Compensation Consultants: Whom Do They Serve? Evidence From Consultant Changes

We study compensation consultant dismissals to investigate whether consultants recommend outsized pay to earn repeat business. Our results show consultants’ interests are aligned with shareholders’ to appropriately pay the CEO. Boards are more likely to dismiss their consultant when CEO pay is abnormally large, particularly for firms with strong corporate governance. We suggest a possible mechanism; consultants influence pay by advising on the constituency of the compensation peer group. New consultants are less likely to select highly paid peers if the CEO was previously overpaid. Directors earn higher votes in annual elections when they replace their compensation advisors.