Selecting a Compensation Consultant — Before ISS Tells You Your Pay Structure Is Wrong

Every public company must have an independent compensation consultant advising the compensation committee — this is a corporate governance best practice that institutional investors, ISS, and Glass Lewis expect. Many companies hire a compensation consultant well before the IPO to design the executive compensation structure that will survive public company scrutiny.

What a Compensation Consultant Does

• Peer group construction: Building the comparator group of public companies used to benchmark executive pay — this peer group will be disclosed in the proxy statement and scrutinized by ISS and Glass Lewis.
• CEO and CFO compensation benchmarking: Analyzing base salary, annual bonus, and long-term incentive (LTI) compensation against the peer group.
• Equity incentive plan design: Designing the post-IPO equity incentive plan — share pool size, award types (options, RSUs, performance shares), vesting schedules, and clawback provisions.
• IPO equity award structure: Advising on pre-IPO option repricing, grant timing, and the design of IPO-related equity awards (including whether to accelerate any vesting at IPO).
• Say-on-Pay preparation: Helping structure the executive compensation disclosure in the proxy statement to achieve a passing say-on-pay vote in the first year as a public company.
• ISS and Glass Lewis analysis: Modeling how proxy advisory firms are likely to evaluate your compensation structure and identifying potential concerns before they become problems.

The Independence Requirement

SEC rules require the compensation committee to assess whether its compensation consultant is independent — specifically checking six factors including whether the consultant provides other services to the company. Most companies use separate consultants for the compensation committee (independent) and for HR/management (who can advise management directly). Make sure you understand which role your consultant is filling.

Key Compensation Consulting Firms

Questions to Ask

• How do you approach peer group construction for a company with our profile — what criteria do you use and how do you handle limited public comparables?
• How familiar are you with ISS and Glass Lewis methodology for growth-stage and tech-sector companies?
• What is your experience with equity plan design for pre-IPO companies — share pool sizing, award mix, and vesting structures?
• Are you advising management as well as the compensation committee — if so, how do you manage the independence requirement?
• What is your fee structure for IPO and first-year public company work?

What the Compensation Consultant Does

The independent compensation consultant retained by the compensation committee has a specific, board-facing role that is distinct from HR or any compensation advisory work done for management:

• Peer group selection: The foundation of executive compensation benchmarking — selecting 15–20 comparable public companies to use as the reference group for setting competitive pay levels. Peer group selection is a significant judgment exercise and is one of the first things ISS and Glass Lewis examine in the proxy.
• Benchmarking analysis: Comparing the company's executive compensation — base salary, target bonus, long-term equity value, total direct compensation — to the peer group at the 25th, 50th, and 75th percentiles. Most boards target total direct compensation between the 50th and 75th percentile of the peer group.
• Equity grant design: Advising on the form, size, vesting schedule, and performance metrics for long-term equity grants. For newly public companies, this includes designing the first post-IPO equity incentive plan and recommending the mix of stock options, RSUs, and performance-based awards.
• ISS/Glass Lewis strategy: Advising the compensation committee on how the planned executive compensation program will be evaluated by the proxy advisory firms — and whether any features are likely to draw a "withhold" recommendation or negative vote outcome on the say-on-pay advisory vote at the first annual meeting.
• Independence certification: Providing the annual certification to the compensation committee that the consultant meets SEC and exchange independence requirements — which is disclosed in the proxy statement.

The Say-on-Pay Advisory Vote

Section 951 of the Dodd-Frank Act requires public companies to hold an advisory shareholder vote on executive compensation at least once every three years (with most companies holding it annually). The say-on-pay (SOP) vote is non-binding but has significant governance implications:

• Newly public companies have the option to hold the first SOP vote up to three years after their IPO — most companies hold it annually from the first annual meeting as a governance best practice
• Companies that receive below 70% support on the SOP vote are expected by ISS to engage with major shareholders to understand the concerns and demonstrate responsiveness in the subsequent proxy season
• Companies that fail to obtain majority support (below 50%) face significant governance scrutiny — ISS will typically recommend against the compensation committee members at the following annual meeting
• The compensation consultant plays a central role in designing the SOP strategy — identifying potential investor concerns before the vote, preparing board materials that address those concerns, and supporting investor engagement if a low vote result is anticipated

