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Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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March 5, 2010

Twelve and One Half Per Cent

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Posted by Derek

I will note here, with no additional comment whatsoever, that Jeff Kindler, Pfizer's CEO, has just been granted a raise in his base salary of 12.5%. Details at Pharmalot.

Comments (26) + TrackBacks (0) | Category: Business and Markets


1. SteveM on March 5, 2010 12:54 PM writes...

That's in lieu of going to jail.

Funny how corporate plutocracy works...

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2. PharmaHeretic on March 5, 2010 1:04 PM writes...

Have you lost faith in our "free market" system?

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3. partial agonist on March 5, 2010 1:05 PM writes...

But that is just salary- his overall compensation is going DOWN 4% to a paltry 14.9 million.

Maybe it is time to sell the wife's backup weekend convertible, adjust the thermostat in the northwest wing of the mansion, and be more stingy with dispensing the Dom Perignon at parties.

Tightening the belt, CEO-style


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4. Hap on March 5, 2010 1:12 PM writes...

Socialism for the CEOs, capitalism for the rank and file. I thought socialism was an inferior economic system, and that if you were actually competent, capitalism paid better, but I guess that was optimistic of me.

As a less-acerbic side note, why are stock options generally priced low relative to the price of a stock at a given time (because I thought that was where Kindler's overall compensation fell)? If you're rewarding people for either short-term or long-term gains, you want to reward them for stock price increases relative to current, not for managing not to to drool over their memos. Alternatively, you would want to evaluate CEOs relative to the stock prices of competitors (did you do better than other people in your position?), but I don't know how to use stock options to do that (how to price them initially, and what to do when your stock price falls, but less than those of other pharma companies). If options are priced really cheaply relative to actual stock prices, it gives the strong impression of stock options as guaranteed pay rather than as an incentive to increase shareholder value.

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5. SteveM on March 5, 2010 1:26 PM writes...

That's in lieu of going to jail.

Funny how corporate plutocracy works...

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6. Wavefunction on March 5, 2010 1:26 PM writes...

Socialize the costs, capitalize the benefits

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7. wcw on March 5, 2010 1:33 PM writes...

Eh. That management around Reagan started to take full advantage of the principal-agent problem is old news. My favorite anecdote revolving around same is in this paper (money quote: 'Never, ever make a distinguished academic your compensation committee chair because you'll be a poor man by the end of it.')

As for options grants, those are gifted because of favorable tax treatment, weak accounting regs and because unlike cash they suit the mainly false narrative that management thereby fairly has been compensated for its accomplishments. Depressing, but we shareholders in aggregate appear to be an incredibly dumb lot.

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8. RandDChemist on March 5, 2010 1:55 PM writes...


We shareholders have very little power.

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9. Hap on March 5, 2010 2:09 PM writes...

Then why should people invest in companies at all through stock? If you have no control over what companies do while their executives are rewarded (sometimes lavishly) for acting in your worst interests, well, why bother? At least the lottery isn't cheating me - well, at least, I don't think so.

If there were a stock price hit for companies' malfeasance (thus making it harder for their companies to raise money, and eventually for their executives to get paid), well, they might change their behavior. If you're going to rob your stockholders, and all they can do is make sure that the guilty parties can't reap the gains of the robbery by selling out and cashing their losses, well, then they can join their stockholders in the poorhouse. If they can always find another moron to buy their stock, well, then the system's dead anyway.

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10. Sili on March 5, 2010 2:56 PM writes...

To be fair - all the discontinued workers are getting 12.5% as well.

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11. SteveM on March 5, 2010 3:18 PM writes...

Re: Redundant postings

Derek, the nefarious gremlim inside your blog engine should be captured and shot...

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12. Bored on March 5, 2010 3:28 PM writes...


No,no. Redundancy reiterates. Ha ha.

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13. Richard A. on March 5, 2010 3:34 PM writes...

I have a brilliant idea. Let the shareholders of Pfizer vote directly on the CEO's compensation package.

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14. Anonymous on March 5, 2010 3:55 PM writes...

To hap @ #9

Only the CEO, his or her lieutenants, and members of the Board of Directors are eligible for stock options at below market strike prices. They set it up this way so that they don't have to suffer public outrage and personal embarrassment when their stock options are issued $x and the stock price falls significantly, leaving them out of the money "forcing" them to backdate the options strike price lower to ensure that they never lose any money. You haven't forgotten those days not so long ago when that was standard operating procedure have you? The current process is way more sanitary and dignified.

Of course the guys in the trenches who are a "reorganization" away from being forced to exercise underwater options simply have to suck up the loss. Their options are issue at "fair market value".

