Compensation Consultants and Executive Pay: Evidence from the United States and the United Kingdom

Abstract

Executive compensation consultants are investigated using data from the United States and the United Kingdom. The study yields a number of findings. First, CEO pay is generally greater in firms that use compensation consultants, consistent with a rent-extraction theory of executive pay. Second, the amount of equity used in the overall compensation package, such as stock options, is greater in firms that use consultants. This is consistent with an optimal contract theory of pay which aligns manager and shareholder interests. Third, there is little evidence that consultants with potential conflicts of interest, such as supplying other business to client firms, leads to greater CEO pay or the adverse design of pay contracts.