Choosing a Strategic Compensation Consultant
By Brent Longnecker, Kevin Kuschel, & Josh Whittaker
With compensation issues and scenarios being dissected under the public microscope, board members, executives and advisors are being scrutinized like never before. This increasingly complex environment heightens the need for credible, strategic-thinking, governance-minded compensation experts and, equally critical, the need for a solid process for selecting those experts.
Within the last month, multiple clients and prospective clients have provided feedback regarding their assessment of the available compensation consultants in the market, whose population has grown substantially over the past five years in the wake of independence issues. This feedback revealed the perception of four types of consultants:
- Data Providers: This defines a large contingent of consultants who simply provide the requested information, nothing more. While this may work in certain situations, the lack of additional commentary related to the data can create uncertainty, especially in complex situations.
- Interpreters: In an effort to solve the issues associated with the Data Providers, these consultants gather, process, and interpret the data to help in the decision making process. However, these consultants are often reluctant in utilizing the data to provide any firm recommendations to the client due to the aversion to risk.
- Advisors: While these types of consultants provide the same data and conclusions as the previously mentioned, they also provide recommendations based upon the outcomes of the analysis and oftentimes aid in developing plans based upon market best practices.
- Strategists (White-Board Consultants): These are a rarer breed. They see data as a necessity, but work to understand a client’s specific business and competitive environment in order to determine how to best utilize the data. To some extent, they are “business junkies” that enjoy the intricacies and nuances of every client. As such, there is never a cookie-cutter approach to design, as they believe each company will require programs which fit their culture and business.
With this information in mind, how do you 1) determine which type of consultant is right for you, and 2) identify which consultants fall into each category? To understand this, it is important to begin with understanding why you are hiring a compensation consultant and the needs your organization has. The following will help guide you through this process.
Under what circumstances are compensation consultants typically hired?
For example, compensation consultants are often hired to help companies address:
- Increased corporate governance requirements on boards
- Legal liability placed on compensation committee members
- Appropriate handling of the complexities and ongoing changes associated with executive compensation
- Expensing of stock options
- Balancing executive compensation with executive, shareholder and corporate interests
- The competitiveness of executive packages
- Specific issues such as long-term incentive plan design, annual incentive plan design, board compensation and assuring reasonable compensation
- Needs Analysis: An outside compensation consultant or firm can help in these situations:
- Need for greater success in attracting, motivating or retaining employees
- Need for independent, third party objectivity
- Need for insight into the organization’s competitive market
- Need for security/confidentiality
- Need for creative solutions/advice on unique issues
- Need for HR expertise that would otherwise be unavailable due to downsizing or time constraints of in-house staff
- Need for an expert opinion in a litigation support role
How Do I Determine Specific Goals?
Before seeking the help of an outside consultant, develop a written description of the challenge or opportunity, goals, and any other specific tasks that will help define the scope of the project. (See Exhibit 1: Selection Criteria Checklist EXHIBITS) This planning exercise will help identify which type of consultant would be best suited based upon the type of data required. While a formal Request for Proposal is not mandatory, the exercise of articulating the need is critical in the selection process to ensure that each prospective consultant receives a consistent description of the project’s scope.
Identifying a pool of experts
In selecting a compensation consultant, a firm should approach the screening process similar to that of hiring a top executive. Check industry experience, client lists, length of time in the business and other indicators of knowledge and experience. The goal of this step is to obtain a list of 3-5 “semi-finalists” which are then invited to submit a proposal.
Once the need for a compensation consultant has been established and defined, a firm can begin with a broad web search for prospective consulting resources and refine the selection process from there. At the macro level, HR professionals can search: (1) via key words, (2) via vendor directories (e.g. the WorldatWork website), or (3) via local compensation associations’ member directories and websites.
For a more refined search, consider asking peers for referral information about individuals or firms they have worked with. Ask peers about their consulting firms’ reputation, how deadlines were met, how solutions were deployed, and how results were measured. Research the issue your organization is experiencing and note what “experts” are commenting on that issue in seminar presentations, technical articles and books. Research each firm’s opinions and make sure their assessments are consistent with your organization’s culture. Books and articles in technical and credible publications are another indicator of consultants’ subject matter expertise.
How Do I Narrow The Field?
The exercise of reviewing proposals will yield insight into the consultant’s methodology, approach to solving problems, relevant expertise, fee structure and overall “personality.” Which consulting firm’s approach seems the most realistic? Thorough? Other factors to examine include the firm’s availability, reputation, technical expertise, stability, and client service record. Beware of low-ball bidders who are desperate for business and for consultancies who are likely to avoid your calls once a bigger client walks in the door. Use these types of filters to identify two or three finalists to officially interview.
Once the final candidates have been identified, it is important to meet the consultant’s project team. Often times the individuals who make the presentation will not be the ones involved in the actual work. By meeting with the team, you can better determine their prospective knowledge and capability – and actively listening to your needs and objectives rather than offering advice without all the pieces. As with any successful partnership, the proper interpersonal “chemistry” is a crucial aspect to the project’s success. Upon engagement, the consulting firm should maintain this team for the duration of your project, or give you approval rights for any replacement personnel.
