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E-MailThis post comes to us from Brian Cadman at the Kellogg School of Management at Northwestern University.
I, along with my co-authors Mary Ellen Carter and Stephen Hillegeist, have recently posted a new working paper entitled The Role and Effect of Compensation Consultants on CEO Pay.
The paper examines how compensation consultants influence the level, form and pay-performance sensitivity of CEO pay for a sample of 880 firms from the S&P 1500 for fiscal year 2006. The sample was collected by looking at the Compensation Disclosure and Analysis (CD&A) report in the annual proxy statement, which is required for filings on or after December 15, 2006. Our final sample of 880 firms all have December fiscal year ends. In addition, 86% of the firms in our sample disclosed that they retained a compensation consultant, suggesting that the use of consultants is widespread.
We find evidence of greater compensation in the presence of a compensation consultant, consistent with theory that these consultants facilitate rent extraction. However, we find no evidence of less pay-performance sensitivity when compensation consultants are hired. Among firms that retain consultants, we also examine whether there is greater rent extraction for clients of consultants with potentially greater conflicts of interest. Using a variety of specifications, we are unable to find widespread evidence of more lucrative CEO pay packages for clients of conflicted consultants despite anecdotal evidence to the contrary. Overall, we conclude from our findings that the potential conflict of interest between the firm and consultant is not a primary driver of excessive CEO pay.
The full paper is available for download here.
