Compensation Consultant Fees and CEO Pay

Abstract

While compensation consultants are known to play an important role in executive compensation design, research on the consultants and their incentives have been largely overlooked in the past due to data unavailability. As disputes over the efficiency and validity of compensation consulting grew rapidly, in December 2009, the SEC required firms to disclose fees paid for executive compensation consulting and other services under certain circumstances. Using 778 compensation consultant engagement and 201 executive compensation consulting fee observations from S&P 500 firms for 2009 and 2010, we examine whether fees paid to executive compensation consultants are related to more lucrative CEO compensation. Overall, we find evidence that CEO pay levels are higher when compensation consultants receive higher executive compensation consulting fees. Further analysis suggests that compensation consultants award higher CEO pay when they only receive more than expected fees for executive compensation consulting. These results support the repeat business hypothesis that compensation consultants bias their compensation advice in order to secure revenue from their clients in the future.