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4. What to Look for in a Consultant

Most consultants that you interview will have adequate experience to provide you with the technical advice that you require and will come from a firm with significant resources to provide required market data. Your final selection will therefore come down to your views of how the consultant will interact with the committee and management. The table on the following page provides an example of the information typically required by a request for proposal for an executive compensation consultant.

Topic Area and Description/Rationale

Information Typically Requested

Company Experience

  • Allows the committee to gain an understanding of the consulting firm’s experience, philosophy, and resources
  • Brief overview of the firm
  • Description of consultant’s background and experience as it relates to the work being requested
  • Current list of clients and industry experience
  • Description of the firm’s thought leadership
  • Experience in designing annual and long-term incentive compensation programs

Consulting Team

  • Provides the committee with information on the potential consulting team to understand the depth of experience of the team
  • For each member of the consulting team, provide:
    • Name
    • Anticipated role
    • Years of experience
    • List of current clients
    • Biography

References

  • Gives the company and committee an opportunity to learn about the consultant from previous clients
  • Provide three compensation committee chair references with the following information:
    • Company for which the individual is the committee chair
    • Contact information: company (current or former, if retired), contact name, address, email, and phone number
    • Summary of scope of work
    • Length of relationship

Potential Conflict of Interest

  • Alerts the committee to any potential conflicts of interest prior to engaging a consultant
  • Highlight any potential conflicts of interest that could result from this engagement including the SEC factors
  • Provide the firm’s conflict of interest policy

Pricing
  • Provide total anticipated consulting fees for completion of the work steps outlined in this request for proposal

General positive aspects in a consultant will include the following:

  • Willingness to speak up when consultant is uncomfortable with decisions the committee is making or management is recommending
  • Creativity in helping the committee consider solutions to difficult challenges
  • Preparedness in advance of meetings sufficient to address issues efficiently and anticipate committee questions
  • Flexibility to think “on the fly” as new issues surface during meetings
  • Ability to engage different points of view while maintaining objectivity
  • Proactive in keeping the committee chair aware of emerging issues between meetings
  • Effectiveness in facilitating decision-making

Similar to the compensation committee chair, while part of the role of the consultant is to provide information and expertise, it is also to facilitate decision-making and bridge the gap between differing points of view. In order to fulfill this role well, the consultant needs to be trusted by the committee members and management, and should be able to relate to their concerns. Directors we spoke to indicated that one of the key challenges for a consultant is balancing the relationship between the committee and management. For example, Peter Haje said, “An open and candid relationship between the consultant and people in the company is critical, and it has not worked well when there was a poor relationship between management and the consultant.” Consultants who fail to recognize the importance of an effective working relationship with management may find that their relationship with management quickly becomes adversarial. On the other hand, if the consultant is perceived as being “too close” to management, the committee may come to question whether or not the consultant is providing objective, independent advice.

Much like management and directors, consultants will generally be most effective if they always keep in mind that their ultimate clients are the company’s shareholders, and that all three key parties (management, the board, and the consultants) should be acting in their interest. As part of the committee’s annual process, they should incorporate an evaluation of the effectiveness of the relationship with the consultant.

Sample Compensation Consultant Evaluation

Rating Scale: 1 = Well Below Expectations;
2 = Below Expectations; 3 = Meets Expectations;
4 = Exceeds Expectations; 5 = Far Exceeds Expectations

Evaluation Statement

Rating / Comments

Overall, how would you rate the consultant’s relationship with the committee?

  

Did the consultant respond to your requests, questions, and concerns effectively, and did they do so in a timely manner? Were there any problems and, if so, in what way?

  

Did the consultant communicate effectively during the engagement? Did the consultant listen and ask effective questions? How would you rate the usefulness and quality of the consultant’s input? In what ways could the consultant improve?

  

Does the committee feel the consultant made appropriate use of market data? Did the data meet the needs of the situation?

  

Does the consultant have a strong understanding of your business, short- and long-term issues, compensation philosophy, and programs? Were recommendations presented with the business context in mind?

  

Did the consultant provide the committee with proper context for their recommendations? Were recommendations presented to include governance, regulatory, and shareholder perspectives?

  

Were the work and recommendations presented effectively? What can be improved?

  

Did the consultant interact with management (on the committee’s behalf) effectively? Should any revisions be made to how interactions occur going forward?

  

In many cases, the compensation committee does not view it as necessary to have an independent legal advisor reporting directly to the committee. Instead, the committee often relies on the company’s internal legal staff and management’s external counsel to provide the committee with legal advice. However, there are certain situations where it is critical for the compensation committee to have its own advisors, and some committees have determined that it is worthwhile to retain a legal advisor to attend all committee meetings and serve as a sounding board between meetings.

Additionally, there are times when the compensation committee needs to work on confidential projects and does not want to share information with the management team. In particular, when recruiting a new CEO or determining compensation arrangements for a departing CEO, it is critical to obtain external legal advice to ensure objectivity.

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