Page 624 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 10. The Board of Directors 609

The committee should, wherever possible, ensure the company reserves the right to
modify or terminate a plan. The committee may also want to ensure that a contract will
continue unless either party exercises the right to cancel the contract, typically within 90 days
of an anniversary date.

Consultants
Use of External Consultants. Consistent with the seventh resolution in Table 10-3, “said
committee may engage services of others to assist them in the performance of their duties,”
committees look to outside consultants to assist them. This is not a slap at the competency
of the inside executive pay planners but a reference to fiduciary trust. It seems a little less than
an arm’s-length transaction to have the inside executive pay planner (who is in the reporting
chain to the CEO) advise the compensation committee on the appropriate form and level of
pay of the CEO. It would be unlikely that many CEOs would advance a negative report.
One possibility is to have the pay planner report directly to the committee, although the
career possibilities of such an individual would be questionable. Even if that were done, it
is important for the compensation committee to have access to an experienced executive
compensation consultant with no ties to the organizsation or or its management. Reasons
include the following:
• Image Engaging an individual and/or firm well recognized for preeminence in the
area of executive compensation design is an overt signal to the outside world that
this committee is “doing right”—excellence by inference. With “so-and-so” as the
consultant, one must conclude the company has an effective pay-delivery system.
• Buffer Employing a consultant prepared to support the position of the committee
gives validity to the program challenged by a shareholder.
• Magician Belief that the individual engaged will bring forth powers of alchemy. With
a wave of the person’s wand, the laborious design process will be circumvented by
the materialization of a simple, easy-to-understand, and easy-to-operate plan that will
be perceived as equitable by all parties concerned. Committees with this approach
probably still believe in the tooth fairy.
• Resources Limited time frame and/or lack of executive compensation plan design
expertise within the company could necessitate going to a consultant who can provide
the know-how and sufficient resources to accomplish the job quickly.
Consulting firms range from boutique specialists to broad-based global organizations.
Some have star or celebrity practice leaders, whose names are widely known because of their
frequent appearance in the business press. Some are very pro-management; others are more
skeptical of the size of executive pay packages.
This raises the question: Who should engage the consultant? Should it be management,
the committee, or both?
Reporting Relationship. Historically, the consultant has been engaged by management to
support the validity of its request. Needless to say, this puts enormous pressure on the
consultant to agree with management.
Best practice is to have the compensation committee take charge of the process, requir-
ing the consultant to work with management but report to the committee (who will pay
the fees and if necessary replace the consultant). Suggestions that management also have