive pay consultants are any less objective than the “independent” boutiques. Ultimately, the real issue is not pay consultants’ perceived “independence,” but the objectivity and overall value of their advice.
Here’s a summary of the academic studies as well as Towers Perrin’s views about consultant independence.