Subject: File No.
From: Keith Johnson
Affiliation: Co-Chair, Network for Sustainable Financial Markets Fiduciary Duty Working Group

March 16, 2017

These comments are submitted in support of the CEO pay ratio rule on behalf of participants in the Network for Sustainable Financial Markets (SFM), an international, non-partisan, non-profit organization comprised of financial market professionals and academics. Detailed comments are included in the attached December 2, 2013 letter to the SEC regarding the original proposed rule.

In addition to supporting the CEO pay ratio rule, we recommend including a safe harbor to encourage more useful pay ratio and management layering disclosures that would produce additional economic benefits greatly exceeding the costs of disclosure for both companies and long-term investors. Our recommendations would avoid a "one size fits all" approach, while providing boards, management and investors with information and insights to improve strategic planning, innovation, risk management, corporate governance and efficient use of capital.

The attached comment letter contains an Appendix which summarizes compensation-related organizational design and behavioral research from the United States, Canada and Britain. This research informs the following principles that provide a foundation for making the pay ratio disclosure process a more valuable mechanism for promoting sustainable value creation.

1. Employees consistently say that a reasonable pay differential between adjacent (value-adding) management layers in their company's management structure would be a compensation increase multiple of 2 to 2.5 times from one management level to the next higher level

2. Each value-adding management layer ("Work Level") is worth about 2 to 2.5 times more in total compensation than the level directly below it

3. The current median pay ratio difference between the principal executive officer ("PEO") and the other Named Executive Officers ("NEOs") directly reporting to that role at the largest 2000 issuers in the Russell 3000 for which data is available is less than 2.5

4. The total number of Work Levels between front line employees and the PEO can vary between companies and between subsidiaries or business lines in the same company

5. Evaluation of pay differentials and the degree of delegated authority between Work Levels can provide insights into a company's organizational and operational efficiency and innovation capacity, as well as the effectiveness of its risk management and PEO succession planning processes

6. The longest accountable performance period for which the PEO and other management Work Levels are held accountable, when compared to the business and risk horizons applicable to each Work Level, is an indication of whether total compensation is linked to risk-adjusted performance

7. In many companies where management of enterprise risk exposures are central to sustainable success, the pay ratio and Work Level difference between the PEO and chief risk officer ("CRO") can be a signal of how robust the enterprise risk management function is at the company.

These findings have already influenced the analyses used by credit rating, governance and investor service providers. For example, research by Moody's Investor Services suggests that high pay equity disparity can flag succession planning risk, increase cost of capital and affect credit ratings. (Analyzing Credit and Governance Implications of Management Succession Planning, Moodys Investors Service, May 2008.) Recent research from the University of Delaware also supports the need for internal consistency of compensation throughout a company, up to an including the PEO. (Elson, Charles M. and Ferrere, Craig K., Executive Superstars, Peer Groups and Overcompensation: Cause, Effect and Solution (August 7, 2012), pages 129 -130. Available at SSRN: http://ssrn.com/abstract=2125979.)

In today's knowledge-based economy, less than 25% of the valuation of the SP 500 is comprised of tangible assets such as property, plant, equipment inventory and cash reflected in financial statements. The other 75% of the valuation is associated with intangible assets of a company, little of which is evident in financial statements prepared under GAAP. ("What is a Company Really Worth? Intangible Capital and the 'Market to Book Value' Puzzle," NBER Working Paper Series (2008) at ftp://db.stanford.edu/pub/gio/CS99I/nber_w14548.pdf.) The intangible assets and market valuation of future company prospects are the real long-term value drivers. They include such intangibles as the optimal management structure design, work processes, information databases, patents, brand equity, enterprise risk management and the human capital that work within the structural capital and work systems of the enterprise.

A major advantage of identifying the median layer in the management structure and median compensation for the entire enterprise would be development of valid and reliable information systems for reporting to the board and C-suite on structural and human capital investments, costs and risks. Development of this data would also allow more accurate reporting to the board and investors of actual and complete enterprise long-term value drivers. The benefits of viewing pay ratio disclosure in this broader context would be enormous.

MVC Associates International (a signatory to the attached letter) cites first-hand knowledge of registrants, which are large global banks that have discovered they do not have the following types of information for thousands of employee roles.

1. The location of the business unit where each role is included

2. What role is the accountable manager for each role (thus they are orphaned roles in the information system and on organization charts) and

3. What the delegation of authority is from the manager to each reporting role, potentially putting the enterprise at material risk.

In addition, these registrants were found to lack reliable information on:

1. How many total enterprise layers they have (PEO to front line)

2. Cost of management by layer and

3. Median employee total compensation costs by layer.

Such deficiencies are 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, signatories to the attached letter 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 pay ratio disclosure process could provide the vehicle for identifying and addressing these shortcomings.

In summary, the attached letter signatories believe that improved reporting to the C-Suite and boards, combined with transparent disclosures to investors, will contribute to a number of benefits:

1. Dramatically improved information systems for Organizational Capital analytics (structural and human) and reporting to the C-Suite and Board

2. More insightful analytics related to organizational performance and risks disclosure for investors

3. Materially better performance of investee companies

4. More insightful proxy and Say on Pay voting processes

5. More sustainable returns for investors and

6. More efficient capital markets overall.

These are significant cost-benefit advantages to a holistic pay ratio disclosure process that should not be overlooked.

(Attachment: December 3, 2013 letter to SEC.)

Submitted on behalf of SFM

(Attached File #1)