Do Compensation Consultants Have Distinct Styles?

Cai, Chen; Kini, Omesh; Williams, Ryan

doi:10.2139/ssrn.2724072

Cited by 3 publications

(5 citation statements)

References 17 publications

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“…Panel B of Table 4 presents the most common compensation consultants used by Australian companies, with Godfrey having the largest number of clients ( n = 55), followed by PwC ( n = 50), Egan ( n = 49) and Ernst and Young (EY) ( n = 40). This contrasts with the US market, in which all Big 4 accounting firms collectively serve less than 3% of clients (Cai et al, 2016). Multiple compensation consultants are used in 20% of observations.…”

Section: Resultsmentioning

confidence: 95%

Evidence on compensation consultant fees and CEO pay

Grosse¹,

Scott

2019

Australian Journal of Management

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Regulators and previous research have expressed concern about the effect of compensation consultants on CEO pay. We use the Australian setting, where fees for both compensation and other consulting services supplied by compensation consultants are mandated disclosures for all firms, to provide evidence on the role of compensation consultants on CEO pay. We find that the use of compensation consultants or remuneration advisers, fees for compensation services and positive residual compensation service fees are associated with higher CEO pay. In contrast, both the provision and the proportion of fees from other services provided by compensation consultants are not. Furthermore, these positive associations are not observed when a Big 4 accounting firm is the compensation consultant. JEL Classification: G38, M12, M48, M52

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Section: Resultsmentioning

confidence: 95%

Evidence on compensation consultant fees and CEO pay

Grosse¹,

Scott

2019

Australian Journal of Management

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“…It also supports the managerial view that their effect is more likely to be abused in poorly governed firms (Armstrong, Ittner and Larcker., 2012;Cai, Kini and Williams, 2016;Cho, Hyun and Shin, 2015). Prior literature suggests governance quality is an important factor in understanding the role of compensation consultants.…”

Section: Previous Research and Hypothesesmentioning

confidence: 99%

“…This enables them to provide only correlation analysis, but may not provide enough solid evidence. A limited number of US and UK studies have been conducted with short-length time series panel data, but the empirical findings remained inconclusive (Cai, Kini and Williams, 2016;Chu, Faasse and Rau, 2017;Goh and Gupta, 2010;Kabir and Minhat, 2014;Murphy and Sandino, 2015).…”

Section: Do Compensation Consultants Drive Up Ceo Pay?mentioning

confidence: 99%

“…They provide more nuanced empirical evidence that some firms may retain compensation consultants to design optimal pay, while others may do it to justify higher pay. Cai, Kini and Williams (2016) use a large sample of US public firms to study the effect of compensation consultants' distinct styles. They conclude that the role of compensation consultants agrees with the efficient contracting view.…”

Section: Do Compensation Consultants Drive Up Ceo Pay?mentioning

confidence: 99%

“…Prior literature suggests governance quality is an important factor in understanding the role of compensation consultants. It also supports the managerial view that their effect is more likely to be abused in poorly governed firms (Armstrong, Ittner and Larcker., 2012;Cai, Kini and Williams, 2016;Cho, Hyun and Shin, 2015). In this paper, we intend to provide direct analysis by focusing on the role of firms' ex ante compensation policies in order to test the following hypothesis:…”

Section: Do Compensation Consultants Drive Up Ceo Pay?mentioning

confidence: 99%

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Do Compensation Consultants Drive Up CEO Pay? Evidence from UK Public Firms

Conyon

Haß

Peck

et al. 2019

British J of Management

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Do compensation consultants drive up CEO pay for the benefit of managers, or do they design pay packages to benefit firm owners? Using a large sample of UK firms from the FTSE All-Share Index over the 2003-2011 period, we show a positive correlation between the presence of compensation consultants and CEO pay. Importantly, isolating this effect is somewhat dependent on the endogenous selection of consultants and the statistical modelling strategy deployed. We find evidence that compensation consultants improve CEO compensation design when their expertise is of greater importance (e.g. during the post-financial crisis period, or for firms that have particularly weak compensation policies). In addition, our findings show that compensation consultants increase CEO pay-performance sensitivity. The balance of evidence supports optimal contracting theory more than managerial power theory, but the authors caution the limits to this verification. We are careful to note that the more compelling evidence for the positive effect of pay consultants on CEOs is based on advanced methods (such as propensity score matching and difference-in-differences), and that more standard approaches (such as OLS and fixed effects) are unlikely to reveal the same level of causality of consultants on CEO pay.

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Relative Performance Evaluation and Strategic Differentiation

Schäfer

2023

The Accounting Review

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I predict that relative performance evaluation (RPE) CEOs avoid strategic differentiation and thereby increase the correlation of their firms' returns with peers' returns. The prediction follows from a moral hazard model integrating strategic differentiation decisions: Differentiation enhances performance but exposes firms to risks not shared with peers, weakening RPE's risk-shielding effect. Consistent with my prediction, I find evidence that changes in peer-group correlation are higher for RPE than non-RPE firms. This effect is more pronounced if benefits from differentiation are low, RPE benchmarks are industry-specific, or RPE grants are large. Additional analyses provide direct evidence that RPE CEOs differentiate their strategies less from industry-common strategies than non-RPE CEOs. To address endogeneity concerns, I present a two-stage least-squares approach exploiting variance in RPE usage induced by compensation consultants' distinct styles. My analyses suggest that strategic differentiation decisions help explain why many boards do not completely filter peer performance from CEO compensation.

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Do Compensation Consultants Have Distinct Styles?

Cited by 3 publications

References 17 publications

Evidence on compensation consultant fees and CEO pay

Evidence on compensation consultant fees and CEO pay

Do Compensation Consultants Drive Up CEO Pay? Evidence from UK Public Firms

Relative Performance Evaluation and Strategic Differentiation

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