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New York Times, May 11, 2007 article

 

The New York Times

Executive Pay: Proxy Season

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May 11, 2007
 

Panel to Look at Conflicts in Consulting

Members of Congress are looking into the potential conflicts among executive compensation consulting firms that do other lucrative work for the companies whose pay they help devise.

The chairman of the House Committee on Oversight and Government Reform has asked the largest companies in the industry for details on their client relationships and the revenues these ties have generated over the last five years.

The companies — Hewitt Associates; Mercer Consulting, which is a unit of Marsh & McLennan; Towers Perrin and Watson Wyatt Worldwide — confirmed yesterday that they had received a letter dated May 8 from Henry A. Waxman, the California Democrat who is chairman of the oversight committee.

Mr. Waxman asked the consulting firms to identify which companies among the nation’s 250 largest they had provided both executive pay consulting and other services for and to disclose total revenues received for each type of service. Mr. Waxman asked that the companies supply the information by May 29.

“Almost everyone agrees the extravagant increases in executive compensation make no sense,” Mr. Waxman said in a statement last evening. “The question I’m looking at is whether potential conflicts of interest among compensation consultants and their corporate clients might play a role in some of the irrational compensation decisions.”

As executive compensation has grown in size and complexity in recent years, pay consultants have become increasingly influential at corporations. And as critics decried rising levels of executive pay, compensation committees of boards justified the outlays as a result of work done by outside consultants.

But the consultants charged with advising on pay were often employed by large companies providing other services — like actuarial work on company pensions and the outsourcing of employee benefit programs — to those same corporations. Contracts for these services often generated significantly more revenue than those involving advice on executive pay.

In 2006, for example, Hewitt generated almost $2 billion in its outsourcing unit while the consulting segment, which includes executive-pay advice, generated about $850 million.

In his letter, Mr. Waxman noted that little is known about compensation consultants’ other business relationships with a company “because the Securities and Exchange Commission does not require companies to disclose whether executive compensation consultants perform other services for management.”

The potential for conflicts among pay consultants is reminiscent of those in the late 1990s among accounting firms that performed lucrative consulting services related to information technology and tax issues for the same companies whose financial results they were charged with certifying. After the S.E.C. required companies to disclose what they were paying in consulting as well as audit fees, the industry moved to separate the two businesses.

But in overhauling its disclosure rules on executive pay last year, the S.E.C. did not require companies to disclose details that would signal potential conflicts among consultants, like the type of other work done by these consultants or the revenues earned under those arrangements. The commission did require public companies to identify the consulting firm or firms hired to help devise executive pay standards, however.

Because companies do not need to disclose these details, investors are in the dark about potential conflicts among consultants that wear two hats at major companies.

Some institutional investors have begun asking companies to volunteer this information. Shareholders at the annual meeting of Verizon Communications last week voted on a proposal that would have required the company to disclose professional relationships with its current or previous compensation consultants that might impair their independence. While the proposal did not pass, it received support from 47 percent of the shares voted, the company said.

When discussing its pay practices in its proxy filings in recent years, Verizon routinely said that they were devised by an “independent outside consultant” that reported to the board. Although the consultant was not identified, it was Hewitt Associates, a company that did extensive work for the company in other areas, generating significant revenues.

Officials at Hewitt and Towers Perrin said their firms were preparing responses to Mr. Waxman’s request. Watson Wyatt’s spokesman declined to comment.

Christine Walton, vice president for public relations at Marsh & McLennan, said, “We can confirm that we have received Chairman Waxman’s letter and that we plan to cooperate with his request for information.”

 

Copyright 2007 The New York Times Company

 

 

 

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