Discussing real-time challenges with prospective consultancies will give you an inside look at the consultants and help identify their approach to working with you. This interaction will also reveal their viewpoints and logic as you see them respond to impromptu problem solving.
All firms looking to hire a consultant should check references of their previous and current clients to validate expertise, particularly in the litigation-prone environment surrounding compensation in the corporate world today. During the reference checking phase, it is also worthwhile to assess the individual or consulting firm’s financial standing and reputation within the community. Any refusal by a consultant to assist in this type of background check should be of significant concern to the hiring firm.
The value of independence
In the field of compensation consulting, independence is being put to the test in the headlines and courtrooms. Within this new age of accountability, there is a critical need for an “independent” opinion on reasonable and competitive compensation practices. Regardless of who initially reaches out – the Compensation Committee or Management – an ethical/independent consultant will always deliver consistent results. The new definition of independence combines the need for technical expertise with that of rendering opinions and recommendations without a conflict of interest. Truly independent opinions result from independent processes, the removal of bias, direct communication links, and technical prowess.
Clients and compensation committees should look for the following from their compensation consultants:
- Desire for a direct link to the client. To ensure buy-in, and to take concerns from all sides into consideration, consultants often talk to several groups of people when examining an issue. While it is important that an independent consultant often interview management and board members, ultimately the consultant should be engaged by one or the other and report findings accordingly. Process is key. (See Exhibit 2: Engagement Process Flowchart EXHIBITS)
- Opinions without conflicts of interest. Consultancies with other “service lines” or relationships (with your organization) might face the temptations of bias. Independence can be compromised when a sticky executive compensation issue emerges that tempts the consultant to cater to the executive in order to preserve other lines of business. Large firms must purpose to be independent by keeping “cross selling” pure (avoiding compromises in compensation advice to salvage larger streams of income elsewhere in the organization). One way to keep the focus on this objective is to require consultants of any selected firm to sign an “Attestation Form” which attests to the independence of the process, findings and recommendations. By signing the form, individuals thereby pledge that the work performed was the sole opinion of the firm and that at no time was the group coerced by the client, board, executives or others in any way. (See Exhibit 3: Sample Attestation form EXHIBITS)
- Transfer of knowledge. A truly independent consultant will not facilitate an addiction to future consulting services. Independent consultants are more concerned with delivering reasonable compensation solutions while educating both board members and management along the way. Also, by having consultants that provide transparency and insight into the processes and framework, organizations can obtain yet another checkpoint for establishing reasonableness in their pay systems designed to attract, retain and motivate key performers.
- Strong governance knowledge. The understanding of governance related to compensation programs is a specialized skill set usually only understood by few. Given the current regulatory environment, this skill is essential.
- Conduct an executive session. While most preliminary findings and recommendations are made directly to the client or board, it is often necessary for the consultant to answer questions in an executive session.
- Provide expertise with integrity. Being technically adept is not only critical in the boardroom, but also in the courtroom. Exemplary executive compensation experts stand by their advice and can help organizations convert “gray” areas into black or white. Independent advisors ensure their recommendations have “good optics” and pass the “reasonable” test.
- Once you have narrowed the field to one or two potential consultants, put them to the final test by giving “extra credit” for these bonus qualities:
- Do they hear your concerns and promise to deliver a customized solution?
- Do they want to earn and protect their role as a trusted advisor?
- Do they seek to be a partner rather than a vendor?
- Do they connect with you relationally speaking through mutual personal interests or other areas that facilitate a close relationship?
- Do they have a passion for their profession?
- Do they appear well prepared?
- Are their written/oral deliverables well defined?
- Are they thought leaders, anxious to proactively stay abreast of the issues and share their expertise?
- Are they up-to-date with key governance issues related to compensation?
Making it official
When engaging a consultant, organizations often wonder whether or not a contract should be in writing. The goal in securing a written engagement letter that defines the scope, the phases, the fee ranges, the deadlines and the approach is: improved clarity. While it is common for consultants to ask for retainers up front, and to provide fee ranges during the initial phase of the project, beware of consultants that consistently charge the maximum.
Choosing the right compensation consultant is a vital decision to any organization that hopes to gain a competitive edge in the coming decades. The right consultant with industry expertise, independence and integrity will prove to be a strategic and powerful business ally. Once a quality consultant is selected, you can increase the likelihood of project success by providing clean data, giving honest feedback, introducing the consultant to other key players, and by acting on the consultant’s recommendations. If the initial advice is not feasible, work with the consultant to identify alternative solutions that can be implemented.
Managing the consultant throughout the project is best accomplished with a team or partnership approach based on open communication. Make sure the consultant focuses on the problem rather than glossing over fundamental conflicts. Clients must remain open to new information, observation and different perspectives without becoming defensive.
The best compensation consultants truly care about the client and are always committed to the success of the project. For internal and external advisors alike, consulting is a calling that involves passion, expertise, creativity, integrity and the courage to impact the future, one company at a time.
Again, here are the 3 Exhibits mentioned in the text above: EXHIBITS