CEO Pay Ratio Disclosure: State and Local Governments May Add to Burden, Executive Compensation Practical Pointers

Business Point

Some state and local governments are attempting to apply new taxes and other charges to publicly traded companies with disclosed pay ratios that exceed certain thresholds. Therefore, companies making such disclosures should consider whether these laws will apply to it and, if so, whether the ratio will exceed the applicable threshold. The company should also involve its tax department to determine any potential tax impact.

Technical Points

Despite the passage by the U.S. House of Representatives of the Financial CHOICE Act, which would repeal the section of Dodd-Frank mandating the SEC to require the pay ratio disclosure, many believe that no substantial change will be made to the disclosure requirement prior to the 2018 proxy season, if ever. This means that companies face not only the burden of preparing for the disclosure, but also, potentially being subject to new taxes and other charges in certain jurisdictions if their disclosed pay ratio exceeds a certain threshold level.

Below are examples of enacted or pending state and local legislation focused on executive pay ratios:

• Portland, Oregon passed in December 2016 an ordinance imposing a surtax of 10% on top of Portland’s business income tax (currently 2.2%) on publicly traded companies if the CEO pay ratio is at least 100:1, with that surtax rising to 25% if the ratio is greater than 250:1. It is interesting to note that Portland’s City Council included several pages of introductory text discussing income inequality and the perceived “explosion” of CEO pay.
• Both Minnesota and Rhode Island currently have pending legislation that would impose surtaxes on state business income tax based on CEO pay ratios and at rates similar to those imposed by Portland. Rhode Island, as part of its finding, cited portions of the introductory text to the Portland ordinance.
• Connecticut has proposed to amend its corporate tax rate on publicly traded companies to tie the tax rate to the pay ratio of the highest paid employee (not necessarily the CEO) to the median employee, with such rates being (i) 5% for ratios of 25:1 or less, (ii) 7.5% for pay ratios above 25:1 and up to and including 100:1, (iii) 10% for pay ratios above 100:1 and up to and including 250:1, and (iv) 25% for pay ratios above 250:1.
• Illinois has proposed the “Business Compensation Equity Fee Act,” which would impose an annual fee on a publicly traded company doing business in the state of (i) $1,500 if the CEO pay ratio is at least 100:1 but less than 250:1, and (ii) $2,500 if the ratio is greater than 250:1.
• Massachusetts has proposed to apply an additional 2% state income tax on publicly traded companies with a pay ratio based on the highest paid employee (not necessarily the CEO) that exceeds 100:1.
• The City of San Francisco has approved a resolution urging the San Francisco Employees Retirement System, which holds approximately $21 billion in assets, to examine executive compensation and pay ratios when making investments and voting on proxies.

It should be noted that many of the laws described above are based on the requirements under Dodd-Frank, and thus a repeal of the Dodd-Frank pay ratio disclosure would make such laws difficult (if not impossible) to enforce. That said, the laws proposed in Connecticut and Massachusetts appear to be written to function independent of Dodd-Frank, and thus any repeal of the pay ratio disclosure requirement likely would not impact such state laws.