A Research Agenda for Examining the Role of Compensation Consultants in the Executive Pay Process

Executive compensation has risen dramatically during the past several years. In some cases, organizations have lost money and value, while their executives have received generous if not excessive compensation. The business press has brought this issue to the attention of the American public and Congress, resulting in increasing examination of all parties involved in the pay-setting process. The selection and use of compensation consultants has come under particular scrutiny. Critics have argued that these firms suffer from serious conflicts of interest, such that they may be partly responsible for the rise in pay and the decoupling of pay from performance. Academic attention to the impact of compensation consultants in the pay-setting process, however, has been lacking, and thus most of the analysis of the subject is based on anecdotal evidence and superficial arguments. In the interest of fostering a more rigorous approach, this paper presents several theoretical perspectives that could be used to examine and explain the influence of compensation consultants on executive compensation. We present these theories in light of a specific case and suggest directions for future research.