The Storm over a Corporate Pay Study

Compensation consultants attack The Corporate Library's report on their business. But despite its shortcomings, the report is a first step in looking at the relationship between those firms and the size of executive pay.

Like 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.”

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