Executive pay consultants are pushing up CEO pay levels, potentially through the use of peer group comparisons involving firms for which they already consult, according to academic research.

The conclusion thrusts another front into the increasingly tense debate over executive pay reopened last year by the chief executive of the London Stock Exchange, Julia Hoggett. She argued that higher rates were needed to shore up UK competitiveness.

Produced by a team at the University of Southampton, the research set out to test whether consultants are contributing to higher pay levels. The team concludes they are.

But the selection of peer group appears key to rising pay levels. Where consultants construct a peer group made up of their own existing clients, CEO pay tends to rise.

The report concludes: “Overall the evidence is consistent with the view that consultants have a non-trivial role in firms’ pay peer selection and respond to conflicted interests which leads to inflated CEO pay.”

Data from 194 consultants at more than 1,000 firms was examined for the research, which first looked at whether pay peers changed after a new appointment: the researchers found they did.

Next, the team found that boards tend to select other companies for the peer-group comparisons that already employ the same pay consultant. In fact, the researchers found that a company is 49% more likely to end up in a pay peer group if it employs the same remuneration adviser.

Lastly, the team looked at whether peer group selection plays a role in CEO pay levels, or whether a peer group with largely the same pay adviser help push rewards up.

‘Impeded efficiency’

“Collectively,” the team writes, “the evidence suggests that consultants respond to conflicted interests, favour incumbent management, and inflate their CEO pay by influencing firms’ selection of pay peers.” They add their findings add “a novel channel through which compensation consultants impeded efficiency in the pay-setting process”.

Pay has become a highly controversial issues in the UK since a blog last year by LSE chief executive Julia Hoggett, arguing that attitudes to pay would need to change if the UK was to remain competitive.

Last week, Hoggett gave speech in which she claimed remuneration chairs were more willing to sit on the “naughty step”—or, suffer a shareholder revolt (a vote of 20% opposition or more)—in order to pass the pay levels they believe are required for CEOs.

Hoggett’s own boss, LSE Group chief executive David Schwimmer, more than doubled his pay when it came to a vote.

There has been opposition to radical pay increases. City grandee Paul Drechsler wrote for Board Agenda that comparison to US rates of pay “often lack merit”.

This year so far, the public register, a live list of shareholder revolts maintained by the Investment Association, has logged five votes that amounted to 20% or more opposition to remuneration policies. They involved votes against AstraZeneca, Travis Perkins, Smith & Nephew, Spirent Communications and STV Group.

The Capital Markets Industry Group, a campaign body chaired by Julia Hoggett that lobbies for reduced governance, has called for the end of the public register.