Can a Tax Make High CEO Pay Go Away?

Portland, Ore., passes a tax based on CEO-worker pay ratios

By Stephen Miller, CEBS Dec 15, 2016

Last week, a new front emerged in the campaign against high executive pay. Portland, Ore., became the first jurisdiction in the U.S. to require publicly traded corporations to pay a surtax if their CEO compensation is more than 100 times their median worker's earnings.

The ordinance, passed by a 3-1 vote on Dec. 7, establishes a business surtax of 10 percent on any publicly traded company doing business in Portland that has a ratio of CEO to median employee pay of at least 100 to 1, and a 25 percent surtax on companies with a ratio of 250 to 1 or higher.

Portland City Commissioner Steve Novick, who sponsored the ordinance, called extreme economic inequality one of the biggest problems facing society. "The top 1 percent, and especially the top one-tenth of 1 percent, have a far larger share of wealth and income than they did 40 years ago," he said.

The tax will take effect next year, after the U.S. Securities and Exchange Commission (SEC) begins to require public companies to calculate how their chief executives' compensation compares with their workers' median pay, and to disclose the CEO pay ratio in proxy statements reporting on fiscal year 2017. Many public companies are already working through the calculations involved.

The rule implements part of the Dodd-Frank Act. However, it's unclear whether the incoming Trump administration will block the rule as part of its promised regulatory overhaul.

Assuming the rule remains intact, Portland's revenue bureau has identified more than 500 publicly traded firms that do business in the city and that could be subject to the tax if their CEO-worker pay ratios are above 100 to 1. The list includes major corporations, with Wells Fargo, Wal-Mart and General Electric among them.

A Harbinger, Advocates Hope

Sarah Anderson, an executive compensation analyst with the liberal Institute for Policy Studies in Washington, D.C., predicted that "this will spark a wave of similar actions, much like the local living wage campaigns that have spread like wildfire across the country."

The Portland proposal could also build momentum for federal action, she said. In September, Rep. Mark DeSaulnier, D-Calif., and Rep. Bonnie Watson Coleman, D-N.J., introduced the CEO Accountability and Responsibility Act (H.R. 6242), which would increase federal tax rates on companies with CEO-worker pay ratios of more than 100 to 1. The Republican Congress, however, is seen as unlikely to take up the measure.

[SHRM members-only toolkit: Designing Executive Compensation Plans]

Critics Are Skeptical

While backers of the tax characterized it as an assault on inequality, "in practice, it may prove to be more of a symbolic blow," said Jared Walczak, a policy analyst with the Center for State Tax Policy at the Tax Foundation, a nonprofit tax policy research organization in Washington, D.C.

An unknown number of companies have CEO compensation above these thresholds, he noted. "Whatever the ratios turn out to be, however…a Fortune 500 corporation is unlikely to renegotiate its chief executive's compensation package to avoid an additional tax hit of a few thousand dollars in Portland, Ore."

Wayne Guay, an accounting professor at The Wharton School–University of Pennsylvania, also believes that "companies may shrug off the surcharge since it would not affect them much, at least in its current form." A surcharge of a few hundred thousand dollars is "not going to force Wal-Mart or Target to change their CEO pay," he said. "Of course, they might be concerned that if every city in the country passes a similar tax, it could start to add up."

The tax also is unlikely to reduce the gulf between executive and average-worker compensation because there are strong economic factors that determine pay, Guay said. "Larger firms and firms that are more complex and riskier pay their CEOs more because they need certain skills. The pay of lower-level workers is dictated by supply and demand" and these workers' skill sets and education levels.

He added, "There is really no economic reason why the CEO's pay would be correlated with the median pay of the workforce."

Related SHRM Online articles:

Preparing for CEO Pay Ratio Disclosures, SHRM Online Compensation, October 2016

Executive Pay: How Much Is Too Much?, SHRM Online Compensation, October 2012

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