A proxy filed with the Securities and Exchange Commission shows that Pfizer (NYSE: PFE) paid CEO Ian Read $27.9 million in 2017, a 61% increase over the prior year. That's not too shabby for running a company with a stock return that trailed the S&P 500 last year.
In fairness to Read, the total shareholder return since he took office in December 2010 is approximately 178%, handily beating the S&P 500 by 25% over that timeframe. Nevertheless, compensation should be a what-have-you-done-for-me-lately kind of thing.
Looking closer, Read's base bay only went up about 2.7% to $1.96 million. A large chunk of the increase came from an $8 million special incentive award that he only gets if both of these conditions are met:
- The total shareholder return is 25% higher than where it closed at the end of last year and stays there for 30 consecutive trading days anytime between now and Dec. 29, 2022.
- Read stays at Pfizer through at least March 31, 2019, and doesn't go to work for any competing company through March 31, 2021.
The first prerequisite seems pretty easy to get. A 25% increase is only a compounded annualized growth rate of about 4.6% over five years. Considering total shareholder returns includes dividends, which currently sits at a dividend yield of around 3.7%, the required return seems like a pretty low bar to jump over.
It appears the main reason for the special incentive award is to keep Read running Pfizer for longer. The proxy statement points out that the award offers "compelling incentive" for him to stay, noting that he could retire now with full benefits having been at the company since 1978, when he started as an operational auditor.
A company in transition
Pfizer is at a crossroads. Arguably, the drugmaker is perpetually at a crossroads with drugs coming off of patent and Pfizer acquiring companies to make up for it.
But this time, it's trying to make a big decision about whether to split itself up by divesting of its consumer healthcare business, including over-the-counter (OTC) products such as Advil and Centrum vitamins. Most of the brands came from its acquisition of Wyeth, having sold its old consumer healthcare business to Johnson & Johnson (NYSE: JNJ) in 2006. While Johnson & Johnson has made OTC and prescription drugs work, the OTC drugs have always seemed like an afterthought at Pfizer.
A spinoff or sale could benefit Pfizer through additional cash that it could use to acquire new high-growth products that are already approved or are late in the drug development process. Using the proceeds for licensing deals, using its mighty sales force, is also an option.
Of course, it depends on how much Pfizer could get for the consumer healthcare business. Pfizer certainly doesn't want to give it away for a song, which Read noted when Pfizer released fourth-quarter earnings in late January: "We remain on track to make this decision, which could include everything from a full or partial separation to ultimately deciding to retain the business, during 2018."
We'll never really know if keeping Read around was worth the added incentives. Perhaps he would have stayed anyway to see the job through. Or maybe his replacement would make the same decisions he'll end up making about the consumer healthcare business. Or, better yet, maybe the replacement would make a different decision that would result in a better shareholder return. Read has been a good CEO, but he's not flawless.
Ultimately, investors should keep in mind that the $8 million award was only 0.05% of the approximately $16 billion in adjusted income Pfizer brought in last year, which seems like a small price to pay to ensure continuality of leadership at the top.
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