The building backlash against high executive compensation is honing in on a new target: The national consulting firms that many large corporations use to construct CEO pay packages. Critics charge that consultants such as Hewitt, Mercer, and Watson Wyatt have conflicts of interest that prompt them to inflate pay plans for management. The central allegation is that the firms don’t provide objective advice to boards on senior management pay because these same managers also hire them to provide other lucrative consulting services.
Although the compensation consultants have long insisted that they’re careful to separate the two business lines, critics have been mustering political backing for an attack from Democrats on Capitol Hill. The first salvo came in December in the form of a hearing held by California Democrat
Henry Waxman, chairman of the House Committee on Oversight and Government Reform.
The hearing’s centerpiece was the release of a study, “Executive Pay: Conflicts of Interest Among Compensation Consultants.” The evidence Waxman’s staff uncovered during a seven-month investigation gave critics plenty of ammo for possible new legislation aimed at the consultants. Its key finding was that almost half of the firms advising boards on management pay at Fortune 250 companies earn hefty fees from management for other services to the company, such as employee benefit administration, human resource management, or actuarial services.
Pointing out that CEOs at the largest U.S. companies earn 600 times more than the average employee, Waxman argued that “consultants who are paid millions of dollars by a corporate CEO won’t provide objective advice to the board. They know what the CEO wants to hear and they know what will happen to their lucrative contracts if they don’t say it.”
The consultants’ response has been to point to the steps they’ve taken to ensure a separation of the services they sell to companies. Such safeguards won’t be enough to fend off Waxman and his fellow critics, though. Even before the hearing, the AFL-CIO, a longtime leader in the attack on CEO pay, filed a proxy resolution at MetLife that asks it to disclose the work performed and fees received by its compensation consultant. It has filed similar resolutions at Bank of America and Northrop Grumman. A second resolution, filed at Occidental Petroleum, Caterpillar, and Devon Energy, demands an outright ban on other services by any consultant hired by the board’s compensation committee.
The AFL-CIO’s initiative is part of a larger effort by 25 institutional investors led by the Connecticut State Treasurer. The group has targeted the comp committees of the 25 largest U.S. corporations, asking them to ban dual roles for consultants, as companies such as Procter & Gamble and Wachovia already do. The AFL-CIO last year mounted a shareholder campaign at Verizon, leading its board to adopt a ban in November.
