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Remuneration consultants are third-party experts who provide advice to corporations on compensation packages for employees, executives and directors. Typically, remuneration consultants are retained when impartial advice is needed to make sure compensation decisions do not exceed normal industry standards. Top-level executives and board members, in particular, set their own compensation without any supervisory authority that can veto the decision. Retaining independent counsel proves to stockholders and regulators that compensation packages were reasonable when awarded and were not intended to raid the company for the benefit of a small group of individuals.
The compensation packages that top-level executives and board members at major multinational corporations receive can seem astronomical to the average person. A compensation package can include wages, stock options and incentives. It can also include substantial deferred payments, severance and special retirement benefits. Compensation packages are contractual and most of the benefits are guaranteed. Once the contract is signed, the executive receives most of the benefits of the contract, regardless of the quality of his performance.
Consequently, remuneration consultants are an important means of checks and balances. A top executive who is fired from his position for poor performance can still receive millions of dollars in compensation under his contract. Without independent verification that the compensation package was reasonable, it can seem as if a departing executive is receiving an unjust windfall. Such an impression can alarm stockholders, undermine public confidence and serve as a red flag to regulators.
A corporation's top executives or board of directors hire remuneration consultants when decisions on compensation need to be made. The consulting firm comes armed with information on comparable corporations and compensation structures that are standard in the industry. They review the compensation package that the company would like to award and make an assessment of the value of the executive or director, taking into account his unique attributes. The consulting firm then prepares a written recommendation regarding the total value of the compensation package and its components.
Governments in certain countries have focused on the role of remuneration consultants to improve corporate governance. In the UK, for example, a bill to improve the accountability of remuneration consultants was introduced into Parliament in 2011. The bill required remuneration consultants to attest to the independent nature of their counsel. Boards and top-level executives were required to have non-executive directors approve the selection of the consulting firm and receive a copy of the consultant's recommendations. The bill was designed to do what regulators in many countries are now seeking to do -- create accountability and transparency in the renumeration process of a corporation's most highly compensated personnel.