How Executive Compensation Consultants Measure the Value Added by Executives in Corporate Governance

Posted: March 23, 2020

Executive compensation consultants are responsible for creating comprehensive compensation programs for executives across a spectrum of organizations. These consultants work closely with HR teams to design and manage incentive plans. A primary function of executive compensation consultants is to identify keystone aspects of company culture in order to develop policies and processes that facilitate sustainable leadership models. A skilled executive compensation consultant will be able to provide complex analysis on compensation programs and will review and approve complex compensation transactions between executives and the organization. Measuring the value added by executives in corporate leadership is a complicated task, as it often involves soliciting feedback from board members and investors. In determining how much value to assign to a specific role, executive compensation consultants must consider the increase in executive payout from the bottom up—not only as a function of annual salaries and bonuses, but also stock ownership. Corporate executives are significant stakeholders in organizational success. In order to promote the interests of the organization, compensation programs for executives must follow a model in which the degree of stakeholder interest corresponds to the value added by each executive in their respective tier of leadership. One of the problems that is inherent in this model is that there is often a delay between the performance of executives and the anticipated results. Therefore, compensation packages should include both Short Term Incentives (STI) and Long Term Incentives (LTI) in addition to annual salaries. It is worth noting that in recent years, there has been a trend toward implementing Clawbacks, which is essentially a method for recouping compensation paid to executives under false pretenses. In 2019, Hertz executives saw a clawback of their compensation due to financial accounting violations. Effective executive compensation consultants will pay close attention to whether the board of directors has a clear majority of independent board members (outsiders with no ties or business dealing with the company) who can truly provide expertise to the CEO and management team and guide company strategy. Most new board members are actually suggested or nominated by the CEO, officially nominated by the board to shareholders who formally vote on the slate at the annual meeting. In defining executive compensation, consultants must also consider whether the CEO role and the Chairman of the Board roles are split. In this model, an outside director acts as the Chair while the CEO leads the business. Traditionally, the CEO was also the CHAIR, and in most companies still remains so. Increasingly, companies are splitting the roles—even where the CEO and Chair are the same person, there is now an outside director who is named as Lead Director to ensure that board independence and oversight is maintained and to check or call out management as necessary. In most settings, the board of directors typically have committees which include a small subset of directors. The most important committees work closely with compensation consultants to evaluate the performance of the company and the CEO and senior executive management. They recommend annual compensation bonuses and future increases to the Board and ideally consist exclusively of independent directors. These independent directors should also spearhead succession planning and recruiting new CEO candidates. Executive compensation consultants can help facilitate this process. Executive compensation consultants should also partner with the Audit Committee of the Board, which can investigate company finances or look into whistleblower complaints if the firm has a formal system for doing so. For many corporations, diversity onboard has become an important criteria of good corporate governance. Effective consultants will help to address whether there are enough women and minorities on the Board and within the organization. Executive compensation consultants are experts in corporate governance best practices. How compensation consultants factor the foregoing while recommending compensation for CEOs, Board members, and other executives will vary, but will always have a pulse on company culture and organizational goals. To learn more about executive compensation consulting, visit our Contact Page, or contact us directly by email at or by phone at 415-618-6060.