THEORY & PRACTICE
| JANUARY 11, 2010
More Boards Opting for
Independent Pay Advisers
Concerns Grow That Multiservice
Consulting Firms May Have Conflicts of Interest for a Client's
More corporate boards are hiring smaller
executive-pay consultancies amid growing concern over possible conflicts of
interest at big pay consultants.
Directors at companies such as
General Mills Inc. and
Visa Inc. recently retained smaller pay advisers after dropping large
consulting firms that provide other human-resources advice to management.
More boards will likely follow, spurred by a new proxy-disclosure rule,
proposed U.S. legislation and the merger of two large HR consultancies.
contend big, multiservice consultants have an incentive to recommend that
directors award rich pay packages to top executives, who control more
lucrative contracts for other HR consulting gigs. Smaller executive-pay
firms typically won't work simultaneously for boards and management,
avoiding potential conflicts.
Starting Feb. 28, a new Securities and
Exchange Commission rule mandates that shareholder proxies reveal whether
boards' pay advisers do other work for the business and what fees they
receive—once management services exceed $120,000 a year.
Last month, the House of Representatives
cleared a bill requiring the SEC to create independence standards for board
compensation consultants. And on Jan. 1, HR consulting giant Towers Perrin
combined with rival
Watson Wyatt Worldwide to form Towers Watson in New York. The firms held
about 27% of board compensation committee gigs at Fortune 1000 concerns in
the year ending Feb. 28, 2009, according to researchers Equilar Inc.
These developments probably will boost the
fortunes of roughly 30 small and midsize independent consulting firms that
shun management work when directors retain them. Many are relatively new and
led by veteran refugees from larger firms. The latest is a New York boutique
launched Jan. 4 by Ira Kay, who previously ran the U.S.
executive-compensation practice for Watson Wyatt.
Mr. Kay says he opened his own shop because
the proposed SEC rule, federal bill and merger accord had cost him three of
his 20 board assignments at companies where Watson Wyatt or Towers Perrin
provide pricier management services.
Smaller consultancies accounted for about 25%
of the $750 million spent on U.S. executive-compensation advice last year,
and that market share could reach 40% by 2011, predicts James F. Reda, who
founded his eponymous pay consultancy in 2003. His firm's revenue has grown
about 30% annually for the past five years, he says.
Farient Advisors LLC has expanded rapidly,
too. The Los Angeles firm served 25 board compensation committees during
2009—up from eight in 2007, its inaugural year, says founder Robin A.
Ferracone. She expects to land 10 or 15 more this year. Ms. Ferracone
formerly led the human-capital business for Mercer, a major HR consultancy
owned by Marsh & McLennan Cos.
Peter Chingos, another Mercer alumnus, and
five fellow compensation consultants left last September to create
Compensation Advisory Partners LLC. So far, every board pay panel that the
New York start-up bid to advise insisted that "your organization cannot do
any other work for our company," he recalls. Three years ago, he says,
"maybe 20% of the proposals would have had that requirement in there."
The independent sector has long been
dominated by Frederic W. Cook & Co., which counsels boards at 71 of the 250
biggest U.S. businesses. That compares with 54 two years ago.
Among Cook & Co.'s newest board clients is
General Mills. Directors replaced Watson Wyatt last May after considering
the move since 2008, says Michael Davis, senior vice president of HR for the
packaged-foods maker. The pay panel preferred a consultancy "with no other
financial ties to the company," he notes. The switch let General Mills
continue using Watson Wyatt for broad-based benefits and compensation
consulting, the manufacturer stated in its August proxy.
"Benefit fees were two to three times the
executive-compensation fees, depending on the year," Mr. Davis says.
In changing to Cook & Co. from Towers Perrin
starting last fall, Visa's board compensation committee "recognized the
value of engaging an independent consultant," a company spokeswoman says,
adding that Towers Watson will still provide services to management that
don't involve executive pay.
Towers Watson officials declined to discuss
individual clients. But some boards "for the sake of optics felt they needed
an independent consultant," says Paula Todd, a leader of its
executive-compensation practice. Despite recent defections, "our market
share has stayed pretty much the same," adds Gary Locke, another practice
In the future, "a lot of firms will hire
multiservice firms like Towers Watson to work with management," Ms. Todd
Hewitt Associates Inc. anticipates a similar scenario as more boards
decide "to avoid additional public and political scrutiny around the
perceived independence of their advisers," says Russell P. Fradin, CEO of
the Lincolnshire, Ill., concern.
Write to Joann S. Lublin at
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