Subject: Comment re: Rulemaking Petition - File No. 4-711
From: Mark C. Ubelhart

November 29, 2017

Now retired as the Corporate Finance/Executive Compensation and Human Capital Foresight (HCF) Practice Leader for Hewitt Associates, now Aon Hewitt, I authored two journal articles and one chapter in a book on the subject of this Petition – “CFO + CHRO = Power Pair” in Strategic Finance, November 2015; “Human Capital Management: The Central Element of All Risk” in People + Strategy, Winter, 2016; and “An Economic View of the Impact of Human Capital on Firm Performance and Valuation” in The Valuation Handbook, Valuation Techniques from Today’s Top Practitioners, Wiley Finance 2009.

I consider this Petition to be very comprehensive it describing current circumstances and very timely.

First, it is very evident that the lack of comparative company-to-company and overtime data is a serious limitation. We addressed that by utilizing information from over 1000 companies over a ten year period from Benefit Administration, Compensation, and Employee Engagement client data covering 20 million employees. It might be possible to enlist Aon Hewitt and other such firms in a coordinated effort if it can be done in a manner that does not compromise their own business’s competitive advantage.

Second, the overall topic is broad by necessity and the idea to develop categories of information rather than focus on individual metrics makes sense but also contributes to the difficulty in succinctly summarizing results. An anecdote from my experience is that when I requested their list of Human Capital metrics from a very prominent client I was sent 30 pages of metrics, none of which were quantitatively or predictively linked to business results.

In my view the Petition’s mention of “Line item disclosures” together with narrative is a useful direction to pursue. At the Spring 2016 HCMC meeting I advocated internal management discussions and when possible presentations to the Board of how management employs Human Capital information in decision making. The thought is that business units would gain from one another and strive to be innovative as they compare their practices to their peers. Stopping short of public disclosure of metrics or results, this would be reinforced by public disclosure of the process being followed and the categories of information being used.

Based on our research one line item that merits inclusion is the relative loss of the compensation investment in Pivotal Employees – labeled the Talent Quotient (TQ) or Investment Based Pivotal Employee Turnover (IBPET) in the articles and book chapter. Converting a head count based turnover to financial metric enhances its relevance in financial terms and its predictive power. It also provides an “intervening variable” meaning HR initiatives can be evaluated based on their impact on retaining Pivotal Employees which predict financial results rather than having to link directly to financial results which is fraught with obvious difficulties of holding everything else constant.  For the Society of Human Resource Management (SHRM) initiative develop metrics for investors and one of the industry segments of the Sustainable Accounting Standards Board (SASB) this approach in lieu of or in addition to conventional turnover metrics was part of the discussion while I was a member.

Mark C. Ubelhart
Consultant to Merritt Research Services, LLC
Clinical Professor of Strategic Finance and Human Capital,
DePaul University Kellstadt Graduate School of Business in Chicago

Executive Advisory Board Member, Center For Corporate Performance (CCP),
Illinois Institute of Technology Stuart School of Business