Outside Advice on Boss's Pay May Not Be So Independent
By Gretchen Morgenson
New York Times
Monday, April 10, 2006
For Ivan G. Seidenberg, chief executive of
Verizon Communications, 2005 was a very good year. As
head of the telecommunications giant, Mr. Seidenberg
received $19.4 million in salary, bonus, restricted stock
and other compensation, 48 percent more than in the previous
Others with a stake in Verizon did not fare so well.
Shareholders watched their stock fall 26 percent,
bondholders lost value as credit agencies downgraded the
company's debt and pensions for 50,000 managers were frozen
at year-end. When Verizon closed the books last year, it
reported an earnings decline of 5.5 percent.
And yet, according to the committee of Verizon's board that
determines his compensation, Mr. Seidenberg earned his pay
last year as the company exceeded "challenging" performance
benchmarks. Mr. Seidenberg's package was competitive with
that of other companies in Verizon's industry, shareholders
were told, and was devised with the help of an "outside
consultant" who reports to the committee.
The independence of this "outside consultant" is open to
question. Although neither Verizon officials nor its
directors identify its compensation consultant, people
briefed on the relationship say it is
Hewitt Associates of Lincolnshire, Ill., a provider of
employee benefits management and consulting services with
$2.8 billion in revenue last year.
Hewitt does much more for Verizon than advise it on
compensation matters. Verizon is one of Hewitt's biggest
customers in the far more profitable businesses of running
the company's employee benefit plans, providing actuarial
services to its pension plans and advising it on human
resources management. According to a former executive of
the firm who declined to be identified out of concern about
affecting his business, Hewitt has received more than half a
billion dollars in revenue from Verizon and its predecessor
companies since 1997.
In other words, the very firm that helps Verizon's directors
decide what to pay its executives has a long and lucrative
relationship with the company, maintained at the behest of
the executives whose pay it recommends.
This is the secretive, prosperous and often conflicted world
of compensation consultants, who are charged with helping
corporate boards determine executive pay that is appropriate
and fair, and who are often cited as the unbiased advisers
whenever shareholders criticize a company's pay as
It is a world where consulting fees can reach $950 an hour,
rivaling those of the nation's top lawyers. And it has
grown into a substantial industry where there is little
disclosure about how executive pay is determined.
Marc C. Reed, executive vice president for human resources
at Verizon, declined to identify the company's compensation
consultant, noting that the Securities and Exchange
Commission did not require it. "We understand the potential
perception issue," he said in an e-mail message, "but we
think it's important to honor the confidentiality of our
advisers, and we have always ensured there have been no
conflicts of interest."
Suzanne Zagata-Meraz, a spokeswoman for Hewitt, said in a
statement: "Hewitt Associates has strict policies in place
to ensure the independence and objectivity of all our
consultants, including executive compensation consultants.
In addition, Hewitt adheres to strict confidentiality
requirements and a strong Hewitt code of conduct."
Because much of what goes on in compensation consulting
stays in the hushed confines of corporate boardrooms, the
roles of these advisers in determining executive pay have
been hidden from investors' view. Nevertheless, corporate
governance experts say, the conflicts bedeviling some of the
large consulting firms help explain why in good times or
bad, executive pay in America reaches dizzying heights each
Warren E. Buffett, the chief executive of
Berkshire Hathaway and an accomplished investor, has
noted the troubling contributions that compensation
consultants have made to executive pay in recent years.
"Too often, executive compensation in the U.S. is
ridiculously out of line with performance," he wrote in his
most recent annual report. "The upshot is that a
mediocre-or-worse C.E.O. — aided by his handpicked V.P. of
human relations and a consultant from the ever-accommodating
firm of Ratchet, Ratchet & Bingo — all too often receives
gobs of money from an ill-designed compensation
How Much Is Too Much?
Executive pay has been a subject of criticism for decades.
Even though last year's pay figures showed slower growth
than in previous years, the fact that executive compensation
often has little relationship to the performance of the
company has contributed to a growing sense among investors
that pay is diminishing shareholder returns. "Everybody
should have an interest in controlling this explosion in
executive pay," said Frederick E. Rowe Jr., chairman of the
Texas Pension Review Board who is also chairman of
Greenbrier Partners, a money management firm in Dallas.
"The wealth of America has been built through the returns of
our public corporations, and if those returns are being
redirected to company managements, then the people who get
the short end of the stick are the people who hope to retire
The median compensation for chief executives at roughly 200
large companies rose modestly to $8.4 million last year,
from $8.2 million in 2004, according to Equilar Inc., a
compensation analysis firm in San Mateo, Calif. The median
was $7.2 million in 2003.
There are those who defend the current levels of executive
pay, saying that the packages are set by the market and
reflect the rising value of executives in an increasingly
complex and competitive arena.
