What is the impact of hiring an executive compensation consultant?
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- เผยแพร่เมื่อ 30 ก.ย. 2024
- #ExecutiveCompensation #Auditing
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The full reference for the research paper
Grosse, M., Ma, N., & Scott, T. (2019). Evidence on compensation consultant fees and CEO pay. Australian Journal of Management. doi.org/10.117...
Dr Grosse - www.uts.edu.au...
Dr Ma - www.uts.edu.au...
Assoc Prof Tom Scott - www.aut.ac.nz/...
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Wow. Thank you for making this kind of videos.
I was thinking that companies are willing to hire these consultants just to show to their stakeholders that the CEO package is somehow reasonable, even if it means they have to spend more (on the consulting fee + $ paid to the CEO).
If anyone, for instance, challenges that a CEO is overpaid, the company would be able to answer that it is the industry standard, backed with the recommendation from the compensation consultant, which is often seen as the expert in the field.
Since when did two companies perform the same? This is flawed for sure- we’re talking thousands of factors determining performance and you can literally slice and dice it however you want to.
Hi Amanda. I enjoy your videos immensely, and thank you for them. Regarding your comments starting at about 16:17, you seem to indicate that the very fact that the firm (our audit client) has used a compensation consultant makes Exec Compensation a higher risk area for material misstatement. My understanding is that if the Board of Company B approves the pay package yielding compensation ~12% higher than Company A, per your example, this fact in and of itself does not constitute a risk to the Company B's financial statements, and that our job as auditors is merely to recalculate the actual compensation recorded and ensure it aligns with what the Board approved. Would you please correct me or clarify how paying execs above-market rates (which clearly is a bad deal for shareholders) constitutes a risk of material misstatement?
Hi Chance! A great question. Yes - our role is to audit executive pay, the same as every other account in the financial statements. However, exec compensation, especially when linked to performance indicators is something most auditors would class as a higher risk of misstatement because of self-interest - that is, execs could manipulate the number/figure that is used in the KPI for their bonus.
If, for no other reason than using a consultant, they get paid more - there are more $$ reasons to manipulate the accounts to meet/beat KPIs.
If the executives are being paid a base salary and nothing else - then you're more correct in thinking that there isn't an increased risk of misstatement.
Amanda :)
@@amandalovestoaudit Thanks so much for your insights on this topic. Makes sense how the conditional components of compensation would warrant additional attention.
You videos are getting better and better.
Thanks Dennis 😊
Hye amanda i love your video and i need to spend more time to watch all your previous video..but i need some help especially on substantive procedure.. help me by summarising it.. make it simple so i can pass my audit paper on monday next weekk .. tqq
Hi - have you checked out this playlist of videos specifically on substantive testing?
th-cam.com/play/PLpJRVR3iB5Z7iZdvXUlEOD0rjcutwYnkv.html
Not yet.. i will watch now..
Thanks for the research and the video. I work for an executive compensation consulting firm based in Singapore, and want to clarify 2 points:
A. The role of executive compensation consultants is to provide independent unbiased advice to the Remuneration Committee (RC) formed by several Non-Executive Directors. The consultants will recommend the executive pay based on individual / company performances and benchmarked against the market data, and it is up to the RC to decide. So for companies without an independent consultant, top executives are actually more likely to get unreasonably high pays because they recommend their own pays to the Board! This is clearly a corporate governance issue. Plus, the consultants will offer market data, which shows the percentile levels and adds clarity and reasonableness of the proposals.
As such, with all due respect, I found the conclusion that "companies hiring compensation consultants are paying more to their top executives" is not very convincing. I have seen some publicly traded companies in Singapore that pays CEO fat bonuses but they do not engage any compensation consultants. As a result, we have to regard these firms as outliers in our market data otherwise it is skewed. How did you ensure two companies are exactly the same when you reached the conclusion? i.e. the companies that pay more with compensation consultants are NOT due to larger size (e.g. top and bottom lines, number of employees, total assets) or better economic profit, share price growth, and solely due to the engagement of compensation consultants?
B. Executive compensation (especially short-term and long-term incentives) ought to be audited based on an Agreed Upon Procedure (AUP) that is pre-agreed with auditors. I respectfully disagree that the management is anyhow able to manipulate their KPIs, as the selection of KPIs and the performance matrix are pre-set and approved by the Board, and financials used are post-audit on an "apple-to-apple" basis with the Target. So to minimise the risk of misstatement, the key is for auditors to follow the AUP when auditing excecutive remuneration.
Hi Jevin - thanks for watching! You raise some really interesting points based on your experience - thank you so much for sharing them. This study was based on Australian data - I wonder if there is something in the context of the Australian vs Singaporean jurisdiction that results in this difference.
I will pass all of your comments on to the authors of the study - and if you’d like to chat to them more about your experiences to help inform future research - please drop me a line at amanda.w.white@uts.edu.au and I will e-introduce you 😊