Monday, April 27, 2009

CEO Hassan and Co. Graded: a "D" by the Corporate Library in 2008; Now To Be Given $78.6 million From the Board

Schering-Plough filed its "regular" annual proxy statement with the SEC tonight, and while the board nominally reduced the compensation of CEO Hassan and the Top Five (due to a failure to meet the goals outlined by the terms of the "Five-Year Transformational Incentive" program -- but more on that in another post!), the real story is that this proxy speaks only as of December 31, 2008 (when Schering's stock price was only $17.03) -- at a time prior to the February 27, 2009 special grants of deferred stock units, and prior to the March 9, 2009 announcement of proposed merger with Merck & Co.

As a public service, I've added up the last two years non-forefeitable cash compensation the board gave to Mr. Hassan (2006 and 2007), then added the same figures for 2008 -- which, by my reckoning, equal another $5.73 million. . . . then added in all the change of control payments he is due, both equity, and non, that are triggered by the Merck announcement. For the graphic below, I've used today's closing NYSE Schering-Plough common stock price -- $22.17. See it below -- click it to enlarge:

Now, to make this easy for you to keep an updated tab upon, know that for every $1 that Schering-Plough's stock rises over $22.17, you'll need to add about another $6 million to the $78.6 million portion of these totals ($6,004,324, to be more precise). So, for example -- at the NYSE close on March 26, 2009, Schering-Plough common stock was $24.42 -- thus, had the merger been completed that night, it would have yeilded a change of control payment to Mr. Hassan of over $92.1 million, PLUS the $31.8 million in his last two years -- equals a grand total haul of over $123.9 million.

Importantly, these figures do not include any "gross-up" for "excessive compensation" taxes that will be paid by Schering-Plough, on behalf of Mr. Hassan, and the rest of the EMT. But Schering is going to pay them -- it has already agreed to do so.

Now, let's read about how the Corporate Library grades Schering-Plough's board and governance processes -- on responsibility, shall we? Yes let's (from page 58 of the proxy):

. . . .The Corporate Library, an independent investment research firm, rated [Schering-Plough] our company Very High Concern in executive pay. . . .

Grade: “D” Overall.

High Governance Risk Assessment. . . .

Fred Hassan was awarded 944,000 options. The large option number raised concerns over the link between executive pay and company performance. Small increases in share price (completely unrelated to management performance) can result in large financial awards.

Hans Becherer and Robert van Oordt were long-tenured and retirement age — independence and succession planning concerns.

Our directors (who as a group held 4 seats on our 3 key board committees) served on boards rated “D” by the Corporate Library: Fred Hassan; Eugene McGrath; Patricia Russo; Arthur Weinbach. . . .

Three directors (who held 5 seats on our three key board committees) were designated as Accelerated Vesting directors by The Corporate Library for speeding up stock option vesting to avoid recognizing the related cost:

Hans Becherer, who even chaired our Compensation Committee; Kathryn Turner; Arthur Weinbach. . . .

It is unfathomable (at least to me) that Mr. Hassan would not be so embarrassed by these excesses, as to agree to return a good portion of the money -- indeed, he sold thousands of investors Schering-Plough common shares at $27.50, in September 2007 (to finance the Organon acquisition) -- a price the shareholders won't likely see, even in the post-merger trading on the NYSE.

1 comment:

Condor said...

The fine print -- how I arrive at $78.6 million (on a change of control):

2/27/09 Deferred Stock Units (not in proxy): $4,336,673.70

All Equity (Options, Restricted Stock, Phantom Units, etc. -- all vest on change of control): $35,313,589.38

Deferred Compensation Accounts (all transferable on change of control): $25,663,210.00

Vested Retirement Benefits (Present Value): $7,587,688.00

2008 Cash Compensation: $5,727,666.00

Grand Total: $78,628,827.08

ALL BEFORE IRS Section 280G payment amounts -- tax gross ups.