S. 5011: Curtailing Executive Overcompensation (CEO) Act

This bill would add a new federal excise tax on certain large employers when the gap between their highest-paid executive and their typical workers is very large.

Who it applies to

The tax would apply only to an “applicable employer,” meaning a company or other employer that:

• Has at least $100 million in gross receipts in each of the prior three years, and
• Has paid more than $10 million in wages in each of those same three years.

Related companies can be combined under existing tax aggregation rules, so multiple entities may be treated as one employer. The bill also allows inflation adjustments for these thresholds after 2027.

How the tax is calculated

The tax is based on the employer’s pay disparity ratio, which compares:

• the average qualified pay of the employer’s highest-compensated employee over the past five years, to
• the median pay of all applicable employees for that year.

The bill defines “qualified wages” broadly, including certain deferred compensation and, in some cases, earned income of self-employed individuals or owner-employees. An “applicable employee” is generally anyone paid at least $5,000 in the year, with inflation adjustments after 2027.

When the tax is triggered

The pay disparity factor is the amount by which the pay disparity ratio exceeds 50 to 1. If the ratio is 50-to-1 or less, no tax is due under this section.

Tax amount

If the ratio is above 50-to-1, the employer would owe an excise tax equal to the lesser of:

• 1% of the pay disparity factor multiplied by the amount by which the highest-paid employee’s pay exceeds 5,000% of median worker pay, or
• 1% of the employer’s gross receipts.

This means the tax is capped at 1% of gross receipts, even if the pay gap is very large.

Anti-avoidance rules

The Treasury Department would be required to issue regulations to stop employers from getting around the tax, including by changing workforce makeup or substituting contractors for employees in order to affect the pay ratio.

Other tax changes

The bill would also make this excise tax nondeductible for federal income tax purposes, meaning employers could not subtract it from taxable income like some other business expenses.

When it would take effect

The changes would apply to taxable years beginning after the date the bill is enacted.

Relevant Companies

• WMT — Large employers with very high executive pay relative to median worker pay could face this tax if they meet the bill’s size thresholds.
• AMZN — Large retail and logistics employers may be affected if their pay ratios exceed the bill’s threshold.
• MCD — Large franchised or company-operated employers could be affected depending on how the rules apply to their payroll structure.
• TGT — Big employers with substantial wage bills and high executive compensation could be directly impacted.
• CVS — Large employers in healthcare and retail may be affected if their pay disparity ratio is high enough.