A Watchful Eye on Executive Compensation: The Consultant’s Role
Over the past several years, and even over the past several months, there has been much press coverage on the compensation of college and university presidents. Most often, these stories focus on how exorbitant the compensation appears. Take a look at one recent article in The Chronicle of Higher Education,
for instance, which reported that leaders of college and university systems saw a 15.5 percent increase in base salaries, on top of attractive perks like homes, cars, club memberships and the like.
How did the higher education community get here? Blame the compensation consultants, of course!
Not so fast. That simplified view—which holds outside advisors largely responsible for rising pay rates—overlooks the crucial role consultants play in helping governing bodies and boards of directors formulate an institution’s unique approach to compensation and the role it will play in helping to recruit, motivate, reward and retain the individuals leading an organization.
To get there will take close collaboration and an honest discussion between consultants and the bodies that hire them around two key issues:
1. Governance and guiding principles.
We’re talking here about thoughtful deliberation that produces a specific set of guiding principles grounded in the “business needs” of the institution. After all, the board is ultimately responsible for ensuring that sound governance and compliance policies are in place; this is just one more risk the institution faces. In taking a hard, honest look at their compensation practices, institutions can go a long way toward ensuring they are staying true to their ideals and to the specific norms governing their work.
2. The role of competitive data.
Compensation consultants often face two other criticisms: they rely too heavily on competitive pay levels as the basis for their recommendations, causing a perpetual upward spiral of pay rates; and they “cherry pick” data that best supports a sought-after outcome, rather than considering research that actually portrays things as they are. Consultants certainly owe boards an explanation that competitive data is simply used as context in deciding the “right answer” for a particular institution, that data is the combined wisdom (and ignorance) of everyone trying to answer the same question. It is merely one element of a thoughtful, multifaceted answer to a number of the key questions boards should consider when looking to determine their rewards practices. Here are some of those questions:
- What institutions should be used in our competitive benchmarking and why?
- Are there specific characteristics of our organization, position or the incumbent that need to be taken into account as we select our external ‘peers’?
- Where should we target our compensation in relation to the external benchmarks we have selected, and why?
- How should we structure our compensation and benefits packages in order to best support our objectives for the institution and the particular position?
- Are our methods and levels of compensation and benefits consistent with the culture and values we hold as an institution?
The responsibility for asking these questions, and a host of others, lies with consultants and boards of directors, alike. With greater clarity around expectations—that an institution has brought a consultant on board for advice and assistance in addressing broader issues and not just seeing the latest pay data, for instance—I believe there would be far fewer instances of outrage over executive pay; and when questions did arise, institutions would be far better prepared to answer them.
Michael Dannar, based out of BDO’s North Carolina office, is an assurance partner in the Nonprofit & Education practice. Mike Conover, located in Boston, is a senior director in BDO’s Compensation & Benefits practice.