Why Hillary should fulfill Bill鈥檚 promise on pay
Because corporations can deduct CEO pay from their corporate income taxes, taxpayers have been subsidizing a growing bonanza.
Valeant's Michael Pearson had the highest pay of any US CEO last year but was ousted from the company this spring because of several federal probes into the drug company's practices. He is shown here (l.) testifying on Capitol Hill earlier this year.
Manuel Balce Ceneta/AP/File
What can be done to deter pharmaceutical companies from jacking up prices of critical drugs? To prevent Wall Street banks from excessive gambling? To nudge CEOs into taking a longer-term view? To restrain runaway CEO pay?聽
Answer to all four: Fulfill Bill Clinton鈥檚 1992 campaign pledge.
When he ran for president, Bill Clinton said he鈥檇 bar companies from deducting executive pay above $1 million. Once elected, he asked his economic advisors (among them,聽) to put the measure into his first budget.聽
My colleagues weren鈥檛 exactly enthusiastic about the new president鈥檚 campaign promise. 鈥淢aybe there鈥檚 some way we can do this without actually limiting executive pay,鈥� one said.
鈥淟ook, we鈥檙e not limiting executive pay,鈥� I argued. 鈥淐ompanies could still pay their executives whatever they wanted to pay them. We鈥檙e just saying society shouldn鈥檛 subsidize through the tax code any pay over a million bucks.鈥�
They weren鈥檛 convinced.聽
鈥淲hy not require that pay over a million dollars be linked to company performance?鈥� said another. 鈥淓xecutives have to receive it in shares of stock or stock options, that sort of thing. If no linkage, no deduction.鈥�
鈥淕ood idea,鈥� a third chimed in. 鈥淚t鈥檚 consistent with what the President promised, and it won鈥檛 create flak in the business community.鈥�
鈥淏ut,鈥� I objected, 鈥渨e鈥檙e not just talking about听蝉丑补谤别丑辞濒诲别谤蝉. The pay gap is widening in this country, and it affects everybody.鈥�
鈥淟ook, Bob,鈥� said the first one. 鈥淲e shouldn鈥檛 do social engineering through the tax code And there鈥檚 no reason to declare class warfare. I think we鈥檝e arrived at a good compromise. I propose that we recommend it to the President.鈥�
The vote was four to one. The measure became section聽. It was supposed to cap executive pay. But it just shifted executive pay from salaries to stock options.
After that, not surprisingly, stock options soared 鈥� becoming by far the largest portion of CEO pay.
When Bill Clinton first proposed his plan, compensation for CEOs at America鈥檚 350 largest corporations averaged $4.9 million. By the end of the Clinton administration, it had ballooned to $20.3 million. Since then, it鈥檚 gone into the stratosphere.
And because corporations can deduct all this from their corporate income taxes, you and I and other taxpayers have been subsidizing this growing bonanza.
Hillary Clinton understands this. 鈥淲hen you see that you鈥檝e got CEO鈥檚 making 300 times what the average worker鈥檚 making you know the deck is stacked in favor of those at the top,鈥� she鈥檚聽聽in her presidential campaign.
And she鈥檚 taken direct aim at executive stock options.
鈥淢any stock-heavy pay packages have created a perverse incentive for executives to seek the big payouts that could come from a temporary rise in share price,鈥� she聽聽in July. 鈥淎nd we ended up encouraging some of the same short-term thinking we meant to discourage.鈥�
Yes, we did. Specifically, her husband and his economic team did.聽
Case in point: In 2014, pharmaceutical company Mylan put in place a one-time stock grant worth as much as $82 million to the company鈥檚 top five executives if Mylan鈥檚 earnings and stock price met certain goals by the end of 2018.
But the executives would get nothing if the company 鈥� whose star product is the EpiPen allergy treatment 鈥� failed to meet the target.聽, Mylan began stepping up the pace of EpiPen price increases. The price of an EpiPen two-back doubled to $600 鈥� a move Hillary Clinton has rightfully called 鈥渙utrageous.鈥�
Stock options doled out to Wall Street executives in the early 2000s didn鈥檛 exactly encourage good behavior, either. They contributed to the near meltdown of the Street and a taxpayer-funded bailout.
Now that Wall Street is no longer restrained by the terms of the bailout, it鈥檚 back issuing stock options with a vengeance.
According to a recent聽聽from the Institute for Policy Studies, the top 20 banks paid their executives over $2 billion in performance bonuses between 2012 and 2015. That translates into a taxpayer subsidy of $1.7 million per executive per year.
Hillary Clinton has proposed penalizing pharmaceutical companies like Mylan that suddenly jack up the prices of crucial drugs. And she鈥檚 promised to go after big banks that make excessively risky bets.
These are useful steps. But she should also consider a more basic measure, which would better align executive incentives with what鈥檚 good for the public.
It鈥檚 doing what her husband pledged to do in 1992, if elected president 鈥� but which his economic advisors then sabotaged: Bar corporations from deducting聽all聽executive pay in excess of $1 million. Period.
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