May 23, 2008
Executive Compensation Consultants: The Next Battlefield for Say on Pay
by Anne Moore Odell
Investors ask the SEC to mandate disclosure of a company's use of executive compensation
consultants and if the consultants are used in other areas of the business as well.
A coalition of 21 institutional investors lead by Connecticut Treasurer Denise Nappier, recently sent a letter
to the Security and Exchanges Commission (SEC)
asking the SEC to require companies to disclose to shareholders in annual proxy statements whether
consultants working for compensation committees are also providing consulting or employee benefits
services to the management of the same companies.
The letter also calls for companies to
disclose any ownership interest the consultant may have in the parent consulting company.
Investors are concerned that advice given to a compensation committee may be compromised in the
form of higher pay if the consultant also provides more lucrative services for management.
"Investors concerned about sustainability issues, such as social equity and the environment,
appreciate that compensation consultant independence can just as certainly impact the bottom line,"
said Denise L. Nappier, Treasurer of the State of Connecticut and principal fiduciary of the $26
billion Connecticut Retirement Plans and Trust Funds (CRPTF).
"We believe that good board
practices -- including the decisions around executive pay -- support the long-term viability of a
company by creating appropriate incentives for executives. Executives' pay should be tied to
performance, and that performance undoubtedly includes the successful achievement of those goals
that support and advance business practices related to sustainability," she added.
letter addressed to SEC Chairman Christopher Cox reads in part: "We believe a potential conflict of
interest exists at companies in which consultants are hired to do work for both a company's
management and its compensation committee. When a consultant performs such services as benefits
management on the one hand and advises the board's compensation committee on executive pay matters
on the other hand, we believe that the consultant's integrity may be jeopardized."
signatories to the letter represent $1.4 trillion in assets under management and include state and
local treasurers and comptrollers from California, Connecticut, Florida, Illinois, Maryland, New
York City, New York State, and North Carolina. Other institutional investors signers to the letter
include AFL-CIO Reserve Fund, Amalgamated Bank LongView Funds, Hermes Equity Ownership Services
Limited, International Brotherhood of Teamsters, Master Trust, Universities Superannuation Scheme
Ltd; and Walden Asset Management.
In December 2007, James F. Reda testified before the House Oversight Committee on
the actual or perceived conflicts of interest of full service consulting firms that offer
management services beyond executive compensation consulting. Even with the firewalls in place to
separate executive compensation consulting from other parts of their business, he points to
possible conflicts of interest or the appearance of a conflict.
Reda is the managing
director of James F. Reda & Associates, which solely provides compensation consulting and no other
management services. Reda explained that up to 90% of Fortune 1000 use executive compensation
Currently, the SEC only requires companies to disclose the name of the
consultants and not the fees paid to them. The House Oversight Committee has collected this data in
the past, but it is not publicly available to investors and others. Reda suggests companies
disclose all fees paid to compensation consultants for compensation consulting and all the fees
paid to the consultants firm for other services, and to also disclose the type of work performed by
the consultant. Reda compares the disclosure of the independence of compensation consultants to the
disclosure of the independence of auditors to senior management.
"You want to be sure that
advice on executive pay is coming from an independent voice, that the consultant has no other
considerations, as shareholders can't be in compensation committee meetings," Reda explained.
The issue of compensation consultants disclosure is part of the larger issue concerning
executive compensation packages. In 2001, Napier filed the first shareholder resolution from the
Connecticut Treasurer's Office calling for a link between executive pay and performance. Since that
time, Nappier's office has worked diligently to address executive compensation.
there is no disputing the fact that CEO compensation has become a growing concern of shareholders,
and one that has caught the attention of the business community, regulators, Congress and the media
-- fueled in part by the exorbitant pay packages granted to CEOs while company performance stalled
miserably, shareholder value dropped steeply and workers lost their jobs, their life savings or
both," Nappier told Socialfunds.com. "No doubt, the failure of a company's board of directors to
take charge and adopt responsible executive compensation policies has forced more shareholders to
take notice and help set the stage for tangible progress on this issue."
to recent developments regarding the new SEC ruling concerning the transparency and disclosure of
CEO compensation, and rise in shareholder votes pushing for greater board accountability in setting
CEO compensation policies and practices as examples of this growing concern. Compensation
consultant independence is an issue that grew out of Nappier's work on the quality of disclosures
on executive pay in the annual proxy statements.
"My administration's initiative with
respect to executive compensation began in 2006 when my office led an investor coalition in calling
on 25 of the largest U.S. companies to adopt policies on compensation consultant independence, and
to report such policies and practices in the 2007 proxies," said Nappier.
continued, "This year, we are once again addressing related executive compensation issues that
have been put forth during the last two proxy seasons, including investor advisory votes on pay
packages known as 'Say on Pay.' We are also embarking on a new compensation issue with two
companies (Abercrombie & Fitch and SUPERVALU) related to the gap in pay between the CEO and the
second in command. Big pay gaps may signal a lack of delegation of power and poor board practices
related to succession planning."
Changes in the SEC's disclosure regulations on executive
compensation are in the wind Nappier believes. She points out that candidates from both parties
have pledged to pass legislation to support shareholder advisory votes. Last month, Senator Hillary
Rodham Clinton introduced the "Corporate Executive Compensation and Accountability Transparency
Act" (S. 2866) which has several important pay-related proposals, including requiring the SEC to
promulgate rules "clarifying and strengthening" the disclosure requirements concerning pay to
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