- On September 5, 2017
More than once we have been asked the best way to find an effective Executive Compensation consultant. While we would love to respond with “Sheffield Barry can help you, no need to look further”, we typically describe how most companies go through the process of issuing a request for proposal (RFP), inviting respondents, interviewing finalists, and selecting a consulting firm. This article reflects the traditional approach used by the majority of our clients over the years, refined to highlight the steps we believe add more value to the process, and minimizing those that add less.
For some organizations, this approach can easily be compressed into two or three key steps, while other organizations may want to spend more time extending the timeframe of certain steps in order to be more thoughtful in these key activities. Your company’s approach will be dependent upon time, resources, the complexity of your compensation issues, as well as the governance needs of your organization. With that
said written, here’s the typical approach for finding your ideal Executive Compensation Consultant.
Step 1: Identify Needs and Draft Scope of Services
The first step in hiring an effective Executive Compensation consultant is to identify your company’s needs so you can draft a tailored scope of services. Remember that the more expansive the scope of services you request, the greater your consultant’s fees will be, so make sure you are prioritizing your company’s resources wisely. Smaller companies may only want or need a “price check” on their CEO pay to ensure reasonableness, while larger companies may need assistance with a wide variety of issues. For context, smaller companies might spend $2,000 – $5,000 every other year on executive compensation consulting, while a typical Fortune 100 company can easily spend $250,000 annually on executive compensation consulting fees.
Typical services include:
- Reviewing and refining your executive compensation strategy
- Defining the competitive market for talent (including defining your peer group companies)
- Benchmarking CEO compensation
- Benchmarking the other highest paid executives
- Analysing equity usage (dilution and overhang)
- Reviewing the annual incentive plan
- Reviewing the long-term incentive plan
- Preparing and reviewing stock ownership guidelines for executives and directors
- Reviewing Board of Director compensation
Sheffield Barry has developed an off-the-shelf, self-service solution for executive compensation benchmarking, supported by our 35+ years of Executive Compensation consulting experience. View our transparent pricing of pre-defined services. If you have difficulty identifying and prioritizing your executive compensation needs, please feel free to contact us and we would be happy to discuss and help you prioritize your issues. We can also help you identify the firms you ought to consider inviting to respond.
Once you have identified the appropriate scope of services, you can draft your RFP.
Step 2: Draft a Request for Proposal
We have seen RFP that are as brief as two paragraphs sent in the content of an email, all the way up to 30-page RFP for larger companies that require over 100 hours to collect information, prepare responses to questions, and format/edit/proofread/produce before responding to the requesting company. How extensive your RFP needs to be will depend upon your scope of services, the time and resources you have available to review responses and identify finalist firms, and the information you will require in order to make an informed decision on which firms you want to interview in more detail.
Your RFP should provide the appropriate context: a description of your company, a summary of any key business issues you are facing, and the suggested scope of services, and then request information from the responding consulting firms. Specifically, you will likely want to understand:
- Firm overview: background and focus, size, client references, etc.
- Team introduction: who will be the key consultants, what are their roles, their background and experience
- Resources: data availability, technical and supplemental resources like tax, accounting and legal advice
- Perspectives on executive compensation: an opportunity to inquire about how this firm differs in their approach or point of view from their competitors
- Suggested approach: how would the team approach your scope of services
- Fees: including any indirect expenses, overhead charges, “load” or other fees and timing
We have seen scores of RFP over our careers. To be sure, the most painful RFP are those where sourcing or logistics manages the process, since many questions that are reasonable to ask of other vendors are much less relevant to management consulting firms. Consider your RFP questions carefully so you don’t waste time reviewing information that may not be relevant to hiring an effective advisor. Also, the extensiveness of your RFP may have a significant impact on the firms that elect to submit an RFP response. By including questions that may only be marginally relevant to your selection criteria, you may unwittingly weed out qualified boutique firms that provide effective advice, but that may not have sales and marketing resources to devote to extensive RFP responses.
We have developed a template with a generic RFP that you are welcome to use, customize or copy and paste. If you are interested in the template, please complete the form at the end of this article and we will send you a link from which you can download the template.
Step 3: Identify Consulting Firms and Invite Responses
The Top 10 Executive Compensation consulting firms are responsible for approximately 75% of the executive compensation consulting suppport to companies in the Russell 3000 (Source: Equilar League Tables). We have summarized the Top 10 Executive Compensation consulting firms here, including both executive compensation practices among diversified HR consulting firms, and independent Executive Compensation consulting firms. Beyond these 10, there are dozens of other fims (such as Sheffield Barry), many of which specialize in specific business situations or industries.
Most firms will invite 6-10 firms to respond to their RFP. Companies that get more than 8 responses quickly experience the law of diminishing returns – any firm among the top 20 firms will have an extremely capable consulting team to support your relationship, and most HR teams do not find special joy in reviewing the 9th or 10th or 15th RFP response. Remember that depending on the nature of your RFP, one or more firms may decline to submit an RFP response – consultant time is not unlimited, especially at smaller boutique firms that have much less overhead to devote to the sales and marketing function.
