Consultants seek cover from new rule

Executive-pay consultants, about to lose their anonymity as the result of a new federal rule, are asking the companies they advise to shield them from lawsuits by shareholders angry over lavish pay packages for corporate executives.

The Securities and Exchange Commission (SEC) rule will force companies to identify their pay experts in public reports starting next year. The consultants want their clients to agree to limit any financial damages and legal fees they would have to pay in a lawsuit.

"When the stuff hits the fan, our names are going to be all over the place," said Steven Hall, whose firm, Steven Hall & Partners, asks to be shielded from lawsuits as part of its standard retainer. "You're just completely hanging out there."

Criticism of executive-pay packages has been fueled by cases such as those of Enron executives Kenneth Lay and Jeffrey Skilling, who reaped millions of dollars as their company imploded, and former New York Stock Exchange CEO Richard Grasso, who's being sued by New York Attorney General Eliot Spitzer over a $190 million payout.

Rep. Barney Frank, a Massachusetts Democrat who is likely to become chairman of the Financial Services Committee in January, has said he will push legislation to give shareholders a greater say over CEOs' pay.

The consultants' efforts to win legal protection for themselves are "a great disservice to investors," said Lynn Turner, a former chief accountant at the SEC. "It would be like a General Motors saying that if you bought a car and the tires fell off, you are on your own, without any recourse or warranty."

About 20 consulting firms work on executive pay, though only a handful are major players, said Broc Romanek, editor of CompensationStandards.com, which provides information about what it calls "responsible executive-compensation practices."

Consultants are usually hired by a board of directors' compensation committee to provide statistics on similar companies' pay packages and advise on benefits, bonuses and tax issues. The firms say their advice helps companies attract and retain top talent. They also say that corporate boards, not consultants, decide how much executives will get.

"Our position is we don't want to be sued for work that we did in good faith," said George Paulin, chief executive officer of consultant Frederic W. Cook & Co. "We want to be indemnified the same way you would indemnify other professional-services firms."

Some firms are asking their clients to agree to cap damages at the amount of fees they earn for the job, while others ask companies to indemnify them for legal costs and damages.

Some corporate-governance experts say pay consultants may be seeking a solution to a problem that doesn't exist. Plaintiffs' lawyers say they can't remember a pay consultant ever being the target of a shareholder suit.

Pay advisers "are not considered typically to be deep pockets," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware in Newark. "Asking for a liability waiver is a little odd, a little overprotective and doesn't put them in a particularly good light."