What the Pfizer (III)? - Enormous Pay for Poor Performance

The recent in-depth investigation by Fortune reporters of 10 years of dysfunctional leadership at Pfizer, the "world's largest research-based pharmaceutical company," raises many issues about leadership and governance in health care (see our post here).  To continue what is likely to become a lengthy series, let us now discuss the discrepancy between the markedly dysfunctional leadership performance documented in the Fortune article and the pay given to the leaders involved.

"Hank" McKinnell et al - 2003-2006

Mr McKinell was forced to retire in 2006. The Fortune article described Mr McKinnell as a "desperate CEO" by 2002 because he could find no way to replenish the company's fading drug pipeline; who then became an absent CEO who "left a power vacuum" and then triggered internal political warfare by setting up a "bitter contest" over succession planning.

The 2006 Pfizer proxy statement reported the total compensation received by Mr McKinnell from 2003-2005.
2003 - $10,706,002
2004 - $11,355,317
2005 - $12,767,270
Each line reflects the combination of salary, bonus, other annual compensation, restricted stock awards, securities underly  options, LTIP payouts, and all other compensation. 
 
The four other best paid executives were Karen Katen, Vice Chairman and President, Prizer Human Health,  David Shedlarz, Vice Chairman, Jeffrey B Kindler, Vice Chairman and General Counsel, and John LaMattina PhD, Senior Vice President, President, Pfizer Global Research and Development.  Their total compensation for these years were
Ms Katen
2003 -  $4,747,478
2004 -  $8,541,220
2005 - $6,663,283
Mr Shedlarz
2003 - $3,722,508
2004 - $6,743,591
2005 - $3,897,293
Mr Kindler
2003 - $3,113,308
2004 - $4,181,817
2005 - $3,338,728
Mr LaMattina
2003 - $2,228,804
2004 - $4,410,130
2005 - $3,558,415

Despite MrMcKinnell's poor performance, he never received less than $10 million a year in the three years before he was forced out.  Other top managers, despite never effectively compensating for Mr McKinnell's bad performance earned at least $ 3 million a year in these three years, with one exception, one manager who only made a bit over $2 million in one of the three years.

Jeffrey Kindler et al 2007 - 2010 

Kindler was forced to resign in 2010. The Fortune article also described Mr Kindler as "suddenly desperate" after two failures of drugs in development; someone who "just couldn't make up his mind," about acquisitions and spin-offs; "anguished" about research, leading to a "messy" overhaul; and putting "destructive" trust in a subordinate with previously described problems with "character, integrity and divisiveness" leading to loss of the loyalty of the executive team.

The 2010 Pfizer proxy statement revealed the total compensation received by Mr Kindler from 2007-2009.
2007 - $13,075,099
2008 - $15,547,600
2009 - $14,898,038
In this proxy statement, each line included salary, bonus, stock awards, option awards, non-equity incentive plan compensation, change in pension value and non-qualified deferred compensation earnings, and all other compensation. 

The four other best paid executives were F D'Amelio, Chief Financial Officer, I Read, Group President, Worldwide Biopharmaceutical Business, M Mackay, President, Pharmatherapeutics Research & Development, and Dr F Lewis-Hall, Chief Medical Officer.  Their total compensation for these years was:
Mr F'Amelio
2007 - $12,338,821
2008 - $6,979,111
2009 - $7,858,969
Mr Read
2007 - $4,560,869
2008 - $7,629,185
2009 - $9,447,036
Mr Mackay
2007 - $3,590,158
2008 - $6,718,580
2009 - $5,878,806
Dr Lewis-Hall
2009 - $5,087,263 (hired in 2009)

Despite Mr Kindler's poor performance, he never received less than $13 million a year in the three years before he was forced out.  Other top managers, despite never effectively compensating for Mr McKinnell's bad performance earned at least $ 4.5 million a year in these three years, with one exception, one manager who only made a bit over $3.5 million in one of the three years.


Summary
 
The business oriented leaders of health care, and some of their sympathizers in health care and policy research are given to preach that "pay for performance," (P4P) applied to health care professionals is a solution to the problem of ever rising health care costs, and ever declining health care access and quality. 
 
Pay for performance applied to the top hired leaders of health care organizations has become a cruel joke.     The Pfizer example shows a company with chronically bad leadership paid hundreds of times what average workers receive.  Despite a parched drug pipeline and languishing stock price, top managers made millions a year, and CEOs who would eventually be forced out for poor performance made tens of millions a year.  One cannot help but conclude that the main goal of Pfizer was to enrich its top managers.  Managers whose main goal is to enrich themselves, of course, are unlikely to manage well, and unlikely to promote development and manufacturing of drugs whose benefits exceed their harms, and which decrease symptoms, improve function, prevent morbidity, extend life, and generally benefit health.   
 