Invite a variety of firms. For example, inviting at least two diversified HR consulting firms, at least two independent firms, and at least two smaller firms to respond to your RFP will give you a sense for resources, capabilities, team experience, and the tradeoffs with timing, responsiveness and professional fees. This will also give you the opportunity to understand differences in perspectives and points of view.
Step 4: Review Proposals and Select 2-3 Finalists
Your HR team – or whomever is leading the selection process – should set the criteria you will use to identify the semi-finalists, as well as the criteria to select two or three firms to send to the Compensation Committee for finalist interviews. While some companies identify and weight between 3-8 different criteria, and have a detailed and formulaic approach for evaluating each RFP response, most companies use much more discretion in evaluating responses. Typically, companies will include criteria such as approach, fees, resources, team experience, and fit.
Some HR teams will meet with up to 4 firms to better understand fit, perspectives and points of view, professional fees (especially whether there is an apples-to-apples comparison of scope and fees between two similar proposals), and the time and resources required from the HR team. Other HR teams will use the written proposals to identify the 2-3 finalist firms to meet with the Compensation Committee. Regardless, the end result ought to be the 2-3 firms that are likely to best support the Compensation Committee with advice and support.
Step 5: Interview Finalists
The 2-3 finalist firms typically will meet with the Compensation Committee of the Board of Directors during one of the regularly scheduled summer or early fall meetings. When governance issues are less of a concern (for example, with smaller public companies or privately-held firms), the 2-3 finalists may be interviewed by the entire Board, or potentially by the CEO (sometimes with CHRO and CFO).
At this stage in the process, most companies have fully vetted the firms, teams, and resources available. Your finalist firms are likely to have very similar data, resources, and team structures, so the limited time available for interviews is best spent on questions and discussion which give the Committee a better understanding of how each consultant will integrate external market data with internal business needs to arrive at recommendations and advice for the right incentive plan design or the appropriate pay adjustment.
The most thought-provoking questions we’ve been asked during consultant finalist interviews have addressed issues of process, perspectives and point of view. Attempt to differentiate the external market data-based “prevalence consultants” from strategic advisors who will bring external data, but deviate from those practices when internal business needs dictate. For examples of questions, see 20 Questions Compensation Committees should ask during Consultant Interviews. For a free downloadable one-page summary, please fill out the contact form at the bottom of this post.
Step 6: Select Your Consultant and Finalize Engagement Protocols
Go ahead, call the selected consultant and let them know the Committee selected them as their advisor. They will be excited.
However, once the consultant is selected, there is one last step to complete before you start work. The Committee, Management, and the Consultant should all agree on guidelines for communicating with one another to maintain independence and avoid potential conflicts of interest. This was management can provide sufficient input for your consultant to develop optimal recommendations, but avoid situations where management is overly influential in developing the consultant’s recommendations.
There are a range of models for interaction, ranging from Compensation Committees that are comfortable with the Consultant working closely with management to develop recommendations, all the way to Committees that do not want consultants to have any interaction with management during the recommendation process. The most common approach we have encountered is where the Consultant develops and discusses the initial recommendations with the Committee (or Committee Chair), and then is able to work with management to refine the recommendations. All drafts of materials that are sent to management are also cc’ed to the Chair of the Committee so a paper trail exists to document subsequent changes to the recommendations.
Regardless of which approach works best, a clear understanding from all three parties will ensure consistent expectations and clear and effective communication.
If you would like to skip all these steps, please feel free to reach out to us! If Sheffield Barry is not the ideal compensation consultant for your needs, we will happily provide you with the names of several other firms. If you still want to go through the typical process of consultant selection, here are several key takeaways to keep in mind:
- Focus on the key issues you need to reduce the potential firms to 2-3. If you must include questions in your RFP from your purchasing team, then minimize as much as possible and attempt to group these together so it is clear that it is purchasing and not the Committee asking these questions.
- Invite as many firms as you like, but attempt to include 2-3 firms that are able to articulate a unique approach or point of view. Capabilities of most firms won’t differ much, and you’ll benefit from understanding the differences of firms with unique perspectives.
- Invite a few smaller firms, as well as a few larger firms, so you get a good sense for the tradeoffs between firm size and the professional fees associated with such.
- Look for an advisor for your company. You will likely see that many individual consultants will position themselves as “strategic advisors” but in fact will turn out to be “prevalence consultants.” So feel free to ask about industry experience and peer pay practices, but demand evidence of their ability to advise you to do something very different than peers or emerging best practices. You need advice for the right compensation decisions and approaches for your company, not for your competitors in your industry.
We have two free resources that may be valuable in your consultant selection process: (1) an example executive compensation consulting RFP template, ready for you to edit or from which you can copy and paste, and (2) a one-page interview guide for your Compensation Committee or HR selection team. If either of these items would be helpful in your process, please submit your email below and we’ll email you a link from which you can download either or both documents.
Sheffield Barry is an Executive Compensation and HR Consulting firm, providing customized advice to clients at an affordable price. We leverage technology to deliver data and analysis as efficiently as possible, so we can invest more time understanding our clients’ unique business issues to develop custom solutions and advice. For more information, please visit us at SheffieldBarry.com or email us at info@SheffieldBarry.com.