Paying for Advice: The Role of the Remuneration Consultant in U.K. Listed Companies

Compensation consultants are an integral part of the process of determining executive pay in large listed companies. This study reports interview-based research with protagonists in setting executive compensation in twelve FTSE 350 companies and addresses why the consultants are used, what they do, and how they are perceived. Consultants have several important roles. Firstly, they act as experts, providing market data and advising on plan design and implementation. Because of this role, they not only guide their clients as to the requirements of the market, they also help create those selfsame market practices and norms. They also have a role in liaison with institutional shareholders, either with or on behalf of the committee. Companies and committees select consultants based on their reputation, with personal contacts playing an important part in the choice. Consultants use impression management techniques to ensure that their reputations remain strong. Reputation is important for all parties, as the use of consultants also acts to legitimize the decisions of the remuneration committee in this increasingly contentious area. However, there is much debate about the consultants' independence and their practices, which could reduce such legitimacy. This Article considers how the legitimacy is evidenced, and considers the ways in which committees and consultants are working to maintain it. This Article contributes to the literature on compensation consultants by taking a qualitative approach, providing explanations of current practice which give background and context to the ongoing debate. I. INTRODUCTION 362 II. REVIEW OF PRIOE RESEAECH 364 A. The Consultant as an Expert 364 1. Providing "Market" Data 364 2. Advising on Scheme Design 366 3. Impression Management 367 B. Influence on the Level and Structure of Executive Pay 368 C. Using Consultants to Confer Legitimacy on the Committee's Decisions 370 III. RESEARCH APPROACH 373 IV. FINDINGS 375 A. How Companies Choose Their Consultants 377 B. The Consultant as an Expert 380 C. The Consultant as an Intermediary 384 D. The Consultant as a Legitimating Device 387 E. Conflicts of Interest and the Appointment of More Than One Consultant 388 F. An Argument Against the Use of Consultants . 391 V. DISCUSSION 392 VI. CONCLUSION 395 I. Introduction Consultants have an important role in advising remuneration committees on the determination of executive compensation1 in listed companies. Their work encompasses supplying data on pay in comparator companies, advice on the choice and design of remuneration schemes, modeling the implications of the suggested schemes, advice on taxation, preparation of documentation, implementation of the selected schemes, and liaison with institutional shareholders. They are acknowledged experts in their field. There is, however, a catch. It has been suggested, both by exconsultants and by regulators, that consultants have conflicts of interest which can lead to biases and result in lax structures or excessive levels of executive pay.2 Despite this widely held view, academic research is equivocal.3 Although concerns over the use of compensation consultants date back two decades, and although several studies of executive remuneration have considered at least some aspect of the work of the consultant, until recently, very few articles had directly examined the impact compensation consultants have on executive pay. Regulatory developments have changed this. …