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CEO Salaries and Pharmaceutical Costs

If you have never been part of a stock option grant arrangement, I should explain that it is not generally a gift.  You get the right to buy stock at a certain price, set such that if you manage to increase the value of the company, your stock options will become worth a pile of money. If the stock price does not rise, or falls, those options are often worthless. Without knowing the details of Pyott's option grant, I can't even begin to estimate what it actually cost Allergan to give him stock options that netted him more than $30 million, but I am guessing that the out-of-pocket cost was a tiny fraction of that — probably no more than a million or two million dollars.

High CEO compensation troubles me from a moral standpoint (although that does not mean that it is the government’s job to do anything about it). But let’s say that Pyott worked for Allergan for $200,000 a year, and the corporation took that $5 million or so that they saved for his salary, bonus, and stock options, and used it to lower the cost of their pharmaceuticals. Allergan's 3rd quarter 2011 net sales was $1.311 billion;  multiply by four to get a rough net sales of $5.244 billion. What would knocking $5 million off Allergan’s net sales save their customers at the pharmacy cash register? About .09% of the sale price. This is trivial.

Pyott isn't the only well compensated executive with Allergan, I'm sure.  But what if the next twenty executives with Allergan were compensated at an average of 1/4 of Pyott's level?  Multiply by five, so another $25 million savings would reduce drug costs by another .47% at the cash register: again, downright trivial.

There are certainly aspects to how pharmaceutical companies operate that artificially drive up costs, no question. There are legitimate questions about whether they spend too much money marketing their patented products when generic, out-of-patent products are often as effective, or almost as effective. But this focus on CEO salaries is missing the point: it may be obscene, but it has essentially nothing to do with the cost of these drugs to customers.