Correcting the Record: Consultants and Executive Pay

Many thanks to David Bratton FCMC and Chair of the Human Resources Committee of a publicly traded Canadian company for his thoughtful reaction to a recent article in the Globe and Mail.

A picture of undue influence by Executive Compensation consultants was portrayed recently in the Globe that struck me as just plain implausible. The authors contend that the consultant is a ‘hidden force behind the rise of executive pay’ by creating a more complex dynamic that’s forced Boards of Directors to rely more on ‘outside advice’. A lot of it seems to stem from a basic misunderstanding of how consultants interact with corporations and their Boards.

First, the firms mentioned in the piece, contrary to the writers’ assertions, are actually quite well-known outside of Board circles and have, over the years, earned excellent reputations for their work. Most of the firms that were referenced work at all levels in organizations and not exclusively with Boards of Directors - and thus are well-known consultants in the field of pay and benefits.
Second, Boards that retain external consultants expect and have a right to unbiased advice and counsel in a field that is often very technical. Compensation plans for senior management can range from the simple to the complex. However, one must not confuse advice and counsel with action and implementation.

The usual practice of the Compensation Committee of the Board is to annually review the compensation of senior management. During this review, some Committees will employ an external third party to provide them with advice. The Committee is free to adopt, modify or ignore the recommendations of the consultant. The Committee’s responsibility is to make a recommendation to the Board and the Board makes the final decision on the format and outcomes of the CEO’s pay plan.

Third, this is a classic misunderstanding of the role of the consultant vis-à-vis their client. The consultant is retained to provide independent advice to the client, the Board of Directors. It is the responsibility of the Board to implement that advice by means of a compensation system that is fair and equitable and achieves the desired performance against the business plan.

No responsible Board of Directors would ever allow themselves to fall back on the ‘advice of the experts!” when criticized. To do so would be to shirk board responsibility and would be an issue that could cause the resignation of the Board should the shareholders take umbrage with their fall-back position. Boards that make decisions must, by their very nature, “own” the final decisions whether it is concerning pay, strategy or results.

Lastly, Management Consultants who are members of a professional association like CMC-Canada have a duty to uphold the ethical standards of the profession. The consequences of a failure to do so may include disciplinary action if they are perceived to be acting in an unethical manner. Such would be the case if the consultant was paid by the Board but directed by management, as it is a major conflict of interest. Being retained by one party and acting on behalf of another as alluded to in the article is simply and clearly a no-no in the consulting world.

Thus the writers’ statement (attributable to Ed Waitzer, former Chair of the Ontario Securities Commission), “if anyone is angry with the board (concerning compensation decisions), directors can defend themselves by pointing to the consultants’ credentials” is patently untrue - in our opinion. Any Board of Directors that employed this tactic would be voted out at the next shareholder’s meeting and replaced by directors who truly understand that they have a duty to take responsibility for their actions.

If you see something that is just not true and in the public domain, it hurts us all. Take a stand and correct a misperception. When you do so, we all win.