Large companies doing business in San Francisco may soon be subject to an additional tax if voters approve the so-called “Overpaid Executive Gross Receipts Tax” this coming November. Joining a minority of municipal governments that have imposed an “executive pay ratio tax” on the heels of the SEC’s CEO pay ratio disclosure rules, the San Francisco Board of Supervisors recently approved a ballot initiative for this November’s election that calls for the imposition of a tax on companies doing business in San Francisco if their highest-paid employee makes more than 100 times the median compensation of the company’s San Francisco-based employees.  As the tax is not limited to companies that maintain headquarters in San Francisco, all companies that have a presence in San Francisco are potentially subject to the tax.  On the other hand, small businesses (generally those with no more than $1,000,000 of annual gross receipts within the city) and non-profit organizations would generally be exempt from the tax.

If the ballot initiative — which requires only a simple majority to pass — is approved by San Francisco voters, two types of taxes could apply to companies engaging in business within San Francisco: a gross receipts tax or an administrative office tax (collectively, the “SF Pay Ratio Taxes”).

  • The gross receipts tax will be calculated based on a company group’s “taxable gross receipts” that are “attributable to” San Francisco, determined in the same manner as the taxable gross receipts tax that has been generally applicable to companies engaging in business within San Francisco since 2014. Consistent with the existing gross receipts tax, the proposed ballot gives the San Francisco tax collector surprisingly broad discretion to independently establish the gross receipts that are generated within San Francisco, and to reallocate gross receipts among related entities. The tax starts at .1% of the taxable gross receipts if the pay ratio exceeds 100 and goes up to 1%  if the pay ratio exceeds 1000. 
  • The administrative office tax applies where a company maintains an administrative office in San Francisco (generally, an entity that is predominantly engaged in providing administrative or management services to a combined group of companies), and is calculated based on the payroll expense for employees based in San Francisco. The tax rate starts at .4 % of the payroll expense if the pay ratio exceeds 100 and goes up to 4% if the pay ratio exceeds 1000. Similar to San Francisco’s existing tax on administrative office business activities, if a company is subject to the administrative office component of the SF Pay Ratio Taxes, the gross receipts tax component does not apply.

Whether the SF Pay Ratio Taxes will apply will depend on the pay ratio (comparison) of the annual “Compensation” payable in a tax year to the highest-paid employee of any entity within the company group of the company doing business in San Francisco, compared to the median Compensation payable to the full-time and part-time employees based in San Francisco.  In contrast to the SEC’s CEO pay ratio disclosure rules that apply to publicly traded companies – under which the pay ratio is generally determined by comparing the CEO’s compensation to the median compensation of all of the employees of the company (with some limited exclusions) – the determination of whether the SF Pay Ratio Taxes will apply is dependent on the pay ratio of the compensation of the highest paid employee (which, although in most cases will likely be the CEO, could theoretically be a different employee) to the median compensation of only those employees who are based in San Francisco. It is also noteworthy that the SF Pay Ratio Taxes are not only applicable to publicly traded companies.

Unlike a similar CEO pay ratio surtax that Portland implemented at the beginning of this year – which simply looks to the SEC’s CEO pay ratio disclosure rules to determine how the CEO/median employee compensation pay ratio is calculated, including how compensation is determined – the SF ballot initiative is silent on the very critical question of how compensation will be determined. While the definition of “Compensation” under the San Francisco ballot initiative is broad and includes wages, salary, commissions, bonuses, stock options and any other property issued or transferred in exchange for the performance of services, as well as “any other form of remuneration” paid to an employee for services, it fails to provide guidance on how the various components of Compensation will be valued for purposes of determining the highest-paid employee and median compensated employee and calculating the pay ratio.

The rules that are eventually adopted to define how Compensation is determined will significantly affect how the tax will impact companies. For instance, if Compensation is calculated simply based on income reported on an  employee’s W-2, it would not accurately reflect the value of bonuses or equity compensation “awarded” in a given year if the employee has not yet recognized income for such compensation — which typically does not occur until the end of a service or performance period, or in the case of stock options, until the options are actually exercised by the employee, which could be several years after the year the options vested or granted. On the other hand, if Compensation will be determined using the SEC’s CEO pay ratio rules, imposing such an undertaking on a company that is currently not subject to the SEC public disclosure requirements (generally, private companies) would result in a significant burden on the company. Without understanding how Compensation will be determined, a company that may be subject to the SF Pay Ratio Taxes may not be in a position to anticipate the potential impact of the taxes and any related planning opportunities.

Commentary from the San Francisco Board of Supervisors, which voted unanimously to place the initiative on the ballot, suggests that the purpose of the tax is less about making policy and more about seeking an additional source of tax revenue, particularly in view of the pandemic. However, the imposition of the SF Pay Ratio Taxes may have the unintended effect of causing lower-paid positions to be transferred outside of San Francisco in an effort to increase the median compensation of San Francisco-based employees and thereby reduce the pay ratio, and consequently, the tax rate applicable to the company.


Victor Flores is a partner in Baker McKenzie’s Employment & Compensation Practice, with a focus on Executive Compensation and Employee Benefits. Victor advises global US and non-US companies – both public and private – on all aspects of executive compensation and benefits matters, including the corporate, securities and tax law, and ERISA issues arising in the implementation and administration of compensation programs. He regularly helps clients with the design and implementation of equity and non-equity based incentive compensation programs and nonqualified deferred compensation programs. Victor also has extensive experience advising on compensations and benefits issues in mergers and acquisitions, corporate reorganizations, private equity and other corporate transactions.


Sinead Kelly is a partner in Baker McKenzie’s Compensation practice in San Francisco. She advises on U.S. executive compensation and global equity and has practiced in the compensation field since 2005. In her practice, Sinead counsels U.S. and non-U.S. public and private companies on all aspects of equity and executive compensation plans and arrangements, including plan design, drafting, administration and governance. In this regard, Sinead advises on and assists companies with compliance with U.S. federal and state securities and tax laws relating to compensation arrangements, as well as with preparing SEC disclosures, complying with stock exchange rules and addressing non-U.S. tax and regulatory requirements. She has been repeatedly recognized by Legal 500 as a leading lawyer for Executive Compensation and Employee Benefits.