Towers Watson Outlines Executive Compensation Consulting Strategy
The consultant says that, “after an extensive three-month review of the executive compensation (EC) consulting market in the U.S.”, it has “reaffirmed its commitment to the EC consulting business, while reorienting its strategic approach to meet the evolving needs of clients”. According to a press release, the strategic review was prompted in part by new Securities and Exchange Commission (SEC) proxy rules that require companies in some situations to disclose the consulting fees they pay to firms that provide both EC and other consulting services.
“Our research has confirmed an evolution in the executive compensation consulting marketplace,” said John Haley, CEO of Towers Watson, in announcing the decision, “We are adjusting our business approach to meet the needs of this changing market while maintaining our absolute commitment to Towers Watson’s continued leadership in the field.”
While Towers Watson said its recent study confirmed that the majority of U.S. companies consider EC consultant independence as one of the factors influencing how they buy EC consulting services, there were a variety of ways they felt they could ensure independence. In addition to the need for a range of EC consulting models, the research showed that the most important criteria behind the selection of a consulting firm are the consultancy’s expertise, quality and depth of data and research, and the relationship with the individual consultant.
New Strategy
With that in mind, the firm said it is embracing a “clients-first strategy that provides clients with the leading, best-in-class consulting expertise, data and research needed under the full range of governance approaches”.
According to a press release, Towers Watson will continue to work with client Board Compensation Committees that are comfortable with the company’s existing EC consulting protocols, which it says include full disclosure of the firm’s business relationship, rigorous peer review and audit, and restrictions on cross-selling of services by EC consultants.
Separate Alternative
For those who believe that retaining separate EC advisors for the Compensation Committee and management is the best governance model, Towers Watson says it will focus on providing EC consulting services to management where another consulting firm serves as the EC advisor to the Compensation Committee. To facilitate this approach for its existing clients who decide this governance model is best for them, an independent, non-affiliated consulting firm, Pay Governance LLC will be formed, staffed by former Towers Watson EC consultants who will serve as Board-level advisors. Towers Watson says that clients who choose to work with both Towers Watson and Pay Governance LLC for their EC needs will benefit from the consultants’ expertise and a similar approach, while maintaining a clear division between management and Compensation Committee consulting activities.
According to the announcement, Pay Governance LLC , which will formally launch on July 1, will be led by a group of former senior leaders at Towers Watson, including John England, Ira Kay and Richard Meischeid. Under the terms of the proposed transaction, Towers Watson, in consideration of certain payments by Pay Governance LLC, will transition a select number of current and former Towers Watson associates to the new firm over the remainder of calendar year 2010, with additional staff transitioning after that based on market demand.
The research leading to this newly expanded approach to EC consulting was based on interviews with more than 100 Human Resources executives, Compensation Committee members and EC consultants. The study, conducted by an independent research firm and an independent management consulting firm, explored issues in many areas of EC consulting, including the new SEC disclosure rules and companies’ views on potential conflicts of interest.
Financial Impact
The impact on annual revenues and net operating income as a result of Towers Watson staff moving to Pay Governance LLC is expected to be approximately $10 million and $3 million, respectively. Towers Watson anticipates that this impact may be offset by potential opportunities created through a reduction in perceived conflicts, as clients who were previously concerned about independence issues may no longer place limits on the work Towers Watson does in other areas.
"While we do see a shift in the buying patterns for EC consulting services, the factors behind those buying decisions remain constant,” said Friske. “As the long-standing leader in EC consulting services, we believe Towers Watson offers clients unmatched value through a unique combination of experience, data and research, all delivered by the most knowledgeable, strategic consultants in the industry.”
Towers Watson says it has more than 350 executive compensation consultants in 16 countries providing advice to over 3,000 clients.