Compensation Consultants – You’re Next

We tipped you off to this issue here and here… It’s about time others see it and put more pressure on the regulators to close this conflict of interest. Unfortunately when it comes to executive compensation, stock options backdating and other ways these consultants have helped corporate America skim the cream off the top of corporate earnings, this “noise in the system” is too little too late.

Compensation consultants eyed for conflicts of interest

“One major corporate lobbyist calls Rep. Henry Waxman’s recently launched investigation into possible conflicts of interest among compensation consultants “just noise,” but companies may need more than earplugs before he is finished….Connecticut treasurer Denise Nappier Ms. Nappier and other state pension officials had pressed the Securities and Exchange Commission to require corporate reporting on compensation consultant fees when it published new rules on executive compensation last July. The agency declined to do so. Ms. Nappier described such reporting as an interim step prior to a ban.

When the SEC balked on requiring reporting, Ms. Nappier corralled 11 other state pension funds who jointly wrote to 25 corporations asking for information on their compensation consultant “independence” policies, …Mr. Waxman announced his investigation on May 8…Mr. Cox is scheduled to appear before the Financial Services Committee on June 25. He will undoubtedly face questions then about the July 2006 executive compensation rule, which even he has admitted has failed to stem corporate “boilerplate” on executive pay. Moreover, Mr. Cox is likely to field questions about why it made sense for the SEC in 2000 to adopt rules on auditor “independence,” but why it does not make sense now to do the same for compensation consultants. Congress legislated on auditor “independence” when it inserted provisions in the Sarbanes-Oxley Act which closed some of the perceived loopholes in the SEC’s 2000 rules.

Mr. Waxman’s letters went to Towers Perrin, Frederick Cook & Co., Mercer Human Resource Consulting, Hewitt Associates, Pearl Meyer & Partners and Watson Wyatt. These companies typically provide pension, actuarial and other employee benefit services in addition to compensation consulting….As Matteo Tonello, a researcher for the board, told FinancialWeek, “There is by now quite a lot of empirical research on the conflict of interest that arises when a compensation consultant wears two hats, one in representing the board and one in representing management.”