One of the myriad regulatory changes that came in the wake of the financial crisis was a 2009 SEC decision to require that firms break down the fees paid to compensation consultants if they also provided other services. The idea was that CEOs could potentially use the promise of extra business to influence a compensation consultants recommendations and that shareholders have a right to know what’s going on.

But the result was rapid turnover in the industry and more space for boutique firms specializing solely in compensation consulting to eat up market share by telling CEOs what they want to hear.

“After the rule change, client firms that switched to specialist consultants paid their chief executive officers (CEOs) 9.7% more in median total compensation than a matched sample of firms that remained with multi-service consultants,” write Jenny Chu, Jonathan Faasse, and P. Raghavendra Rau of the University of Cambridge Judge Business School in a recent study. “Overall, our study finds strong empirical evidence for the hiring of compensation consultants as a justification device for higher executive pay.”

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Switching to specialist consultants correlates to 9.7% higher pay

The study uses a dataset of executive pay at 1000 different firms from 2006 to 2012 to examine how different consultants effected executive pay. It found that the CEOs of firms that switched from multi-service consultants to compensation specialists were paid 9.7% more than CEOs of firms that stayed with multi-service consultants. Similarly, firms that started using compensation consultants after the rules change had a 7.5% rise in median CEO pay compared to a propensity-matched group that didn’t.

And just in case the incentive for consultants isn’t clear, the study also found a clear correlation between the size of a CEO’s pay hike and the likelihood that the same consultant is called back next year. So the SEC disclosure rules, meant to restrict CEO’s influence over compensation recommendations, really just meant a change in tactics instead of an end to influence.

Board-retained consultants recommend lower pay for CEOs

But the news isn’t all bad. Chu, Faasse, and Rau also found that compensation consultants who only answer to the board are associated with a 12.9% lower median pay level than similar firms where management chooses the consultant. It seems obvious that CEOs (or anyone else) shouldn’t be allowed to hire and fire people with so much influence on their paycheck, but the practice continues nonetheless.