Forced to confess their use of compensation consultants for the first time this spring, a solid majority of corporations report using pay consultants for outside help.
Those are the findings of a Compliance Week analysis of nearly 250 proxy statements already filed this year. Three out of four companies in Compliance Week’s sample used some form of consulting help, whether through a direct relationship with a consulting firm or through the acquisition of survey data. Most companies named the consulting firm hired; only three companies acknowledged using a firm, but did not name the firm. Fifty-three companies, or 21.5 percent, used no consultant.
2007 is the first time companies must file statements under the Securities and Exchange Commission’s new disclosure rules, including the new Compensation Discussion & Analysis section that details whether a compensation consultant is used.
Two consulting powerhouses clearly rose above the fray: Towers Perrin and Mercer Human Resources Consulting. The duo captured approximately 32.4 percent of the market surveyed, with Towers Perrin winning slightly more engagements (17.4 percent of the engagements) than Mercer (15.0 percent).
Third was boutique compensation consultant Frederick Cook & Co., followed by Hewitt Associates and Watson Wyatt Worldwide, which both have multi-billion-dollar HR consulting businesses.
Borges
“I think for everyone who works in the compliance area, accountants, lawyers, and consultants, [the new SEC rule] has generated a lot of additional business,” says Mark Borges, a principal at Mercer HR Consulting. “Given that there are 15,000 public companies, a number of whom have engaged consultants, it’s really resulted in a step up in business.”
None of the firms would say how much their revenues for compensation consulting are rising this year, although Mercer, Hewitt, and Towers Perrin all say the numbers are up. But consultants also stress that the increased business is part of a broader trend toward more transparency since Sarbanes-Oxley was passed five years ago.
“Business has been good for some time,” says Paula Todd, a managing principal with Towers Perrin. “Over the last three, four, five years, as there’s been more focus on following Sarbanes-Oxley, [to] formalize certain processes that are not as formalized. [Companies] have discovered that outside assistance would be useful.”
Bread And Butter
Typically, consultants’ roles have varied with each company. Often, the company’s legal department drafts the necessary disclosures, and then the consultant offers advice or technical assistance on fine points such as the structure of a pension or a change-in-control payment. But that had also been the norm since the SEC last overhauled disclosure of executive pay in 1992; now that the rules have changed, so have the chores done by various players.
MARKET SHARE
Below is an excerpt from the Compliance Week analysis of compensation consultants. The report looked at 246 CD&A disclosures made prior to press time. 190 of those used at least one consulting firm, resulting in a total of 213 consulting firms mentioned. The market share numbers below are as a percent of the total firms engaged:
Consulting Firm
Clients
Market ShareAs A PercentOf Total Firms Engaged(213 Total)
Towers Perrin
37
17.4 %
Mercer HR Consulting
32
15.0 %
Frederic W. Cook & Co.
19
8.9 %
Hewitt Associates
18
8.5 %
Firm Unidentified
18
8.5 %
Watson Wyatt
16
7.5 %
Clark Consulting
11
5.2 %
Pearl Meyer & Partners
11
5.2 %
Hay Group
6
2.8 %
Please Note: Pearl Meyer is a subsidiary of Clark, yet some companies did not indicate that relationship, making overlap difficult to decipher. Also, the number of consulting firms engaged (213) exceeds the number of companies that cited a firm (190), as some companies used more than one firm. Download the spreadsheet below for details.
Source
Compliance Week Analysis Of CD&A Disclosures (April 17, 2007)
“In terms of preparing the proxies, there are lots of people involved,” Todd says. “There are a lot of peoples’ fingerprints on these documents.”
Borges calls compensation surveys the “bread and butter” of consultants’ work, and the most common. But continuity is important, too, he says, as firms develop certain specialties within their surveys. “The data is only really meaningful over an extended period of time. Most firms will have specialized industry survey they do every year—say, a size and revenue.”