Peer Group Design — The Most Consequential Decision

The peer group selected by the compensation committee — with advice from the consultant — determines the competitive market for executive pay. A poorly designed peer group (too small, too large, wrong sectors, or too generous) creates both governance risk and actual compensation cost misalignment. Key peer group design principles:

• Size: Peers should be 0.4–2.5× the company's revenue or market cap — centered on comparable-size companies rather than aspirational large-caps
• Sector: Peers should operate in the same or highly adjacent sectors — a SaaS company's peer group should be SaaS companies, not diversified technology conglomerates
• Public company status: All peers must be public companies with disclosed compensation data — private company comparables are not usable for benchmarking
• Stability: The peer group should be stable year over year (replacing only peers that become non-comparable through M&A or dramatic size changes) to allow meaningful trend analysis

Peer Group Construction — The Most Important Deliverable

The peer group is the single most consequential deliverable a compensation consultant produces. It determines the benchmarks against which executive pay is measured in the proxy statement — and against which ISS and Glass Lewis will evaluate whether compensation is "excessive."

A well-constructed peer group for a newly public company typically has 12–20 companies and is selected using:

• Industry/sector: Companies in the same or closely adjacent sectors — if you are a SaaS infrastructure company, peers should be SaaS infrastructure, not generic "software"
• Revenue range: Typically 0.5×–2× the company's trailing revenue. The peer group should not be dominated by much larger or much smaller companies.
• Market cap range: Within 0.25×–4× of the company's expected IPO market cap. Including companies 10× larger skews benchmarks upward artificially.
• Growth profile: Peers should have broadly similar growth rates — a 40% ARR growth company should not be benchmarked primarily against 10% growth companies or vice versa

Say-on-Pay — The First Vote

Public companies must hold an advisory shareholder vote on executive compensation (say-on-pay) at least every three years, with most choosing to hold the vote annually. The first say-on-pay vote — typically at the first annual meeting 12–15 months after the IPO — is watched closely by governance-focused investors.

A "passing" say-on-pay vote is considered 70%+ support; below 70% is a material concern that triggers engagement with institutional investors; below 50% is a crisis. Newly public companies with reasonable compensation structures that have been properly benchmarked to a defensible peer group rarely fail their first say-on-pay vote. The risk is elevated when:

• Founders receive unusually large IPO-related grants that were not disclosed to pre-IPO investors
• The peer group is perceived as cherry-picked toward higher-paying companies
• Performance metrics for bonuses or PSUs are set at levels that appear easily achievable in hindsight
• Pay significantly exceeds peers without a clear performance rationale

Peer Group Construction — The Most Important Deliverable

The peer group is the single most consequential deliverable a compensation consultant produces. It determines the benchmarks against which executive pay is measured in the proxy statement — and against which ISS and Glass Lewis evaluate whether compensation is "excessive."

A well-constructed peer group for a newly public company typically has 12–20 companies and is selected using four criteria: (1) same or closely adjacent sector, (2) revenue within 0.5×–2× of the company, (3) market cap within 0.25×–4× of the expected IPO market cap, and (4) broadly similar revenue growth profile. ISS and Glass Lewis scrutinize peer groups for cherry-picking — a group that skews toward larger, higher-paying companies without clear rationale will draw a negative proxy advisory recommendation.

Say-on-Pay — The First Vote

Public companies must hold an advisory shareholder say-on-pay vote annually. The first vote — typically at the first annual meeting 12–15 months post-IPO — is watched closely by governance-focused investors. A "passing" result is generally 70%+; below 70% triggers engagement with institutional investors; below 50% is a governance crisis.

Newly public companies with well-designed compensation structures and defensible peer groups rarely fail. Risk is elevated when: founders receive unusually large IPO-related grants, the peer group appears inflated, bonus targets are set low relative to actual performance, or total pay significantly exceeds peers without a performance rationale. The compensation consultant should stress-test the program against ISS guidelines before the proxy is filed.

Major Compensation Consulting Firms