There was an exception where consulting services were sought from one of the big four accounting firms – Deloitte, PwC, KPMG and EY – which control 27 per cent of the compensation consultant market.
Dr Ma said it appeared economic incentives were in place.
“The big four accounting firms have a reputation to uphold and probably don’t want to be associated with recommending excessively high pay, whereas these smaller consultants don’t have the same consideration,” he said.
“Instead they have strong financial incentives to keep a particular firm as a client so they would be more financially inclined to go along with a CEO if they thought they should be paid more.”
The study showed the range of consulting fees paid ranged from $1045 to $457,244, with the average fee sitting at just under $50,000.
However the study said it was not clear whether the correlation between higher pay and advice was due to consultants’ recommendations or because a company had hired a consultant to legitimise higher pay.
John Egan, who leads remuneration and governance consultancy Egan Associates, said boards of companies outside the ASX 300 rank often sought advice during periods of high growth.
He said pay was likely to rise in that context as companies either adjusted CEO pay to match that growth, or recruited executives from another organisation to accelerate its pace.
In the Australian market, 24 per cent of firms received remuneration recommendations from a compensation consultant, and 18 per cent received generic remuneration advice.
Firms are required to publicly disclose whether they receive a specific recommendation but are not required to disclose generic advice.
However, Dr Ma found there was a correlation between higher CEO pay and both types of advice and said firms might be trying to find a “loophole around disclosure”.
The study argues “if regulators wish to mitigate potential conflicts of interest from using remuneration advisers” they should also mandate the disclosure of generic remuneration advice.
Mr Egan said in his experience, firms might opt receive generic advice rather than seek a specific recommendation they then had to disclose.
“A core reason is that [boards] do not wish to defend a circumstance whereby they have an argument with shareholders in relation to being more generous than the market data might reveal,” he said.
I think many boards at the moment would have the view that they’re really under scrutiny in the area of remuneration
Advisor John Egan
“We would certainly engage in lots of conversations where we say we think an increase would be inappropriate and they don’t necessarily want to say that was a recommendation.”
Mr Egan said he believed there should be increased transparency but that was not simple and directors already faced pressure over executive pay under the two-strikes system that could see investors vote them out of a job.
“I think many boards at the moment would have the view that they’re really under scrutiny in the area of remuneration [and] the requirements are severe enough,” he said.
“They don’t want the regulator to govern their life. They’d like shareholders to have the belief they will undertake their work comprehensively and thoroughly and they’ve been given a bit of notice they haven’t done that perfectly.”
Natassia is a journalist for The Sydney Morning Herald.