78. We also examined the role of remuneration consultants
in the context of their advice to members of remuneration committees.
Deloitte explained that it saw "the role of the adviser to
the committee as contributing to, and enhancing the deliberations
of, the remuneration committee, and providing expertise and knowledge
of market practice which will allow the committee to make informed
decisions". Deloitte was clear that it did "not decide
either the quantum or indeed the structure of the remuneration
which is the responsibility of the committee". Instead its
role as independent external advisers included:
current remuneration arrangements and providing input and advice
on the restructuring of arrangements and the design of new arrangements,
giving consideration to the alignment with business strategy and
the external market;
· providing relevant
and current market data;
· ensuring committees
are aware of shareholder views and concerns and facilitating an
open dialogue between companies and shareholders and their representative
bodies on remuneration matters.
Finally, Deloitte clarified the relationship of remuneration
consultants with management, stating that they consultants "work
with management at the request of the committee, for example to
gather information to allow us to understand and review current
arrangements or to help support implementation, but our responsibilities
are always to the committee".
79. Mr Montagnon accused remuneration consultants
of having "contributed to the general ratchet in executive
remuneration because they seem to have business models which require
them to earn fees which require them, therefore, to modify packages
every year which, therefore, requires the packages to go up".
Mr Barber also spoke of the 'ratchet' effect telling us that it
was remarkable how many remuneration consultants "are given
remits which refer to a benchmark of the upper quartile. If endlessly,
year after year after year, you are referred to the upper quartile,
then that is an endless ratcheting and an ever-increasing gap
with the rest of the workforce".
80. Mr Montagnon cited concerns over conflicts of
interest if the same consultants were advising both the remuneration
committee and the company management: "if they are advising
the remuneration committee and not the management, that is one
thing and, if they are advising the management and the remuneration
committee, it gets a bit complicated, and some of them tell me
that that is what they do".
The ABI argued that the introduction of a code of ethics was necessary:
Given the important role these consultants play and
the inherent contradictions in their business model between seeking
to supply independent advice whilst having a vested interest in
creating more complexity and change, we believe that they should
have a Code of Ethics. This Code should include details on how
to manage the conflicts of interest, a prohibition on working
for both the non-executives and the management at a company, and
a commitment to responsible marketing and to use benchmarks with
81. Ms Arrowsmith concurred that remuneration consultants
needed to be very clear about who they worked for. She told us
that in her role, she worked for the company: "the company
is the remuneration committee, it is not the self-interest of
management, and I might work with management to get the facts,
but I do not work for the management and it is a very important
also told us that she was "very comfortable with a code of
ethics. I have lived by it all my working life, so I cannot see
any reason why anybody should have an objection."
82. We have
received a body of evidence linking remuneration consultants to
the upward ratchet of pay of senior executives in the banking
sector. We have also received evidence about potential conflicts
of interest where the same consultancy is advising both the company
management and the remuneration committee. Both these charges
are serious enough to warrant a closer and more detailed examination
of the role of remuneration consultants in the remuneration process.
We urge Sir David Walker to examine these issues and, in particular,
to consider whether remuneration consultants should be obliged
to operate by a code of ethics, a proposition which we find attractive.