Monday, April 27, 2009

How is it that 25 Percent of the Five Year Incentive Was Paid Out -- for 0.72 Percent of Actual TSR?

UPDATED: Lest one think this discusssion involves only a relatively-small amount of money -- at $22.17 per share, tonight's NYSE close, Hassan, Bertolini, Cox, Saunders [Editor's errata] and Sabatino received about an additional of $8.7 million, in the aggregate -- with about $4.4 million of that amount going solely to CEO Hassan.

On April 24, 2008, Schering-Plough common stock closed at $17.86 on the NYSE. On that day, the board told the world, and the SEC, in last year's annual proxy (on page 22 near the bottom), that:

. . . .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. . . .

Now, on March 31, 2008, Schering-Plough stock closed at $14.20 on the NYSE. On April 24, 2008, it stood at $17.86. At year-end, December 31, 2008 -- Schering-Plough common stock closed at $17.03 per share (actually below the price on the day the board mailed last year's proxy).

Since when does agreeing to bust-up, and sell-off a company (on the cheap) qualify as "performance" under the Five Year Transformational Incentive program?

Since Ira Kay and Hans Becherer sit in review, I gather. Here is this year's disclosure -- and note well -- the quartile-chart at right is nowhere to be found last year's proxy. Did the Compensation Committee "move the goal posts closer"? Who knows? It is clear that this disclosure wasn't shown in graphical form, last year. [See actual graphic, from Schering's present proxy -- at right.]

Text (about at the middle of Page 29):
. . . .Actual TSR: Target -- 15%

Actual -- 0.72%

Relative -- (Negative 1.08%). . . .

. . . .As shown above, Schering-Plough failed to reach its targeted level of actual TSR but did achieve its targeted level of relative TSR. As a result, only 25% of each named executive’s target award was earned as shown below. . . .

Okay, in the blue text (last year's disclosure, above) did anyone notice a defined term called "Relative TSR"?

Nope -- me either. "Actual TSR" or actual total shareholder return -- for the five years was 0.72 percent. Yes. That is less than one percent. In fact, it is less than three-quarters of one percent. Overall, the Peer Group lost about one percent, in the same period -- but how does this remotely justify a 25 percent payout?

And yet, the Compensation Committee, chaired by Mr. Becherer, awared 25 percent of the five-year incentive to CEO Hassan, and the Top Five (excluding Dr. Koestler -- he apparently wasn't eligible, back then), for less than three-quarters of one percent of total actual shareholder return, during the five years.

For CEO Fred Hassan, alone, that equaled 198,488 units, or $4.4 million at tonight's $22.17 Schering-Plough NYSE Closing price, per share.

Again, an additional $4.4 million, for less than three-quarters of one percent total shareholder return.

That is appalling.

By the way, does anyone else wonder why, exactly, Mr. Hassan was telling Wall Street that the cholestrol franchise's US sales were "generally stabilizing" toward the end of 2008 (near five year measurement time) -- when we only now learn that the US Vytorin/Zetia month-by-month sales continued to fall an additional 15 percent, in sequential quarters (Q4 2008 to Q1 2009)? I am put in mind of at least $4.4 million reasons.


Anonymous said...

and you wanted to know why there was no survey for executive pay?

Here's a good chunk of the reason~

Anonymous said...

There is no end to these skunks. They certainly get at 'A' for creative crookery.

Anonymous said...

So, what are the chances Glenmark will be able to get past the patent infringement suit?

Condor said...

Great Question, Number 3! --

See my UPDATE, to this post -- I am addressing it on top!

Thanks for the interest -- do stop back. . . .