Why Should You Hire a Compensation Consulting Firm?

Fall is that time of the year when companies with fiscal years aligning with the calendar year may be starting to evaluate how their performance is tracking relative to performance goals and may be starting to plan salary increase budgets for the next year. Both of these items have special importance this year due to the implications of the pandemic.

Many companies are finding that performance for the year is likely to fall short of the goals set for their short-term incentive plan, and will need to begin considering what kind of payouts, if any, should occur at year-end. In addition, data on salary increase projections for 2021 is starting to become available, so decisions will need to be made on the magnitude of salary changes for the coming year.

It may also be the time that companies consider hiring a compensation consulting firm, if they haven’t engaged with one in the past, or making a change in compensation advisors. This engagement, and its timing, is particularly important for companies looking to make thoughtful and well-considered changes to their compensation plans for the next year.

Why should you use the services of a compensation consulting firm?

Companies that have not previously engaged a compensation consultant find it valuable to do so when they either encounter new challenges with existing plans or are looking for new plans to address evolving employment challenges.

Examples of the former include changes in regulation, diminished plan effectiveness in driving behavior or reinforcing culture, or the need to re-invest in other parts of the business.

Examples of the latter include the emergence of staff retention issues, a need to update the executive compensation plan, the introduction of a new product line that requires a modification to the sales plan, or a concern the company’s broad-based employee compensation plan is no longer competitive in the market.

Publicly traded companies may require specialized advice on executive compensation issues, such as SEC reporting, peer group selection, the application of discretion in incentive plan payouts, employment contract development, say-on-pay vote response, or an additional request for equity from shareholders.

Non-employee directors at public companies have accountability for ensuring appropriate compensation policies and practices regarding these issues are in place at their companies, and an outside consultant can provide the expertise needed to assist directors in meeting these fiduciary responsibilities.

Companies that currently have a relationship with an outside compensation advisor may also want to take this opportunity to consider a change, as it could be time to get a different perspective on plan designs.

New executive leadership or a new compensation committee chair might be an impetus to interview alternative compensation advisors, with the objective of ensuring competitive consulting fees and/or a higher level of responsiveness. It is our belief that it is healthy for companies to periodically evaluate alternative advisory services, rather than simply retaining the same consulting firm year after year.

Factors to Consider in a Consulting Relationship

Listed below are the characteristics companies may consider when deciding whether or not to engage an outside compensation consultant for the first time or when looking to change consultants:

Professional Competence – The expectation upon hiring an outside consultant is that those advisors are experts in their field, whatever that may be. For executive pay consultants, being an expert in the field includes exposure to, and understanding of, accounting, tax, regulatory issues and requirements, governance matters, plan design, and interpersonal psychology. Sales compensation specific expertise includes understanding sales channels, the sales cycle, target setting, plan design, and the appropriate mix of fixed and variable pay for each impacted sales position.

A diverse set of compensation management competencies is developed through extensive experience across multiple industries and varying types of clients. Size of a consulting firm is a factor as well, and companies may opt for either a large or small consulting firm, depending on what they are looking for in a consultant.

Large companies have the advantage of high collective competence, due to the large number of experts at their disposal, but have higher overhead costs that are passed on in often substantially higher fees. Smaller firms can often provide the same degree of expertise at a more reasonable price and a higher level of individualized service.

Collaboration and Education – Outside consultants should not be hired solely for their personal expertise, but also for their ability to effectively employ that expertise with their clients. From our perspective, the best results are achieved when the client is fully engaged and collaborated with throughout the consulting engagement, as they are the experts in their business and company culture. When considering executive pay consulting for public companies, consultants typically work directly for the compensation committee of the board, but the company’s management team must also be significantly involved in the consulting process to both understand their perspectives and gain their buy-in of recommendations.

The field of compensation management is complex, and consultants should be willing to share their knowledge with their clients beyond simply completing the assignment. We consider an engagement a success if the client acquires the knowledge to fully manage their program once the consulting engagement ends. The executive compensation body of knowledge is particularly extensive and hiring a compensation consultant can provide the client with relevant legal and governance changes, emerging perspectives and trends, and best practices to both the management team and/or the compensation committee.

Willingness to Understand the Client’s Business – All companies are different to some degree, even if they are in the same industry, and the “art” of compensation consulting is to identify and understand these differences between companies in order to integrate each client’s unique attributes into their compensation design. Consultants must be able to understand the financial, strategic, and cultural distinctiveness of their clients to effectively advise and work with their clients to develop programs that are optimal for each specific set of company attributes.

Independence – The role of compensation consultants is to provide the client with the information and recommendations they need to make thoughtful decisions, while maintaining an unbiased point of view regarding the facts. While a well-informed and highly engaged consultant will express their opinion and back up their recommendations with objective data, the final decisions should be made by the client.

Specific to executive compensation engagements for public firms, board members and management should maintain strictly business relationships with their company’s compensation consultants, as the SEC suggests these relationships play a major role in determining advisor independence, which is necessary to comply with Dodd-Frank.

Process Management - A central part of a consultant’s role is to facilitate the consulting engagement without becoming the central focus of the process. Clients have limited time to spend on compensation matters and should be able to look to the external consultant to manage the engagement process, as they have both the experience and expertise. Sometimes differing perspectives exist among the project stakeholders, which requires first establishing common agreement on strategic principles for the project’s goals. To effectively move the consulting process forward requires the ability to anticipate controversial issues, see the big picture, provide advanced planning, over communicate, and continually follow-up on unsettled issues.

Hiring a Compensation Consulting Firm – One Size Does Not Fit All

Outside compensation consultants provide an independent perspective, unique expertise, experience in different client situations, and the ability to manage the consulting process.

Companies should assess the effectiveness of their compensation plans each year for possible modifications, and outside compensation consultants with a firm grasp on the competencies listed above can be a great resource to assist in this evaluation.

If a client isn’t ready to fully commit to a particular outside consultant to undergo a full compensation plan redesign, engaging with them to evaluate a single current plan can be a cost effective approach to determining if they are a good fit for your company.

We suggest that companies consider what they want in a consultant relationship and the different options available, as one size does not fit all clients when it comes to choosing a consulting firm. Our firm has over 20 years of experience consulting with clients of different sizes and industries. We would be happy to discuss with you how the POE Group could be of service in providing compensation advisory services tailored to your firm’s unique needs and desired outcomes.

Read more from the POE Group:

Elon Musk is the World’s Richest Person, and His Compensation Plan is Just Getting Started

Salary Strategies in a COVID World

Short-Term Incentives: 2020 Review and 2021 Challenges