Now that the scope of the failings of Pfizer's hired leaders has been made clearer, the company has become one of the best, or worst examples of self-interested leadership and its perils for health care. 
 
As I have repeated endlessly,... health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research. On the other hand, those who authorize, direct and implement bad behavior ought to suffer negative consequences sufficient to deter future bad behavior.
 
If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.

BUY IT NOW!

What the Pfizer (II)? - Lack of Transparency About Dysfunctional Leadership

The recent in-depth investigation by Fortune reporters of 10 years of dysfunctional leadership at Pfizer, the "world's largest research-based pharmaceutical company," raises many issues about leadership and governance in health care (see our post here).  To continue what is likely to become a lengthy series, let us discuss the most obvious one, is the discrepancy between what appeared in Fortune and what Pfizer chose to make public about its leadership.

This discrepancy is most apparent when one compares official descriptions of executive performance with what the Fortune reporters found.  To illustrate, consider the official descriptions of the performance of former Pfizer CEOs Hank McKinnell and Jeffrey Kindler in the respective years in which they were forced out.

"Hank" McKinnell -2006

Mr McKinell was forced to retire in 2006.  The Fortune article described Mr McKinnell as a "desperate CEO" by 2002 because he could find no way to replenish the company's fading drug pipeline; who then became an absent CEO who "left a power vacuum" and then triggered internal political warfare by setting up a "bitter contest" over succession planning.

The 2006 Pfizer proxy statement  explained how the Board of Directors' Compensation Committee assessed Mr McKinnell's performance,

The Committee does not rely solely on predetermined formulas or a limited set of criteria when it evaluates the performance of the Chairman and CEO and the Company's other elected officers.

In 2005, the Committee considered management's continuing achievement of its short and long-term goals versus its strategic imperatives, including Dr. McKinnell's objectives which are shown below:

• Achieve specific revenue, EPS, operating cash flow per share, and merger-related synergy goals
• Effectively communicate strategy and financial results to increase shareholder value
• Deliver more new medicines more quickly to patients, through industry- leading R&D productivity and significant in-licensing activity
• Adapting to Scale
• Promote new directions in health and wellness
• Shape a positive environment for better healthcare
• Developing People, Talent, and the Organization

The Compensation Committee then assessed McKinnell's performance thus:

Financial and merger synergy goals

Overall, the financial targets, which reflected a significant stretch for the organization given the dynamic business environment and the loss of exclusivity for certain key products, were exceeded.

Communicate effectively

However, given the performance of the Company's stock price in 2005 when compared to prior years, the Committee felt that the goal of effectively communicating strategy and financial results to increase shareholder value was not met.

More medicines more quickly

All R&D productivity and licensing goals were met or exceeded, with, notably, five products under priority review at the FDA — an industry first. As the R&D organization continues to establish the industry standard in productivity, the Committee determined that performance against this objective significantly surpassed expectations.

Adapting to scale

In 2005, initiatives related to Adapting to Scale resulted in twice the cost reduction that had been estimated for the year, giving a very strong start to the Company's efforts to reduce the cost base and streamline the organization.

So,

the Committee believes that overall performance significantly surpassed the expected outcomes for this objective.

Promote new directions

In promoting new directions in health and wellness, Pfizer's newly launched Healthy Directions program for U.S. based colleagues far exceeded expectations.... the Committee determined that these goals were significantly exceeded.

Shape a positive environment

The Company is also leading efforts to rebuild trust in the industry and large companies in general.

So,

Overall, the Committee believes that the Company surpassed expectations of performance against this particularly challenging objective.

Developing people, talent, and the organization

With respect to the final objective for 2005 — Developing People, Talent, and the Organization — the Committee recognized that senior leadership of the Company has been instrumental in developing and implementing new People & Talent strategies related to long-term development planning for key talent, enhancing leadership skills for all 'people managers', and enabling Pfizer to become a global leader in attracting, developing, and engaging a diverse workforce that delivers superior business results. As a result, the Committee determined that the goals of this objective were surpassed.

So, according to the Committee, Mr McKinnell's performance was excellent in all areas but one.

Accordingly, based apparently on this stated "General Compensation Philosophy,"

The Committee believes that compensation paid to executive officers should be closely aligned with the performance of the Company on both a short-term and long-term basis....

So the present value of Mr McKinnell's total compensation was estimated to be $15,880,989.

