Compensation consultants’ reputation, non-compensation consulting services and CEO pay

Abstract

ABSTRACTIn this study, we draw on the reputation and product quality literature to examine whether compensation consultants with higher reputation have incentives to provide higher-quality services in terms of CEO pay level and pay performance sensitivity (PPS). Using 1,827 US firm-year observations for 2009 and 2010, we find that consulting firms with a higher reputation, proxied by consultant size, are associated with lower compensation and higher PPS. We also find that the PPS for consultants that also provide non-compensation-related services (NCS) is significantly positive for consultants with a higher reputation, consistent with the reputation protection explanation, and significantly negative for the other consultants with a lower reputation consistent with the conflict of interest argument.