Companies may also use a consultant to formulate compensation programs generally, Borges says. “If they want to have a program intended to achieve a particular result, they may use a consultant to help identify what the program should look like,” he explains.
The least common use of consultants, Borges continues, is to make recommendations for specific executives, whether overall or in precise areas.
“If you have a new CEO, we can help you decide how much [CEOs are] paid,” he says. “If you want to grant stock options, we can help you decide … the right number of shares” to grant overall or to individuals.
Working With Consultants
The Compliance Week research did find that certain compensation consultants were preferred by companies depending on size and industry. The six companies in the insurance industry with more than $10 billion in revenue, for example, all used Frederic W. Cook & Co. or Mercer Human Resources Consulting, with the three largest all selecting Cook.
But use of compensation consulting doesn’t necessarily correlate to company size. The nature of the consulting relationship will depend on the client, Borges says.
“Some comp committees have ongoing relationships, or they only want a specific survey that covers a certain number of positions on a one-time basis,” he explains. “I would say probably it’s more common for consultants to be contracted to either conduct a tailored survey or a current survey for those positions. Probably the smallest segment are the ones who have an ongoing relationship,” with advice given every year.
But Geoff Loftus, vice president at the Society for Corporate Secretaries and Governance Professionals, stresses that compensation consulting is hardly a new phenomenon spawned by the CD&A’s arrival.
Loftus
“It’s not the driving force; that’s not what we’re hearing,” he says. “People were looking for independent comp consultants before the CD&A came into being.”
Indeed, Loftus says, for some companies, an outside consultant may be overkill. “What I do know is that our member companies are relying very heavily on their outside law firms, but they have relationships with them in 97 percent of the cases,” he says.
The Alamo Group, one of the CW survey companies that did not seek a consultant, stuck with its law firm, said Richard Wehrle, the company’s vice president and controller.
The firm, Sidley Austen Brown & Wood, has a “world of experience in SEC matters,” Wehrle says, and helped Alamo work through the disclosures.
“It’s not complicated; you have to think through things and make sure the management’s interpretation of compensation isn’t any different,” Wehrle says. “I won’t say it’s not irritating. [But] as soon as you get it put together it’s really not too bad.”
THE RULE
The excerpt below is from the final SEC rule On compensation disclosure:
...(3) Provide a narrative description of the registrant’s processes and procedures for the consideration and determination of executive and director compensation, including...
... (iii) Any role of compensation consultants in determining or recommending the amount or form of executive and director compensation, identifying such consultants, stating whether such consultants are engaged directly by the compensation committee (or persons performing the equivalent functions) or any other person, describing the nature and scope of their assignment, and the material elements of the instructions or directions given to the consultants with respect to the performance of their duties under the engagement...
Source
Executive Compensation And Related Party Disclosure (SEC Final Rule; Effective Nov. 7, 2006; Page 395)
Renewed buzz over consultants, Loftus said, came along with efforts for further transparency and independence in setting CEO pay. But if independence is the goal, finding a disinterested compensation consultant isn’t necessarily easier. Boards must avoid consulting firms used by any company subsidiary, no matter how distant.
“It’s getting very difficult for some large companies to find somebody who is truly independent,” Loftus says. But despite the increased work, he adds, companies are coping. “Everybody’s plowing through it; that’s what they do.”
Todd
Yet some express doubts about whether the regulations achieved greater transparency. “I got real mixed reactions to that,” Todd says. “I think their heart was in the right place; they heard from investors that they wanted more information.”
But for some aspects of the disclosure, Todd says, execution proceeded poorly. For example, she says, the total compensation number in the Summary Compensation Table “is just a bunch of junk … It’s a combination of apples and oranges. It isn’t a meaningful number.”
Even for sophisticated investors, she adds, “I think they’ll find that they just got overload. These proxies are extremely long. I’m kind of hoping that the SEC takes a step back and looks at this and makes some midcourse corrections” after this year’s proxy season.
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