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Politics and Policy

New SEC rules require companies to identify their paid "professional compensation consultants". You know, the guys who are hired to say how much the CEO should be paid.

But these same guys are trying to get the lame-duck Republican congress to give them immunity from any shareholder lawsuits.

Consultants Seek Cover From New Rule

Which makes me wonder - what, exactly, are they worried about? The article points out that no executive pay consultants have been sued to date that anyone is aware of. Perhaps they are concerned that the linkage between these firms and inter-locking Boards of Directors and CEOs will, when revealed in SEC statements, show an inherent conflict of interest?

This is my understanding of how it works. The entire Board of Directors appoints a smaller "Compensation Committee" to decide how much the executives and directors of the company are paid. The "Compensation committee" hires the "independent compensation consultants" to advise them. usually, one of the members of the compensation committee is the contact point with the consultants. By hiring the "independent consultants", they insulate themselves from shareholder lawsuits, by pointing out that they performed with due dilligence by seeking an independent opinion, and their ultimate decision was consistent with its report.

So the compensation consultants issue a report which usually says" "(a) gee, executive pay is so high, your executives need a raise or they will be lured elswhere, and (b) while you are at it, your board members need a raise also!"

So, the compensation committee reports to the whole board that all their executive officers need big raises and more perks in order to stay "competative".

The next step is that many members of the compensation committee all happen to be CEOs of their own companies, also. They complain to the board that they have knowledge that other companies are paying their executives more than they are being paid, and it is time for a review of their executive pay and benefits package. The CEO of the first company happens to be on the Board of Directors of the second company, and also on the Compensation Committee. He hires the same "independent compensation consultant", who issues the same report, except it revises its figures upward to account for the raises approved by the first company.

The process reproduces itself infinatum, with wages, benefits, and perks spiralling ever-upward.

Now what would happen if the "independent compensation consultants" ever reported that the company executives were already overpaid, and their executive pay and benefit packages should be reduced? The "independent consultants" would probably find that is the last report they were ever hired to issue.

I also think its funny how the word "competative" has an entirely opposite meaning in when used in the executive compensation setting, than it is used when evaluating every other worker's pay. In the former context, the pay keeps "increasing" to be competative. But in the latter context, workers are told that they must accept lower wages and reduced benefits to remain "competative".
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