The NASPP Blog

June 3, 2014

CEO Pay Ratio Tax

It was over before I even had a chance to blog about it–a proposal in the California Senate to tax companies based on their CEO to median employee pay ratio. But the question is: is it really over or is this just the beginning?

Background: The CEO Pay Ratio Disclosure

As my readers know (because how could you possibly have missed this news, even if you foolishly don’t read the NASPP Blog religiously), the Dodd-Frank Act requires public companies to disclose the ratio of CEO pay to median employee pay and, last year, the SEC proposed rules to implement this disclosure. The final rules are expected sometime this year.  The media has been very excited about this disclosure (and, as a blogger, I can sympathize with the desire for more fodder for headlines on otherwise slow news days) and the SEC received close to 23,000 form letters in support of the disclosure and a petition in support of it with close to 85,000 signatures.

But, despite this overwhelming support, the institutional investors that spoke on the panel “Say-on-Pay Shareholder Engagement: The Investors Speak” at last year’s 10th Annual Executive Compensation Conference were ambivalent about how helpful the disclosure would be to their decision-making process. The SEC also has expressed ambivalence over the usefulness of the disclosure.

The CA State Senate Sees an Opportunity

But, while investors and the SEC aren’t sure how useful the disclosure will be, the CA State Senate found a way to put the disclosure to use:  tax revenue.  Specifically, a bill introduced by Senator Mark DeSaulnier (whose district is sort of the far east bay area–I’m sure there’s a better name for it and you think I’d know it, since I live just over the district border, but I don’t) proposed a corporate tax on a sliding scale tied to the CEO pay ratio. Some companies with low ratios might have ended up paying less corporate tax but most companies would have likely ended up paying more.  Towers Watson provides more detail on how the tax would have worked in the May 1 entry in their Executive Pay Matters Blog (“California Legislation Would Limit Tax Deductions for Companies Where the CEO Pay Ratio Is Too High“).

Just to make things even more fun, the proposed legislation called for a different calculation than the SEC’s rules.  CA would have included only US employees in the ratio and would have required it to be based on FICA wages.

It’s All Over; Or Is It?

But none of that matters at this point because the bill was defeated (see Towers Watson’s May 30 blog, “Update: California Senate Defeats Bill to Limit Tax Deductions at Companies With High CEO Pay Ratios“).

The question remains, however: is this the end of this sort of legislation, or only the beginning?  The bill was defeated 19-17, which certainly isn’t overwhelming opposition.  BTW–that was 19 votes for and 17 against; in CA, tax increases require a two-thirds majority in both houses of the legislature (so the bill needs 27 votes to pass in the CA Senate).  In a Democratic state that doesn’t have this two-thirds requirement for tax increases, this bill would still be in business (of course, it would still have to get past the State Assembly and the Governor).  Only five democratic senators voted against the bill; the rest of the opposition was republican (no republicans voted for the bill). Moreover, the CA Senate has voted to reconsider the bill–it is still in play (although there are not enough democrats in the Senate to ensure passage, some republican support would be required).

– Barbara