Companies that use compensation consultants end up paying more to their CEOs, but a new Wharton study suggests that conflicts of interest between the consultant and the firm aren't to blame.
Critics contend that compensation consultants have a financial interest in pushing for excessively high CEO packages because many of them profit from doing other work for the company. A recent Congressional committee report supported the idea that such conflicts drive up CEO pay. "There's a feeling that executives are overpaid, and people want to get to the bottom of this issue," says Wharton accounting professor Mary Ellen Carter, who coauthored this latest study with Brian Cadman, a visiting professor at Wharton and a professor of accounting information and management at Northwestern's Kellogg School, and Stephen Hillegeist of INSEAD.
Their research, which included 880 large firms, found that while executives get paid more when compensation consultants are involved, the CEOs are still held to acceptable pay-performance standards. "We are unable to find widespread evidence of more lucrative CEO pay packages for clients of conflicted consultants despite anecdotal evidence to the contrary," the researchers conclude. The study is called, "The Role and Effect of Compensation Consultants on CEO Pay."
According to Cadman, it's understandable, especially in this down market, that shareholders and consumers are suspicious of highly paid CEOs. The subprime mortgage crisis has drawn even more attention to the lucrative deals that executives cash in on. "People see CEOs continuing to get high levels of compensation and they are not seeing a lot of performance in their own portfolios," says Cadman, adding, however, that his team isn't "finding much evidence that consultants are helping CEOs extract more wealth" from firms.
The issue of executive compensation and the influence of compensation consultants have been scrutinized by the House Committee on Oversight and Government Reform, chaired by Rep.
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