Monday, July 30, 2007

Integrity in the Compensation Consulting Business

Fred Whittlesey
Compensation Venture Group, Inc.

Consultants always dread making a mistake. Providing advisory services at the level of the Board of Directors sets a very high bar for accuracy - perfection, basically. Any slight error can draw into question an entire presentation and report and sap credibility. We learn this our first year as associate consultants and most of us carry the ethic of quality and accuracy with us throughout our careers.

It's a bit surprising, and a little amusing to boot, to read in Financial Week today that Enron Creditors Recovery Corp. has had to ask a US District Court judge to force a compensation consulting firm to correct its errors. I cringe when I learn that my firm has made a mistake and we bend over backwards to fix it quickly and at no cost to the client. I can't imagine having an issue escalate to the point where a federal judge's involvement is needed.

But that is the case with Enron's successor firm and Hewitt Associates. According to Financial Week, Hewitt did the calculations for distributing $89 million to former employees of Enron but distributed $22 million of that amount to the wrong people. I suppose the good news is that 75% of the money went to the right people and 75% is a solid "C" grade in school. Yet I can't imagine sending a client something that is 25% wrong. That's not very accurate.

Enron CRC apparently felt that Hewitt, while admitting its mistake (which Hewitt blamed on a "software glitch" - and wasn't a "software glitch" blamed for accidentally erasing some email messages sought in the Enron investigation?) was taking too long to issue corrections and has "continued to drag their feet" in the matter. That's not very responsive.

Besides getting it wrong, taking too long, and blaming the error on software (I wonder whose software it was - Hewitt's?) the question has been raised how one approaches an employee who lost their job and retirement savings in the Enron debacle and asks for a refund of incorrectly paid funds. A lawyer representing ex-Enron employees said that either Enron or Hewitt should pay back the money. Not that my opinion counts, but I would say that should be Hewitt. Maybe with an apology, and maybe without a court order. But that's just how I would do it if I was a consulting firm with $450 million in cash and equivalents at the end of my last fiscal year, and revenue of $2.8 billion - although Hewitt had a financial loss of about $116 million last year, so maybe they're a little more hesitant to part with what money they have.

At a time when all compensation consulting firms are being questioned on matters of independence and integrity (remember that Hewitt was at the center of the controversy with their consulting to Verizon - read about it here) stories like this do nothing but make these firms, and the industry, deserve the questions being asked - like why does it take a court order for you to fix your mistakes, and why are you engaging in business where you have an obvious conflict of interest that shareholders of your client find unacceptable, and why are you losing money as a result? Maybe that last question is answered by the first two.


kevin.haugh said...

The compensation error that Fred discusses in this post is not uncommon and underscores the importance of using a centralized process for compensation planning and management. Considering that compensation can be an organization's single largest operating expense - 60% or more - it makes sense to look at this process more closely to avoid risks like corporate mismanagement and fraud, as well as common inefficiencies such as wasted time and money to find and fix compensation errors. Also, compliance and transparency is more closely monitored than ever before and this applies not only to large enterprises, but to mid-size companies as well. We've discussed this at length here and here

-- Kevin Haugh, Senior Director, Product Marketing, Workstream Inc.

Claim said...

This error only demonstrates how poor the system currently is and how much fraud goes on now.
Centralisation may mean there is more accountability but it also means there is more chance of messy cover ups like in the United Kingdom at the moment. What is essential is that accountability is direct and attributable from the start.
Sue, UK
Asbestos Injury Claims