Henry Waxman has long been pursuing the issue of excessive executive pay. But now being in the majority, he can really take action. link Someone needs to take this issue on. It certainly won't be the CEOs. As we observed a year and a half ago: CEO pay very reasonable - says new report by CEO organization. But I digress.
On Wednesday December 5th, the Committee held a hearing to examine the role played by compensation consultants in determining the pay packages of senior executives at the largest publicly traded corporations. Corporate governance experts, institutional investors, and compensation consulting firms testified regarding the role of consultants in setting executive pay, efforts to prevent and manage conflicts of interest, and the adequacy of the information available to shareholders and the public.
You can find links to testimony and the committee report here.
Here are some excerpts from that report.
United States House of Representatives Committee on Oversight and Government Reform Majority Staff, Executive Pay: Conflicts of Interest among Compensation Consultants (December 2007)
The report concludes:
The information provided to the Committee represents the best — and only — comprehensive information currently available on the extent of conflicts of interest among executive compensation consultants. An analysis of this information shows that in 2006, over 100 Fortune 250 companies used compensation consultants that provided both executive compensation advice and other services to the company at the same [time]. In many cases, the consultants hired to provide executive compensation advice were paid millions of dollars by the executives whose pay they were supposed to assess. The information provided to the Committee also shows that many of these conflicts of interest were not disclosed to the investing public in company SEC filings.
Here is a snippet of information that led to that conclusion.
Towers Perrin, in a letter to Chairman Waxman, listed several policies and procedures for ensuring the soundness and objectivity of its consulting advice. These include:
(a) a code of conduct that articulates a commitment to providing impartial and objective services;
(b) the designation of a senior consultant to review and resolve all potential conflicts of interest before an engagement proceeds; (c) review of significant executive pay recommendations by a senior consultant not on the consulting team performing the work; and
(d) a policy precluding an individual who advises a company’s board on executive pay from serving as the firm’s relationship manager with the company, where the firm provides other services to the same company.
The Committee did not investigate the internal practices in place within compensation consulting firms, such as efforts to separate executive pay consultants from the firm’s other engagements with a client company. However, there is evidence to suggest that the lines between those providing executive compensation advice and those providing other services may not be as bright as the consultants described. Employment advertisements posted by some of the compensation consultants indicate that one responsibility of individuals hired to perform executive compensation services is “cross selling” other services to client companies.
For example, Towers Perrin, in a recent job posting for an executive compensation consultant, listed the following as job responsibilities:
• Cross selling consulting and other Towers Perrin services to existing
and new clients• Minimum revenue generation from all sources (i.e., not just executive compensation services) goal of $750 thousand in the first 12 months would be expected
Similarly, a recent Mercer job posting for a senior executive compensation consultant identified the following as a job responsibility: “generating revenue through development of new client relationships, cross-selling to current clients and extension of current client engagements.”/blockquote>
On Wednesday December 5th, the Committee held a hearing to examine the role played by compensation consultants in determining the pay packages of senior executives at the largest publicly traded corporations. Corporate governance experts, institutional investors, and compensation consulting firms testified regarding the role of consultants in setting executive pay, efforts to prevent and manage conflicts of interest, and the adequacy of the information available to shareholders and the public.
I personally find it interesting that the compensation advisers place so much faith in disclosure and very, very strong standards. Why not just make it simple - and more effective - by having no conflicts of interest?
The latest
On January 31, the Oversight Committee requested Executive Compensation Information from Fortune 250 Companies.The Oversight and Government Reform Committee is asking the compensation committee chairs of each of the Fortune 250 companies to provide information about how executive compensation consultants are utilized by these corporations in setting executive pay. This inquiry is part of an ongoing investigation into the role played by compensation consultants at large publicly traded corporations. In December 2007, the Committee held a hearing and released a report on this subject.
You can find the text of the letter that was sent out included in this press release. link
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