June 17, 2020

Comp Consultants: Maybe the Problem Isn’t Other Services. . .

Several years ago, the SEC approved exchange rules requiring the comp committee to review the independence of a comp consultant before retaining that consultant. The requirement was prompted by concerns about how other lucrative services provided to the company might influence the consultant’s advice to the board. But is the potential impairment of consultant independence by fees for other services the right issue to focus on here?

A recent study from the American Accounting Association study suggests that it isn’t. Instead, the study found that the amount of fees the consultant receives for its advice to the comp committee may have a greater influence on its CEO comp recommendations than other services that it provides to the company. This excerpt from the press release announcing the study explains:

The new research suggests that since 2009 the reward to EC consultants for sumptuous CEO pay packages has had less to do with gaining access to additional company services (in other words, with cross-selling) than with securing repeat EC consulting at high fees. Researchers Jeh-Hyun Cho of Arizona State University, Jeong-Hoon Hyun of NEOMA Business School in France, and Iny Hwang and Jae Yong Shin of Seoul National University, Korea, write that among multi-service providers they “find no evidence that CEO pay is higher when non-EC fees are higher, providing no support for the cross-selling hypothesis.”

In contrast, among the same group they “find strong empirical support for the repeat-business hypothesis suggesting that consultants receiving higher EC fees recommend higher total [CEO] compensation in an effort to secure future engagement with clients.”

The study says that for every 1% increase ($1,770) in the average consultant’s fee, CEOs reap an additional $4,474 in pay. The authors suggest that one reason for the link between higher fees and higher comp is that comp consultant fees are rarely a significant issue for the board during the retention process, because the amount is relatively small in the grand scheme of things. In addition, many firms have spun-off executive comp practices from their broader business, effectively taking cross-selling off the table as an area of potential concern.

Financial Reporting: Covid-19’s Ongoing Impact

Last quarter’s financial reporting was a barrel of laughs, wasn’t it? Well, buckle up, because this Deloitte memo says that Covid-19’s ongoing impact may result in a bumpy ride for many companies in the current and future reporting periods as well. The memo addresses some of the key financial reporting issues and accounting topics that are likely to be confronted as the pandemic’s impact continues to play out. This excerpt addresses some of the considerations that come into play when dealing with modifications of revenue contract terms:

Some companies may seek to mitigate the effects of the pandemic by offering features such as price concessions, discounts on the purchase of future goods or services, free goods or services, extended payment terms, extensions of loyalty programs, opportunities to terminate agreements without penalty, or revisions to purchase commitments.

If revisions are made to a revenue contract, significantly different reporting outcomes may result depending on the nature of the changes. Companies must consider the specific facts and circumstances of changes in contractual terms (including their business practices and communications with customers) to determine whether to account for the impact of such changes at a single point in time (e.g., the quarter ended June 30, 2020) or over a longer period.

Other topics addressed include goodwill impairment, valuation of deferred tax assets, and modification of other contractual arrangements.

EDGAR: Get Those Notarized Authentication Docs In!

In March, the SEC adopted a temporary rule allowing EDGAR filers that were unable to obtain notary services due to the Covid-19 crisis to nevertheless obtain access codes if they subsequently submitted notarized authentication documents. Last week, the SEC issued a reminder that filers who relied or plan to rely on the temporary rule between 3/26/20 & 7/1/20 need to submit the required notarized authentication document as correspondence to EDGAR within 90 days of the date they submitted their application for EDGAR access. Failure to do so may result in suspension of EDGAR access.

John Jenkins