Compensation Consultant Fees and CEO Pay

While compensation consultants are known to play an important role in the design of executive compensation contracts, evidence on the effect of compensation consultants on CEO pay is mixed. Using a sample of 3,198 compensation consultant engagements and 576 executive compensation consulting fee observations from S&P 1500 firms for fiscal years 2009 to 2011, we examine the relation between executive compensation consulting (EC) fees and non-EC fees paid to executive compensation consultants and CEO pay. We find that CEO pay is higher when compensation consultants receive higher EC consulting fees. Additional analysis suggests that compensation consultants recommend higher CEO pay when they receive greater than expected fees for EC consulting. We further find that the positive association between EC fees and CEO pay is driven largely by weakly governed firms. We find limited evidence, however, that consultants’ cross-selling incentives are associated with greater CEO pay.