Pearson says, “We feel very, very comfortable with our accounting. In fact, we’re probably more conservative than many other companies.” Valeant’s disclosures, he says, go well beyond its peers. Investors are free to do their own calculations based on the information the company provides, he says. But that’s something even large investors struggle with, and is likely beyond most retail investors.
Even if Pearson can neutralize the accounting debate, however, the question persists—how long can he keep up the acquisitions? “Maybe the most legitimate question of our strategy is, ‘How long is the runway? How many opportunities are out there?’” says Ingram. “I can tell you globally there are so many small and mid-sized companies that can benefit from this strategy—as long as you can execute it.”
Pearson notes that Valeant revenues are now roughly eight times larger than when he joined the firm five years ago, once one accounts for divestitures. Does he think it can grow by another eight times in the next five years? “We probably won’t,” he says. “But we’re certainly going to try to.”
PEARSON’S TAKEOFF: FROM LOW-PROFILE CONSULTANT TO ONE OF CANADA’S BEST-PAID CEOS
Valeant Pharmaceuticals International Inc. chairman and CEO Michael Pearson was one of the most richly rewarded executives of a Canadian-listed company in 2011, earning compensation valued at $36.7 million (all currency in U.S. dollars). He has also accumulated a pile of equity, bringing the value of his stake at the end of January to a stunning $300 million after just five years—not including the additional $200 million worth of unrealized pretax gains from his fully vested stock options.
This doesn’t seem to bother shareholders. In fact, one of the company’s largest investors designed Pearson’s pay plan, and he says it’s doing what it’s supposed to do: richly rewarding the CEO when shareholders do well—but denying him if they don’t.
Pearson is paid $1.75 million in base salary, but it’s the long-term incentives that really count. Factoring out dividends related to Valeant’s merger with Biovail Corp. in 2010, Pearson earned $23 million in 2011.
Of that, 80% was in the form of stock or option rewards, whereas the median for S&P 500 CEOs is about 50%. That, says Steven Kaplan of the University of Chicago’s Booth School of Business, keeps Pearson’s interests aligned with those of shareholders. “If the stock goes up, he does well, and if the stock goes down, he does much less well.”
The key feature of Pearson’s pay package is a grant of 120,000 “performance share units,” which turn into common shares when they vest. But they only vest if Pearson delivers a 15% compound annual return over three years. If he doesn’t, the PSUs are worthless. If he delivers 30%, he’ll get twice the original allotment of PSUs. At 45%, he gets three times, and at 60%, four times. “Everybody told me and him we were crazy to do that, because it’s such a high bar in an era when stocks aren’t performing,” says director Mason Morfit, former chairman of the board’s compensation committee, and the main architect of the pay plan. “Most people would prefer to take the risk out of their compensation plan.”
Pearson is contractually bound to hold on to the vesting equity until the end of his term as CEO. That is supposed to deter him from making short-term moves to goose the stock: But, of course, it does nothing to protect shareholders if the company’s high-risk, debt-fuelled growth strategy hits turbulence.
It’s an approach that makes Pearson more like the boss of a firm owned by private equity, not public investors: Private-equity investors like their CEOs to have skin in the game (Pearson bought $5 million worth of Valeant stock when he joined in 2008) and their backs to the wall, working hard to create value and getting rich if they do.
Other boards are “curious and intrigued” by Valeant’s approach, says Canadian compensation adviser Georges Soaré. But, he adds, “I haven’t seen too many that have an appetite to go down this road.”