Tips on interviewing compensation consultants
Readers frequently request guidance on how to evaluate advisory firms. This new series of articles will present information on how to interview and compare advisers in a variety of disciplines.
Pay decisions and processes are key components of a company’s talent strategy. As your company’s overall business strategy evolves, so too must its pay philosophy and programs. Leaders often rely on their own experience or on their boards for compensation advice. However, there are times when an outside compensation consultant can be a valuable resource. Consultants not only have up-to-date market data but also can independently think through your compensation issues, develop solutions and help implement them.
Do your homework
• Define the scope and expected timing. The scope of work and the timing of the project are often clear (e.g., competitively assess executive compensation and develop a long-term incentive plan). However, at other times the scope can be broad and somewhat nebulous. Taking the time to define the issue and desired outcome up front will save you time and consulting fees in the long run. If the issue is broad, segment the work into phases so that you can track progress against project milestones. For example, if your company wants to ensure its pay programs are fair and equitable, it’s important to determine the population to be studied, identify the specific pay programs for review and clarify what the terms “fair” and “equitable” really mean to you. You should also determine approximately what the project budget should be.
• Gather data. Pulling together documents will help you define the issue and get the consultant up to speed quickly. Consultants will typically ask clients for an overview of financial performance, strategic plan, organization chart, job descriptions and pay history for relevant positions, incentive plan documents, and tenure and turnover statistics. Before you disclose this information, be sure to get a confidentiality agreement in place.
• Understand your internal decision-making process. Understanding how you and your organization make tough decisions on key issues can inform the consultant selection process and project timing. A more consensus-driven culture requires a consultant who is comfortable soliciting different opinions and skilled at bringing together different perspectives to forge a solution. However, more perspectives and facilitation usually mean a longer project process and higher consulting fees. For a more targeted process (for example, where winning over the major decision-maker or most vocal shareholder is key), select the consultant whose style and process closely approximates the decision-maker’s.
• Study up on the firms. Your professional network can refer you to a consultant. An internet search can reveal more options. Review the consulting firm’s website to see if its principals have written articles or given presentations on the issue you’re facing. Ask consultants who pass this initial round to submit a formal proposal.
Understand the business model
Your project can be quoted on a fixed-fee or on a time-and-materials basis. Fixed-fee projects tend to be well-defined and standard (e.g., benchmark 30 positions). For more complicated projects (such as developing and gaining shareholder approval of a new long-term incentive plan), consultants may encounter facts and circumstances that require more analysis or facilitation. In these cases, consultants will give a project estimate based on what they know at the time of the proposal and bill on actual time.
If the firm is quoting a fixed price, ask whether there are embedded assumptions that could result in the actual fee being higher than the estimate. Assumptions could include the number of in-person meetings and report/concept iterations.
Some consultants seem to charge low consulting fees because they are compensated on the back end through the products or services they sell. For example, a firm offering to design a long-term incentive plan for a low price may have a predefined plan in mind that utilizes insurance-funded products from which the firm earns a commission. Such a firm may seem appropriate but will not necessarily be the ideal partner if you need an unbiased assessment of all long-term incentive plans that could be considered.
Questions to ask
When interviewing consultants, ask questions to help you understand their level of experience and depth of knowledge.
1. What is the consultant’s experience with family-owned and private companies? Unlike publicly traded companies, family-owned and private companies are niche sectors where data is hard to come by.
Experience with the interpersonal dynamics among family shareholders or private company owners is paramount to project success. Consultants should demonstrate that they are familiar with the issues faced by closely held companies.
2. What is the consultant’s expertise with your company’s area of concern? Compensation can be segmented into different categories. You will want to do a deep dive to ascertain that the consultant has relevant experience with:
• Companies of similar size in your industry
• The employee segment being assessed (board of directors, executives, all employees)
• Your talent issue (pay competitiveness, recruiting, retention)
• The pay program (salary, annual bonus, long-term incentives, deferred compensation, benefits)
• Specific situations (succession planning, anticipated sale, initial public offering, turnaround)
Evaluate the proposal
Consider the following questions when reviewing a firm’s proposal:
1. Has the proposal accurately defined the scope of work and project deliverables? This will tell you whether the consultant was listening to you and understood the issues.
2. What is the project approach and time frame? Are you comfortable with these? Do they seem reasonable?
3. What is the consulting firm’s bench strength? For some companies, a local boutique firm may be appropriate. For other businesses, a national firm is the ideal fit. National firms have access to multiple and/or proprietary survey sources and professional networks. They have experience with specific company situations (e.g., initial public offering, turnaround, company sale) and with clients who have financial sponsors. As your company evolves, a national pay partner can be your guide in planning for the future.
4. Who from the firm will be working on your project? Will the partners do most of the work, or will the firm highly leverage its junior staff? Is the personality of the consultant who will work with you a good fit with the personalities of your key decision makers or shareholders?
Ask prospective consultants to give you client references. This will enable you to assess whether what the firm told you during the vetting process matches what other clients have experienced. Questions to ask references include:
• What was the reason for your compensation study?
• Who worked on the project? Did the staffing follow the proposal?
• Were you happy with the process and results?
• Was the project delivered on time and within the stated budget? If not, what happened?
• Would you use the consultant again?
Once you’ve engaged the consultant, be open about your challenges. The consultant can’t read your mind or uncover your hidden agendas. An understanding of the issues gives the consultant an opportunity to find areas of alignment and keep the project moving toward a solution.
While you may initially hire a compensation consultant to address a specific issue, the person can become a trusted adviser over the long term. Having the right pay partner as your company evolves will help you confidently address your talent challenges and ensure your employees’ interests are aligned with those of your shareholders.
Bertha Masuda is a a partner at Compensation Advisory Partners, Los Angeles, Calif. (capartners.com).
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