Compensation Consultants
Compensation consultants are now becoming a popular tool to assist company in managing their compensation program and corporate governance strategies. However, there are both pros and cons in using compensation consultants.
On one hand, there are some clear benefits; firstly, compensation consultants can provide expert knowledge, for example, insight and advice on trends in executive compensation, an assessment of executive compensation relative to executive performance; and insight and advice on the level and mix of pay and benefits (Conyon, 2007). Although, compensation consultants are viewed as external third parties providing solutions of optimal efficient managerial compensation contracts to align the benefits of both the employee and employer in the most fair and unbiased way. They have the ability to help the firm maximize shareholder’s value by designing compensation schemes that more closely align the interests of managers with shareholders since they can bring breadth and depth of experienced from handling similar problems and benchmarking comparable (peer group) firms especially when there is high information asymmetry between different parties. Other benefits include cost reduction in recruiting/rewarding process and efficient allocation of resources by taking the tasks away from human resource, compensation committee and shareholders who may not have the knowledge and experience in determining senior executive pay package.
On the other hand, there are some drawbacks in hiring compensation consultants. Firstly, compensation consultants face potential conflicts of interest that can lead to higher recommended levels of CEO pay, including the desires to cross-sell services and to secure repeat business. Evidence shows that US CEOs receive about 18% more total compensation, and Canadian CEOs receive about 33% more, when their executive compensation consultant also provides other services to the firm (Murphy & Sandino, 2010). They are more
On one hand, there are some clear benefits; firstly, compensation consultants can provide expert knowledge, for example, insight and advice on trends in executive compensation, an assessment of executive compensation relative to executive performance; and insight and advice on the level and mix of pay and benefits (Conyon, 2007). Although, compensation consultants are viewed as external third parties providing solutions of optimal efficient managerial compensation contracts to align the benefits of both the employee and employer in the most fair and unbiased way. They have the ability to help the firm maximize shareholder’s value by designing compensation schemes that more closely align the interests of managers with shareholders since they can bring breadth and depth of experienced from handling similar problems and benchmarking comparable (peer group) firms especially when there is high information asymmetry between different parties. Other benefits include cost reduction in recruiting/rewarding process and efficient allocation of resources by taking the tasks away from human resource, compensation committee and shareholders who may not have the knowledge and experience in determining senior executive pay package.
On the other hand, there are some drawbacks in hiring compensation consultants. Firstly, compensation consultants face potential conflicts of interest that can lead to higher recommended levels of CEO pay, including the desires to cross-sell services and to secure repeat business. Evidence shows that US CEOs receive about 18% more total compensation, and Canadian CEOs receive about 33% more, when their executive compensation consultant also provides other services to the firm (Murphy & Sandino, 2010). They are more