San Francisco has enacted a new 'CEO tax.' It's for companies that 'overpay' their CEOs.

  • Residents of the city of San Francisco this week approved what's known as the the "Overpaid executive gross receipts tax" also called the "CEO tax." 
  • It's an extra tax on companies with offices in San Francisco when those companies pay their CEOs more than $2.7 million annually, and exec pay is over 100 times the median worker pay in the city.
  • Proponents of the tax say that it will mostly hit retail, grocery, hotel and other businesses that have large numbers of hourly workers or low-salary positions.
  • However, several large, public tech companies with offices in San Francisco also have high CEO pay-to-worker ratios.
  • Visit Business Insider's homepage for more stories.

While much of California's tech industry has been focused on passing statewide propositions like Prop 22, which prevents gig workers from being classified as full-time employees, another really interesting ordinance was approved by San Francisco residents this week: Proposition L.

Prop L is known as the "CEO tax," although its official title is the "Overpaid executive gross receipts tax."

It slaps an extra tax on companies with operations in San Francisco when they pay their top executives more than $2.7 million annually — and executive pay is 100 times or more than the median pay of that company's San Francisco workers. Prop L overwhelmingly passed, garnering 65% of the vote.

Starting in 2022, Prop L will add an additional tax of between 0.1% – 0.6% on a company's gross revenue attributed to the city, or a 0.4%-2.4% payroll tax attributed to the city, for any company that operates in San Francisco that pays its executives far more than it pays San Francisco employees. 

The higher the executive pay compared to rank-and-file employees in the city, the bigger the tax. For instance, a company that pays 100:1 – 199:1 would be charged the 0.1% extra tax or 0.4% payroll tax; for ratios of 200:1 – 299:1, the tax is 0.8% and the scale inches up. The top bracket is for any company that pays 600:1 or more.

The CEO tax takes into account the executives' total compensation, including salary and stock.

The tax isn't likely to snare many businesses, especially not small businesses, its proponents say. Prop supporters also argued it was most likely to impact companies that rely on a lot of hourly wage workers or relatively low-paying salaried jobs, like retailers, grocers and hotel chains. 

Opponents of the tax, like former candidate for mayor Richie Greenberg, accused City Hall leaders of blaming the tech sector for "economic imbalances" and called the proposition "misguided and bizarre." However, San Francisco isn't the first to do such a tax. Portland, Oregon, adopted a similar one in 2017.

Because public companies are required to disclose their CEO pay ratios, we know that many public tech companies with offices in San Francisco pay their CEOs more than 100 times their median worker salary — sometimes way more. This is true even when they pay their median workers well, like over $200,000 annually.

We've compiled a short list of tech companies that have CEO pay ratios of over 100, but first some caveats: The tax will only apply to the ratio of CEO pay vs. salaries for a company's San Francisco employees, and public records on CEO pay ratio don't break out median worker pay by location. They use a median average for all workers everywhere.

So, Business Insider cannot verify that any of the tech companies listed below would actually be on the hook for the extra tax, or if they would be exempt for other reasons.

That said, here's a short list of tech companies with operations in San Francisco that pay their CEOs 100 times or more their median employee pay, as disclosed in their company's SEC forms, or compiled by the AFL-CIO. 

Salesforce fiscal 2019
— CEO pay: $26 million
— Median worker pay: $167,750
— CEO pay ratio of 155-1

Adobe fiscal 2019
— CEO pay: $39 million
— Median worker pay: $147,115
— CEO pay ratio: 266:1

Google fiscal 2019
— CEO pay: $281 million
— Median worker pay: $258,708
— CEO pay ratio: 1,085:1

Zynga fiscal 2019
— CEO pay: $12 million
— Median worker pay: $98,588
— CEO pay ratio: 118:1

Microsoft could also potentially be on the hook, given it has offices in San Francisco and a CEO pay ratio of 249:1. 

What about Uber, Pinterest and Lyft?

Uber and Pinterest are based in San Francisco and their CEO pay ratios may put them at risk. In fiscal 2019, Uber paid its CEO over $42 million and Pinterest paid its CEO over $46 million. But as newly public companies, neither company has yet to disclose its employee median pay or their CEO pay ratio. Lyft has also not yet disclosed this information, but its CEO pay is far lower, and likely doesn't exceed the 100:1 ratio.

What about Twitter and Dropbox?

Twitter is headquartered in San Francisco but its pay ratio last year wouldn't put it at risk.

Twitter fiscal 2019
— CEO 2019 pay: $1.40 (yes, one dollar, forty cents)
— Median worker pay: $213,155
— CEO pay ratio: less than 0.001

(Note that Prop L specifies the highest paid manager, not just the CEO.)

In 2019, the highest paid exec at Twitter was chief legal officer Vijaya Gadde, with total compensation of $7.9 million. But even if using her pay, the ratio is 37:1.

Similar to Twitter, Dropbox's fiscal 2019 CEO pay ratio was low, at 6:1.
— CEO pay: $1.4 million
— Median employee pay: $244,570

The company's highest paid executive was senior VP Timothy Young at $20.5 million and that's a ratio of 84:1, still not high enough to qualify.

Given all of this kind of variability, San Francisco's controller estimates this tax will yield an additional $60 million and $140 million annually into the city's coffers.

Salesforce, Pinterest, Microsoft, Twitter and Dropbox declined comment. Adobe, Google, Zynga, and Lyft did not immediately respond to our request for comment, nor did San Francisco city Supervisor Matt Haney.

An Uber spokesperson responded to reiterate that the tax won't go into effect until Jan. 1, 2022.

Source: Read Full Article