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Rep. Henry Waxman claims that when companies use consultants for both pay advice and other services, it leads to "soaring" executive pay packages.
Sarah Johnson, CFO.com | US
December 5, 2007
Highly paid executives may have hoped that many of the issues concerning the scrutiny of their compensation packages were settled when the Securities and Exchange Commission implemented new disclosure rules last year.
But even in the waning days of its first session, the 110th Congress keeps revisiting the issue—much to the chagrin of some Republicans. In April, the House passed a bill that would give shareholders a nonbinding, advisory vote on senior executives' pay packages. And now, members of congress are considering whether to raise another notion that could cut into compensation agreements — or at least result in giving more information to investors about how they're put together.
During a heated debate of the House Committee on Oversight and Government Reform on Wednesday, Chairman Henry Waxman, a California Democrat, presented his theory that companies' relationships with compensation consultants could be spawning "soaring" executive pay packages. According to recent research by his office, 113 of the Fortune 250 companies employed compensation consultants who also provided them with other employee benefit services, and risk management, and other consulting work. Such work, said Waxman, reflects a conflict of interest whose existence should be shared with investors.
Consultants with such apparent conflicts are moved to help boost executive pay because they're more exposed to corporate management and may seek to help those managers get better packages in return for more consulting work, according to Waxman. "Are soaring CEO pay packages earned or are they the result of a rigged process?" he asked.
In response, the Republicans on Waxman's committee called the issue a waste of time. "I find this hearing one of the most appalling, most embarrassing hearings I've ever had at this committee," said Rep. Mark Souder, an Indiana Republican. In general, the Republican members said the conflict-of-interest issue isn't something they should address legislatively. Democrats suggested that the topic be put before the SEC.
For their part, representatives of Towers Perrin, Mercer Human Resources Consulting, and other compensation consulting firms that provide additional services, argued that they have procedures that keep their employees who advise corporate compensation committees separate from their employees who provide companies with other types of services. "I don't believe that objective, conflict-free advice is compromised simply because other people at the same firm may also be providing consulting services to a client," said Donald Lowman, managing director of Towers Perrin.
At the same time, Charles Scott, president of Mercer's human capital consulting arm, acknowledged that some of his clients insist on using Mercer solely for their compensation advice so they can freely say that that service is provided independently. Indeed, investor advocates at the hearing praised Verizon for recently deciding to ban the practice of using an outside compensation adviser for additional services.
To promote their case at Wednesday's hearing, the investor advocates stressed the simplicity of their proposal for eliminating conflict-of-interest concerns: All they want is for companies to disclose potential conflicts on their proxy statements. That issue was raised and later dropped by the SEC when it worked on new requirements for companies to explain how they decide to pay their CEOs, CFOs, and other high-earning executives in the Compensation Discussion and Analysis sections of their financial statements.
One compensation consultant contended that the rise in executive pay packages in recent years has nothing to do with the influence of people like him. "The executive pay level is driven by global market forces," said Michael Powers, global practice leader for executive compensation and corporate governance for Hewitt Associates. "Increasingly, companies are bidding for the services of the same cadre of talented executives, and that trend is expected to continue."