Are Big Pharma's CEO Pay Packages Outrageous?

Money for nothing. That's basically what departing Novartis  (NYSE: NVS  ) chairman and former CEO Daniel Vasella would have gotten before an uproar in Switzerland nixed the deal. His non-compete agreement with the big pharma would have paid Vasella around $13 million for six years to not work for a competing firm -- $72 million for doing nothing. That's not merely a golden parachute. It's a platinum parachute.

After the outrage erupted in the normally peace-loving Swiss public, Vasella and the Novartis board agreed to scrap the deal. However, the controversy made me curious about arrangements that other top pharma executives might have in place. Do shareholders in the U.S. have reason to be outraged over other platinum parachute deals?

Exit in style
The good news is that there is no competition with Novartis when it comes to sky-high non-compete agreements for executives who leave for any reason, at least with U.S.-based pharmaceutical companies. However, quite a few CEOs would be able to exit in style under certain scenarios.

Most of the large pharmas specify that top executives would receive compensation in the event of a change in control of the company. A notable exception was Johnson & Johnson (NYSE: JNJ  ) . J&J doesn't provide any additional compensation to CEOs or other current top executives in the event of a change in control of the company. Four companies stood out, though, as providing lucrative platinum parachutes.

Source: Company SEC filings.

Amgen (NASDAQ: AMGN  ) ranks at the top of the list. The company's CEO, Kevin Sharer, would receive nearly $37 million as a going-away gift. Gilead Sciences (NASDAQ: GILD  ) CEO John Martin isn't far behind. Martin's parting prize would be a little over $36 million.

Neither George Scangos, CEO of Biogen Idec (NASDAQ: BIIB  ) , nor Ian Read, CEO of Pfizer (NYSE: PFE  ) would be hurting much should their companies change control. Both men would stand to receive close to $33 million.

What about if the CEO is forced out without a change in control event? Pfizer's Read still wouldn't be clipping coupons. He gets more than $22 million for any termination "without cause," which means there was no misconduct involved.

Source: Company SEC filings.

Gilead's Martin and Biogen's Scangos might have to defer any plans to buy a yacht, since both men would get less than $8 million. Poor Kevin Sharer of Amgen would be left to fend for himself.

Pay for performance?
Of course, I'm being just a wee bit facetious. None of these CEOs would be struggling if their employment were terminated. That won't happen because each already receives hefty compensation. At least they're getting paid for working rather than for not working. That actually raises other questions. How much are these CEOs getting paid now? And are they worth it?

With this in mind, let's look at a comparison of 10 large U.S.-based pharmaceutical firms' CEO pay in 2011 versus stock return over the last two years. Sure, an argument could be made for looking at a longer time horizon, but let's take the "what have you done for me lately" viewpoint here.

Sources: Company SEC filings, Yahoo! Finance.

J&J's former CEO, William Weldon, ranked as the highest-paid of the group with nearly $27 million total compensation in 2011.  However, his company also came in at the bottom of the pack in terms of two-year stock performance. 

Biogen beat all of the other companies in stock performance, but CEO Scangos was next to last in compensation. Likewise, Robert Hugin of Celgene  (NASDAQ: CELG  ) received the lowest total pay of the group, yet his company's return was third-highest. John Martin was in the bottom half of CEO compensation packages, but Gilead still ranked second in two-year return. 

Money for nothing?
What does all this really mean? Maybe it's much ado about nothing. One of the CEOs without a platinum parachute, J&J's Weldon, was paid the most despite leading his company to the worst share performance of the group. Biogen's Scangos and Gilead's Martin might have nice termination deals, but they both provided better results for the money than most other CEOs did. 

Shareholders should be leery of termination agreements that give ridiculous amounts of money to executives for doing nothing. They should also demand that compensation packages be tied to performance in a way that is meaningful.

I'm not a subscriber to the class warfare mentality that attacks individuals simply because they make a lot of money, though. A CEO who delivers extraordinary results deserves extraordinary pay. Without appropriate incentives to find the most capable leaders, companies -- and investors -- would be in dire straits.

Celgene's CEO, Bob Hugin, will fall under the investor microscope in coming years. Shares have skyrocketed recently as Hugin outlined a plan to almost triple the company's profits in only a few years. But should you buy the story Celgene is selling? Make sure you understand the key opportunities and risks facing this company by picking up The Motley Fool's brand new premium report on Celgene. To claim your copy today -- along with a free year of updates -- simply click here now.


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