Compensation Consultants: Meet the Conflicted Advisors Behind Ginormous CEO Salaries
Just what exactly is the job of a compensation consultant?
Hired by corporate boards of directors, these advisors are expected to provide independent consultation on behalf of the shareholders.
But with executive pay continuing to skyrocket as many companies face a challenging economic backdrop, many continue to have doubts about the services compensation consultants actually provide.
Business Insider reached out to compensation consultants and corporate governance experts to get a more intimate understanding of what this business is really all about. Our case study: The Company (DIS).
Meet, the Walt Disney CEO Who Will Get 8-figures through 2016
In March, shareholders approved a sweet new employment agreement for Disney CEO Bob Iger.
Iger gets a base salary of $2,500,000 through 2016. He will also enjoy a minimum fair value long-term incentive compensation award of $15.5 million and a minimum target bonus of $12 million through 2015.
Previously, Iger was paid $2 million in base salary, with a target bonus of $10 million and long-term compensation of $9 million, according to Disney's March 7 proxy statement.
In its proxy statement, Disney's board explains that the raise came via negotiations with Mr. Iger, who was also named chairman in the new agreement, and in consultation with the compensation committee's independent consultant, Pay Governance LLC.
At the same time, the proxy statement also claims that the compensation committee "determines the compensation of the chief executive officer without management input," even as it is "assisted in this determination by its independent compensation consultant." So how exactly does the firm, Pay Governance LLC, remain independent if Mr. Iger remains a negotiating partner?Keeping Up With The Joneses
People refer to the problem of escalating executive salaries as the "Lake Wobegon" effect, a reference to Garrison Keillor's fictional town where "all the children are above average." Substitute "CEOs" for "children," and you get the idea. In a 2006 letter to shareholders, took aim at the pay consulting industry, referring to the fictional firm of "Ratchet, Ratchet and Bingo" as advising some of the companies notorious for paying stratospheric compensation to CEOs.
Despite recent efforts to address the independence of executive compensation consultants, interviews with compensation experts reveal a central conflict remains: Consultants are ultimately beholden to a compensation committee's instructions.
And while a compensation committee ostensibly acts in the interests of shareholders, they will usually go to great lengths to keep CEOs - and instruct consultants to act accordingly.
"It's the 'keep up with the Joneses' theory," said Pamela Greene, a corporate governance expert at the firm Mintz Levin. "So it's perpetual. If you think everyone else is getting pay raises...No one wants to be an outlier if they have a really good executive."
Karl Okamoto, a professor of securities law and corporate finance at Drexel's Earle Mack School of Law, was more direct: "I don't see them frankly as being anything more than just there to paper over the decision."
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