Jeffrey Kindler - 2010

Kindler was forced to resign in 2010. The Fortune article also described Mr Kindler as "suddenly desperate" after two failures of drugs in development; someone who "just couldn't make up his mind," about acquisitions and spin-offs; "anguished" about research, leading to a "messy" overhaul; and putting "destructive" trust in a subordinate with previously described problems with "character, integrity and divisiveness" leading to loss of the loyalty of the executive team.

However, in the company's 2010 proxy statement, the Compensation Committee made this general assertion:

The Committee believes that Mr. Kindler's leadership was a significant factor in the continued progress made by Pfizer in 2009 in strengthening the foundation for future growth and long-term success.

Then, Mr Kindler, like Mr McKinnell, was assessed against specific performance standards thus:

Financial Results

Despite the unprecedented challenges in the global macroeconomic environment and other challenges, the Company exceeded the target goals for 2009 set by the Committee for annual incentive purposes

Enhancing the Product Portfolio

Under Mr. Kindler's leadership and oversight, during 2009 we improved the product portfolio (early stage through late stage),...

People Management

In 2009, we met or exceeded each of our people management goals,...

Business Model Implementation

the Company remains on track to meet the various research and development goals announced in March 2009. Mr. Kindler also further strengthened the Company's leadership team through strategic hiring and the redeployment of key senior leaders across the Company.

Wyeth Transaction

During 2009, we devoted significant attention to the acquisition of Wyeth. Under Mr. Kindler's leadership, we finalized negotiations, gained regulatory approval and closed the $68 billion acquisition of Wyeth, all in an expeditious manner. During the year, Mr. Kindler oversaw a detailed review of Wyeth and its businesses and the development of an integration plan,...

So,

With the completion of the acquisition under Mr. Kindler's leadership, Pfizer is one of the largest biopharmaceutical companies in the world, as well as a more diversified company in the health care industry.

Industry Leadership

During 2009, Mr. Kindler was actively involved, through both Pfizer and external organizations, in developing and advancing U.S. and global public policies that serve the overall interests of our Company and our shareholders

In summary,

In view of Mr. Kindler's accomplishments noted above and the fact that he achieved all of his objectives and exceeded most of them, the Committee believes that Mr. Kindler successfully led the Company toward the achievement of its strategic goals during 2009....

Based on the same general compensation philosophy noted above, Mr Kindler's total compensation in 2009 was $14,898,038.

Summary

Anyone who depended on these proxy statements to assess the performance of the Pfizer CEOs in 2006 and in 2010 would have likely concluded that both CEOs exhibited exemplary performance. These impressions would have apparently been sharply discrepant with the realities inside the company at those times.

Like the children of Lake Woebegone, we have frequently noted how almost all CEOs seem to appear "above average" or better to their boards of directors or trustees. The case of Pfizer in 2006 and in 2010 shows a board of directors which painted a grossly optimistic view of CEO performance to the public. In both years, these views would almost immediately clash with the fates of the particular CEOs. Now, based on the Fortune investigative report, these views seem even more overblown if not absurd.

This case, which again concerns the "world's biggest research driven pharmaceutical company," suggests one should be very skeptical about evaluations of executive performance in proxy reports. Proxy reports now appear to be a very cloudy window through which to view how corporations are really run. However, in the US, proxy reports have legal standing and are supposed to be sources of definitive information for stockholders and anyone else interested in the corporations that produce them.

Thus, the large organizations that dominate US health care may be even less transparent than they appear. True health care reform requires true transparency, and meaningful deterrence of propaganda disguised as fact.

BUY IT NOW!

Pay for What? - Redux: Surrealistic Pay for Health Care Corporate CEOs

Pay-for-performance has been a persistently fashionable mantra for health care business leaders and policy advocates, particularly as applied to physicians to control costs and perhaps even improve quality.  We have been highly critical of current methods proposed to measure performance and tie pay to it (e.g., here), and other bloggers, notably Dr Robert Centor at DB's Medical Rants, have vigorously pursued this issue (e.g., here).

It is beyond ironic that meanwhile, the pay of health care organizations' leaders seems less and less related to their performance.  For example, in a recent series on local executive pay in the Boston Globe there were these examples:

Hologic

Hologic Inc. gave its chief executive, John W. Cumming, a $1.5 million “retention payment’’ as part of his $10.5 million pay package last year. He was promised the payment in mid-2006 if he remained with the company through the end of 2008. At the same time, the Bedford women’s health care products company posted a $2.2 billion loss, largely resulting from a big write-down related to the 2007 purchase of Cytic Corp. Cumming has since stepped down as chief executive, but remains chairman. Hologic declined to comment.

