Answer to Question 1
Answer: Executive compensation consultants make recommendations about what and how much to include in executive compensation packages based on strategic analyses. However, consultants often find themselves in a precarious position in that they must recommend lucrative compensation packages so that they will make a favorable impression on the CEO who hired them.
Boards of directors represent the interests of the shareholders by measuring executive decisions. A conflict of interest may arise in that CEOs often nominate candidates for board membership, and it is the board of directors who makes the final approval of the compensation package.
A compensation committee is comprised of board of directors members within and outside the company. The committee members perform three duties. First, they review various consultant recommendations for compensation packages. Second, they discuss the assets and liabilities of the recommendations. Third, they forward the best proposal to the board of directors for consideration.
Companies that sell and exchange securities on public stock exchanges are required to file various information with the Securities and Exchange Commission (SEC). One of the main objectives of SEC is to clarify the presentation of CEO compensation along with four mostly highly paid executives. Another important objective of the SEC is to increase the accountability of company boards of directors for executive compensation policies and decisions. The SEC requires companies to include the identity of consulting firms in public disclosure statements. This creates concerns for conflict of interest for consulting firms that consult a company on more than one area. Consulting companies might intentionally recommend better executive compensation packages to get additional consulting opportunities from the management. SEC rulings also increased board members' accountability for approving sound executive compensation packages.
Answer to Question 2
Answer: C
