Massachusetts Introduces Highest Paid Employee-Ratio Legislation as Illinois Creates Pay Ratio Fee

February 24, 2017

The proliferation of state pay ratio proposals continued this week as legislators in the deep blue states of Massachusetts and Illinois introduced new pay ratio measures, with Massachusetts becoming the first state to eschew use of the SEC's pay ratio calculation in favor of a pay ratio which focuses on comparing a company's highest paid employee to median U.S. employee pay.  The addition of the Illinois and Massachusetts legislation brings the number of states which have introduced or passed pay ratio legislation to five, not including the cities of San Francisco and Portland, Oregon.  Interestingly, the two new pay ratio legislative efforts do not follow the templates used previously, which primarily imposed surtax penalties on companies based on the pay ratio:

  • Massachusetts:  Massachusetts Senate Bill S.1555 introduces a Massachusetts-only pay ratio calculation which is not connected to the SEC requirement.  The act defines "compensation ratio" as "the amount equal to the greater of the compensation of the [CEO] or the highest paid employee of the business for the calendar year" compared against "the amount equal to the median compensation of all employees employed by the business, including all contracted employees under contract with the business, in the United States for the calendar year preceding the beginning of the taxable year."  The legislation is unique as it focuses on the highest paid employee, not the CEO, harkening back to the ill-fated "Katie Couric Rule" where the SEC considered, but eventually scrapped, requiring pay disclosures on the three highest paid non-management employees at a company.  Under the proposed Massachusetts legislation, having a ratio per the calculation detailed above which exceeds 100 will subject the public company to an extra 2 percent state tax.  Additionally, because the Massachusetts pay ratio is U.S.-only while the federal SEC pay ratio is global, if the SEC requirement is not eliminated, companies doing business in Massachusetts may be forced to disclose two pay ratios to comply with each requirement.         
  • Illinois:  Introduced by Democrat State House Rep. Jaime Andrade Jr., the "Business Compensation Equity Fee Act" (HB3335) would subject publicly traded companies doing business in Illinois to an annual fee based on the company’s SEC-disclosed pay ratio.  For ratios exceeding 100 but less than 250, companies would have to pay a $1,500 fee, while ratios exceeding 250 would result in a $2,500 fee.   
The continued use of the pay ratio by state legislatures to subject companies to additional taxation underscores the importance of obtaining a full legislative repeal of the federal disclosure requirement, while also opposing pay ratio initiatives at the state and local levels.