Smithers, get me an above-average pay consultant

The Mail on Sunday 6 February 2005

All the children in Garrison Keillor's best-selling novel Lake Wobegon are said to be 'above average' Though that is a mathematical impossibility, it seems to be a rule that has been taken up with some enthusiasm when setting boardroom pay levels.

The Lake Wobegon effect works like this. Boards hiring a new chief executive or reviewing pay scales seek the advice of remuneration consultants, whose job it is to know the going rate.

No board, though, wants to pay the average because that would be an admission that the successful candidate or incumbent is just that - average. So executive pay spirals ever upwards, and the link between pay and performance that shareholders demand becomes ever more detached.

The average pay of at typical FTSE 100 director has jumped by about 80 per cent in the past five years, while the value of leading shares has plunged by almost a third.

But as companies prepare to face shareholders at annual meetings, the role of this army of pay consultants is coming under fire.

They are accused of fuelling boardroom pay rates to win business for themselves. The Association of British Insurers, whose members speak for a fifth of the stock market, claims that the advisers are soliciting business by hinting to prospective clients that they could drive up pay rates for directors.

'Some advisors are ratcheting up pay and need to distinguish between genuine need as opposed to "me-too-ism",' said Peter Montagnon, the ABI's head of investment affairs.

New research carried out for the Financial mail suggests that there is a clear link between companies with controversial remuneration practices and their pay consultants.

Two surveys were conducted. In the first, consultants were matched to more than 40 companies whose pay reports last year earned 'red top' warnings from the ABI. They signal that the Association believes pay is far too high.

The same exercised was carried out with four companies whose remuneration reports received the largest number of dissenting votes by shareholders last year. In both cases, consultancy firm New Bridge Street came top. It had seven clients 'red-topped' by the ABI last year, and ten of the top 40 companies where the shareholders staged the biggest revolts over boardroom pay.

A recent survey found that, together with its larger US rival Towers Perrin, New Bridge had effectively cornered the market, advising two-thirds of FTSE 100 companies in the past couple of years.

Towers Perrin helped devise the astonishing £22 million pay plan for GlaxoSmithKlein chief executive Jean-Pierre Garnier that was rejected by shareholders.

It also came up with a controversial £2.3 million bonus scheme for Sainsbury chief executive Sir peter Davis that ultimately cost him his job. Investors are concerned that the concentration of pay advice is hampering the introduction of innovative schemes that could improve the link between pay and performance.

'The ratcheting up of directors' pay seems to be based on a number of factors,' says Alan Brett of Manifest, which gives advice on shareholder voting and helped compile the data.

'There are an increasing number of companies declaring themselves "international" and demanding pay to match American companies. There is increased disclosure on pay at British companies so everyone knows who earns what. And there is increased competition between pay advisers to win business.'

But the pay consultants are not ready to take the blame. New Bridge's David Tankel said: 'We advise more FTSE 350 companies than any other consultancy, so it is not surprising we should feature in the ABI's list.

'But it would be misleading to suggest we deliberately go round ramping up boardroom pay. It's the remuneration committee that sets directors' pay, not us. We just supply the data - and sometimes our advice is overruled.'

But Financial Mail has also uncovered evidence that the cult of the pay consultant is reaching new heights.

Thanks to new rules, companies are obliged to reveal who their pay advisers are and what they do.

Not content with hiring one expert, some companies now have several to advise them, not just on boardroom pay, but also to advise on issues such as directors' pensions, contracts, overseas benefits, best practice and non-executive fees.

According to manifest, the record is held by BHP Billiton, the world's biggest mining company. It retains a staggering six firms of pay consultants.

BHP Billition is closely followed by two other FTSE 100 companies - Imperial Tobacco and insurer Friends provident - who each have five.

But the trend to more pay consultants is not confined to blue-chip companies.

Both tout operator First Choice and music retailer HMV also have five pay firms on their books. And these advisers do not come cheap. Consultants charge about £500 an hour for their services.

So it probably will not be long before they bring in pay consultants to set the pay of pay consultants.

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