A Surcharge on CEO Pay

In case you missed it, the city council in Portland, Ore., voted last week to impose a surtax on companies whose chief executives earn more than 100 times the median pay of their rank-and-file workers beginning next year.

According to the New York Times piece, the legislation is ground-breaking:

The surcharge, which Portland officials said is the first in the nation linked to chief executives’ pay, would be added to the city’s business tax for those companies that exceed the pay threshold. Currently, roughly 550 companies that generate significant income on sales in Portland pay the business tax.

According to the Times piece, companies must pay an additional 10 percent in taxes if their chief executives receive compensation greater than 100 times the median pay of all their employees, and organizations with pay ratios greater than 250 times the median will face a 25 percent surcharge.

This new surcharge comes along just as companies are preparing to comply with the Security and Exchange Commission’s pay-ratio disclosure rules under the Dodd-Frank Act.

“Portland’s effort to impose pay ratio penalties would raise new issues for public companies already working to comply with the SEC’s pay ratio disclosure rules,” said Mike Stevens, a partner in Alston & Bird’s employee benefits and executive compensation group, shortly before the Portland City Council voted on the matter.

“As companies look to address the mechanics of the pay-ratio rules and prepare early disclosure models,” he said, “it’s important to understand that the SEC has given companies broad leeway in calculating these ratios. If Portland or other jurisdictions decide they are going to impose a penalty based on ratios, we  can expect that companies will take a hard look at the available alternatives and likely will become more aggressive with their method of calculation.”