Executive compensation consultants coming under fire for potential conflicts

Sometimes, determining what to pay top executives requires a little help.

While some companies carefully craft their own executive compensation packages, others call in executive compensation consultants - and some of those consultants are coming under fire for potential conflicts.

Verizon Communications, for instance, used Hewitt Associates to create a $19.4 million compensation package for CEO Ivan G. Seidenberg. Some critics cried conflict because Hewitt, a major Verizon customer, also runs Verizon's employee benefit plans and advises on pension plans.

Although Hewitt's role as Verizon's compensation consultant has become public, most consultants remain unidentified, thanks to confidentiality agreements.

The Securities and Exchange Commission is considering requiring companies to identify executive compensation consultants, although they wouldn't have to identify other work the consultants do for the companies.

There are no current restrictions on other work compensation consultants may do for companies.

Many executive compensation consulting firms are part of larger firms that provide other financial services. Watson Wyatt, Towers Perrin and the Hay Group are among the giants in this industry. And those giants face challenges.

Bruce Haller, chairman of the management department at Dowling College Paul and Terry Townsend School of Business, said ethics is becoming a major issue in calculating executive compensation.

Consultants have helped firms develop packages that compensate executives for performance, he noted, but some packages are criticized as exorbitant.

The defense is that all these compensation proposals, whether through a board of directors or a subcommittee on the board, are voted on, said Haller. And members of the board are voted on by the shareholders.

Louis Grassi, managing partner at the Grassi & Co. accounting firm, noted that after major events such as the Enron and WorldCom scandals, stricter regulations and a more rigorous climate have left corporate boards cautious when calculating compensation.

There's such a higher level of responsibility, Grassi said. I think most board members treat that responsibility seriously.

Grassi sat on the compensation committee of a public Long Island company that hired Manhattan-based consulting firm Pearl Myers to assist with a compensation package for a new COO. The right deal, he noted, is all about staying within ranges.

You want to be fair and reasonable, Grassi said. We found out the range in the compensation and - we pulled up our own statistical data. We went out to our consulting firm, checked to see what they felt the salary range was.

Executive compensation consultants still have potential conflicts of interest, and Haller sees the potential for new legislation. But capitalism is built upon people making as much money as they can, he noted.

Our whole system is predicated on free enterprise and supply and demand, Haller said. You can make as much money as you possibly can. There's not a lot of incentive to restrict that.