The rank and file are judged according to the principles of "pay for performance". The obscenely overpaid at the top are judged according to "pay regardless for performance". They don't even try to push "trickle down economics" like the politicians do. They prefer "trickle up". With so many foot soldiers and so few "leaders", "deluge up" is a more accurate description.

Pfizer CEO defence? Andrew Witty over at GSK got a 78% increase.

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15. Hap on March 5, 2010 4:18 PM writes...

I guess if Witty can be rewarded with a 78% raise for that performance, it's hard to begrudge Kindler his raise (unless you just got laid off to pay for it or actually own Pfizer stock, I guess).

Of course, comparing your pay to that of the "slowest psychopath" seems like the wrong standard to me, at least if you want your company to survive for longer than a beached jellyfish in the Mojave.

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16. Pharma Conduct Guy on March 5, 2010 7:11 PM writes...

Recently, I came across billionaire Mark Cuban's blog, where he rails against pathetic management of publicly traded companies who make a fortune. You can read the full story by clicking on the link for my name on this comment, but here's a brief summation of Cuban's recommendations:

Mark's position really distills down to some simple concepts, listed here.
  1. Couple CEO compensation, risk and performance more tightly. An important element of this recommendation is to reduce substantially the size of severance packages in cases of poor performance.
  2. Pay CEOs in cash. In theory, paying the bulk of CEO compensation in stock shares, options, or warrants should motivate CEOs to operate in a way that is best for shareholders. Unfortunately, this system invites all kinds of abuse, from option back-dating to "make-whole" resets when the stock tanks. Payments in straight cash are much more transparent. Also, payments in cash link the CEO's fate more closely with that of the "rank-and-file" employees.
  3. Prevent certain kinds of businesses from becoming publicly traded. There's a good reason that law firms are not allowed to issue public stock. Some of the same arguments apply to other types of businesses.
  4. Structure Wall Street to reward long term thinking and performance, thereby inducing stability from constant over-correcting to market fluctuations. I have some of my own data on this topic that I'll publish soon.
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17. z on March 6, 2010 7:12 AM writes...

I guess they can afford it with the Wyeth folks off the payroll now.

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18. Anonymous on March 6, 2010 7:22 AM writes...

@Sili #10, I'm not sure what you mean by all the discontinued workers getting 12.5% as well. Probably jokingly as 12.5% of zero. Just thought I'd try to clarify this, in case folks think there is something going on, that Pfizer is somehow being kind to people.

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19. J-bone on March 6, 2010 1:49 PM writes...

Every now & then I like Mark Cuban. My favorite episode is after the backlash surrounding Josh Howard, Cuban posted some of the more racist e-mails he had received, with the sender's e-mail address included (many of which were clearly work e-mail addresses).

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20. Sili on March 6, 2010 2:01 PM writes...

Exactly, Anon @18.

Sorry if my attempt at wryness misfired.

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21. gnubee on March 6, 2010 5:13 PM writes...

do they pay him in pieces of eight?

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22. JB on March 8, 2010 6:51 AM writes...


Nope, 30 pieces of silver.

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23. GSKER on March 8, 2010 12:23 PM writes...

Thats nothing you should check out Andrew Witty's 76% pay rise. When research staff get 0%.

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24. David Formely Known as a Chemist on March 8, 2010 3:00 PM writes...

In response to #9 (Hap):

Stock options aren't issued with strike prices below the current market value, that would lead to a huge compensation charge the company would have to recognize immediately. When you see the value of stock options listed in a press release/news article like the one Derek linked to at Pharmalot, that's an estimate of the ultimate value of those options once exercised. These estimates are generally reached using the Black-Scholes pricing model (see

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25. Hap on March 8, 2010 3:50 PM writes...

I thought that higher executives received stock options significantly below market, so that makes me feel less bad about their compensation (or at least that it has to be counted against their companies immediately if it were given as such).

The only worry I would have would be if the prices at which the stock could be purchased could be changed later, so that even if the stock price fell, the option would always be worth something (effectively making the option added pay). I don't know if that is possible (or legal) though.

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26. David Formerly Known as a Chemist on March 8, 2010 4:59 PM writes...

Repricing of stock options happens occasionally in small companies, but I don't see it very often in large organizations like Pfizer. When small companies do this, they typically cancel the original option grant, then issue new options with a new strike price. There may be ways to simply change the strike price of the original options, I'm not sure. However they do it, it isn't automatic, and it needs to be disclosed in regulatory filings. This tends to happen in small companies that have suffered huge stock price declines, so they can keep their employees interested in sticking around. When your options have a strike price of $5 and the stock is currently trading at $0.90, those options aren't serving the intended function of "golden handcuffs". I don't see this being a big issue with large pharma executives, who have plenty of reasons to stay (like fat paychecks, restricted stock grants, juicy perks, etc).

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