The market for US compensation consultants is looking increasingly concentrated according to new research by ProxyGovernance.

Based on data for annual meetings held between Jan. 1, 2009 and July 1, 2009, five consulting firms – Towers Perrinand Watson Wyatt (now combined as Towers Watson & Co.), Frederic W. Cook & Co., Inc. Mercer LLC and Hewitt Associates LLC – accounted for 72% of the pay advisory services provided to S&P 500 boards. Results for the Russell 3000 show slightly less concentration, with the same five companies -- which, with the exception of Frederic Cook, offer a broad range of other consulting services – providing advice to 53% of boards disclosing the retention of a pay advisor.

A shake-up in the market place is likely however, as ongoing investor pressure, new SEC disclosure rules, and proposed legislation prompt boards to better ensure the independence of the compensation advice they receive. The concern, long-voiced by corporate governance advocates, is that multiservice consultants could give conflicted advice to compensation committees in the hopes of winning more lucrative consulting contracts from management.

Following several proxy seasons in which shareholders have pushed resolutions seeking more disclosure and/or greater independence in this area, the SEC, starting Feb. 28, will require proxy statements to detail any other services provided by the board’s pay consultant in excess of $120,000/year. Going further, the House of Representatives has passed a bill that will, if it becomes law, require the agency to establish independence standards for pay consultants. The result, as the Wall Street Journal recently noted, is that smaller independent consultants, presumably unconcerned with winning other company contracts, will gain market share at the expense of the big multi-service consultants.

Looking at PGI’s data for the Russell 3000, which lists around 150 different consultants, there appears to be a deep pool of alternatives to the big consultancies, and many that focus exclusively on executive-pay. Presently, Frederic Cook is the most engaged ‘independent’ player.