Today we contributed our opinion to the SEC regarding its move to reconsider the Pay Ratio Rule, which would require corporations to disclose the gap between CEO compensation and “median” worker pay. We reprint our letter below.
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Dear Acting Chairman Piwowar:

Cornerstone Capital Inc. (“Cornerstone”) appreciates and welcomes the opportunity to submit comments in response to the Commission’s reconsideration of the Pay Ratio Rule (Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act).

Founded in 2013, Cornerstone is a financial services firm based in New York. The mission of the firm is to apply the principles of sustainable finance across the capital markets, enhancing investment processes through transparency and collaboration.  In offering investment consulting and advising, investment banking, and strategic consulting services, Cornerstone works with asset owners, corporations and financial institutions, promoting new research in the field of Environmental, Social and Governance (ESG) analysis, and facilitating capital introductions for organizations around the world engaged in sustainable business practices.

The Commission has received numerous submissions in the years since this measure was initially passed by Congress outlining the rule’s potential benefits and costs.  Reviewing this correspondence, we observe that investor groups have identified substantial material benefit, while representatives of issuers have raised concerns about whether they would be able to provide meaningful information in a cost-effective manner.

As an advisor both to corporations and investors, we would encourage a decision to go forward with the rule as mandated in the statute.  Nevertheless, the Commission should take heed of the concerns of issuers that disclosures provide shareholders with accurate and reliable information.

Because our investor clients seek to invest for the long term, we have a strong interest in urging corporate disclosures that enable investors to evaluate risks and make decisions that will affect the long-term health of our clients’ portfolios.  Our corporate clients believe that meaningful disclosure that communicates how they are managing environmental, social and governance matters helps them to attract long-term capital.

As a matter of good corporate governance, we believe that corporate disclosures should provide holistic information about the compensation strategies.  As Charles Elison and Craig Ferrere have pointed out[1], current disclosure requirements focus entirely on executive compensation, ignoring the company’s governance strategy for compensation throughout the firm.  Peer group comparisons provide useful but limited context for understanding CEO pay, since no two firms’ strategy or business model is perfectly comparable. Peer group comparisons also reinforce the notion that CEO pay should be treated as distinct from other forms of compensation, and may place upward pressure on pay levels.

By providing intra-firm context, pay ratio disclosure will shed light on the role compensation plays generally in its human capital strategy, including the strategic importance of top management relative to the rest of the firm’s talent.  A consistent body of research has determined that compensation strategy has implications for firm strategy, talent retention and employee engagement.  For example, Cornerstone Capital Group has published research demonstrating that quick serve restaurants that invest in both technology and human capital may enjoy higher margins and profitability.[2]

We are sympathetic to concerns that such issues as outsourcing, foreign employment and part-time and seasonal workers may impact pay ratio figures.  However, methodological choices may have a material impact on any accounting metric, and financial data may not be meaningful without context.  Narrative descriptions accompanying pay ratio disclosures will help to provide necessary context to understanding these figures.  Investors will find these disclosures particularly useful in comparison to other companies or as a measure of change over time.

We appreciate that for particularly large global companies, finding the “median” worker may be difficult.  Nevertheless, statistical sampling techniques can be employed to reduce the burden of this research.[3]  Therefore, we are not supportive of allowing companies to exclude workers from the sample, which may distort the pay ratio and creates a moral hazard to manipulate the figures.

We are also sympathetic to the concern that the “median” worker is only one data point and may not fully represent the company’s human capital strategy.  While we believe that the current disclosure represents a meaningful step forward, we recommend that the Commission also require companies to disclose total payroll, which will allow investors a fuller picture of the company’s compensation strategy, without creating additional substantial burden on companies.

We appreciate the opportunity to provide these comments and urge the Commission to move forward with final rulemaking on Section 953(b).

Sincerely,

John K.S. Wilson

Head of Corporate Governance, Engagement and Research

Cornerstone Capital Inc.

[1] https://www.sec.gov/comments/s7-07-13/s70713-582.pdf

[2] The Economics of Automation: Quick Serve Restaurant Industry, by Michael Shavel and Andy Zheng, March 2015  http://cornerstonecap.wpengine.com/2015/03/the-economics-of-automation-in-the-quick-serve-industry/

[3] https://www.sec.gov/comments/s7-07-13/s70713-1561.pdf