In an interview with The Wall Street Journal on March 20,
John W. Snow, secretary of the Treasury, characterized
executive pay this way: "In an aggregate sense, it reflects
the marginal productivity of C.E.O.'s." Mr. Snow added that
he trusted the marketplace to reward executives. Mr. Snow
was a member of the Verizon board from 2000 to 2002 and on
its compensation committee in 2001.
But defenders of executive pay are increasingly being
drowned out by investors and workers who see some packages
not only as an unjustified cost but also as a potentially
divisive social issue.
Any discussion of executive pay quickly leads to
compensation consultants, because they are the experts
relied upon by company directors trying to balance their
fiduciary duties to shareholders and their desire to keep
management happy. Directors look to consultants for their
knowledge about prevailing pay practices as well as the tax
and legal implications of different types of compensation.
Yet the consultants' practices have received little
Consultants help select the companies to be used in peer
groups for comparison purposes in judging an executive's
performance. Picking a group of companies that will be easy
to outperform is one way to ensure that executives can clear
performance hurdles. Another is to structure an executive's
pay so that it is always at or near the top of those in his
industry regardless of his company's performance. This
pushes up pay simply when others in the industry do well.
Consultant creativity is behind some of the pay practices
that have generated huge windfalls for executives in recent
years. Some of the most costly practices involving stock
options, like mega-grants and automatic reloads of options
when others are cashed in, have vanished under pressure as
accounting rules have changed. But innovative practices
continue to crop up and spread quickly because comparisons
with what other executives receive is a central factor
driving executive pay.
An increasingly common practice of consultants is to use the
same performance benchmark to generate both short-term and
long-term pay. This arrangement rewards executives twice
for a single achievement, noted Paul Hodgson, senior
research associate at the Corporate Library, a corporate
governance research firm in Portland, Me.
A recent study by the Corporate Library, "Pay for Failure:
The Compensation Committees Responsible," identified 11
major companies whose shareholder returns had been negative
for five years, but whose chief executives' pay had exceeded
$15 million during the last two years combined. "The
disconnect between pay and performance is particularly
stark" at these companies, the study noted. They include
Time Warner and
Directors Help Each Other
Verizon is the other company on the list. Mr. Seidenberg's
$75 million total pay for five years looked especially high
against a total shareholder loss of more than 26 percent in
the period, the study said. Verizon's board received a
grade of D in effectiveness from the Corporate Library.
Robert A. Varettoni, a Verizon spokesman, pointed out that
Mr. Seidenberg had received the first increase in base
salary last year since the company was formed in 2000.
"During this particularly tumultuous time in the telecom
industry," Mr. Varettoni said in an e-mail message, "Verizon
has maintained its financial health and infrastructure
investments, increased its dividends, lowered its debt,
transformed its revenue growth profile, and provided
customers with a steady stream of product innovations, such
as wireless broadband services and fiber-optic-based TV
Doreen A. Toben, chief financial officer of Verizon, sits on
the board of The
New York Times Company and on its audit committee.
Hewitt Associates is the compensation consultant for The New
York Times, said Catherine Mathis, a spokeswoman for the
Times, but does not handle other business for the company.
Consultants are not alone in driving executive pay.
Corporate boards are often composed of other chief
executives with an interest in keeping executive pay high.
Even though stock exchange regulations require compensation
committee members to be independent of the executives whose
remuneration they oversee, their connections with those
people can run deep.
Verizon's compensation committee, for example, consists
entirely of chief executives or former chief executives.
Three of the four members sit on other boards with Mr.
Seidenberg. When he was on Wyeth's board, Mr. Seidenberg
helped set the pay of one member of Verizon's compensation
committee, John L. Stafford, previously the chairman and
chief executive of Wyeth.
Human resources officials often work closely with the
compensation consultants and report directly to the chief
executives. Then there are the executives themselves, who
have been known to make quiet suggestions to their directors
about their pay, according to board members and compensation
experts who spoke about their experiences but said they
feared retribution if they were identified.
Mutual fund and pension fund managers, too, regularly vote
their shares in favor of large grants of stock options or
The potential for conflicts in consulting arrangements can
be difficult for outsiders to spot. Even if the consultant
is identified, the other work that a consultant's company
performs for the compensation client is hard to plumb.
"I wish we could figure out how to flesh out the conflicts
that pay consultants have in the same way we were successful
in fleshing out the conflicts in Wall Street research," said
Richard H. Moore, who as treasurer of North Carolina
oversees $70 billion. "This is one of the last pieces that
are pure unadulterated conflicts that neither the board nor
the shareholder is well served by."
