It looks like bad news for AstraZeneca CEO Pascal Soriot and his bonus for the year, which will take a big hit if core earnings fall below $4.20 a share, which the company said on Thursday is pretty much a given. But some think that could be a good thing for investors, kind of their bonus for the year.
About a quarter of Soriot’s long-term bonus is shares worth about £4.8 million ($6 million), which would vest if AstraZeneca hit the $4.20-a-share threshold, Thomson-Reuters reports. EPS was $4.31 a share for 2016, and a higher EPS is valued by investors who treasure a large dividend.
If it appeared that earnings in 2017 would come close, Soriot and his board might be tempted to make some “bad transactions to pretty the picture, either by booking one-off gains as earnings, or buying profits at inflated levels,” Reuters' BreakingViews blog asserts, expressing what is on investor's minds. “Asset sales, which Astra calls externalizations, already made up a quarter of the group’s operating profit last year.”
Since it is going to be a clear miss—guidance was given for EPS this year to decline by a low to mid-teen percentage rate—Soriot’s pay won’t be a distraction and the company can make solid long-term growth decisions, the Thomson-Reuters blog contends.
“The group’s admission that earnings this year will fall below the $4.20 a share limit—meaning part of Soriot’s award will not vest—should hopefully foster a longer-term focus.”
In the earnings call on Thursday, Soriot addressed the topic head-on, insisting that while committed to the dividend, the company has always said if it has to give, and exec compensation is “negatively impacted,” so be it.
“We continue doing the right thing by the company and we'll do what we believe is right to do to make sure we maximize the value of this company because in the long run, we all win … if we do the right thing,” Soriot said, according to a Seeking Alpha transcript. “So we'll continue trying to achieve our short-term goals, but in the end, if we have to prioritize, we'll prioritize, of course, the dividend in the long term.”
The only way that wouldn’t be good for shareholders, Thomson-Reuters says, is if the compensation committee were to bump up the CEO’s base pay or pension to compensate for the lost portion of his bonus.
It is not unheard of for the board to think along those lines. Last year, when the company was warning of lower earnings, it reportedly talked about reducing the bonus target from $4.20 EPS to $4, an idea that received a very cold response from some large investors.
Soriot’s compensation, which was valued at about $12 million in 2015, has been discussed quite a lot by investors since the CEO and the board spurned Pfizer’s $120 billion takeover attempt two years ago. Soriot and friends insisted that AstraZeneca investors were better off following them into the future and pledged to build the company’s revenue to $45 billion by 2023, a quantum leap beyond where it is. Some investors thought if exec was so confident then compensation should be tied to the 2023 pledge, something the board has yet to do.
The $45 billion revenue goal was aggressive under the best of circumstances, and is getting further and further away. The company reported 2016 revenue of $23 billion, off 5% as generics continued to whittle away at sales and AstraZeneca’s diabetes sector reported weak revenues. In guidance, the company said it expects the top line could slip a percent or so this year.
Still, Soriot remains upbeat, pointing to its immuno-oncology candidate as its next big thing and insisting AstraZeneca has a lot more than just that to look forward to.