Executive Compensation, Compensation Consultants, and Shopping for Opinion: Evidence from the UK

Abstract

This paper builds on prior research on compensation consultants and executive pay, which finds widespread use of compensation consultants and higher levels of pay and proportion of equity based-pay in firms that employ consultants. Using a sample of FTSE 350 firms from 2002-2008, we provide new evidence that CEOs and executives of firms that switch their main consultant receive higher salary increments in the year of the switch (both absolute and adjusted for median peer levels) and a less risky compensation package, through a higher proportion of bonus and a lower proportion of equity pay. We do not find that executives of firms that increase their number of consultants have higher increases in compensation than non-increasing firms. Our results provide some evidence that companies successfully engage in opinion-shopping between consultants for more favourable compensation packages for CEOs and executives.

Keywords: Executive Compensation, Compensation Consultants, Pay-Performance Sensitivity, Managerial Power, Opinion-Shopping

JEL Classification: J33, M52, G30