Exec Comp CEO Pay Ratio Tax Passes in San Francisco

Starting in 2021, companies with a presence in San Francisco will pay a tax if the ratio between their CEO’s and their median worker’s pay is greater than 100 to 1, after a majority of voters approved a wealth tax on CEOs on Election Day.

The tax, which is the first in the country to have been voted on by constituents that includes both public and private companies, is a variation of a tax that has been widely discussed elsewhere. Boards have largely shrugged off the idea that a pay ratio is meaningful. But now that San Francisco and Portland, OR have adopted taxes on income equality, it could be a matter of time before other jurisdictions pile on.

Deb Lifshey, managing director at Pearl Meyer, says she hasn’t heard from many boards that are concerned about the San Francisco law. She says conversations around pay ratios have become infrequent since two years ago, when companies first had to start disclosing it to comply with SEC rules.

“Even at that time, boards didn’t seem overly concerned,” she says.

With the new tax in San Francisco, Lifshey thinks that companies could move workers out of San Francisco, and she questions “whether voters actually understood” what the proposition on the ballot meant.

With the change in administration, she says, “anything’s possible.” Indeed, a CEO pay ratio tax has been introduced in various iterations on the federal level in the past couple of years, although none made it out of the committee level.

Meanwhile, a shift in the SEC’s regulatory priorities under the Biden administration could mean changes to certain disclosures, Lifshey says. She says that she expects boards will be asked to provide more information on human capital and possibly need to disclose more information in the section of proxy statements specific to the CEO pay ratio.

“With the Biden administration, it might even evolve into something bigger,” she says.