San Francisco Passes a Tax on Companies Based on Their Executive Pay Ratio

Published: November 2020

 

San Francisco voters passed a new pay ratio tax this month for companies operating in city limits that becomes effective in 2021. We explain what businesses need to know.


San Francisco voters approved a measure on November 3, 2020, that imposes a tax on companies operating in the city based on their CEO pay ratio. While similar in concept to the SEC’s CEO pay ratio rule, this law is based on a ratio of the compensation of the company’s “highest paid employee” worldwide (not necessarily the CEO) to the median compensation of the company’s population of San Francisco-based employees. The SEC rule, on the other hand, is calculated based on the CEO and median of worldwide employees. 

As a result of the differences in the two rules, companies subject to the San Francisco Executive Pay Ratio will need to perform a calculation separate from the SEC rule. Moreover, the city law applies to both private and public companies operating in San Francisco. Since private firms have not been subject to the SEC rule, they will likely need more assistance in determining resources necessary to calculate their pay ratio. Certain small businesses[1] and tax-exempt organizations are not subject to the new law.

The city law establishes two graded taxes to be collected from companies based on their pay ratio:

  • Administrative Office Tax – For any business maintaining an administrative office in the city[2], the tax is graded based on companies’ CEO pay ratio (0.4% of companies’ total taxable payroll expense attributable to San Francisco for ratios above 100:1, up to 2.4% tax for ratios of 600:1 ratio or more) 
  • Gross Receipts (Non-Administrative Office) Tax – For any businesses engaged in any business in San Francisco, the tax is graded based on companies’ CEO pay ratio (0.01% of gross receipts attributable to the city for ratios above 100:1, up to 0.6% for ratios of 600:1 ratio or more)

It appears that the two taxes are cumulative for businesses that both maintain an administrative office and conduct business (i.e., have gross receipts) within the city.

The initiative is fraught with administrative issues that will take time to resolve. For example, the use of “highest-paid employee” in the numerator of the ratio does not necessarily require that the individual be an officer. For example, the highest paid employee is not always the CEO at some financial services firms.

Proceeds of the tax will be used to fund mental health facilities, services and programs in San Francisco.

Aon’s governance team will be monitoring the impact of the law and can assist clients in ensuring compliance. If you have questions about the SEC or San Francisco pay ratio rules, please contact our team at rewards-solutions@aon.com
 
[1] Generally, the term “small business enterprise” shall mean and include any person or combined group, except for a lessor of residential real estate, whose gross receipts within the City for the preceding tax year did not exceed $1,000,000, adjusted annually in accordance with the increase in the Consumer Price Index
[2] Generally, "Engaging in business within the City as an administrative office" means that:
      (1)   a person is engaging in business within the City during the tax year and over 50 percent of the total combined payroll expense within the City of that person and its related entities for the preceding tax year was associated with providing administrative or management services exclusively to that person or related entities;
      (2)   the total combined number of employees of that person and its related entities within the United States as of the last day of the preceding tax year exceeded 1,000; and
      (3)   the total combined gross receipts of that person and its related entities reported on United States federal income tax return(s) for the preceding tax year exceeded $1,000,000,000.
 

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