It’s no secret that the top executives of companies receive extraordinarily large amounts of money for relatively little work, especially when compared to everyday people. Now, consulting firms are also starting to be scrutinized for their role in the process. With rising income inequality quickly becoming a very concerning issue, many people have been examining how consulting firms are helping to organize the large earnings that are enjoyed by top company leaders.
While consulting firms often go unnoticed outside of company board rooms, these powerful agencies have been developing increasingly complex pay systems for company CEOs. Obviously, these pay systems work largely in favor of top business executives. They use every known trick in the book, including cash bonuses and performance share units. They also make use of complicated formulas to calculate payouts in a way that attempts to give company leaders top pay with as little scrutiny as possible.
Consultants often try to cover this up by saying that since they are an outside party, they fully use their own discretion when deciding payouts within a corporation. However, critics are arguing that the consulting firms are working in favor of the higher ups, while trying to disguise this practice by using complex pay systems. The consultants get their foot in the door by saying that companies need to use their services in order to make their paydays appear fair and justifiable, while also helping them to manage a complicated process. From there, they work in favor of the company leaders.
According to executive chair of the CI Financial Corporation Bill Holland, consulting services are a scam. He says that they may pay systems much too complex, and they rely too much of benchmarking the pay of executives against other companies. Companies get sucked in because, unsurprisingly, those who make pay decisions want to compensate company leaders at an above average level for their industry. Often company leaders aim to be in the top quarter percentile when it comes to compensating their executives.
Holland said, “If everyone is in the top quartile, you have runaway inflation that cannot stop. All you have to do is pay above the median and mathematically it does not stop. So the consultants, I think, are essentially a negative component of this.”
However, representatives of consulting firms are quick to defend their practices. They have said that companies that hire independent consultants typically have more equal pay throughout the entire company and that these companies tend to have a greater association between performance and compensation.
Additionally, just because a company has hired a consulting firm does not mean that the company will necessarily listen to their recommendations. Many ideas from consultants get shot down because they aren’t to the liking of shareholders, or they differ too much from traditional policies. Indeed, radical changes to pay structure are often impossible to achieve.
Still, the speculation that consulting firms try to appeal to CEOs by recommending large raises is still present. A major problem is ensuring that the consultant is actually independent of the company. Since it is often those with a major stake in the matter who select which consulting firm to hire, the process often becomes quite skewed. While a company might appear to be ethical by hiring an outside consulting firm, that “independent” source could be working in their favor the entire time.