Many of us in the executive compensation field have been busy these past few months preparing proxy statements and corresponding executive compensation disclosures. Now that the crush of proxy season is largely behind us, and companies have either made it through their first pay ratio disclosures or are about to file proxies with pay ratio disclosures, you might be tempted to take a pause and catch your breath. But wait! An unnerving and growing trend has emerged in which state and local governments have either passed or are considering new taxes and other rules that are tied to a company’s pay ratio.
Most of these new or proposed bills would add surtaxes based on a company’s pay ratio. For example, Portland, Oregon adopted a new tax in which it will levy:
- A 10% surtax on companies with a pay ratio of at least 100:1 but less than 250:1; and
- A 25% surtax on companies with a pay ratio of 250:1 or greater.
Other states either have followed or are considering following suit (in their own unique fashions), including:
- California (which, inconveniently, is considering adopting its own pay ratio formula)
- New Hampshire
- Rhode Island
- San Francisco
We flagged this issue prior to the pay ratio rules becoming effective (see our comment letter here) as one of the many problems associated with the pay ratio rules. Unfortunately, the trend of states and localities seeking to levy punitive taxes based on pay ratio disclosures, that even the SEC admits, are simply estimates, is troubling and may ultimately grow in prevalence. We are continuing to monitor all pay ratio taxes and will provide updates as warranted.