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April 27, 2006
Golden Parachute, Still Packed and Ready
Posted by Derek
So it looks like Pfizer's shareholder revolt didn't get much traction today. A couple of groups had urged "no" votes on issues like CEO Hank McKinnell's compensation and pension package, but all the company-endorsed positions were carried by a good margin.
I'm of two minds about this sort of thing, but I come down more with the revolutionaries, partly because I think that company boards should be kept on their toes a lot more than they are. And although I'm somewhat rightish in my politics, I think that CEO compensation has become out of whack over the years. Making the rewards this huge seems to me to run the risk of creating a management culture that's mostly concerned with fighting to the top of the sugar pile. I do think that higher positions should be well-paid, mind you, just perhaps not quite as asymptotically well-paid as they've become. Presumably the market will eventually correct for this, if companies become too top-heavy in their expenditures or ruin their managerial competence with perverse incentives. But it could take a while for all that to even out, and in the meantime we have some unseemly situations.
I'd rather see such rewards tied to measurable performance, insofar as it can be measured, but there's a danger in relying on any one factor. If you tie the big payoffs to the price of the company's stock, you create a moral hazard, with an incentive to do whatever it takes to elevate the stock. And that's only a rough surrogate for what's good for the company. If you use some sort of internal financial measurement, like sales growth or what have you, then the hazard is the temptation to sweeten the numbers. Examples of both of these situations abound. I think it's best to rely on a score that's made up of a number of factors, with no one of them large enough to present a target for funny business.
How does McKinnell stack up? Pfizer's stock has been no particular prize during his tenure, and I've said before that I don't see it being one for some years to come. That's one of the things that got the shareholders - some of them, anyway - wound up. Other measurements could be spun either way: if you like the bigger-bigger-bigger path the company's taken the last few years, and admire the big-decision mentality that's been needed to realize it, then you'd probably be inclined to let the man take the cash. But if you think that these moves are part of Pfizer's current problems, or at least no part of their solution, then you've got a different figure in mind for him. Pfizer seems to have more of the first type of shareholder than the second, at least for now. . .
Comments (13)
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1. Paul on April 27, 2006 9:06 PM writes...
Pfizer's board took it on the chin in today's WSJ. They were given an overall grade of 'D' and criticized in every category except accounting mischief.
Permalink to Comment2. Matt on April 27, 2006 10:39 PM writes...
There are some new rules being discussed by the SEC which will hopefully give shareholders a clearer picture of the value of a CEO's compensation. Country club membership, options, etc. will be more fully disclosed.
Permalink to Comment3. Paul Hughes on April 28, 2006 4:17 AM writes...
McKinnell stacks up just fine.
It could be argued he inherited the last gasp of the last growth spurt and the bubble stock price and bubble PE ratio when he took over.
Those people who whine that the stock has declined 40% since McKinnell took over should really not have bought PFE at a PE of near 50.
Today the company is a money machine whether or not this is factored into the current price of the stock and pays a 4% cash dividend, about twice the S&P average. As a well known investor has said, "in the short term the market is a voting machine, in the long-term a weighing machine". Profits eventually matter.
I expect McKinnell will get praise in about 5 years when it becomes apparent the changes he put in place 5 years ago begin to pay off. It takes a long time to turn a huge company like this around but PFE is currently in excellent shape and I believe he has performed a valuable service for current Pfizer shareholders.
Permalink to Comment4. Paul Hughes on April 28, 2006 4:18 AM writes...
McKinnell stacks up just fine.
It could be argued he inherited the last gasp of the last growth spurt and the bubble stock price and bubble PE ratio when he took over.
Those people who whine that the stock has declined 40% since McKinnell took over should really not have bought PFE at a PE of near 50.
Today the company is a money machine whether or not this is factored into the current price of the stock and pays a 4% cash dividend, about twice the S&P average. As a well known investor has said, "in the short term the market is a voting machine, in the long-term a weighing machine". Profits eventually matter.
I expect McKinnell will get praise in about 5 years when it becomes apparent the changes he put in place 5 years ago begin to pay off. It takes a long time to turn a huge company like this around but PFE is currently in excellent shape and I believe he has performed a valuable service for current Pfizer shareholders.
Permalink to Comment5. JSinger on April 28, 2006 9:12 AM writes...
