Compensation Consultants: Whom Do They Serve? Evidence From Consultant Changes
54 Pages Posted: 3 Dec 2018 Last revised: 24 Apr 2021
Date Written: April 23, 2021
We study compensation consultant dismissals to investigate whether consultants recommend outsized pay to earn repeat business. Our results show consultants’ interests are aligned with shareholders’ to appropriately pay the CEO. Boards are more likely to dismiss their consultant when CEO pay is abnormally large, particularly for firms with strong corporate governance. We suggest a possible mechanism; consultants influence pay by advising on the constituency of the compensation peer group. New consultants are less likely to select highly paid peers if the CEO was previously overpaid. Directors earn higher votes in annual elections when they replace their compensation advisors.
Keywords: compensation consultants, executive compensation, director elections, corporate governance
JEL Classification: G30, G34, J33, M52
Suggested Citation: Suggested Citation