Use of compensation consultants is lining CEOs’ pockets

New research has found that the top 500 ASX listed companies pay their executives more when they use compensation consultants, all other things being equal, than when they don’t, reflecting similar results from the United States and United Kingdom.

Even after controlling for factors such as company size, profitability, risk, debt levels and corporate and governance structures, researchers from the University of Technology Sydney (UTS) and Auckland University of Technology still found higher pay on average with consultants, which were used by around 30 per cent of the companies studied.

It was unclear however, whether the higher pay stemmed from the consultants’ recommendations to because the companies in question had hired to consultant to legitimise larger remuneration packages.

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There was also a correlation between higher consultant pay and higher CEO pay, and longer relationships with consultants and greater executive salaries. Companies that retained a compensation consultant for over a year had higher CEO pay than those who had first engaged a consultant.

Similarly, there was a link between higher pay and hiring consultants, with CEOs of companies that hadn’t previously used a compensation consultant receiving larger pay increases after one was engaged than they had before.

The exception was when a Big Four accounting firm was hired as the compensation consultant, when there wasn’t any correlation between the use of or fees paid to consultants and higher CEO pay. The work’s lead research, Dr Nelson Ma, said could be due to these firms only gaining a small portion of their revenue though compensation consulting.

The research came as executive remuneration is under a spotlight, with boards under increasing pressure to explain lucrative pay agreements. In the last few years, for example, shareholders of Westpac, NAB, ANZ, AMP and Telstra have all voted for ‘strikes’ against the businesses in protest of their remuneration practices.

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