Study notes conflicts in exec pay consultants

Consultants who recommend pay packages for U.S. corporate executives have pervasive conflicts of interest that appear to be inflating executive compensation, according to a congressional study issued Wednesday by the House Government Oversight Committee.

Nearly half of all Fortune 250 companies rely on compensation consultants who do other, more lucrative work for the firms, and consultants with the most revenue at stake appear to have an incentive to recommend higher executive pay packages, the study found.

Among the 250 largest U.S. companies, at least 113, or 45%, received advice on executive pay from companies providing other services to the firm, the study concluded. Compensation consultants were paid 11 times more on average for other services they provided and in some cases earned 50 to 70 times more, according to the report.

Rep. Henry A. Waxman (D-Beverly Hills), who chairs the Oversight Committee, has raised concerns about potential conflicts of interest on the part of compensation consultants, fearing they might inflate recommendations for executive pay in hopes the chief executive will reward them with other business. Waxman said Wednesday that investors eyeing seemingly unjustified CEO pay raises “think the system’s rigged.”

The study provided some support for such concerns, finding that median CEO pay in 2006 was 67% higher at companies whose consultants had the largest potential conflicts from other business compared with firms whose consultants didn’t have such conflicts. Democrats said the results indicated that compensation consultants might present conflicts similar to those posed by outside auditors being highly paid by a client for nonaudit services.

Republicans on the panel balked at the findings, calling the analysis “unreliable,” and complained that the House committee had no business interfering with corporate decision-making.

“Corporate America does not need Congress’ ‘wisdom’ in this regard,” Republicans on the committee said in a statement on the report. Several called the hearing “embarrassing” and Rep. Lynn Westmoreland (R-Ga.) characterized it as part of a congressional “march toward socialism.”

GOP panel members said the evidence showed that corporate boards were doing a good job of firing underperforming CEOs and that shareholders had been silent about potential conflicts involving compensation consultants, suggesting it wasn’t a burning concern for them.

Compensation consultants bristled at suggestions that their advice might be tainted by conflicts of interest.

Donald Lowman, an executive at consulting firm Towers Perrin, told lawmakers that the company’s integrity was “not for sale,” and Mercer’s president of human capital consulting, Charlie Scott, said he didn’t think “that the potential for conflicts means that there is a conflict.”

Consultants stressed that executive-compensation decisions were made by corporate boards of directors, not CEOs, and that corporate directors don’t always heed the advice that consultants provide.

Frederick W. Cook & Co. Chief Executive George Paulin endorsed additional safeguards to ensure compensation consultants had no ties to company managers, however. Cook, based in Los Angeles, provides executive-compensation consulting only, and Paulin said an easy way to ensure independence for all outside compensation consultants would be to subject them to the same New York Stock Exchange independence rules applied to outside directors serving on compensation committees.