Portland Spurs Efforts to Rein In CEO-to-Worker Pay Gaps

About 500 publicly traded companies doing business in Portland, Ore., are likely to face a tax for big pay gaps between their CEO and rank-and-file workers, representing the first tangible aftereffect of a federal rule that requires disclosure of those figures.

Big corporations like Walmart Inc., Verizon Communications Inc. and Marriott International Inc. have a presence in the city and each disclosed “pay ratios” large enough to trigger a new local surtax. So did TJX Companies Inc., which owns TJ Maxx, Marshalls and other retail store chains, and restaurant operator Chipotle Mexican Grill Inc.

The city’s tax on certain ratios—expected to yield about $3 million in its first year—has spawned similar proposals across the country.

Both supporters and opponents of Portland’s surtax admit it’s not likely to put a dent in the coffers of most companies, and whether it spurs changes in corporate compensation practices is likely to hinge on this strategy’s widespread adoption.

“As a practical matter, it’s still a drop in the bucket for these companies,” Portland Commissioner Amanda Fritz told Bloomberg Law. “Little Portland is not going to make much of a difference on its own.”

The surtax has rankled some members of the city’s business community, including apparel brand Columbia Sportswear Co. The Portland-based company is subject to the tax, which it says is based on an inconsistent metric and is meant as a shame tactic.

The Portland Method

If a publicly traded company doing business in Portland pays its CEO between 100 and 249 times more than its median employee, it would be subject to a 10 percent surtax for that fiscal year. A ratio equal to or above 250-to-1 would spur a 25 percent surtax.

According to data compiled by research firm Equilar Inc., the median pay ratio of all companies on the Russell 3000 Index that have disclosed them was 70-to-1 as of May 10.

Portland’s surtax is assessed as a percentage of the amount of business license tax a company pays to the city. And businesses subject to the surtax may soon need to pay more, as the city council is expected to hike its business license tax for the upcoming fiscal year.

In one example pulled from material on the city’s website, a public company with a 1,000-to-1 pay ratio that pays $250,000 in city business taxes would face a $62,500 surtax—25 percent of its business license tax. This would make its total tax due to Portland that year $312,500.

Walmart, Verizon, Marriott, TJX and Chipotle are listed by Portland’s revenue division as being in compliance with city business tax laws, meaning it’s probable that they will be subject to a business license tax for income earned within city limits—a prerequisite for the surtax. Of these five companies, only TJX responded to Bloomberg Law’s inquiries about its activities and tax liabilities in Portland.

A spokesperson for the retailer confirmed it operates stores in the city and said the company follows “applicable legal requirements, whether at the federal, state, or local level.”

The Securities and Exchange Commission crafted the pay ratio reporting requirements under a mandate from the 2010 Dodd-Frank Act. Most public companies were required to develop and disclose ratios for fiscal 2017 beginning this year.

Business advocates like the U.S. Chamber of Commerce opposed the requirements, and several groups that filed comments with the SEC during the rulemaking process claimed the ratios were designed solely to call out companies and their executives.

Portland’s city council adopted the pay ratio surtax in December 2016 after it was floated by former Commissioner Steve Novick. No ratios had been reported to the SEC at that point, but now that the bulk of them have been revealed, it’s possible to get a sense of the companies that might be affected by the penalty.

Tyler Wallace, tax division manager in Portland’s revenue division, said in an email to Bloomberg Law that the city has notified the roughly 500 companies that may be subject to the surtax. There are no exemptions to the surtax, which is based solely on the number disclosed in a company’s public proxy statement.

“Penalties and our standard enforcement tools will be used to achieve compliance,” Wallace said.

The roughly $3 million the city expects to raise from the surtax this year is earmarked for Portland’s affordable housing efforts and for funding its police force and fire stations, Fritz said.

The surtax and the pending hike of the city’s business license tax are a part of an effort to create a “more equitable” tax structure, Fritz added. “Taxing the rich is something people in Portland have been asking us to do,” she said. “So far [the surtax] is working as intended.”

While the penalty is meant as a way to help tackle income inequality, Fritz said she also hopes that it sparks an increase in what companies pay their average employees.

The Tax Discussion

Portland’s tax strategy triggered a larger debate about the merits of taxing companies based on their pay ratios.

Since the city adopted the surtax, a handful of jurisdictions across the country began weighing the idea of adopting similar approaches for targeting CEO-to-worker pay gaps.

Legislative proposals in six historically left-leaning states, including California, Connecticut, and Illinois, would impose either a fee or an increased tax rate on companies with pay spreads that surpass predetermined thresholds.

In some cases these proposals base penalties on the pay ratios required by the SEC. But in others the ratios vary, with some comparing CEO compensation to median employee pay in its U.S., not global, workforce. California’s pending legislativeproposal would hike the tax rate for companies that add non-U.S. workers and reduce their number of U.S.-based employees.

“What they are trying to do is rein in CEO pay and up employee pay,” Carol Silverman, a partner in Mercer’s law & policy advisory group, said of efforts to tax companies on their pay ratios. “Taxes are one way of accomplishing those goals, but there might be more effective alternatives.”

Companies with a seasonal or temporary workforce, or with many employees based in countries that pay lower wages “are going to get penalized,” Silverman told Bloomberg Law.

But companies in industries like financial services that have high executive compensation may have some of the lowest ratios because they employ so many high-paid workers, she added. “And companies that outsource jobs tend to have lower ratios than companies that keep lower paying jobs in-house, so taxes don’t always encourage the kind of behavior that maybe you want to promote.”

The SEC’s rules give companies significant leeway for calculating their ratios, which business advocates have cited as a reason to avoid company-to-company comparisons.

Retailers, restaurant groups, and manufacturers with significant global or part-time employee bases have reported some of the largest CEO-to-worker pay gaps thus far.

Business Impact

“If you’re going to have a tax, it needs to be one that’s fair, consistent, and repeatable,” Richelle Luther, Columbia Sportswear’s Senior Vice President and Chief Human Resources Officer, told Bloomberg Law.

Luther said the surtax represents a “fundamental lack of fairness,” as only a “very small number” of companies will bear the full burden, and they may or not be the worst offenders.”

A Columbia spokesperson said the company expects to pay about $5,000 for the surtax.

The penalty isn’t going to be “massive, but that’s not the point,” Luther said. “You can’t use a methodology that has such a wide range of interpretation.

“It’s not so much that it’s a financial disadvantage, It’s more about [the] principal” behind it, she added.

According to Luther, the widespread adoption of a financial penalty for certain pay ratios is cause for concern in the business community. “You really have to start thinking about a collective effort to consider this from a legal perspective,” she said. There “might be some avenues” there.

Sarah Anderson, director of the Global Economy Project at the left-leaning Institute for Policy Studies, said she expects momentum for pay-ratio penalties to continue to grow, especially as more people become aware that the CEO-to-worker data is now available.

“It’s sparking a bit of a debate about whether these extreme gaps are good for business,” Anderson said.

A penalty for above-average ratios would “ideally” be nationwide, but if a state like California would move in that direction it could create a snowball effect, she said. And “more momentum could build” around the tax strategy once other jurisdictions see the revenue it generated in Portland.

To contact the reporter on this story: Jacob Rund in Washington at jrund@bloomberglaw.com

To contact the editor responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com