Corporate Governance Mechanisms: The Case of Compensation Consultants

This article analyzes the effect of compensation consultants on executive pay practices. From a theoretical perspective, there are conflicting optimal contracting and managerial power related arguments on their role in the pay-setting process. Moreover, empirical evidence also indicates an academic debate on their role within the firm's corporate governance system. Overall, research so far still has not given a clear answer on whether they are part of the agency problem or they act at the shareholders' interest and thus contribute towards optimal contracting. Keywords: compensation consultants; agency theory; managerial power theory; corporate governance; executive pay