Thursday, December 18, 2008

Impertinent Question Department: When is "Performance-Based Pay". . . Um, NOT?

Or, "What did the board say about compensation, just a few months ago?"

Regular readers will recall that, in May of 2008, Schering's Board, and Compensation Committee (chaired by Hans Becherer), told us -- in breathy tones, no less -- that the Top Six at Schering would receive "no payments" under the Long Term Performance Incentive Plan, for the five years ended December 31, 2008 -- if Schering's stock price was the same on December 31, 2008 as it was on March 31, 2008. That was a nice piece of public relations, at the time. It suggested that executive compensation at Schering was truly linked to performance. See this, from the most-recent Schering proxy statement (at page 22):

. . . .The outstanding five-year transformational incentive (with a performance period ending in 2008) uses total shareholder return (both actual and relative to the Peer Group) as a performance metric. Stock price declines often adversely impact total shareholder return. As a result, named executives Hassan, Bertolini, Cox, Sabatino and Saunders may lose future compensation with respect to the transformational incentive if the stock price does not increase prior to the completion of the performance period. For example, had the performance period ended March 31, 2008 (rather than December 31, 2008 as provided in the plan), the payout would have been zero for each of them based on performance metrics of actual and relative total shareholder return. . . .

Unless, apparently, your name is "Tom" -- as in Koestler, or Sabatino.

So, it now seems that the reality varies from the PR, in several significant cases -- and especially if your name is "Tom".

What has happened since the proxy was mailed? Well, Chief Science Officer, Dr. Koestler, and General Counsel Tom Sabatino, have each received significant, unscheduled interim payments -- not contemplated by their original employment contract terms -- and, in the case of Mr. Sabatino, in cash, and without regard to Schering's performance. In fact, Mr. Sabatino received $500,000 in cash, just last week. No strings attached.

Schering's stock stands at $16.70 tonight -- it was $14.40 on March 31, 2008. It was $32 in the Summer of 2007. By way of comparison, when the Transformational Plan was adopted, Schering stock was trading around $17.10, in late December 2003, to early Janaury 2004:

I cannot understand, given today's unwelcome news that Vyotrin/Zetia continued to swoon, and swoon badly, in November 2008 -- despite Mr. Hassan's predictions to the contrary on November 24, 2008, how the $500,000 cash payout can be squared with these vaunted proxy-promises.

To be clear, the cash payout is lawful -- it is just a very cynical way to do business. Cash -- without any earnout, is simply not paying for improved shareholder returns. They (shareholders) simply have had none, of late. So, niether should the two Toms -- in my view.

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