Do Compensation Consultants Drive Up CEO Pay? Evidence from UK Public Firms

20 Pages Posted: 30 Jan 2019

See all articles by Martin J. Conyon

Martin J. Conyon

Lancaster University - Management School; Wharton School, Center for Human Resources

Lars Helge Hass

Lancaster University - Management School; University of Iowa - Henry B. Tippie College of Business

Simon I. Peck

Case Western Reserve University - Department of Marketing and Policy Studies

Graham Sadler

Coventry University

Zhifang Zhang

Warwick Business School

Date Written: January 2019

Abstract

Do compensation consultants drive up CEO pay for the benefit of managers, or do they design pay packages to benefit firm owners? Using a large sample of UK firms from the FTSE All‐Share Index over the 2003–2011 period, we show a positive correlation between the presence of compensation consultants and CEO pay. Importantly, isolating this effect is somewhat dependent on the endogenous selection of consultants and the statistical modelling strategy deployed. We find evidence that compensation consultants improve CEO compensation design when their expertise is of greater importance (e.g. during the post‐financial crisis period, or for firms that have particularly weak compensation policies). In addition, our findings show that compensation consultants increase CEO pay–performance sensitivity. The balance of evidence supports optimal contracting theory more than managerial power theory, but the authors caution the limits to this verification. We are careful to note that the more compelling evidence for the positive effect of pay consultants on CEOs is based on advanced methods (such as propensity score matching and difference‐in‐differences), and that more standard approaches (such as OLS and fixed effects) are unlikely to reveal the same level of causality of consultants on CEO pay.

Suggested Citation

Conyon, Martin J. and Hass, Lars Helge and Peck, Simon I. and Sadler, Graham and Zhang, Zhifang, Do Compensation Consultants Drive Up CEO Pay? Evidence from UK Public Firms (January 2019). British Journal of Management, Vol. 30, Issue 1, pp. 10-29, 2019. Available at SSRN: https://ssrn.com/abstract=3326042 or http://dx.doi.org/10.1111/1467-8551.12307

Martin J. Conyon (Contact Author)

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Wharton School, Center for Human Resources ( email )

3600 Locust Walk
Philadelphia, PA 19104-6365
United States

Lars Helge Hass

Lancaster University - Management School ( email )

Department of Accounting and Finance
Lancaster, LA1 4YX
United Kingdom

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States

Simon I. Peck

Case Western Reserve University - Department of Marketing and Policy Studies ( email )

Cleveland, OH 44106
United States

Graham Sadler

Coventry University ( email )

Zhifang Zhang

Warwick Business School ( email )

Warwick Business School
Coventry CV4 7AL
United Kingdom

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