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For additional information about the House committee hearing reported below, see

For a previous report of the issues addressed in the House hearing, see

Note: James F. Reda, whose testimony is referenced, has been a member of the Forum Advisory Panel that proposed principles for shared management and investor interests in equity-based compensation practices.

 

New York Times, December 6, 2007 article

 

The New York Times

 

 

 


December 6, 2007
 

House Panel Finds Conflicts in Executive Pay Consulting

Conflicts of interest are pervasive among executive compensation consultants, according to a Congressional investigation. Moreover, the inquiry found, consultants who do other work for companies while helping them devise executive pay recommended significantly higher pay packages than consultants who had no such additional relationships.

The comprehensive analysis was released yesterday at Congressional hearings convened by Henry A. Waxman, the California Democrat who is head of the House Committee on Oversight and Government Reform. Concerned that rising executive pay might be a result of consultant conflicts, Mr. Waxman asked the committee’s staff last summer to collect information from six top consulting firms about their work for the 250 largest publicly traded companies.

The committee asked the firms to identify clients for which they had provided both executive pay consulting and other services and to disclose total revenue received for each type of service from January 2002 through December 2006. None of this information is typically made public.

As executive compensation has grown in size and complexity, pay consultants have become increasingly influential. And board compensation committees have rebutted criticism of rising pay by maintaining that the outlays were justified through the use of outside consultants.

But the consultants who advise on pay are often employed by large companies that provide other services to the same corporations, like actuarial work on pensions and management of employee benefit programs. Contracts for these services often generated significantly more revenue than advising on executive pay.

The consulting firms asked to supply data were Frederic W. Cook & Company; Hewitt Associates; Mercer Human Resources Consulting, a unit of Marsh & McLennan; Pearl Meyer & Partners; Towers Perrin; and Watson Wyatt. Two companies — Frederic W. Cook and Pearl Meyer — said they had provided only compensation consulting services.

During 2006, the committee’s analysis showed, 179 of the largest 250 companies disclosed hiring at least one of those six firms to advise them on executive pay. Of those companies, 113, or 63 percent, paid the same firm to provide other services to the company in 2006, creating the potential for conflicts.

Nevertheless, the committee found, 30 of those companies identified their compensation consultant in Securities and Exchange Commission filings as “independent.”

MetLife, for example, described its consultant as independent even though it had paid the firm more than $7 million for other services, the committee report said. PepsiCo similarly identified its consultant as independent, even though it had paid the firm more than $6 million for other work.

“We strongly disagree with the committee’s contention that you can’t have a firm that provides your board with some confidential advice on compensation and have them also provide other work for your company separately from that,” said John Calagna, a MetLife spokesman. He added that company rules kept compensation advice objective.

A PepsiCo official declined to comment.

The committee report noted that companies that used one firm both to consult on compensation and to provide other services wound up paying more to their chief executives.

At 25 companies whose pay consultants came from firms that also had highly lucrative contracts to provide actuarial or employee benefit services, chief executives were paid a median salary of $12.5 million last year. That was 67 percent higher than the median salary paid by companies that did not use consultants that were potentially biased.

The study, which covered five years, found that chief executives’ salaries grew 226 percent at companies employing consultants with potential conflicts — more than twice as much as the 105 percent growth in salaries paid to top executives of companies that used independent consultants.

Most of the companies whose consultants simultaneously provided pay advice and other services failed to disclose those arrangements to investors, the committee found. Only 33 of the 113 companies disclosed that their pay advisers had done other work for them as well.

James F. Reda, an independent consultant in New York who spoke at the hearings, recommended that all fees paid to consulting firms be disclosed to investors. Many other panelists agreed.

“It’s a gut check for the compensation committee of the board and would make sure that they are informed,” Mr. Reda said. “Also, investors can look at it and use their own judgment as to how it affects executive compensation.”

The committee report stated that the study’s findings were not proof of a causal relationship between higher executive pay and a possibly conflicted consultant. But it indicated that further investigation of the relationships was merited.

“There are millions of Americans that when they look at the soaring amounts that C.E.O.’s are being paid in this country, they think the system is rigged,” Mr. Waxman said as he adjourned the hearings. Disclosure of consultants’ dual relationships with companies whose pay they recommend should not be objectionable, he added.

 

Copyright 2007 The New York Times Company

 

 

 

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