Room for Potential
The only reference to Hewitt Associates in any Verizon
filing, for instance, is a letter sent by the company to
institutional shareholders and attached to a 2004 proxy
filing. The letter, written by a Hewitt official, details
the supplemental executive retirement plan in response to a
shareholder proposal that would have required stockholder
approval of any "extraordinary benefits for senior
executives" at Verizon.
Last year, Verizon's directors described the compensation
adviser as an "independent, outside consultant." In this
year's proxy, the word "independent" is missing.
The Securities and Exchange Commission has proposed rules on
compensation disclosure that would require compensation
consultants to be identified. But the rules would not force
companies to disclose details of other services provided by
the consulting firm or its affiliates.
The potential for conflict is reminiscent of that among
auditing firms that were performing lucrative consulting
services related to information technology and tax issues
for the same companies whose financial results they were
certifying. When the S.E.C. required companies to disclose
how much they were paying in consulting as well as audit
fees, the industry was compelled to separate these
"Auditors' giving companies tax advice while acting as their
independent auditors was clearly crossing the line into bad
corporate governance in the cases of Enron and
Hollinger," said Mr. Hodgson of the Corporate Library.
Referring to pay consultants, he added: "The perception has
been growing that it is better that there be a clear line of
distinction between the people the board hires and the
people hired by the corporation."
The Conference Board, a nonprofit organization that conducts
research and conferences for business leaders, issued a
report in January suggesting, among other practices, that
boards hire their own compensation consultants, who have not
done work for the company or its current management. The
report quoted a former chief justice of Delaware, E. Norman
Veasey: "Compensation committees should have their own
advisers and lawyers. Directors who are supposed to be
independent should have the guts to be a pain in the neck."
But according to consultants and directors, compensation
committees typically employ a consultant who also works with
a human resources executive, the company's chief executive
and the chief financial officer. In many cases, a company's
chief executive is present at meetings where the
compensation consultant and the human resources executive
hash out the terms of a package.
Some compensation committees have started hiring their own
pay consultants who do no other work for their companies.
James F. Reda & Associates, a small pay consultant in New
York, founded in 2004, works with some of the nation's
largest companies on executive compensation issues. But
such independence is uncommon.
In a comment letter to the S.E.C. on its proposed disclosure
rules, Mr. Reda noted that all but one of the nation's large
compensation consultants offered other services. "Most
diversified H.R. consulting firms earn more on selling other
services than on performing compensation consulting
services," he wrote.
Hewitt; Watson Wyatt; Towers Perrin; Pearl Meyer & Partners,
a unit of Clark Consulting; and Mercer Human Resources
Consulting, a unit of Marsh & McLennan, all provide a vast
array of services to corporate clients.
Hewitt, for example, conducted mostly actuarial work when it
was founded in 1940. Now, it is much more diversified,
operating in 31 countries and providing things like
investment services. Of the $2.8 billion in revenues at
Hewitt in 2005, 71 percent came from its outsourcing
business; 29 percent came from its human resources
Typically, only a fraction of a firm's sales come from
compensation consulting. Mr. Reda estimates that
compensation consulting generates less than 2 percent of a
diversified firm's revenues.
Verizon is not the only Hewitt compensation client that uses
the firm for actuarial, administrative, investment advice or
other services. According to filings with the Labor
Department, Hewitt has worn two hats in its work for
Maytag, Genuine Parts,
Procter & Gamble, Toro,
Morgan Stanley and
Because few companies identify their compensation
consultant, this list is by no means comprehensive.
At Verizon, Hewitt is ubiquitous. The company operates
Verizon's employee benefits Web sites, where its workers get
information about their pay, health and retirement benefits,
college savings plans and the like. Labor Department
filings show that Hewitt is actuary for three of Verizon's
pension plans. Hewitt also performed extensive work for the
two companies — Bell Atlantic and GTE — that merged to
become Verizon in 2000. Immediately after the merger,
Verizon employed Hewitt to help it assess overall human
resources costs. Over the years, Hewitt's Web site has
offered testimonials from Verizon officials about its
These multiple relationships are no accident. Hewitt calls
its offerings "total human resources solutions" that help
clients manage the costs of their work force efficiently.
Towers Perrin, Watson Wyatt and Mercer Human Resources make
the same pitch. They contend, as Wall Street firms once did
about stock analysts and investment bankers, that potential
conflicts can be managed properly. In a working group
report written by corporations and consultants last year for
the Conference Board, they argued that companies and boards
are best served by using a single compensation consultant —
less adversarial and lower cost — and that the consultant
should work closely with the company's management in
devising executive pay. This argument was rejected in the
Conference Board's subsequent report.
A 'One-Two Punch'
Brian Foley, an executive compensation expert who operates
his own independent consulting firm in White Plains and who
does not work for Verizon, analyzed Mr. Seidenberg's pay for
this article. "If you were a shareholder looking at how
Ivan did financially, in terms of new stuff, if you didn't
know the facts, you would have sworn they had a really good
year," Mr. Foley said. "Bonus up 23 percent and a 40
percent salary increase — that's a one-two punch in a year
when stockholders are down."
