CEO Salaries and Pharmaceutical Costs

I had a conversation recently with someone who was quite upset about how much money pharmaceutical companies spend on CEO compensation -- at a time when many people are not able to afford necessary medicines.

While I do not support restricting or limiting compensation, I also often scratch my head and ask, “Does it really make sense for a corporation to give someone tens of millions a year to run a company?”  Beyond a certain point, there's no useful way to spend the extra money.  Someone who gets $30,000,000 in a year is grossing more than $82,000 per day, or $575,342 per week.  How many steaks can you eat, how many vacations can you take, how many homes can you occupy, how many Ferraris can you drive?

Still, I thought it would be interesting to see how much pharmaceutical makers are spending on CEO compensation, and if this might be a factor in the costs of lifesaving pharmaceuticals. Forbes keeps track of the top 400 CEO compensation packages for American corporations.  Pharmaceutical company CEOs are NOT unusually highly paid.  There are a few pharmaceutical CEOs in the top 100, but only a few.  By comparison, other sectors, such as health care, communications, entertainment, consumer products, and stuff of questionable actual value, are more common in the top 100 list. UnitedHealth Group's CEO is the top: $101,960,000.

When I started digging into the details of these compensation packages, however, I noticed something very interesting, of which David E. I. Pyott of Allergan (a drug company) is pretty typical: The vast majority of the compensation is stock gains, not salary or bonuses. Of Pyott's $33.76 million compensation, $30.64 million was stock gains -- not salary, bonuses, or other forms of direct compensation. In practice, this means that what the company actually wrote him checks for was about $3 million; the rest is the result of stock option grants.

This is partly because of a law the Democrats passed in the 1990s that prohibits corporations from deducting as business expenses any CEO or other top officer salaries that exceeds $1 million a year. Before this law, most corporate officer compensation was salary; afterwards, it was typically stock options, which I am afraid may have encouraged a more short-term view of appropriate corporate governance.