C&B Notes

Appearance over Substance

A new study suggests that hiring compensation consultants both raises executive compensation and provides an “independent” justification for doing so.  Incentives matter.

What were the results? You will be shocked, shocked to learn that your worst suspicions are confirmed. Yes, firms that hire pay consultants pay their executives 7.5% more than those who don’t.  Yes, companies that hung on to their multi-service consultants paid their executives 10% less than those that switched to specialist consultants.  Executives who work at firms where the board hired the consultants earned 13% less than when the consultants were hired by the management themselves.  When executives get a big pay rise, their companies are less likely to replace their consultants in the following year.

The authors conclude that

“…our study finds strong empirical evidence for the hiring of compensation consultants as a justification device for higher executive pay.”

So, be very suspicious of arguments that higher executive pay is the result of the “war for talent”, the unique importance of the CEO in a globalized world, or whatever.  If such arguments were true, it should make no difference whether consultants are hired or not.  This smacks more of the famous lickspittle courtier of Louis XIV, the Sun King, who, when asked the time, replied “It is whatever time your majesty pleases”.  “Whatever pay your majesty pleases” is the modern equivalent.