Evidence on compensation consultant fees and CEO pay

Abstract

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

Powerful CEOs, cash bonus contracts and firm performance

“…Of the control variables, the bonus ratio significantly increases with firm size ( lnSize t −1 ) across all columns. However, in contrast to studies that find firms using a remuneration consultant pay their CEOs a greater proportion of total compensation as incentive payments (Grosse et al., ), this study finds that Consultant is inversely associated with the bonus ratio for the cash‐only subsample but positively associated with bonus ratio for the equity subsample. This may be driven by the sample period, which extends before the Australian Treasury's Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 , which from 2011 onwards requires companies to disclose details of remuneration consultants used.…”

“…We include an indicator variable equal to 1 if the firm employs a compensation consultant during the year (Consultant); the literature suggests that compensation consultants have economic incentives to bias their recommendations upwards to please management (Bebchuk & Fried, 2003Grosse, Ma, & Scott, 2019;Murphy & Sandino, 2019).…”

“…Specifically, increases in compensation, equity and cash bonuses, in particular, are associated with firms that employ a compensation consultant (Grosse et al, 2019). Last, we control for any change in base salary (ΔSalary) Table 2 provides the industry distribution based on 2-digit Global Industry Classification Standard (GICS) and highlights that no one industry dominates the sample.…”

“…We include an indicator variable equal to 1 if the firm employs a compensation consultant during the year ( Consultant ); the literature suggests that compensation consultants have economic incentives to bias their recommendations upwards to please management (Bebchuk & Fried, , ; Grosse, Ma, & Scott, ; Murphy & Sandino, ). Specifically, increases in compensation, equity and cash bonuses, in particular, are associated with firms that employ a compensation consultant (Grosse et al., ). Last, we control for any change in base salary ( ΔSalary ) to capture the impact on the bonus ratio should base salary change significantly compared to the prior year.…”

The quality of other assurance services supplied by accounting firms: Evidence from independent expert reports

“…23 23 The current regulatory landscape in Australia only requires other services supplied in conjunction with engagements involving external auditors and compensation consultants to be publicly disclosed (Carey et al, 2014; Grosse, Ma, & Scott, 2020). …”