Investors and advisers at odds in SEC probe of compensation committees

Dodd-Frank consultation also covers executive pay advisers

A Securities and Exchange Commission consultation on corporate compensation committees and pay advisers – which closes today – has highlighted the divergence of opinion between institutional investors and executive pay consultants.

On the one side are some of the world’s most prominent responsible investors such as CalPERS, Hermes etc. On the other are consulting firms like Mercer and Aon Hewitt.

The SEC announced in late March that it was seeking comments on a proposed rule on listing standards for compensation committees, to implement provisions of the Dodd-Frank Wall Street Reform Act. The consultation also looks at the role of compensation advisers.
The investor responses demonstrate their requirements for greater transparency about compensation advisers, while the advisory firms say there is already enough disclosure.
In the words of the $75.7bn (€53bn) Ohio Public Employees’ Retirement System: “All fees paid to compensation advisers and potential conflicts of interest should be disclosed annually.” It fears “objectivity can come into question” when pay advisers receive income for providing other services.

California pension giant CalPERS argues companies should disclose details about consultant identity and conflict of interest matters in their proxies.
Hermes Equity Ownership Services, the engagement arm of BT Pension Scheme-owned Hermes, says it believes external pay consultants are playing an increasingly influential role “and swaying compensation committees’ decisions”.It was “crucial” that advisers’ involvement with companies is free of conflict “to ensure that their input is in shareholders’ best interests”. It wants companies to consistently include this as part of their mainstream reporting.

The Council of Institutional Investors, a non-profit association of pension funds with combined assets in excess of $3trn, made the point that advisers who count on lucrative actuarial or employee benefits contracts from senior management “may be inclined to recommend overly-generous pay packages for these executives”.

And the UK’s Local Authority Pension Fund Forum made the case that disclosure rules for pay advisers could inadvertently “formalise” their role – and “sustain the upward spiral caused by the benchmark data which consultants supply”.

On the other side of the argument are pay consultants, often part of larger ‘multi-service’ firms.

Mercer, in its submission, said it believes the current level of disclosure is “adequate and appropriate for investors’ purposes”.

Rival Aon Hewitt, in a nine-page letter, called for proxy disclosures to be presented in a “competitively neutral” way. It saw a bias against multi-service firms and asked: “Why is it a bad thing for consultants to the board to own company stock?”

“We do not believe requiring a disclosure describing the compensation committee’s process for selecting advisers will provide information that is useful to investors,” Aon Hewitt claimed – adding that proxy disclosures are already “too lengthy”.