Pay Consultants Boost CEO Pay: USC Study

Last Updated Sep 5, 2008 12:52 PM EDT

dollar.jpgDo compensation consultants, hired by boards to help figure out competitive remuneration for CEOs, do what they are paid to do?

Maybe, but they tend to drive up pay rates, according to a recent study.

An abstract of the study by Kevin J. Murphy of the University of Southern California's business school and Tatiana Sandino of USC's accounting school, says that the consultants operate with a Catch 22.

"Compensation consultants can never be truly independent from the exeutives who hire them, since the consultants will naturally seek to repeat business and 'cross-sell' additional services," the authors say. This is true despite a firm's size, industrial sector or pay mix.

While Murphy and Sandino didn't find any clear conflicts of interest, they note that pay rates tend to be higher if the consultant works exclusively for the board's compensation committee rather than for management.

One difference is when the compensation committee hires several consultants at once to come up with more ideas. Problem is, who has the money to pay for that?