Equity Magazine August 2017 Issue

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The CEO decides how much you get paid, but who decides his pay? Enter
the secretive and complex world of the executive compensation consultant
Words by Varun Godinho
Warren Buffett and his chief
lieutenant Charlie Munger are
united in their overt distaste for
executive compensation
consultants – professionals appointed by the
boards of some of the world’s biggest companies
to determine the compensation-and-benefits
packages of its top bosses. At the annual Berkshire
Hathaway annual meeting in May this year, Buffett
said, "If the board hires a compensation consultant
after I go, I will come back – mad," while Munger
added, “I have avoided all my life compensation
consultants. I hardly can find the words to express
my contempt."
But is the business of compensation
consultants getting an undeserved bad rap?
“There is always a risk of us having an inflationary
pressure on compensation. But the more
balanced view is that we act as a controller and
brake on executive pay. We’re very aware of what
the market rate for a job is and the HR
professionals inside the institutions that we deal
with need third-party validation of what they are
doing. In many instances, I find myself arguing
for compensation to go down rather than up.
That’s the bit of the discussion that Mr. Buffett
might miss because he only receives the headlines
where the numbers are going the other way,” says
Dubai-based Martin McGuigan, Partner at Aon
Hewitt Middle East, who also heads up the
McLagan division at Aon that specifically deals
with compensation within the financial services
sector in the MENA region.
Globally, Aon Hewitt is one of the biggest
players in the industry – reportedly, over 70 per
cent of the Fortune 500 and FTSE 100
companies in America and the UK have
contracted its services to determine the pay of
its upper-crust management.
Contrary to what you believe, these
consultants aren’t the empowered sharks that
dole out packages worth tens of million on a
whim to slick CEOs. McGuigan explains its
business model. Most organisations have what
is known as an internal nomination and
remuneration committee (NRC). The NRC is
tasked with finding executive-level candidates –
often accepting names pitched by headhunters
– vetting and interviewing them and, most
importantly, will act as the penultimate authority
on determining the quantum of pay.
To help them reach that decision though, the
NRC cannot rely on headhunters who are
motivated by securing a higher pay for their
candidate because they are paid a percentage of
the final package. Instead, they turn to thirdparty
neutral external bodies like the Aon
Hewitt to gather market intelligence on what
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