Valeant Pharmaceuticals' now-ex CEO Michael Pearson could have been a billionaire more than four times over if his winning streak hadn't come to an ignominious end.
Now bowing out with apologies and mea culpas, Pearson racked up an apparent $140 million in stock awards last year, putting his total 2015 compensation at $143 million-plus, if the official calculation in Valeant’s proxy is to be believed. Those stock awards came with a potential payoff of up to $2.66 billion, with "potential" now the operative word. But we’ll get to that in a minute.
Last January, before Valeant’s superaggressive pricing policies went public, before a short seller outed its sketchy relationship with specialty pharmacy Philidor Rx Services, before its shares went into free fall--in short, while Pearson was still riding high on Valeant’s deal-fueled growth and hefty stock gains--the company awarded him 450,000 performance-based shares as part of a new employment contract.
The shares would pay out based on Valeant’s shareholder returns. If those returns hit the low end of Pearson’s target, measured in 2019 and 2020, then the 450,000 performance units would convert to common stock. Less than 10% return? No vesting. At 10%, all 450,000 come through. And the higher the return, the bigger the number of shares, to the point where Pearson could collect 2.25 million shares if compounded annual returns amounted to 50% over the 5-year period. A stock price, in other words, of $1,181.81, the company’s proxy says.
Valeant’s proxy doesn’t disclose the full range of Pearson’s shareholder-return goals. But two things are clear: The company meant to give its CEO an enormous incentive to pump up its stock price.
At the high end, with a 2.25-million-share payout, that award would be worth $2.66 billion. No wonder Pearson was willing to forgo a base salary, as he did under that new employment contract.
Of course, almost everything has changed since. Pearson is now out of a job, with former Perrigo CEO Joseph Papa having stepped in this week. He admitted that his strategy--buying companies planning to profit off drug price increases--was a mistake. He said he’d been too aggressive about price increases. Valeant’s ability to make deals is now curtailed, thanks to accounting problems that delayed its required regulatory filings and, in turn, forced it to make concessions to creditors. And its shares closed Friday at $33.36, down from the $140 base price on Pearson's grant signed.
Consequently, Pearson’s cash bonus for 2015 took a big hit; the company’s financial performance yielded exactly zero in that column. He still collected $2 million, however, because Valeant’s compensation committee figured he met his own personal performance goals. Those included adding new managers to the executive team and repairing employee morale after Valeant’s attempt to buy Allergan failed. And, somewhat ironically, given persistent complaints about transparency, “effectively communicating to investors the company’s business model.”
That share grant? It’s recorded on Valeant’s proxy at $140 million, calculated based on that $140 price when the grant was made. Value now, per the proxy statement? Zero.
“Based on Valeant’s current share price of $31.35, all of the performance share units granted to Mr. Pearson in 2015 (reflecting reported compensation of $140 million) would be forfeited for no value on his termination of employment,” the proxy states. “Valeant’s share price would need to increase to $186.88 for any of the performance share units granted to Mr. Pearson in 2015 to vest,” assuming a termination date of December 31 of this year.
In fact, the proxy says, Pearson’s “realizable” pay over the past three years amounts to only $18.5 million, just 12% of a potential three-year total of more than $156 million.
Pearson is entitled to severance of up to $9 million under his employment deal, and he’ll get the 2016 salary and bonus he had earned as of his departure date. Valeant says it’s planning to strike a “separation and consulting agreement” with him, and that it considers his departure as a termination “without cause,” which means his pay, bonus and stock-and-options vesting will happen according to plan.
On Pearson’s departure date, his performance-based shares vested pro rata, at whatever level his targets stipulate. Except for those 450,000 shares granted last year; he has additional time on those. Theoretically, as the proxy states, he could still get some kind of payoff, if Valeant’s shares bounce back in a big way this year. Otherwise, no dice.
Meanwhile, Papa’s own compensation package dangles a rather large carrot for stock appreciation: a $500 million payoff if Valeant shares manage to break $270 in three years. Some market watchers see that deal as uncomfortably similar to Pearson’s, with the potential to spawn too-aggressive behavior.
Valeant, though, says its board is considering a compensation overhaul. The compensation committee and Papa intend “to further review Valeant’s compensation policies and practices in light of our recent experiences and may make changes to our programs to reflect the current environment and evolving strategic priorities,” the proxy states. Meanwhile, the company has handed out retention bonuses, boosted severance and added a new equity award to remaining managers, to persuade lower-level execs not to jump ship.
- see the Valeant proxy
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