A dark corner of corporate America is being thrust into the harsh glare of disclosure.

New rules are forcing blue-chip companies to expose ties with their compensation consultants by making public business relationships, including how much they pay the advisers -- putting potential conflicts of interest in plain view.

Some of the first annual proxy statement filings detailing executive compensation this month show that the disclosure rules have begun to shake up the business of executive compensation consulting and have caused some major U.S. business to consider switching pay advisers.

Early indications are that Towers Watson, the giant in the field, is being affected. Towers Watson was formed this year in the $3.5 billion merger of Towers Perrin and Watson Wyatt.

One client, IBM , disclosed that it had cut ties with Towers Watson as its compensation adviser, doing so last July, when the U.S. Securities and Exchange Commission proposed the new disclosure rules.

Another client, Kellogg , said it was exploring alternatives to using Towers Watson as its compensation consultant in light of the merger.

A third, Coca-Cola Co , disclosed that it paid a combined $7.5 million in 2009 to predecessor firms Towers Perrin and Watson Wyatt for consulting services, employee survey support and actuarial services.

Doug Friske, who leads Towers Watson's global executive compensation practice, played down the impact of the new disclosure rules, saying that his company has not experienced a significant loss of clients.

All the clients are looking at this, Friske said. It is an issue they are dealing with.

QUESTION OF APPEARANCE

Regulators and watchdog groups have long questioned whether compensation consultants are able to curry favor with the top executives of major companies by helping boost their pay in return for access to more lucrative pension work, and sometimes millions of dollars of fees.

As a result, companies generally do not like disclosing their ties to compensation consultants that are also doing other work for the companies because of the appearances that there could be a conflict.

The client does not want that combination disclosed, said Rose Marie Orens, a senior partner with Compensation Advisory Partners. It looks like a conflict. It looks like your independence might be affected.

It is too early to tell whether the new disclosure rules will have any impact on executive pay practices or embolden shareholders to question compensation packages. Still, they are expected to reshape the consulting business.

Currently, big companies like Towers Watson, Hewitt Associates Inc and Mercer, a subsidiary of Marsh & McLennan Companies Inc, are compensation consultants for about half of the major U.S. companies, according to data by Equilar, which tracks executive compensation.

'A GREATER CONFLICT'

The new rules, effective March 1, generally require a company to disclose how much it pays its compensation consultants, whether the adviser does other work for the company, and how much the adviser is paid for that work.

The rules are especially uncomfortable for Towers Watson because the world's largest human resources consulting company wears so many hats for its clients.

The rules are creating a degree of obstacle to pursuing executive compensation work or other types of work, said Todd Van Fleet, an analyst with First Analysis Securities.

Towers Watson is by far the biggest compensation adviser for management of the companies that make up the Russell 3000, hired by 22 percent of that group, according to Equilar, a firm that tracks compensation data.

Ira Kay, who formerly directed Watson Wyatt's compensation practice and has now opened his own consultancy, said clients are gritting their teeth and making the change from big companies like Towers Watson, Hewitt and Mercer.

'VERY COMFORTABLE'

Friske, of Towers Watson, said many clients feel very comfortable continuing to use the company as its compensation consultant, even in light of the new disclosure rules. Friske said Towers Watson has strict protocols that guard against conflicts of interest, giving confidence to clients.

They will realize that the advice they were receiving didn't change and that there wasn't an outcome that wasn't there anyway, Friske said.

To be sure, only a small number of proxies have been filed so far. Thousands more will be filed in the coming weeks.

Peter Oppermann, a senior compensation consultant with Mercer, said it is premature to begin drawing conclusions from the disclosures that have been made so far.

Oppermann added that many companies addressed concerns about working with large consultancies long before the SEC's new rules went into effect.

Yet Richard Harris, a principal and senior executive compensation consultant with Hewitt, said that while some clients have decided to continue with their current consultants and disclose the ties, that is not the norm.

Those are fewer and far between than they were even a few years ago, said Harris, whose company recently announced the spin-off of Meridian Compensation Partners, a compensation practice. Companies are looking for, for the most part, consultants who can be truly independent, meaning they will provide no other services.

THE FIRST PROXIES

Disclosures in the first proxy filings of the season underscore the dilemmas facing some companies.

IBM, for example, reported that its compensation committee paid Towers Perrin $101,175 in 2009 for compensation consulting, before the relationship was terminated in July.

During that same period, IBM paid Towers Perrin $2.4 million for other consulting services, including help with pension design.

Kellogg did not say in its filing how much it paid Towers Perrin for advising its board's compensation committee on pay issues, nor did it say how much is paid Watson Wyatt for broad-based benefits and actuarial consulting.

Coca-Cola disclosed more, saying it paid Towers Perrin $107,509 for advising its compensation committee in 2009.

The company also said it paid for benefit consulting services, employee survey support and actuarial services, totaling $4.17 million for Towers Perrin in 2009 and $3.35 million for Watson Wyatt in 2009. And Coca-Cola appears to be sticking with Towers Perrin.

Representatives for IBM, Kellogg and Coca-Cola declined to comment.

The compensation consulting firms that stand to benefit from the changes are boutiques like Frederic W Cook & Co Inc and James F Reda & Associates LLC, as well as firms that have splintered away from the Big Three human resources consultancies.

Orens, of Compensation Advisory Partners, a firm of former Mercer consultants, argues that clients are likely to continue moving away from large companies for compensation advice when those firms also do other consulting work.

It should have a big impact on the large human resources firms, Orens said. It is going to be very difficult for them to stay in this business because they are almost always going to have this 'other services' issue.

(Reporting by Steve Eder; Editing by Jeffrey Cane and Steve Orlofsky)

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