• More Jurisdictions Considering Taxing High CEO Compensation
  • March 24, 2017 | Authors: David D. Ebersole; David M. Kall; Michelle Rood
  • Law Firms: McDonald Hopkins LLC - Columbus Office; McDonald Hopkins LLC - Cleveland Office
  • Last December, Portland, Oregon became the first city in America to pass an ordinance imposing an additional tax on the compensation of any chief executive officer of a publicly traded company doing business in Portland whose compensation is more than 100 times that of a median worker’s compensation. The ordinance, which affects about 550 firms, calls for a 10 percent surtax when the pay ratio of CEO to median worker is between 100 to 1 and 250 to 1. When that ratio exceeds 250 to 1, the surtax increases to 25 percent. We detailed the law in our December 22, 2016, article.

    As we noted, the surtax was made possible in the first place by a 2015 Securities and Exchange Commission (SEC) rule requiring public companies to disclose the ratio of the compensation of their CEO to median employee compensation. The rule requires companies to disclose the ratio of the median annual total compensation of all employees, excluding the CEO, to the annual total compensation of the chief executive officer. 

    Other jurisdictions are contemplating duplicate laws as well. For example, Rhode Island’s H 5141 would amend the state’s business corporation tax to impose a surtax of 10 percent if a corporation reports a pay ratio of at least 100 to 1 but less than 250 to 1 on SEC disclosures. When the pay ratio reaches 250 to 1, the tax becomes 25 percent. 

    The impetus for Rhode Island’s measure is the same as that of Portland’s ¿ because these jurisdictions believe that chief executive officer pay contributes to growing income inequality. H 5141 cites the research of Thomas Piketty, from his book "Capital in the Twenty-First Century," which details the growing disparity in income, along with reports from The Center on Budget and Policy Priorities and data from the Economic Policy Institute. The research shows that, among other things:
    • In 2015, chief executive officers in the largest corporations made an average of $15,500,000, which is 276 times the annual average pay of the typical worker; 
    • Corporations with high chief executive officer-worker pay ratios have lower employee morale and lower shareholder returns compared to corporations with lower ratios; 
    • Corporations with high pay ratios perform worse than those with lower ratios; 
    • According to researchers, the “spectacular concentration of income and wealth among the top one percent and one-tenth percent is bad for the economy and bad for democracy.” 
    San Francisco is another city pondering a CEO surtax. A recent Bloomberg piece pointed to an as-yet undrafted bill there that a Supervisor Jane Kim plans to put forth; presumably, it would mirror the others. She believes the move is justified because, in her mind, it is clear that cities “cannot rely on Washington and Congress to take leadership on the growing wealth and income gap.”

    A piece in Talent Economy, which describes itself as a Human Capital Media publication that covers the “evolving dynamic around the role talent plays in the modern economy,” questions whether this kind of endeavor is helpful. On the assumption that taxing is the “right approach,” the author suggests that what constitutes the “right ratio” to tax is unknown. But the piece also notes that “[s]ome argue [that] intervention at the bottom of the wage spectrum is a better approach.”

    Talent Economy points to the sentiments of the managing director of CEO Update, a Washington, D.C. based online publication focusing on trade groups, professional organizations and nonprofit organizations, who agrees that the focus should be on lower-paid workers. His concern is that the ratio approach is unfair, and “if CEO pay starts going in a downward direction, the leader might just leave for another company.” He would prefer to see efforts to increase the lowest wages. 

    Similarly, the chief executive officer of a San Francisco based a wearable-tech firm contended that “[i]f you’re going to get into penalizing companies, focus instead on rewarding companies that are leading the way with closing the gap that has a broader impact on an employee base than strictly the CEO.” 

    Fast Company has weighed in on the debate as well, opining that although the ultimate goal is to combat income equality, questions as to whether this is the right tool remain. Nevertheless, “the fact is that for business to be successful, it must also be sustainable.” Even so, these new laws could “move the national conversation about income inequality forward.”