Pay Consultants Face Ban on Providing Other Work for Same Firm

By | July 8, 2009

The Obama administration plans to detail as soon as this week new measures to clamp down on potential conflicts of interest between compensation consultants and corporate executives, sources familiar with the administration’s thinking told Reuters Wednesday.

The administration is considering language that would prohibit a consulting firm from providing compensation advice and other human resources work for the same company, said two sources, who requested anonymity because the legislative language could change.

That would be a departure for consulting firms such as Mercer, a subsidiary of Marsh & McLennan Companies Inc., and Hewitt Associates Inc. — which now can provide a multitude of services to corporations.

The tougher rules come as executives’ pay packages are scrutinized after some managers at companies that received taxpayer funds walked away with hefty payments, such as those at insurer American International Group Inc.

Corporate governance activists have accused pay consultants of crafting exorbitant packages for executives because sometimes they are hired by the same managers to help run pension plans and advise on human resources issues.

The administration is expected to unveil legislative language on compensation committees and consultants that goes further than what the Securities and Exchange Commission proposed last week.

Under the SEC proposal, companies would be required to disclose fees paid to compensation consultants when they help determine how much an executive or director should be paid. That disclosure would only be required if the same consulting firm provided other human resources services for the same company.

The administration’s plan to prohibit a consulting firm from providing both pay and other advice is similar to what the United States did with auditors of public companies after the Enron and WorldCom accounting scandals.

Accounting firms such as PricewaterhouseCoopers LLP, Deloitte &Touche LLPand Ernst & Young LLP are not allowed to audit and provide other consulting services for the same company.

The administration is also expected to propose legislation to make compensation committees more independent by giving the committee the “responsibility and the resources to hire their own independent compensation consultants and outside counsel.”

The legislation will be part of the White House’s plan to overhaul the country’s financial regulation. Already, it has proposed language for a new Consumer Financial Protection Agency, which will have powers to write and enforce rules for a wide range of financial products.

Treasury Secretary Timothy Geithner has advocated giving shareholders a nonbinding vote on executive pay and has outlined broad reforms to ensure that board compensation committees have more independence from management.

“Many of the compensation practices that encouraged excessive risk-taking might have been more closely scrutinized if compensation committees had greater independence and shareholders had more clarity,” Geithner said in June.

(Reporting by Rachelle Younglai; editing by Andre Grenon)

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