May 15, 2007

Compensation Consultants under the scanner

In the US 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.

From the NY Times:

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.

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.

Hmm, interesting!