One Culprit in the CEO Pay Fiasco: Compensation Consultants

Last Updated Nov 28, 2007 3:57 PM EST

For anyone who wonders how compensation for CEOs reached today's stratospheric heights, consider the role of compensation consultants such as Hewitt, Mercer Human Resources, and Towers Perrin.

These sorts of companies often have millions of dollars a year of business with major Fortune 500 companies involving all sorts of human resources and pension work. They complement that work by consulting for the compensation committee of the board of directors, which is not part of management at all. In fact, the compensation committee is supposed to have an arm's length relationship with management and is supposed to make independent judgments about CEO pay.

So the fact that a consulting company gets millions of dollars a year from management may or may not influence what they recommend that management gets paid. It smells like a classic case of ou scratch my back, I'll scratch yours. No one can document that a systematic pattern of conflict exists; but certainly there is the appearance of a possible series of conflicts.

Rep. Henry Waxman, chairman of the House Committee on Oversight and Government Reform, is sponsoring hearings on these on Wednesday, December 5. It may not be that Congress has the power to enact legislation requiring that the compensation committees of boards hire only consultants that have no relationship with management. But by spotlighting the issue, Waxman is doing everyone a service. He's using the bully pulpit. Comp committees should pay heed.