What Is the Tax Excessive CEO Pay Act?

The Tax Excessive CEO Pay Act is a legislative proposal that uses the corporate tax code to address the gap between executive and worker pay. It creates a financial disincentive for companies with large pay disparities by imposing a higher federal corporate income tax rate on them. This rate is triggered when a top executive’s compensation exceeds the median worker’s pay by a specified ratio. The policy encourages companies to either increase worker wages or moderate executive pay, with the additional tax revenue contributing to federal funds.

Determining Applicability of the Act

The proposed act applies to publicly traded companies and private companies with average annual gross receipts over $100 million. Publicly traded companies are already subject to Securities and Exchange Commission (SEC) rules that require them to report the pay ratio between their CEO and median employee. Because of this, the infrastructure for reporting the necessary pay data is already in place for these companies.

The definition of “compensation” is comprehensive and aligns with SEC disclosure standards. It includes an executive’s base salary, bonuses, stock awards, option awards, and changes in pension value. The median worker’s compensation is calculated using the same methodology to ensure a consistent and comparable measure between the two figures.

To comply with existing SEC rules, companies must identify their median employee. This is done by examining the total annual compensation of the entire employee population, excluding the CEO, using either the full roster or statistical sampling. The median employee’s total pay for the year becomes the benchmark used to establish the pay ratio.

Calculating the Corporate Tax Rate Increase

The act’s mechanism is a graduated increase in a company’s corporate income tax rate based on its CEO-to-median-worker pay ratio. The legislation proposes a tiered structure where the tax penalty escalates as the pay gap widens, applying the rate increase directly to the company’s overall tax liability.

The first tier of the tax increase is triggered when a company’s pay ratio surpasses 50-to-1. For companies with a ratio between 50 and 100, a tax rate increase of 0.5% is added to their regular corporate income tax rate. For example, if a company with a 75-to-1 pay ratio has a corporate tax liability of $100 million, the additional tax would be $500,000 ($100 million multiplied by 0.5%).

As the pay ratio climbs, the tax rate penalty becomes more significant. A second tier applies to companies with a pay ratio between 100-to-1 and 200-to-1, imposing a 1.0% rate increase. Subsequent tiers continue this pattern for ratios above 200-to-1 and 300-to-1, with rate hikes potentially reaching 5.0% or more for the largest pay disparities.

Interaction with Existing Executive Compensation Rules

The proposed act would operate alongside existing tax laws, most notably Internal Revenue Code Section 162(m). This section limits the corporate tax deduction for compensation paid to certain top executives to $1 million per individual annually. For taxable years beginning after December 31, 2026, the group of “covered employees” will expand to include the five highest-compensated employees. This rule prevents companies from deducting large amounts of executive pay from their taxable income.

The two policies function differently. Section 162(m) is a deduction limitation, meaning any executive pay over $1 million cannot be used to reduce the company’s taxable income. The company loses the tax deduction for the excess amount, which impacts its taxable income before the corporate rate is applied.

In contrast, the Tax Excessive CEO Pay Act imposes a direct corporate tax rate increase based on the pay ratio. It is an additional layer of tax policy, not a replacement for Section 162(m). A company could be affected by both provisions, facing a deduction limitation on high salaries and a rate increase from a high pay ratio.