Robert Reich: Why Hillary should fulfill Bill’s promise on CEO pay
What can be done to deter pharmaceutical companies from jacking up the prices of critical drugs, prevent Wall Street banks from excessive gambling, and nudge CEOs into taking a longer-term view?
Answer: Fulfill Bill Clinton’s campaign pledge on CEO pay.
In 1992, he proposed to bar companies from deducting pay above $1 million. Once elected, he asked his economic advisors (including yours truly) to put the measure into his first budget.
My colleagues weren’t exactly enthusiastic about the new president’s proposal. “Maybe there’s some way we can do this without actually limiting executive pay,” one said.
“Look, we’re not limiting executive pay,” I argued. “Companies could still pay their executives whatever they wanted to pay them. We’re just saying society shouldn’t subsidize through the tax code any pay over a million bucks.”
My colleagues continued to resist.
“Why not require that pay over $1 million be linked to company performance?” said another. “Executives have to receive it in shares of stock or stock options, that sort of thing. If no linkage, no deduction.”
“Good idea,” a third chimed in. “It’s consistent with what the president promised, and it won’t create flak in the business community.”
“But,” I objected, “we’re not just talking about shareholders. The wage gap is widening in this country, and it affects everybody.”
“Look, Bob,” said the first one. “We shouldn’t do social engineering through the tax code And there’s no reason to declare class warfare. I think we’ve arrived at a good compromise. I propose that we recommend it to the president.”
The vote was 4 to 1. The measure became section 162(m) of the IRS tax code. 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, becoming by far the largest portion of CEO pay.
When Bill Clinton first proposed his idea, total compensation for CEOs at America’s 350 largest corporations averaged $4.9 million. By the end of the Clinton administration it had ballooned to $20.3 million. Since then, it’s 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 gets it. “When you see that you’ve got CEOs making 300 times what the average worker’s making you know the deck is stacked in favor of those at the top,” she has said in her presidential campaign.
And she’s taken direct aim at executive stock options.
“Many 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,” she said last year. “And we ended up encouraging some of the same short-term thinking we meant to discourage.”
Two years ago, pharmaceutical company Mylan put in place a one-time stock grant worth as much as $82 million to the company’s top five executives if Mylan’s earnings and stock price met certain goals by the end of 2018. But the executives would get nothing if the company — whose star product is the EpiPen allergy treatment — failed to meet the target. Almost immediately, Mylan stepped up the pace of EpiPen price increases. Since then, the price of an EpiPen two-pack has doubled to $600 — a move Hillary Clinton has rightfully called “outrageous.”
Stock options doled out to Wall Street executives in the early 2000s didn’t 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’s back to issuing stock options with a vengeance.
According to a recent report from the Institute for Policy Studies, the top 20 banks paid their executives more than $2 billion in performance bonuses from 2012 to 2015. That translates into a taxpayer subsidy of $1.7 million per executive per year.
Hillary Clinton has proposed penalizing pharmaceutical companies such as Mylan that suddenly jack up the prices of crucial drugs. And she’s promised to go after big banks that make excessively risky bets.
These are useful steps. But she should also consider a more basic measure that would better align executive incentives with what’s good for the public.
It’s doing what her husband pledged in 1992 but which his economic advisors sabotaged: Bar corporations from deducting all executive pay in excess of $1 million. Period.