In response to growing concerns over income inequality, some states are proposing legislation designed to penalize companies using pay ratio data disclosed pursuant to the Securities and Exchange Commission’s pay ratio disclosure rule.
The SEC’s pay ratio disclosure rule requires public companies to report the ratio of pay between the median employee and the principal executive officer. Companies must report their pay ratio in their 2018 proxy statements using 2017 compensation data.
The concept of using pay ratio data to address income inequality isn’t new. Portland, Oregon, adopted a local ordinance that imposes a surtax, which correlates to the pay ratio disclosed by companies in compliance with the SEC’s rule. The applicable surtax is:
Five states also have proposed legislation that will impose a tax or flat fee based on pay ratio. The legislation introduced in Minnesota (HF 65) and Rhode Island (H. 5141) proposes to adopt a surtax that is largely similar to Portland’s pay ratio surtax. Additional efforts include:
-Illinois (HB3335) proposes to impose an annual fee on publicly traded companies based on the SEC’s pay ratio disclosure rule. Companies would be subject to the following fees:
-Connecticut (HB 6373) proposes to amend the current corporate income tax structure based on pay ratio. The proposed tax rate is:
-Massachusetts (S. 1555) proposes to impose a 2 percent surtax on publicly traded companies that report a pay ratio that is more than 100:1. Interestingly, the legislation introduces a Massachusetts-only pay ratio calculation that is independent of the SEC calculation.
There has been significant buzz regarding the future of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the pay ratio provisions. Despite lingering questions regarding the pay ratio, executive compensation experts believe that we will continue to see similar efforts at the state and local levels. Steve Seelig of Willis Towers Watson, told Bloomberg BNA March 1, “When disclosure of the CEO Pay Ratio disclosure was first made law in Dodd-Frank, the focus was not on shareholder reaction but rather on what would be the next shoe to drop from legislators and regulators” and that “this is because shareholders uniformly have expressed indifference to seeing a pay ratio disclosure that does not provide additional insight on how CEO’s compensation is connected to corporate success.” Seelig added, “Don’t be surprised to see other efforts in this area, perhaps in how state and local governments interact with government contractors who might have a ratio that is seen as too high.”
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