Selecting an independent compensation consultant: here are the important criteria boards should apply.

• Author: Ferracone, Robin A.
• Position: COMPENSATION AT WORK

AS PUBLIC CONCERN over executive compensation has intensified, shareholders increasingly have become concerned about the independence of compensation consultants who advise board compensation committees. In December 2009, the SEC issued a new rule that requires companies to disclose to shareholders whether their board compensation consulting firm also provides services to management that exceed $120,000 in annual fees.

In response to these changes, the compensation consulting industry has been restructuring, with most multiline firms spinning off their executive compensation units, and several compensation consulting leaders launching new boutique consultancies. Amidst these changes, most companies have either moved or will move toward retaining an independent resource that reports solely to the compensation committee of the board. In this regard, boards do not want the slightest hint of a conflict of interest, real or perceived, nor do they want the slightest risk that their multiline consulting firm may be doing business, even unwittingly, elsewhere in the company. Further, with so many new consulting firms out there, a number of companies are curious to see just what the new firms have to offer.

In this new era of change, boards need to decide which criteria, in addition to independence, they will use to select a new consultant. Last year, in partnership with DIRECTORS & BOARDS, Farient Advisors conducted a survey of board members involved in executive compensation decision making. We asked the survey respondents to list the criteria they either used, or would use, to select a compensation consultant. The top criteria were: (1) ability to give an objective opinion, (2) industry knowledge/knowledge of business performance measurement, and (3) good chemistry.

Given the visibility and criticism around executive compensation, we were not surprised that board members value objectivity. In our experience, to be most effective, the compensation consultant must develop informed opinions based on company-specific facts, an understanding of the industry and competitive situation, sensitivity to the regulatory environment, creativity to develop practical approaches to thorny issues, and sufficient experience to "see around the corners" and predict how a particular course of action likely will play out. The consultant should not be a tie breaker, an advocate of one side or the other, or someone who merely supports the loudest voice or most popular...