How Good Is Your Comp Consultant?

Amid today’s intense scrutiny of executive pay, compensation committees face growing pressure to be completely transparent with regard to the role that compensation consultants play in their deliberations. In this environment, committees are paying closer attention than ever to the qualifications and performance of their executive compensation consultants. Stock exchange rules call for compensation committees to evaluate their own performance on an annual basis.

Reviewing how the committee uses compensation consultants—and how those consultants perform in their various roles—is a natural component of the committee’s self-evaluation. Reviewing the consultant’s work not only helps the committee chairperson and members improve the way they operate and the quality of their decision-making processes, it also helps the consultant better understand the committee’s expectations and needs. We suggest that such reviews are conducted regularly, at least annually. Here’s a checklist of some of the key areas committees should examine:

Qualifications, performance, advice

• Does the consultant working with the committee demonstrate adequate judgment, skill, and experience, including a firm grasp of pay-for-performance principles, corporate governance, legal and regulatory issues, use of data, and program design?

• Does the consultant’s firm offer sufficient technical and consulting expertise to address issues that are—or are likely to become—important to the committee (including executive benefits, global expertise, succession planning, etc.)?

• Is the consultant responsive to the committee’s questions and requests?

• Does the quality of the consultant’s work (accuracy, depth, clarity, timeliness, creativity) meet or exceed the committee’s expectations?

• Does the consultant follow a welldefined and fully documented qualityassurance process that ensures that the committee receives quality information and advice? Is the work reviewed by another senior-level consultant with relevant expertise and experience?

• How would you rate the usefulness and quality of the consultant’s input? Role and relationship

• How would committee members assess their working relationship with the consultant? What’s the nature of the consultant’s reporting relationship with the chairperson?

• Does the consultant communicate effectively with the committee chair and other members? Does the consultant keep the committee adequately informed about competitive trends and regulatory issues?

• Does the consultant’s firm have adequate bench strength to always meet the committee’s needs, including an appropriate backup who could step in if necessary?

• Is the committee satisfied with how the consultant interacts with management? Should the “rules of engagement” for such interactions be refined in any way? Decision support

• Does the consultant demonstrate an understanding of the company’s business, industry, financial performance drivers, and key human capital and governance issues?

• Does the consultant make appropriate use of survey and benchmarking data? Does he or she have access to robust proprietary data and tools to support decision making?

• Does the consultant provide the committee with the proper context for recommendations (e.g., via a “tally sheet” or other means)? Does he or she ensure that committee members understand alternative approaches and the potential consequences of those alternatives?

• Does the consultant seem prepared for meetings and informed about the issues on the agenda? Does the consultant properly prepare the committee chairman and/or members for meetings to help build consensus for decisions and avoid surprises?
•  
• Is there anything the consultant could do to help the committee be more effective? Conversely, is there anything the consultant should do differently or not at all?
•  

The practice of periodically evaluating the performance of a company’s executive compensation consultant can pay solid dividends to the compensation committee— and play an increasingly important role in ensuring sound corporate governance. Effective consultants welcome the dialogue.