Charles River Laboratories

Charles River Laboratories International Inc. chief executive James C. Foster received $1.3 million in deferred compensation in a year when the company disclosed plans to cut 300 workers, or 3 percent of its workforce. Charles River declined to comment.

Note that a Charles River board member was one of the authors of an Institute of Medicine report advocating P4P for physicians, as we posted here. Ah, the irony.

Boston Scientific

New Boston Scientific Corp. CEO J. Raymond Elliott started midyear and received a $1.5 million bonus. Boston Scientific posted a $1 billion loss last year.

Elliott got a lot more than that, as reported in a companion Boston Globe article:

Elliott, whose experience includes running another medical device company, Zimmer Holdings Inc., was paid a performance bonus of nearly $608,000 last year, in addition to a $1.5 million signing bonus and $29.4 million in stock awards and options.

Meanwhile, the company's losses continue to mount:

And in February, Boston Scientific agreed to pay $1.7 billion to settle patent infringement charges from rival Johnson & Johnson, making it likely the company will post another loss this year.

Note that Boston Scientific has had its ethical as well as financial failings, especially involving the case of the faulty implantable cardiac defibrillators, which resulted in settlements of civil lawsuits alleging that it hid data about the defects, and two guilty pleas by a company subsidiary to charges that it did not notify the FDA about these problems (see post here).

Vertex Pharmaceuticals Inc

At Vertex Pharmaceuticals Inc., chief Matthew W. Emmens, who took over five months into the year, received $2.8 million performance award last year, a year in which the company lost $642 million.

He actually got a lot more than that, too, as per the second Globe article:

His pay package included more than $15 million in restricted stock and options.

Cephalon

At the same time, an op-ed by Michael Hiltzik in the Los Angeles Times noted that a health care company had the most unfairly paid CEO, according to "veteran compensation consultant Fraef Crystal,"

Cephalon Inc., ... CEO, Frank Baldino, Crystal identifies as the most overpaid chief executive in his database. (Baldino's $11.1 million pay last year is 832% of what would be fair, Crystal calculated.)

Note that Cephalon settled charges of off-label promotion of narcotics for over $400 million in 2008 (see post here).

Summary

So the general rule seem to be that top executives of health care organizations make large, sometimes enormous amounts of money, and that occurs regardless of company or personal performance. The riches keep flowing even if the company loses millions or billions, or lays off significant chunks of its workforce.

Hiltzik identified corporate executive pay as:

the No. 1 scandal of American business — executive pay that bears scant relationship to what these people are worth.

The CEO pay curve has been galloping out of control for so long that it has achieved the status of a cliche. In 1965 the average U.S. CEO earned 24 times the pay of the average worker. Four decades later the ratio was 411 to 1..

Furthermore,

The dismal reality of CEO pay is that it comprises two problems, not one. Top executive pay generally is too lavish in the U.S. no matter what performance standard you apply. Good performance or bad, the pay disparity between the CEO and the rank and file is larger than in any other country, contributing to rising income inequality and to its consequent social pathologies.

It's also based on several flawed assumptions, argue Jay Lorsch and Rakesh Khurana of Harvard Business School in a recent article for Harvard Magazine. One is that money is the only motivating factor behind executive performance.

Another is that shareholders are the only stakeholders in corporate performance whose interests matter. This is a relatively recent paradigm, they observe; as late as 1990 business groups recognized the importance of a corporation's responsibility to stakeholders such as employees, customers, suppliers and the community.

The flaw in the latter assumption is that it ties CEO pay to stock prices, which they can't influence on their own. But the picture of the CEO as virtually the sole auteur of a corporation's fate permeates American society. Listen to a Meg Whitman campaign ad talking about 'the EBay Meg created.' If you pay attention you may catch a reference to the 15,000 employees who were there when she left, at least a few of whom must have had something to do with the company's success.

A further problem is that the pay of top corporate leaders is generally set not by the share-holders, that is, the owners of the company, but by boards of their cronies, many of whom are also members of the CEO club.  As Hiltzik noted,

although most corporate boards make a show of placing pay decisions in the hands of a committee of 'independent' directors, the members are almost always current or former top executives themselves, members of a tight club.

By the way, as we posted here, a member of both the Hologic and Vertex boards was a former hospital CEO who got a generous retirement package despite its financial straits.

So while their policy flacks continue to push pay-for-performance for physicians, maybe health care corporate leaders should set an example by embracing real pay for performance themselves.

To repeat, again, again, again,.... Until they do, top executives remain really different from you and me.  If we do not hold health care leaders accountable, if we do not provide them with incentives that are proportional to their actual performance, why should we expect health care organizations to do any more than satisfy their leaders' self-interest?

BUY IT NOW!