Media Contact:
Catherine Behan
Communications Manager
Mercatus Center at George Mason University
Office: 703-993-4960
Email: cbehan1@gmu.edu
Executive Pay and the Role of Compensation Consultants
December 5, 2007
Highlights
Our Findings
- There is currently a dispute among academic researchers as to the source of increases in executive compensation over the last decades and its impact on shareholder welfare.
- A substantial body of recent empirical corporate governance research finds that executive compensation is primarily the result of the increased value of corporate assets and the increased competitive pressures faced by executives and corporations.
- Researchers at the Massachusetts Institute of Technology found that between 1980 and 2000 CEO compensation rose in proportion to the increase in the market capitalization of the 500 largest public companies. Both the average asset value of the 500 largest firms and CEO pay grew by 500% (a factor of six).
- Researchers at the Federal Reserve found a significant correlation between executive compensation and firm performance between the years 1936 and 2005.
- Taken as a whole, academic research greatly calls into doubt the notion that increased executive compensation reduces corporate profits in a way that harms investors.
- The overwhelming majority of the numerous studies on potential conflicts of interest among auditors that also provided nonauditing services to their clients found no relationship between audit quality and the provision of nonaudit services, and several studies have found that auditors providing nonaudit services actually improved audit quality. The provision of noncompensation consulting services by executive compensation consultants may similarly have no, or even a positive impact, on the appropriateness of compensation decisions.
Recommendations
- Neither Congress nor the Securities and Exchange Commission should prohibit or otherwise limit the provision of noncompensation services by compensation consultants.
- Neither Congress nor the Securities and Exchange Commission should mandate that public companies be required to disclose information regarding whether compensation consultants also provide noncompensation services to the company.
