AUGUST 24, 2009, 12:01 A.M. ET
Valeant CEO's Pay
Package Draws Praise as a Model
Pearson paid plenty to become chief executive of
Valeant Pharmaceuticals International
in 2008. He'll be paid plenty more if he succeeds.
Pearson's unusual pay package wins praise from compensation critics, who say
it may offer a model for other public companies. Directors of the midsize
drug maker required him to buy at least $3 million in stock, forgo routine
annual equity grants and hold many shares for years before selling.
J. Michael Pearson
element is unique, but the combination is rare -- for a public company. G.
Mason Morfit, chairman of Valeant's board compensation committee and main
architect of the package, says he wanted to mimic executive-pay deals at
businesses controlled by private-equity firms. Mr. Morfit is a partner of
ValueAct Capital, an activist hedge fund whose 22% stake makes it Valeant's
say the deal gives Mr. Pearson incentives to boost long-term value for
investors. For example, the 49-year-old CEO only gets to keep certain
restricted shares if Valeant's share price increases at least 15% a year
through February 2011. Mr. Pearson can't sell most restricted shares or
exercised stock options for two years after they vest.
"It goes a
substantial distance toward addressing my concerns about executive-pay
arrangements," says Lucian Bebchuk, a Harvard law professor and frequent pay
companies would benefit from imitating this or moving in this direction,"
adds Steven N. Kaplan, a University of Chicago business professor and pay
researcher. "More pay for performance is a good thing."
G. Mason Morfit
will certainly be well paid if Valeant performs well. Directors awarded him
equity initially valued at $18.1 million, according to the Aliso Viejo,
Calif., company's latest proxy statement. If Valeant shares are at $37.16 or
higher in February 2011, the package will be worth $88 million, Mr. Morfit
shares closed Friday at $27.17, more than double the level when Mr. Pearson
arrived and near a seven-year high. The new CEO has sold poor-performing
businesses, slashed research spending, found a rich partner to help
introduce a promising epilepsy drug and spent $394 million to acquire three
companies with approved dermatology products.
formula is no guarantee of success. Several concerns controlled by private
equity failed recently, including Chrysler Group LLC. Former Merrill Lynch &
Co. CEO John Thain bought more than $11 million of shares during his first
year, according to pay researcher Equilar Inc. He was forced out in January
after Bank of America Corp. acquired Merrill amid mounting losses.
compensation specialists worry that Valeant's approach could spur moves that
briefly boost shares, but ultimately hurt the company. Certain analysts have
questioned the research cuts, for example. "It creates some incentive to
jack up the stock price in year three to hit these [performance] hurdles,"
Mr. Kaplan says.
BIGGER BANG FOR THE BUCK?
Investor G. Mason Morfit,
chairman of the board compensation committee at Valeant
Pharmaceuticals International, offers these suggestions for
shareholder-friendly pay packages:
Make top managers buy
lots of stock with their own money.
Tie equity grants to
total shareholder return.
Be generous on the
upside, but tough on the downside.
Don't grant equity
automatically every year.
Don't backslide -- no
bonuses if executives miss targets.
Scrap 'entitlement' perks like car
allowances and club dues
worry about that issue," Mr. Morfit replies. He says the board keeps close
tabs on management, and he talks to Mr. Pearson daily.
wasn't always on the cutting edge of pay practices. In 2003, directors of
the company then known as ICN Pharmaceuticals Inc. sued former CEO Milan
Panic to recoup a $33 million bonus. Mr. Panic, who was ousted following a
proxy fight, later agreed to repay $20 million.
33 years old, joined Valeant's board in May 2007. He's a rarity, one of just
28 compensation committee chairmen at 3,367 companies holding more than a
20% stake, according to the Corporate Library, a governance-research firm.
directors began seeking a new CEO in December 2007. Mr. Morfit told Mr.
Pearson and two other finalists that he liked the private-equity model for
executive pay "because it aligns management's incentives with those of the
investor," he recalls. "Nobody was scared off."
already was advising Valeant as head of the global pharmaceutical practice
at consulting firm McKinsey & Co. He had the cash to meet the stock-purchase
requirement. He ended up buying $5 million of shares, at an average price of
$16.65. "I thought it was a great deal," he says.
and fellow directors then adopted the same approach for new senior
executives, requiring them to buy big chunks of company stock. The
requirement restricted Valeant's management talent pool to affluent risk
takers. But Mr. Pearson says he found already successful people willing to
take less guaranteed pay up front.
recruits initially had qualms. Rajiv De Silva, hired last January as chief
operating officer of Valeant's specialty pharmaceuticals business, must
purchase $425,000 of Valeant shares by January.
bothered his wife, who warned, " 'I hope you know what you're getting
into,'" recalls Mr. De Silva, a former Novartis AG manager who previously
worked for Mr. Pearson at McKinsey. He won her over by pledging to limit
other investments. Mr. De Silva has bought $200,000 of Valeant shares so
Joann S. Lublin at
©2009 Dow Jones & Company, Inc. All Rights Reserved