The Advisors' Blog

– Broc Romanek, CompensationStandards.com

In response to my recent blogs parsing comments received by the SEC in response to its pay ratio disclosure proposal, a member wrote in this:

In reading the comments to the SEC, there seem to be quite a few from investors, which might somewhat counter the arguments made by some that that investors have no interest in this rulemaking. My reading of the investor comments is that most discuss the cost/benefit tradeoff of the CEO pay ratios. Here is one that I found interesting from Railpen Investments which noted:

The calculation of the ratio could lead to identification of internal control weaknesses. We note that the Human Resources Policy Association has provided a response to the SEC which sets out the challenge for companies to produce the information; a survey of their members indicates that 84% of those surveyed are not able to provide the information to compute ‘cash compensation’.3 We question what other information is not available if the basic information is not available to compute the ratio.

And the Network for Sustainable Financial Markets wrote:

From the perspective of long-horizon investors (such as pension funds, sovereign wealth funds, endowments and foundations), these deficiencies are very likely to be seen as material “managerial control risks and weaknesses” that should be known to the company’s chief risk officer and accurately reported to the board. Where these material control weaknesses exist, we believe they should also be disclosed to investors along with a plan to remedy, in the same way that material weaknesses in internal
control over financial reporting are reported to audit committees and disclosed in periodic SEC filings. The Dodd-Frank pay ratio disclosure process could provide the vehicle for identifying and addressing these shortcomings.

We recognize that it might take a transitional period before most companies could develop robust information systems to solve for these material managerial control weaknesses. However, once developed and implemented by registrants, their C-Suites and boards will be able to use the process and analytics to more effectively manage these key organizational assets and minimize associated risks.

Since the Human Resource Policy Association noted in its comment letter: “To identify the median employee, registrants will need to determine all employees at all locations as of the end of the fiscal year. Obtaining a global employee headcount is time consuming and complex” and “The HRPA survey asked whether total annual cash compensation of all employees globally on an individualized basis was easily obtainable by the U.S. compensation staff, and 84% of respondents indicated that the information was not easily obtainable. Of that 84%, over 70% indicated that gathering that information would be very difficult,” maybe this is an opportunity for some CHRO’s to finally put in place the strategies, process and HR technologies needed to provide strategic insight about structural, human capital and compensation investments?

By the way, here’s a memo from Towers Watson handicapping the pay ratio comments…