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Comp, Consultants and Conflicts of Interest
Hewitt Associates recently announced a partial spin-off of its executive compensation consulting practice. The news, which comes just a month after the Towers Perrin/Watson Wyatt merger, may be further encouragement for companies to seek out independent compensation consultants, experts say.
On Feb. 1, Hewitt Associates announced it closed on a partial divestiture of its executive-compensation-consulting business in North America. Under the terms of the agreement, a select number of principals and consultants will leave Hewitt to form Meridian Compensation Partners, which will operate as an independent executive-compensation consultancy, according to the Lincolnshire, Ill.-based human resources consulting and outsourcing services company. The news comes just a month after Towers Perrin and Watson Wyatt Worldwide, two of the largest HR consulting firms in the United States, merged to form Towers Watson, a global professional services company focusing on employee benefits, talent management, rewards, and risk and capital management. Even before that merger, corporate governance activists criticized the potential conflicts of interest that can develop when executive-compensation consultants from a firm are hired by the same managers to advise them on other human resource issues. The Hewitt announcement figures to give more credence to those fears, experts say. In fact, Marc Hodak, founder and partner of Hodak Value Advisors, a New York-based management consulting firm, recently wrote on his blog that the Hewitt's spinoff means that users of Towers Watson "are exposing [themselves] to all manner of legitimate shareholder concerns ... . Hewitt has decided that they don't want to deal with explaining to increasingly defensive boards how getting $100,000 for advising them on senior management pay is not a conflict with their selling that management $10 million worth of other HR services." Joe Conway, director of media relations for Towers Watson, says Hewitt's decision is their "reflection of their view of the evolving landscape for executive compensation today." He says the SEC proxy rules -- which were revised recently to increase disclosure of potential conflicts of interest -- "afford companies considerable flexibility to structure their executive-compensation advisory relationships in ways that best meet each company's unique needs," and notes that Towers Watson meets its clients' needs for "objective, high quality advice on their executive and director compensation programs." Many companies are becoming more anxious about those potential conflicts of interest, says Charles Tharp, executive vice president for policy with the Center on Executive Compensation at the HR Policy Association in Washington. "The concern is that the board consultant will provide advice designed to reinforce management's recommendations on pay in order to ensure that the consultant's firm retains the other consulting business, which can often be more lucrative," says Tharp. "In light of the increased scrutiny of executive pay and corporate governance, there is a clear trend toward compensation committees engaging their own independent consultants to provide advice on executive compensation," he says. Russ Fradin, Hewitt chairman and CEO, acknowledged the situation in the company's statement announcing the spin-off. "The independence of executive-compensation consultants who serve compensation committees has become a politically charged issue over the past few years," said Fradin. "While Hewitt has established substantial safeguards to ensure that our consultants provide purely objective advice and counsel, the recent SEC fee-disclosure rules and political environment are pressuring some clients to avoid the issue entirely by moving to completely independent advisers." Indeed, some companies may already be shying away from the heavy hitters in compensation consulting in favor of smaller, more specialized firms, notes Tharp. To address and avoid potential conflicts of interest, an increasing number of compensation committees are taking one of two approaches when seeking out comp advice, Tharp says. "One, [committees are] retaining a compensation consultant to advise the committee, and prohibiting that consulting firm from doing other work with the company. "Or, the organization allows the committee's consulting firm to do other work for the company, but only with the prior approval of the committee chair," he says, adding that "increasingly, committees are adopting the first approach." Hodak says the concept that independent firms may soon be the primary source for truly objective compensation advice is an idea based "probably more [on] perception than reality. ... The guy giving compensation recommendations is rarely the same one selling benefits consulting. "But the potential for conflict is there. There is nothing that HR professionals and managers can do about that, and boards can't depend on 'Chinese walls' to protect them." Nevertheless, the recent attention afforded the executive-pay issue should provide the impetus for HR professionals to "feel freer to look beyond the big firms for compensation advice [and turn to] firms that specialize in compensation," he says. Ultimately, this controversy may lead more companies to do just that, Hodak concludes. "One of the things that big HR consulting firms historically brought was the protection of their brand names. The negative publicity is beginning to reverse that advantage," he says. "Boards are now forced to look beyond the brand names -- as they should -- to find the best advisers they can." These shake-ups should convince HR leaders to include the names of independent consultants to boards and comp committee among the "slate of potential firms to work with," says Jack Dolmat-Connell, CEO of DolmatConnell & Partners, a Waltham, Mass.-based executive-comp-consulting firm. Whatever route the organization takes, Tharp says, HR should play a significant role in supplying leaders with the information they need to make an informed decision. Should the company use a consulting firm for both executive comp and other consulting services, "the role of the HR leader is to ensure that the compensation committee has complete information on the services provided by the consulting firm and the corresponding fees associated with each type of work. [HR must also] provide a draft of the disclosure that would be required under the new SEC rules." Or, if an independent consultant is retained, "the HR leader can help the committee in assessing and [aligning] the compensation recommendations of the consultant with the business strategy and talent strategy of the company," he says. "The HR leader can also be a resource to the committee's consultant in helping him or her understand the business strategy, culture and talent issues of the company. "My experience," Tharp says, "is that there tends to be an effective partnership between the HR leader, the independent consultant and the compensation committee in determining the appropriate executive compensation program for the company."
February 5, 2010 Copyright 2010© LRP Publications |
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