Big or Small: Compensation Consultant Selection, Switch and CEO Pay

Using a sample of U.S. S&P 1500 firms from 2007-2009, we provide new evidence showing that CEOs of firms engaging BIG6 consultants receive lower equity payments and lower total compensations compared to that of firms engaging SMALL consultants. In addition, we also find that a switch in a firm’s compensation consultants influences its CEO pay via two directions. When a firm switches its consultant from SMALL to BIG6 consultants (SMALL to BIG6), its CEO receives lower bonus, lower equity and lower total compensation. By contrast, when a firm switches its consultant from BIG6 to SMALL consultants (BIG6 to SMALL), its CEO receives higher salary, higher bonus, higher equity and higher total compensation. Our evidence supports the argument that big consultants tend to design more optimal contract to reduce CEO’s “excess pay” with their superior expertise on pay structure and concerns of high reputation cost.