Michael Pearson is living every management consultant's dream: In 2008, he left McKinsey & Co. after 23 years to take the helm of the emerging Valeant Pharmaceuticals International Inc. Less than a decade later, he has nearly $3-billion (U.S.) in stock and options in the company, with the potential to own hundreds of millions of dollars more.
The rewards are due, in large part, to the amazing performance of Valeant shares, which have risen so high that the company is now the most valuable on the Toronto Stock Exchange. Over the past decade, Valeant shares have returned more than 2,300 per cent, the best performance in the TSX, according to S&P Capital IQ. At $113-billion (Canadian), Valeant's market capitalization is now about $4-billion ahead of Royal Bank of Canada, the previous champion.
What has been a boon to Mr. Pearson is that Valeant has long used stock performance as the core of its long-term compensation program.
Mr. Pearson has nearly five million stock options, some currently exercisable, some not, with profit of $1.2-billion (U.S.) at Thursday's New York Stock Exchange close of $254.28. Valeant also has a program that awards stock in the company to its executives, then ultimately multiplies those awards based on the total shareholder return (TSR) the company achieves. Valeant has typically tripled the number of shares in the initial awards as it has blown past its stock-return goals.
Here's the result:
In addition to the $1.2-billion of options, Mr. Pearson owns more than 2.2 million shares worth about $570-million (some of the shares were purchased, not awarded as compensation, the company says).
A family trust, from which Mr. Pearson says he does not benefit, owns an additional 1.2 million shares worth almost $310-million.
There are more than three million shares in the compensation plan that Mr. Pearson has earned, but not yet collected as the company continues to tally its returns. Those are worth nearly $800-million at Thursday's close.
A 2011 stock award is on track to pay out 360,000 shares worth about $92-million at Thursday's close.
It dwarfs Mr. Pearson's $1-million salary and $3-million in cash bonuses in 2014. (He has given up his salary for 2015, but now has a bonus plan that can pay as much as $10-million.)
"Our compensation philosophy is to align management's pay with long-term TSR," the company told shareholders in its proxy statement this spring. "We richly reward for outstanding TSR performance, but pay significantly less for below average TSR performance." (A company spokeswoman declined to comment beyond what was said in the proxy.)
The company measures returns over three or more years, and for stock awards made from 2008 to late 2012, it had to hit a minimum annual return of 15 per cent for executives to get any of their shares. Awards tripled if the company achieved 45 per cent annual returns and, for Mr. Pearson, quadrupled at 60 per cent. With this component of the plan, "the company's executives could be among the best-paid in the industry," Valeant said.
In 2012, the company lowered the bar, making a 10-per-cent annual return the minimum. This was "more appropriate given compound annual growth rate returns for our peer group," Valeant says.
Mr. Pearson signed a new contract in January, and the company provided more incentives: A grant of 450,000 performance shares that could quintuple to 2.25 million shares if TSR is 50 per cent over five years. While it's still early, the shares are up 80 per cent from January, and 2.25 million shares are worth $572-million at Thursday's close.
While these numbers may shock, many Valeant shareholders will not complain, because the stock performance, in their view, justifies the results.
Institutional Shareholder Services, one of the proxy advisory firms that rates companies on governance and pay, assigns Valeant its best governance-risk rating and suggested shareholders vote "yes" in the company's say-on-pay vote this spring, albeit with "caution."
ISS says that "the company has produced superior shareholder returns on both a short- and long-term basis, and the executive pay program is designed to reward [executives] for continued strong returns."
On the other hand, it says, given the pharmaceutical industry's track record for stock performance, it's not clear that a 10-per-cent return is a high enough threshold.
Glass Lewis, another proxy advisory firm, recommended a "no" vote on say on pay because of Mr. Pearson's January award, calling the payout potential "excessive."