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For background on evolving views of advisory voting since 2006, see

For previous reports addressing disclosures of compensation consulting relationships, see

Note:  James F. Reda, referenced in the article below, served on the Advisory Panel of the Options Policies Forum that initiated the advisory voting project and proposed principles for reporting compensation information.  He also led that Forum program's "Analytical Alternatives" workshop.


New York Times, June 22, 2008 column


The New York Times




June 22, 2008


Fair Game

How Big a Payday for the Pay Consultants?


THE credit crisis, rising oil prices and the economy may dominate headlines, but excessive executive pay still makes shareholders boil. With the proxy season pretty much over — and with John McCain and Barack Obama both making compensation a campaign issue — let’s see where investors stand in the battle to rein in outsized pay.

The progress, alas, has been minimal.

Even as the stock market flags and credit losses mount, executive pay marches higher. Ousted chief executives also continue to reap rich going-away gifts. Martin Sullivan, lately deposed as chief executive of A.I.G., may receive $68 million in severance as he makes his way out the door, according to the Corporate Library, a governance research firm. Never mind that his shareholders lost 41 percent of their market value since he took over the company in March 2005.

This year, investors concerned about pay practices concentrated their efforts on trying to have shareholders become more involved in the process. Some 100 “say on pay” proposals made it into proxy statements. And Mr. McCain jumped on that bandwagon in a speech on June 10, stating that shareholders should approve all aspects of a chief executive’s pay package.

But asking ain’t the same as getting. Less than 10 percent of the proposals won majority support at shareholder meetings this year. Companies urged investors to reject them, typically arguing that they would give outsiders too much sway in boardroom decisions. Judging by this season’s votes, more than a few investors are siding with management.

Perhaps a more modest approach to runaway pay is in order — like attacking potential conflicts of interest among compensation consultants who design the lucrative packages.

Compensation consultant biases can arise when a company’s board uses the same consulting firm for pay design as well as other services such as human resources management and outsourcing advice. Because the fees earned by consultants for compensation work are far less than what they make on other business, there is a risk that compensation gurus will put together cushy pay packages in order to snare more lucrative gigs elsewhere in the corporate empire.

Here’s an easy fix: Require companies to detail in proxy statements all fees paid to consultants they hire, for compensation design and all other services.

When the Securities and Exchange Commission rewrote the laws on executive compensation disclosure last year, it didn’t require public companies to detail consultants’ fees. This was a mystifying mistake.

Disclosing compensation design fees and other revenues earned by the same consulting firm would mirror the tabular disclosure forced upon companies’ auditing firms via the Sarbanes-Oxley Act. Before that disclosure was required, accounting firms were in a similarly conflicted position, often generating substantially more revenue from tax and information technology services than from corporate audits. This put them in the position of possibly giving short shrift to audits to protect their other, more lucrative lines of business.

The disclosure worked. It essentially allowed investors to determine where auditor conflicts might lie.

The CFA Institute’s Centre for Financial Market Integrity, part of a nonprofit association of more than 92,000 financial analysts, portfolio managers and other investment professionals, has asked that the S.E.C. revisit the rule changes. One improvement that the center’s officials have sought is the disclosure of fees earned by consultants.

“Such disclosures will allow shareowners to determine whether the board’s consultants are sufficiently independent from senior management with regard to executive compensation advice,” wrote Kurt Schacht, managing director at the center, in a late December letter to the S.E.C.

BUT under the new pay rules, companies only have to identify their consultants; beyond that, they aren’t required to provide any more information about their compensation architects. While many say the firms in their employ have no biases, investors have no way to verify such claims.

A Congressional inquiry suggests that some verification is needed. In hearings last December, Representative Henry A. Waxman, the California Democrat who is head of the House Committee on Oversight and Government Reform, found that 113 of the nation’s 250 largest companies paid the same firm to provide compensation consulting and other services to the company in 2006, creating the potential for conflicts. Yet 26 percent of those companies also identified their compensation consultant in S.E.C. filings as “independent.”

That’s precisely why a fee table would come in handy.

The potential for conflicts is greatest at large consulting firms that offer an array of services. These include Towers Perrin, Hewitt Associates, Watson Wyatt and Mercer Human Resources Consulting, a unit of Marsh & McLennan. All the firms say they manage their operations to ensure that conflicts don’t arise.

Happily, roughly half of the companies in the Standard & Poor’s 500 have significantly changed the way they hire their consultants and have largely eliminated biases, said James F. Reda, a compensation consultant in New York whose firm does only pay design. Still, that leaves a good number of companies with potential conflicts.

Instead of supporting fee disclosure, Mr. Reda said that consulting firms interested in more billable hours would be more likely to urge their clients to institute “say on pay” plans. Working closely with shareholders to gain their input on pay programs could easily increase consultants’ revenues by 30 percent, Mr. Reda estimated.

First, the consulting firm would have to devise a summary of the company’s compensation philosophy, he said. Then it would presumably have to help the company sell the program to its investors, making changes as it encountered objections. All this would have to be done before the proxy went out ahead of the annual shareholders’ meeting.

Far simpler to disclose consultants’ fees, Mr. Reda said, a job that might take all of 20 hours to complete. “We don’t need more regulation,” he said. “What we need is disclosure of the independence of the process.”



Copyright 2008 The New York Times Company




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