Mylan’s EpiPen controversy is just the latest example of the negative ripple effects of corporations’ performance-based compensation on society at large

Here’s a figure that could have you reaching for an EpiPen, assuming you can afford one: one billion dollars. That’s how much additional revenue the Institute for Policy Studies calculates the federal government might have collected over a four-year period if it weren’t for a pesky loophole that allows US corporations to deduct performance-based compensation from what they have to pay in corporate taxes each year.

The just-released study comes amid the latest example of how basic salary on share price performance leads to bad decisions that have negative effects on society at large: Mylan, the drug company whose decision to hike the price of the lifesaving EpiPen has triggered a sky-high share price and a massive pay day for its CEO, Heather Bresch.

The IPS’s report is the latest in a series devoted to excessive executive compensation and wealth inequality, the research firm takes aim at the loophole as it relates to Wall Street’s banks. The top 20 banks forked over more than $2bn in performance-related bonus payments to each of their top five executives between 2012 and 2015, IPS says.



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Between the financial crisis and up until 2012, those banks weren’t allowed to take advantage of the loophole. As part of a widespread attempt to rein in the worst of the compensation practices that contributed to the crisis, Congress imposed a raft of new restrictions and rules governing pay at the banks as long as they still owed money borrowed under the Troubled Asset Relief Program (Tarp).

Once those Tarp funds were repaid, the banks were free to dole out performance-based bonuses once more – and they rushed to do so. The study notes that the share of vested stock paid out as bonuses to the top five bank employees at the banks it studied rose from about 5% (when they were still under Tarp oversight) to 50% today.

The Institute for Policy Studies uses the banks as a case study in arguing for the demolition of the executive pay bonus loophole. Their broad argument couldn’t be more accurate or more timely. We need to revive the debate about all the wrongs committed in the name of delivering value to shareholders, and performance-based compensation is the tip of that particular iceberg.

The pursuit of shareholder value has become a cult devoted to delivering maximum profits to shareholders, at all costs. Just look at how Mylan Pharmaceuticals has responded to the virtual evaporation of competitors to its lifesaving EpiPens by raising the price it charges for the auto-injector pens (which treat deadly allergic reactions to bee stings and food allergies) from $50 apiece to $600 for a two-pack over the course of eight years.

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Just why on earth did Mylan do this?

Well, it could. It has a virtual monopoly on a critical product – one that millions of people with an allergy rely on. There’s a bonus: the active ingredient, epinephrine, degrades rapidly, so they need to buy new EpiPens every year.

Mylan blames the insurance industry – a convenient scapegoat. Consumers were never supposed to pick up the full price tag: if insurers aren’t paying, that’s because the Affordable Care Act has left the health insurance system in a mess, distorting drug pricing.

It’s worth noting, however, that EpiPen price increases began before the Obama administration’s healthcare law was put in place, and that in Canada’s single-payer insurance market, people suffering from allergies can pick up an EpiPen two-pack for less than $100. Of course, in Canada, it’s not Mylan that sets the price, but Pfizer, which has licensed the injectable medication from Mylan.

Let’s circle back to the pesky question of what it is that motivates CEOs like Bresch, why they make decisions like this and what they conceive their responsibilities to be.

Since the summer of 2007, the Standard & Poor’s 500-stock index has climbed 47%, while Mylan’s shares have outperformed dramatically, soaring 178%. And yes, you-betcha, Bresch has benefited from some of that same performance-linked compensation. Not only has it deprived the taxpayer of potential income, but it has rewarded Bresch for doing something that is just as clearly against the public interest just as leveraging the banking system to the hilt was in the run-up to the financial crisis in 2005, 2006 and 2007.

Bresch clearly should have been rewarded for savvy marketing that made EpiPen a “must have” item in schools, airplanes and theme parks. But should Bresch have been rewarded so lavishly simply for being able to hike those prices and profit from the fact that Mylan had no viable rivals? It wasn’t as if the company was being rewarded for years of costly research and development. On the contrary; about half of its revenue was pure profit. And a lot of that went to pay Bresch’s increasingly lavish compensation package, which rose at an even faster clip than did EpiPen’s price. In 2007, Bresch pocketed $2.45m; in 2015, her compensation totaled nearly $19m.

In whose interests are companies like Mylan and the Wall Street banks being run?

The basic argument – based on law that dates to the early 20th century, when Henry Ford’s shareholders sued him for trying to make cars more affordable to customers – is that a company has a fiduciary duty to maximize profits for its investors. It has been seized on, amplified and raised to the status of holy writ by short-term thinkers among those on Wall Street.

The result? Publicly traded businesses, fearful of being pummeled by hedge fund investors, end up increasingly detached from the realities of the real world. They reward CEOs lavishly for delivering outsize profits and big stock price gains, even if that is done by keeping wages and salaries for employees at rock bottom levels. That’s how we end up with firms like Walmart and McDonald’s ostensibly employing people full time, who still rely on various forms of government assistance to keep them above the poverty line.

Doing away with tax deductibility for performance-based compensation, as the Institute for Policy Studies suggests, would be a great start. At a stroke, there would be one less incentive for companies to give outsize rewards that are geared exclusively to a measure of performance that may not be in everyone’s interest. As the financial crisis should have taught us, a boom in a company’s profits and a run-up in the company’s stock price as a result, isn’t always an unquestioned good thing. Making performance-based pay more costly to a company might force the board’s compensation committee to think more critically about the criteria that they’re using.

The real value of the IPS report isn’t in the fine details like how many dollars might have flowed into the US Treasury (much less how many teachers’ jobs might have been funded as a result – as if government budgets worked that smoothly …). Rather, it has drawn attention to the crucial issue of performance-based compensation and the pesky questions that underpin it. If, as some legal scholars suggest, it’s possible for companies to go beyond the narrow, toxic pursuit of maximizing profits and think about what is good for their employees, consider their customers, take the environment into consideration and pursue innovation, then the debate about how we get from here to there has to start somewhere. Performance-based compensation is a logical point.