San Francisco Could Follow Portland in Regulating CEO Compensation

In 2016, Portland, Oregon, passed an ordinance targeting CEO pay ratios, becoming the first locality to successfully implement a measure attempting to regulate high pay ratios between companies’ CEOs and their median employees by imposing a tax surcharge. Under the Portalnd ordinance, a 10 percent surcharge is added to the city’s existing business tax for a company that exceeds a 100 to 1 CEO to median employee pay ratio and a 25 percent surcharge is added if the pay ratio exceeds 250 to 1.

Following the passage of Portland’s tax initiative, we covered statewide efforts to pass legislation regulating CEO compensation ⁠— none of which have succeeded. When Portland passed the CEO pay ratio tax, the city experienced only a minimal tax revenue increase, but Portland city councilmember Steve Novick said the ultimate goal was to set a precedent for other jurisdictions to follow. This November, San Francisco could become the next locality to follow suit.

The San Francisco Board of Directors recently released the text of a November ballot initiative to regulate CEO pay ratio. Under the proposal, the city would implement a gross receipts tax and administrative office tax on San Francisco city and county companies whose executive pay ratio exceeds 100:1.

Non-administrative business offices would be subject to a tax ranging from 0.1 percent to 0.6 percent of gross receipts, dependent on the pay ratio. Tax rates for administrative offices would range between 0.4 percent and 2.4 percent of the company’s total payroll attributable to the city. According to the city controller’s office, the tax is estimated to generate between $60 million and $140 million in additional revenue each year. The first year that Portland’s tax ordinance went into effect, the city received approximately $3.5 million from the new tax stream.

According to the initiative, the tax stream will go towards funding Mental Health SF, a program being advanced by the San Francisco Board of Directors and aimed at providing free mental healthcare to city residents. If the program does not pass the ballot in November, tax revenue from the pay ratio initiative will go toward funding other mental health facilities and services.

If voters in San Francisco approve the proposal at the ballot box on November 5, companies with “excessive” CEO compensation will be subject to a more specific sliding tax scale than Portland businesses. In San Francisco, the tax levied on companies would grow incrementally as pay ratios increased by values of 100, with the highest rate imposed for both non-administrative and administrative businesses with a CEO pay ratio exceeding 600:1.

In addition to tax variations, the San Francisco initiative will need to garner more support than Portland’s surtax. When the Portland city commissioner proposed the city’s tax measure, the proposal only had to gain approval from three of the five local council members. As a ballot measure, the San Francisco tax initiative will require a two-thirds voter approval rate in order for it to be adopted. It is unclear whether the initiative will garner enough popular support to pass. The CEO of the San Francisco Chamber of Commerce expressed concern that the tax will push low-wage jobs out of the city, where many large companies will be impacted.

In the past several years, states have taken a variety of approaches in attempts to regulate executive compensation. A 2017 bill in Connecticut (CT HB 6101) would have denied economic assistance and tax expenditures to companies with CEOs earning 100 times the average Connecticut employee’s wages. The same year, an Illinois bill would have levied an annual fee between $1,500-$2,500 depending on the company’s pay ratio. This year, California is considering (CA SB 37) a statewide tax increase on companies with wide disparities in CEO to median worker compensation. Massachusetts legislators also considered a bill (MA SB 1702) this year to implement a CEO pay ratio tax. Both the California and Massachusetts bills are presently pending in committee.

Prior to the passage of Portland’s city ordinance on pay ratio, state and local lawmakers had previously attempted to regulate executive compensation. In 2017, the U.S. Securities and Exchange Commission eased the process of pay ratio oversight by enacting legislation from seven years prior, requiring companies to disclose the ratio between their CEO and median worker pay grade.

Since then, only Portland, Oregon, has acted on the information release. Depending on the November ballot results, San Francisco⁠ could follow in its path.

Update (July 24, 2019)