Companies and their general counsel are closely following a new Portland, Oregon, tax that is based on the pay disparity between CEOs and average workers. This week Portland became the first in the U.S. to impose such a tax on about 550 businesses, but it could spread to other cities.
The contentious tax idea hits at a time when companies are already gearing up to comply with the U.S. Securities and Exchange Commission's pay ratio disclosure rules that go into effect on Jan. 1. Portland will base its tax on the numbers filed with the SEC.
Michael Stevens, a partner in Alston & Bird's employee benefits and executive compensation group in Atlanta, says the tax is largely symbolic. “It's a sort of sin tax like those on cigarettes, alcohol and other behaviors the government wants to discourage. Portland wants to discourage pay inequality,” he explains.
“From a general counsel's stand point,” he says, “they [GCs] are already probably grappling with the SEC's pay ratio rules. If we see other jurisdictions decide to impose taxes, I think we'll see companies take a very hard look at getting more creative with their methods of calculation.”
Stevens explains that collecting the data, finding the so-called median employee and figuring the ratio “is not as easy as pushing a button in the payroll department.” The process is very time consuming and expensive for large companies, he says.
“Right now the focus is on a cost effective way to find the number. But if there is going to be a penalty on that number, then people are going to redouble efforts to find other ways to calculate it,” he says.
The SEC has given companies broad leeway in calculating the ratios, he says, including using statistical sampling and tax reports.
Stevens says most companies are hoping the pay ratio rule, which is part of the Dodd-Frank Act, will be repealed under President-elect Donald Trump's administration.
“The Republicans have already proposed legislation to pull back some parts of Dodd-Frank, including the pay ratio disclosure rule,” Stevens notes. “If that rule is rescinded, then so is the Portland tax because there will be no data for them to base it on.”
Couldn't Portland simply require companies to do the ratios anyway, just for the city? Stevens doubts it. “My guess is the cost of determining the number would be greater than the tax they would pay in Portland,” he says.
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