The Price of Advice
45 Pages Posted: 29 Jul 2011
Date Written: 2009
Abstract
This article posits that it is both inappropriate and inefficient to allow third-party compensation consultants the sweeping amount of authority they are being currently afforded within the compensation determination process. Moreover, this article argues that such relegation of authority and influence to outside consultants has been both a contributing factor to the current problem of excessive executive compensation and a continuing frustration of our efforts to combat the problem. Historically, efforts to curtail excessive executive compensation levels have proceeded through the promulgation of four distinct policies: promoting director independence, introducing regulation to enhance disclosure, empowering shareholders, and relying on the courts to serve as a remedial check on gross violations of the process. In order to effectively mitigate the pay problem on a substantive level, these policies must first be reevaluated in light of the ubiquitous presence and assumed authority of third party consultants. Next, they need to be reassessed to determine how they might operate to arrest the expanding authority of outside consultants within the corporate compensation determination process, thereby facilitating the production of more equitable executive compensation packages. The article concludes by suggesting potential workable solutions to the problems caused by improper relegation of compensation-setting duties to outside compensation consultants.
Keywords: compensation consultant, agency theory, corporate governance, executive compensation
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