Shareholders responded by voting overwhelmingly for the proposed board, including well over 90 percent in favor of McKinnell, according to preliminary results announced at the meeting held at the Cornhusker Marriott in Lincoln, Nebraska.
Out of curiosity, they held this meeting in Lincoln because:
a) Their livestock vaccine plant there (601 W. Cornhusker Highway!) is such an integral part of the company?
b) Warren Buffett wanted to be able to fly home for lunch?
c) They're hiding from somebody?
Permalink to Comment6. Timothy on April 28, 2006 9:42 AM writes...
I'd rather see such rewards tied to measurable performance, insofar as it can be measured, but there's a danger in relying on any one factor. If you tie the big payoffs to the price of the company's stock, you create a moral hazard, with an incentive to do whatever it takes to elevate the stock. And that's only a rough surrogate for what's good for the company.
So you don't tie them to any one thing, you create a balanced and objective measurement system. I'd go with earnings per share (a better measure of health than stock price, I'd say), overal profitability, growth across the different LOBs...etc etc. It gets complicated the more you add, but that's my view on the best way to go about keeping compensation in line with the performance of the company.
There are some new rules being discussed by the SEC which will hopefully give shareholders a clearer picture of the value of a CEO's compensation. Country club membership, options, etc. will be more fully disclosed.
Great, more SEC rules. JUST what we need. Oy and vey.
Permalink to Comment7. Insider on April 28, 2006 12:09 PM writes...
I'm sure Hank is worth every penny!
We are not paid what we are worth......we are paid what we negotiate!!
As Paul Hughes suggests it's the fools who bought Pfizer stock at high prices who are the idiots, not Hank......
Hank's pension should be a percentage of Exubera's sales.
Permalink to Comment8. wcw on April 28, 2006 6:36 PM writes...
There are lots of things to do about executive compensation, but I find the simplest is not to invest in companies whose pay packages offend me. Unless I think they'll deliver for my portfolio, mind you -- I never stand on principle when money's at stake.
The problem with McKinnell's pay package is that it's so at variance with his company's performance versus its peers. Talk about the future all you like, but this sort of thing is way too easy to do with his stock:
http://ichart.finance.yahoo.com/z?s=PFE&c=NVS,RO.SW&t=5y&z=l
Full disclosure: over the time period indicated I have had a very small, indirect ownership stake in the two non-blue lines, so perhaps I am merely partial. As I recall, their executives are both very handsomely compensated, and you don't hear me complaining.
Permalink to Comment9. srp on April 28, 2006 6:53 PM writes...
I know of one company that took the attitude that if people weren't willing to take lower pay to work there then they weren't creating a satisfying enough work environment. (This was not at all a touchy-feely kind of place--quite the opposite.)
Maybe this logic should be applied to boards of directors: If you can't attract a talented CEO at a lower rate of pay than rivals', you're not doing your job very well. That would counteract the current presumption where every firm wants its CEO to be paid in the upper 1/3 of bosses. Lake Woebegone is an expensive destination in executive class.
Permalink to Comment10. tom bartlett on May 1, 2006 7:58 AM writes...
Derek, I usually agree with you on matters of Med Chem and disagree on matters of "free market" economics. In this case, I agree. CEO compensation should be linked to performance.
Permalink to Comment11. burt on May 1, 2006 8:02 AM writes...
Hank should be skewered on a sharp stick, after the gut job he did on PHA. That was a strong, viable company before he destroyed it. He "ate the seed corn", and now PFE will have to keep acquiring to make up for their serious deficits in R and D.
Permalink to Comment12. secret milkshake on May 1, 2006 10:02 AM writes...
Pfizer overpaid for Pharmacia. Then Pfizer laid off most people from there and closed the the Pharmacia sites. They promised 2 billions in "synergies" and they had to fire people. They did not want to fire Pfizer people. Soo..
People that were not as successfull in their own work were helped by project transfer from Pharmacia. Most of Pharmacia folks went elswhere.
As an example, all that came out from former Pfizer LaJolla (former Agouron) in the last few years was developed at former SUGEN, Pharmacia San Francisco site.
Permalink to Comment13. burt on May 1, 2006 11:27 AM writes...
I actually hope they pull out of their slump. I have a lot of stock.
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