Toward a better pay governance model: a review of the SEC's new compensation consultant fee-disclosure requirements.

• Author: Friske, Doug

Companies concerned that the SEC in effect would mandate a specific governance model for working with executive compensation consultants breathed easier when that agency adopted enhanced proxy disclosure requirements in December. The SEC's new disclosure rules, effective for the 2010 proxy season, afford considerable flexibility for corporate boards and management to define pay governance and advisory processes that best meet each organization's unique needs.

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Although additional disclosures about the consulting fees paid for executive compensation advice may be required in some cases, the SEC rules do not prescribe any particular model for relationships with executive compensation advisors. Thus, while companies will need to review their pay governance models to make sure they understand the disclosure implications, there's no reason to change arrangements that have served companies well in the past. Following is an overview of the new fee disclosure requirements, the various pay governance models available to companies under the rules and some of the key issues companies should consider in deciding how to structure their pay governance processes going forward.

New Fee Disclosures

As part of a broader set of proxy disclosure changes unveiled last July, the SEC had originally proposed that companies be required to disclose all fees paid to multi-service consulting firms that provide executive compensation services to the company. The proposed consultant fee disclosures were designed to "allow shareholders to assess the potential conflicts of interest in regard to the compensation advice given to companies," the SEC explained.

The SEC acknowledged that its original proposal was quite broad and would have required disclosure of fees and the nature of all services provided by multiservice consulting firms that "played any role in determining or recommending the amount or form of executive and director compensation." There was also concern that the fee disclosure rule would be misinterpreted as a "bright line" test, implying that an executive compensation consultant could not be considered objective if the consultant's firm also provided other services.

Executive consultant* compensation engaged by-- Single-consultant Board/Compensation Management model Committee Multi-service firm N/A that provides $120,000 or less in other services Multi-service firm N/A that provides more than $120,000 in other services N/A...