According to Verizon's proxy, Mr. Seidenberg received his
raises last year in part because the company expanded "its
customer base through innovative products in wireless,
broadband, data, video and long-distance services,"
according to the company's proxy statement. In addition,
Verizon made significant investments in its network and
enlarged its market share. Verizon's annual consolidated
operating revenue increased 6 percent, driven by 16.8
percent revenue growth at Verizon
Wireless and 10.5 percent revenue growth in wireline
Mr. Reed noted that last year Verizon's board canceled
209,660 restricted shares Mr. Seidenberg was to receive.
"Ivan and the board have made a series of strategic business
choices that are designed to create sustainable long-term
shareholder value," he said in an e-mail message. "In 2006,
these plans have begun to take root, and our shareholders
have begun to benefit accordingly."
But Mr. Foley pointed to several aspects of Mr. Seidenberg's
pay that seem out of sync. One is the low level of
performance — beginning at the 21st percentile of other
companies — that generates an incentive stock payout. "If
you have 100 companies in the sample, as long as you beat 20
of them you start making money," Mr. Foley said. "That
hurdle is so low it's almost embedded in the ground."
Another surprise, Mr. Foley said, was Verizon's
contributions to Mr. Seidenberg's retirement plan in recent
years. "They've put in almost $6 million in four years in
new contributions — that goes beyond holy cow," he said. "I
look at this in the context of all the retrenchment Verizon
has made in retiree benefits and medical for the
rank-and-file guys." Verizon has frozen future benefits to
be paid under Mr. Seidenberg's retirement plan, which had
grown to $15.2 million by the end of last year.
Each year that Mr. Seidenberg has been Verizon's chief
executive, a shareholder proposal has appeared on the
company's proxy that is critical of its executive pay. At
this year's meeting, scheduled for May 4, shareholders will
vote on a proposal that would require that at least
three-quarters of stock option and restricted share grants
to executives be "truly performance-based, with the
performance criteria disclosed to shareholders."
The company's directors say its incentive pay plans already
"provide aggressive and competitive performance objectives
that serve both to motivate and retain executives and to
align their interests with those of the company's
But the Corporate Library study concurred with Mr. Foley in
questioning Verizon's practice of paying bonuses even when
the company's performance lags well behind that of most
companies in its comparison groups. "This is not even
logical," the study asserted.
Mr. Reed of Verizon noted that the consultant used by the
compensation committee did not certify board actions, "but
its perspective — which board members may or may not agree
with — is one of many inputs considered before the board
reaches its independent decision."
On the matter of disclosing the consultant's identity,
"We'll continue to look at this issue," he said, "even if
the S.E.C. does not adopt new guidelines."
Gary Lutin, an investment banker at Lutin & Company in New
York and an adviser in corporate control contests, said:
"Paying some friendly consultant $100 million to help you
justify the diversion of shareholder wealth to managers is
just adding another $100 million to the diversion. If
you're really trying to be a responsible director, you'd
never rely on an expert who can't be considered objective."
Shareholders Speak Up
Verizon's compensation committee is led by Walter V.
Shipley, former chief executive of the Chase Manhattan
Corporation, and is made up of Richard L. Carrión, chief
executive of Banco Popular de Puerto Rico; Robert W. Lane,
chief executive of
Deere & Company; and Mr. Stafford, formerly of Wyeth.
None of Verizon's directors agreed to be interviewed for
Many of the Verizon directors who are on its compensation
committee have also met Mr. Seidenberg at board meetings of
other public companies. At Wyeth meetings, Mr. Seidenberg
encounters Mr. Shipley, who is the chairman of Verizon's
compensation committee and who is a member of Wyeth's
committee, sitting with Mr. Carrión, at least until 2006.
Mr. Seidenberg sees Mr. Stafford when the board of
Honeywell International meets. Mr. Stafford is chairman
of Honeywell's compensation committee, which includes Mr.
C. William Jones, the president and executive director of
BellTel Retirees, a group of 111,500 people, has had many
meetings with Verizon executives to discuss pay.
BellTel Retirees have placed four shareholder proposals
relating to executive compensation on Verizon proxies in
recent years; the organization has won significant
concessions from the company after the proposals attracted
Mr. Jones said Verizon executives had always treated him
with respect. But the dialogue stops on the subject of
Verizon's consultant. "I spoke to a senior vice president
of human resources and said, 'Who is it?' " recalled Mr.
Jones, who retired in 1990 with 30 years' service. "He
said, 'We have a policy that we do not disclose that
information.' I don't know what the secret is."