Tuesday, May 20, 2008

Curiouser. . . . and Curiouser.

[UPDATED -- 05.20.08 @ 8:50 AM EDT: Perhaps Ms. Wolf's remarks may be read to mean that since the time Mr. Hassan joined Schering-Plough, the stockholders have never approved a plan that allowed pay on "Market Capitalization" increases. And perhaps, we are then left to our own devices, by Ms. Wolf to infer, all by our lonesome-selves, that the 2006 proxy disclosed payments made under the 2002 Schering stock-based compensation plan, not the 2005 version. And while that 2002 plan did, in fact, allow "Market Cap" as a metric, it is -- to my eye -- the height of unbecoming sophistry, to write what she wrote -- on the clearly-loaded topic of executive compensation in what has now become a "turbulent" period in Schering's history.

What she wrote, when viewed from that entirely-stilted perspective, is accurate, insofar as it goes. But, in the land of good practice under the securities laws (making complete and accurate disclosures to the investing or voting public), the vast fields her comments of yesterday omitted -- rendered the small bit she wrote -- rather materially-misleading, for the lack of complete information, and context. Now, I am a student of these matters -- if it was opaque to me, how was an ordinary investor, or proxy-holder, to parse her game of hide-and-seek?

That is, a reader of Ms. Wolf's comments might fairly (but wrongly) infer that Mr. Hassan, and his executive officers at Schering, had never been paid for increases in "Market Capitalization". In fact, they were so paid, during the year 2006.

And so, Ms. Wolf's goofy "talking points" rather deftly, but deceptively, side-step the real issue -- by obscuring it -- the issue of whether Mr. Hassan, and Mr. Becherer, and Mr. Kay should have chosen against paying on "market cap" increases, at all (even if some prior, presumably tainted, plan allowed it) -- if they were, in fact, attempting to "clean up" disclosure practices, and compensation policies, at the then-"new" Schering Plough.

So, the above sort of mendacious-sophistry is very unbecoming -- and leaves me wondering: "In exactly what way, Ms. Wolf, does such parsing about CEO compensation help "earn trust, every day"?

Again, I am shrugging, here.

We are talking about a man who received $30.2 million in compensation last year (and $29.6 million in 2006), to preside over a full-on-fiasco of a study -- on a product generating at least 60 percent of all of Schering-Plough's 2007 profits.

And to deflect attention from these facts, his lawyers are sent-out to go dance about, like angels on the heads of pins, here? Deeply-disappointing, that.


Earlier, the "Sir Lancelot" of that "kingdom far, far away" called Pharmalot.com has hat-tipped this piece! Cool!]

It seems that Schering's "designated" Compensation Consultant, Ira Kay (pictured below, left), of Watson, Wyatt, on behalf of his patron, Hans Becherer, the Chairman of the Compensation Committee of Schering-Plough's Board of Directors (pictured, at right), has recently decided to entirely remove "Growth in Market Capitalization" as one of the general metrics upon which Executive Compensation levels were judged, in 2007.

Why would he do that?

Back on April 25, 2008, that question set me to thinking through a few structural puzzles about the way Schering -- as opposed to many other companies its size -- discloses pay, and actually pays, its executives. And then I blogged on them -- kinda' too-wonkishly, in fact. Looking back, I buried the headline, back then. Until today.

Yesterday's surreal (and apparently inaccurate) denials from a high-ranking lawyer at Schering-Plough about the use (and/or non-use) of "Market Capitalization" as a metric for measuring performance has made me abidingly curious -- curious enough to re-write, and update that April 25, 2008 post -- so I'll not link to it here. This one supercedes that one.

Why would a lawyer -- a high-ranking corporate lawyer, one who signs one of the Schering cover-letters to each year's proxy statement (including the one filed with the SEC for the year ended December 31, 2006) -- so vehemently (and, it would plainly seem, erroneously) attempt to deny the existence, and use, of the very first compensation metric listed at the top of page 25 of that very same filing? Why?

Well -- I strongly suspect that I do know why. But let us first consider the continuing chain of unusual events, here. And to be clear, Ms. Wolf would be merely a foot-soldier in this particular campaign of curiosities. No, the really tough questions -- questions for which I cannot see many pleasant, or reasonable, answers -- are going to fall directly at the feet of the Chairman of Schering's Compensation Committee, and the consultant upon whom he relies for advice about setting compensation metrics, and levels. An example? I submit for your consideration:

Note that the 2005 Schering proxy, at page 42 -- omits mentioning "Market Capitalization" as one of the allowed metrics for measuring performance (and thus determining the levels of executive compensation). Take a look:

. . .the Compensation Committee may select under the Plan to include one or more of the following (in absolute values or relative to the performance of one or more comparable companies or an index of comparable companies):
• Net operating profit after taxes;
• Operating profit before taxes;
• Return on equity;
• Return on assets or net assets;
• Total shareholder return;
• Relative total shareholder return;
• Earnings before income taxes;
• Earnings per Share;
• Net income;
• Free cash flow;
• Free cash flow per Share;
• Revenue (or any component thereof);
• Revenue growth;
• Share performance;
• Relative Share performance;
• Economic value added; and/or
• Return on capital. . . .

So, in the 2005 proxy, the shareholders approved a stock-based compensation plan (as required by SEC rules, and NYSE listing standards applicable to Schering-Plough). That plan -- drafted by Schering's management, and put before the shareholders for approval -- does not, by its terms, allow the use of the performance metric called increase in "Market Capitalization".

And yet, we see that for the year ended December 31, 2006, according to the early 2007 proxy (see image, below, and page 25 of this SEC filing), executive compensation was considered, and paid, at least in part, on a measurement of the rate of increase in "Market Capitalization" -- from 2004 to 2006.

An image of that actual page-filing [click to enlarge!]:

That, my friends, is rather astonishing. I have to say that I have never seen that occur -- not in over 20 years of public company practice, inside of, or outside of the reputed-to-be wild and wooly pharma sector -- I've just. never. seen. it.

And, as I wrote on April 25, 2008, I still think it is difficult to overstate the ramifications, here: Should all that compensation from 2006, and 2007, and now part of 2008, be re-assessed, and re-calculated, to exclude any amounts awarded in reliance on the impermissible (or double-weighted), factors? Is this why Matt Herper's Forbes headline of yesterday asked about the "return" of Hassan's 2006 compensation?

I don't know -- but all those plaintiffs' lawyers will definitely have a view on this.

To round out this particular series of very odd events, I must also remark on the silence of the current Schering proxy statement -- the proxy employed to solicit votes for the just completed Annual Shareholders' Meeting, in Memphis.

It utters not one peep about "Market Capitalization." And it utters no peep about where it went -- why it went -- or why it was never listed as one of the factors for awarding executive compensation, as presented to, and approved by the shareholders -- at management's direction. Similarly, and puzzlingly, the proxy simply makes no mention of whether the 2006 compensation was paid, in part, in error.

What has transpired since that time (the ENHANCE fiasco, and the steep decline in stock prices, and the granting of even-cheaper stock options to high-management than were apparently granted to middle management, in early January 2008), simply must be considered "material information related to a voting decision". So, how can it be that the mistaken-payment of compensation on a factor not approved by shareholders, for at least the year 2006, escapes all mention?

How can that be, Mr. Becherer? Mr. Kay? Mr. Colligan? Mr. Hassan? Mr. Sabatino?

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