Sunday, June 27, 2010

An Appalling Look Back -- At Some Schering Fiduciaries' Abdication -- Compensation Committee Outcomes

As a service to the readership, I thought I'd update an April 2009 analysis of what happens -- what the nearly-final outcome looks like -- when board of directors members (allegedly) abdicate their fiduciary duties. In this case, I've updated, for last Friday's New Merck stock prices, just one small portion of the vested gains Mr. Hassan is sitting on (assuming Bausch & Lomb hasn't already required him to sell the New Merck stock he holds) -- due to his having (allegedly) "effectively captured" the Compensation Committee, and manipulated its deliberative processes.

Again, to be clear -- this is only the tip of the iceberg -- but it may be the least justifiable tip. In future posts, I'll update his overall compensation package, for the near-$36 price of New Merck, at present. [Note that the figures in the overall graphic at right need to be "grossed up" -- by about an additional 30 percent or so, so the top end -- $173.4 million, at $28 -- looks more like $225.4 million, at around $36/share for New Merck -- I'll do the more detailed calcuations on some other lazy, rainy Sunday afternoon (but additional options became in the money, available and vested, when Merck crossed $31 per share last Winter -- in 2010).]

Okay -- here goes -- all date references have been edited, to make sense of the fact that the calendar now reads June 2010:

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 the 2007 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 the prior 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 sat in review, I gather.

Immediately below (in dark green), is the 2009 disclosure -- and note well -- the quartile-chart (graphic at right) is nowhere to be found the prior year's (2008) proxy. Did the Compensation Committee "move the goal posts closer"? Who knows? It is clear that this disclosure wasn't shown in graphical form, in that prior (blue 2008) year. [See actual graphic, from Schering's 2009 annual 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 (the 2008 disclosure, a little bit 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, 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 legacy Schering-Plough units. Those units, at his termination (on the morning of November 3, 2009), became shares of legacy Scheirng-Plough common stock. Those shares were then converted into the right to receive $10.50 in cash, and 0.5767 shares of common stock of New Merck, for each of the 198,488 shares so held. So, the cash portion of this five year transformation payout was about $2.048 million -- and the stock portion was worth at least $7.132 million, at this past Friday's $35.93 New Merck NYSE closing price (June 25, 2010).

Again, an additional $9.28 million, on top of about $225 million, already awarded -- for less than three-quarters of one percent total shareholder return.

That is completely appalling. Whether one thinks Hassan & crew "saved" the company -- or busted it up -- $235 million is simply too much. Way. too. much.

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 later learned (in late-April 2009) 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 $9.28 million reasons.


Anonymous said...

just a bit off topic....any word on the court case re: Goli?

Condor said...

Hello Anon. -- the short answer is that there is no news. Arbitration is still scheduled for September 2010. J&J's Centocor has made no official statement about any settlement talks. Nor has Merck.

Sorry, but this is the most current "official" Merck SEC filing on-the-topic -- and it, along with later filings (indicating that the arbitrators have been empaneled, and discovery is underway), speaks only as of March 31, 2010.

Namaste -- do stop back.

Anonymous said...

Thanks-I thought I lost track of something. All prompted by my first visual of the new Goli commercial this past Thursday.


Anonymous said...

Really good sharing this.