Bill Clinton Created This Terrible Corporate Loophole. Will Hillary Close It?

Drug company Mylan has been widely condemned this year for the skyrocketing cost of its EpiPen, an emergency allergy medication. Now, media reports say that executive bonuses may have played a role in the price-gouging. The Wall Street Journal reported on Thursday that two years ago, Mylan put in place a “special incentive plan” to reward executives for hitting “aggressive profit targets.” The New York Times described the bonus as a “one-time stock grant” given to executives “if the company’s earnings and stock price meet certain goals by the end of 2018.”

This could explain why your EpiPen two-pack costs $600 today, versus half that amount in 2014: A drug executive’s bonus might depend on it.

The Mylan case is an example of how performance-based pay can end up hurting customers while fattening executives’ wallets. For the last two decades, the government has encouraged these kinds of schemes through a lucrative tax break that gave corporations incentives to focus on their firms’ stock price rather than their core business. A new report from the Institute for Policy Studies (IPS) shows how companies continue to exploit this loophole, costing taxpayers tens of billions of dollars and undermining the economy.

The policy goes back to Bill Clinton, who campaigned for president on rolling back excessive CEO pay, which according to the Economic Policy Institute jumped from an average of $1.49 million in 1988 to $4.9 million in 1992 (adjusted for inflation). At the time, companies could deduct all of their compensation from their corporate taxes, as a normal business expense. Clinton’s idea was to cap that: No corporation could write off an executive’s salary above the first $1 million. This measure passed in Clinton’s first budget in 1993, and became section 162(m) of the IRS tax code.

 But there was one exception. Companies would still be allowed to deduct compensation for high-earning executives if it was deemed “performance” pay. So if you paid a CEO with a bonus, then you could deduct it all. And that bonus could be composed of stock options, so that the executive’s compensation rose along with the stock price.

 Predictably, base salaries for CEOs and top executives froze, and bonuses took off. Overall compensation soared. If the idea was to reduce executive pay, it failed. In 1992, total compensation for CEOs at the top 350 firms was $4.9 million, according to the IPS study. By 2000, the end of the Clinton administration, it was up to $20.3 million, an increase of over 400 percent. ...