Executive pay and the Board: should a compensation committee have its own consultant? No.

• Author: Cook, Frederic W.
• Position: Includes related article - Chairman's Agenda: Governing for Shareholder Prosperity

Should a compensation committee have its own consultant? No.

Should compensation committees have their own consultants? This question is increasingly being asked in the press, in boardrooms, and among institutional investors. It is being asked because there is a perceptions that executive pay is "out of control," that pay for CEOs and other senior executives is not related to performance, that ratios of executive pay to average employee pay are too high, and that executive pay is hurting employee morale and productivity, thereby reducing performance and global competitiveness.

There is also a perception that compensation consultants who develop executive pay programs for companies are beholden to the management, which hires them. The feeling is that if compensation committees had their own consultants or staff support, they would be in a better position to critically evaluate management's recommendations and make decisions in the shareowner's interests.

The short answer to the question of whether compensation committees should have their own consultants is "no." A "yes" answer would place the consultant in an advocacy position for the committee in opposition to management. Consultants, as contrasted with attorneys, should not be advocates of one party vs. another but, rather, should provide independent, objective advice and develop recommendations for the good of the corporation as a whole.

There may be special situations in which the committee may wish to employ its own consultant in a one-shot capacity (see sidebar). In more normal situations, however, it would be wasteful and unnecessary for both management and the compensation committee to employ their own experts in opposition to one another. Rather, if the use of a consultant is called for, it should be sufficient to employ one firm with the reputation for independence and integrity and instruct the consultant to work with management and the committee, but for the company, in completing the engagement.

Executive pay presents a potential for conflict of interests between management, which wants to be paid well for its services, and the board, which is responsible by law for hiring and compensating management on behalf of shareholders. When compensation consultants are employed by management, they risk being perceived as being on management's side in this conflict of interest and, hence, not truly objective. This leads to pressure for the compensation committee of the board, which is...