Companies that use compensation consultants often award their CEOs higher salaries than those that do not. Using a sample of more than 2,000 firms and examining total annual CEO compensation data from each company’s most recent fiscal year that ended on or after December 31, 2006, the authors found that the problem has less to do with the fact that consultants were hired than with underlying governance problems at the companies themselves. Companies with weak boards of directors and overpaid executives often hire compensation consultants who are unwilling or unable to correct the overpayment, even if it is what’s best for the company. The authors also examined whether consulting firms recommended higher salaries when they provided additional services unrelated to compensation, but found no evidence that this was the case.
Although compensation consultants don’t necessarily encourage excessive pay, they are often hired by companies with deficient corporate governance, and rarely prevent the boards of such companies from overpaying their executives.