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Do Compensation Consultants Enable Higher CEO Pay? A Disclosure Rule Change as a Separating Device

Author

Listed:
  • Jenny Chu

    (Cambridge Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom)

  • Jonathan Faasse

    (Independent, Bedford, Bedfordshire, United Kingdom)

  • P. Raghavendra Rau

    (Cambridge Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom)

Abstract

We investigate the impact of a firm’s compensation consultant choice on executive compensation by examining shifts in consultant choice stemming from a 2009 U.S. Securities Exchange Commission requirement that firms disclose fees paid to compensation consultants for both consulting and other services. We show that the disclosure rule change acted as a separating device distinguishing firms likely to have used compensation consultants to extract rents from shareholders from firms that were likely to have used consultants to optimally set pay. We conclude that not all multiservice consultants are conflicted, while not all specialist consultants are guardians of shareholder value. Our study provides a more nuanced view of the association between compensation consultant choices and executive pay.

Suggested Citation

  • Jenny Chu & Jonathan Faasse & P. Raghavendra Rau, 2018. "Do Compensation Consultants Enable Higher CEO Pay? A Disclosure Rule Change as a Separating Device," Management Science, INFORMS, vol. 64(10), pages 4915-4935, October.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:10:p:4915-4935
    DOI: 10.287/mnsc.2017.2845
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    References listed on IDEAS

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    Cited by:

    1. Canil, Jean & Karpavičius, Sigitas, 2020. "Compensation consultants: Does reputation matter?," Journal of Corporate Finance, Elsevier, vol. 64(C).
    2. Lucas C. Coffman & Alexander Gotthard-Real, 2019. "Moral Perceptions of Advised Actions," Management Science, INFORMS, vol. 65(8), pages 3904-3927, August.
    3. Fich, Eliezer M. & Parrino, Robert & Tran, Anh L., 2023. "When and how are rule 10b5-1 plans used for insider stock sales?," Journal of Financial Economics, Elsevier, vol. 149(1), pages 1-26.
    4. Asher Curtis & Valerie Li & Paige H. Patrick, 2021. "The use of adjusted earnings in performance evaluation," Review of Accounting Studies, Springer, vol. 26(4), pages 1290-1322, December.
    5. Shi, Lina & Gong, Stephen & Wang, Xingang, 2021. "Social network, corporate governance, and rent extraction in CEO compensation: Evidence from spatial econometric models," The British Accounting Review, Elsevier, vol. 53(4).

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