Increase Seen In Solicitation for Proposals from Independent Compensation Consultant

By: Paul R. Dorf, APD

Upper Saddle River, NJ - September 18, 2009 - Upper Saddle River, NJ:  Compensation Resources, Inc. (CRI) has seen a dramatic increase in requests for executive compensation advisory services from Compensation Committees of publicly-traded companies.  Paul Dorf, Managing Director or CRI, indicated that, “We expected an increase as Boards respond to the current public and media outcry over excessive executive compensation; however, we have been surprised by the number of additional companies that are seeking an independent review of their executive pay practices.  This appears to be a direct response to recent government proposals on potential conflicts of interest among some of the larger compensation consulting firms,” Dorf continued.

A December 2007 US House or Representative’s report authored by Congressman Waxman (D-CA) titled, Executive Pay: Conflicts of Interest Among Compensation Consultants[1], outlined these key findings:

v      In 2006, at lease 113 of the Fortune 250 companies received executive pay advice from consultants that were providing other services to the company.
v      These consultants providing both executive compensation advice and other services were paid almost 11 times more for providing other services than they were paid for providing executive compensation advice.
v      More than two-thirds of these companies with potentially conflicted compensation consultants failed to disclose these relationships.
v      The study also indicated that there appears to be a correlation between the extent of the consultant’s potential conflict of interest and the level of CEO pay.

This summer, the SEC solicited comments on a number of proposed changes related to executive compensation, proxy disclosure, shareholder rights, and compensation consultants.[2]  The concern regarding compensation consultants focused on the potential conflict of interest when the same or affiliated compensation consultant works for both management and the board of directors in setting management’s pay.  The proposed changes would require companies to disclose this potential conflict and the amount of fees paid for these services.

Independent compensation consultants, like CRI, could potentially benefit from these changes, should they take effect.  Paul Dorf agreed, “In this day and age, why would a compensation committee accept such a risk of conflict when it can easily be mitigated by choosing a truly independent compensation consultant?”