With board compensation committees taking on more responsibilities for companies, including oversight of compensation plans, pay governance and human capital policies, it is often necessary to bring on an independent consultant to ensure that the committee's decisions are fair and support the company's strategic vision. In its report, CHRO Guide: Selecting an Independent Compensation Consultant, HR Policy Association's Center on Executive Compensation identifies the factors that can bring about the need for a new compensation consultant, suggests criteria for evaluation and selection, and details the ideal onboarding process for a new consultant. We spoke to Ani Huang, senior vice president of HR Policy Association and president and CEO of the Center on Executive Compensation, about the report's findings.
Directors & Boards: What are some of the most common triggers that cause compensation committees to engage a compensation consultant or make a change from the one they already have?
Ani Huang: The most common trigger is a change in the compensation committee chair. The new chair often wants to assess the dynamics between the consultant, committee and management, and solicit feedback on the consultant. It is a great opportunity to look at how meetings have been run with fresh eyes and consider how a new consultant could change and improve the effectiveness of the meetings and processes.
Other common triggers include the performance of the compensation consultant not meeting the committee's expectations; overly long tenure with the existing consultant; a change in the business structure, such as with M&A activity; or loss of a say-on-pay vote, particularly if the committee was surprised by the event.
DB: What are some of the key steps and milestones a compensation committee will have to consider when designing a process to bring on a compensation consultant?
AH: Key steps for success include:
- Determining a cadence for reviewing consultant performance (such as annually) and considering an external scan or request for proposal (RFP) process (for example, every five years). Whatever cadence you decide upon should be added to the committee's calendar, and you should make sure the consultant is also aware.
- Determining who will lead the process. The compensation committee is responsible for the decision, of course, but some chairs prefer management to take the lead with sourcing candidates, drafting RFPs and reviewing responses. Other chairs take on this role themselves.
- Considering how many candidates the committee would like to hear pitches from, who should participate in the pitches and how long each pitch should be. A major thread of our interviews was that these should be at least 45 minutes or longer.
- Determining how the final candidate will be selected. Two finalists provided by the chair to the committee? The chair making a decision and recommending to the committee? Or the full committee hearing all pitches and deciding?
- Making sure the committee chair and chief human resources officer (CHRO) check references on each finalist, with the aim of getting past the “polite boilerplate” and into behavioral style.
- Ensuring a clean transition during a relatively quiet period and focusing on a rigorous onboarding for the new consultant.
DB: What are some of the most important criteria for bringing in a compensation consultant, or do they vary from committee to committee?
AH: Each committee will have its own unique needs and preferences for how they want to work with the consultant. These questions are helpful to determine the criteria that are most important for each organization. Some of the questions compensation committees will have to ask are:
- What level of engagement is preferred? Do we want a consultant who is “in the trenches” as a working partner or more of a liaison between management and the committee?
- What working style is preferred? Do we want deep technical knowledge, or should we seek a consultant focused on strategic thinking like future trends and broader talent issues?
- Do we want a one- or two-consultant model for the committee and/or management?
DB: How are compensation committees evaluating the performance of their compensation consultants?
AH: We found that 90% of our members now have an annual process to assess the performance of their compensation consultant and provide ongoing feedback. This is provided directly by the chair, either formally or informally after consultation with management. In terms of looking externally, many companies are considering a five-year cadence as part of the committee's governance, but this may vary from company to company and does not always result in a change in consultant.
DB: What are the current best practices for onboarding a new compensation consultant?
AH: It is helpful to provide advance notice to the consultant if the organization is planning to conduct a search and to include the consultant (if desired) in the search. They should also have an opportunity to bid for the business. Other best practices include:
- Don't let procurement run the show. Make sure management is involved so they can explain that the search is for a direct advisor to the board, not a typical vendor.
- Assigning a special project to a leading candidate is a great way to learn how the consultant thinks, organizes information and presents their ideas.
- Don't skip the reference checks. They are often the most important and useful part of the process.
- During the onboarding process, the consultant should review multiple years of minutes and documents from prior committee meetings to get acclimated along with reviewing plan documents. Set up working sessions with the CHRO and chair, both of which will be valuable in helping the consultant build key relationships and understand dynamics. The consultant should also meet with business leaders to glean context on how compensation plans are perceived and gain an understanding of the history.