In Depth
An independent compensation consultant is an external advisory firm engaged directly by the board's compensation committee to provide expert guidance on executive compensation matters. Major compensation consulting firms include Meridian Compensation Partners, Semler Brossy, Pay Governance, Frederic W. Cook, and Compensia. The consultant's services typically include competitive market analysis and benchmarking against the peer group, advice on compensation program design and pay mix, development of performance metrics for incentive plans, review of employment agreements and severance provisions, analysis of equity plan share utilization and dilution, and preparation for shareholder engagement on compensation issues. The Dodd-Frank Act requires compensation committees to assess the independence of their compensation consultant by considering six factors: other services the consultant provides to the company, fees paid as a percentage of the firm's total revenue, policies to prevent conflicts of interest, business or personal relationships between the consultant and committee members, stock ownership in the company, and business or personal relationships between the consultant and executive officers. Many leading compensation consulting firms operate exclusively on the committee side, they do not provide other services to management, to eliminate potential conflicts. The compensation committee must disclose the identity of its consultant in the proxy statement and describe any conflicts of interest. The relationship between the committee and its consultant is crucial to effective governance because the consultant's analysis and recommendations heavily influence pay decisions. Critics argue that the consulting model can contribute to pay inflation if consultants are incentivized to maintain client relationships by recommending generous pay packages.