VideoLike a lightning rod during a Maine thunderstorm, The Corporate Library has a way of drawing charges — from critics in whatever industry it is studying at the time. And sometimes, from outsiders as well; CFO.com, for example, raised questions a year ago about flaws in TCL's report on stock-option backdating.
Some criticisms aimed at its October 2007 project, "The Effect of Compensation Consultants: A Study of Market Share and Compensation Policy Advice," appear premature, however. The study, which acknowledged that comparisons among the 10 largest firms reflected only the first year of data available under broadened corporate proxy-disclosure requirements, appears to be an early building block in what could be valuable research. Expanding the study, as the Portland, Me.-based research center says it plans to do, may provide results both to ease shareholder worries about executive compensation that doesn't reflect actual performance, and help companies select consultants best suited to corporate needs.
At its most basic, the 13-page "Effect of Compensation Consultants" report had modest goals and a very basic methodology. But it showed a wide variance in pay results in all the compensation categories studied.
Starting with the measurement of consultant market shares — from Towers Perrin and Mercer as the largest at 29 percent and 22 percent, ranging down to Clark Consulting and Compensia at 3 percent each — the study looked at CEO base pay at the consultants' clients, rated as a percentage against a peer median salary. The study then ranked average client-firm bonuses by consultant, as a percentage of salary, and did the same for stock-option values compared to a peer level. Other tables rated target values of performance-related non-equity incentive comp and equity awards as a percentage of salary.
In some of the key measurements, Pearl Meyer's clients averaged 18.58 percent above the peer median salary, while Radford's clients averaged 0.18 percent below peer level, and Compensia's rated a full 16.20 percent below the median. And in bonuses paid, Frederic W. Cook clients and Hewitt Associates clients weighed in at 194 percent and 188 percent of salary, respectively, while consultants with clients paying bonuses less than 100 percent of salary were Clark (87 percent), Compensia (83 percent), and Radford (79 percent). Others among the top 10 were Towers Perrin (170 percent), Pearl Meyer (168 percent), Mercer (167 percent), Hay Group (153 percent), and Watson Wyatt (106 percent).
To an unusual degree for a Corporate Library study, conclusions based on the numbers seemed quite neutral. "One of the things that I wanted to be very clear about is that the disclosure requirements here (from the Securities and Exchange Commission) are very new. We're only one year into them," TCL research associate Alexandra Higgins, the report's author, tells CFO.com. "A lot of the reaction to the report was that the result might be very different if we covered a longer term," she adds, although she notes that her "sense" — while unsupported by data — is that "a difference in the results would be highly unlikely."
Ammunition for the House
Despite the humble goals of the study, however, it quickly became part of a debate about the consultants' role in executive pay — and especially about charges of conflicts of interest among consultants that perform multiple advisory services for the same client. The report was cited numerous times, for example, during the heated debate early this month in the House Committee on Oversight and Government Reform, chaired by California Democrat Henry Waxman.
David N. Swinford, president and CEO of Pearl Meyer, tells CFO.com that the Corporate Library report overlooked in its compilations restricted stock grants and performance share plans, which are vital to the structures of many big companies. "Among the larger, more-established and more mature companies, [TCL's] analysis didn't really look at what is often 30 percent of the pay package," he says. Those long-term results, along with the benefits of retirement plans and perquisites, often are vital to the package created in a pay-for-performance system.
"When you look at some companies, salaries are 10 to 15 percent of the total package; that's all they are," Swinford says. "It's sort of like an appetizer, and then the meal comes." In other industries, though, salary is a much larger component of total pay. And the consultants' plans often reflect the trends in the industries they serve.
He is also critical of the one-year time period used for total shareholder return, even though TCL argues that this is a reflection of the short amount of time over which the disclosures have been required. "One year is just too short a term, and Corporate Library uses one-year total returns a lot," he says.
Further, Swinford questions TCL's "peer" categories, which were created over 10 industry sectors, each subdivided into four equal market-cap ranges to provide benchmarks. "They tend to use large peer groups in basic categories," says Swinford. "But we use related industries and similar size characteristics" in formulating peer groups, and TCL's approach likely skewed the results in the case of Meyer and other consultants with larger clients.
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