Valeant kills CEO award as it alters program

Valeant Pharmaceuticals International Inc. plans to kill a US$29.8 million stock award it gave CEO Joseph Papa as the firm revamps its compensation program for senior managers.

Papa and chief financial Officer Paul Herendeen, who both received large upfront equity awards when they were hired in 2016, will instead get smaller annual grants, Valeant said Monday in a regulatory filing, noting that the decision was partly based on shareholder feedback.

The award would have given Papa at least 933,416 shares if Valeant’s stock price hit US$150 within four years, gaining more than 350 per cent from the time of the grant and 10 times current levels. If the price eclipsed the top threshold of US$270, the award could have yielded as many as 1.87 million shares worth about US$500 million. The grant resembles those former CEO Michael Pearson got in 2011 and 2015, which were set to pay out several times the target number of shares if Valeant had achieved goals for shareholder return. The 2015 award would have been worth US$2.66 billion if Valeant’s share price reached at least US$1,181.81 on three separate dates between October 2019 and April 2020.

Equity awards that vest if stock-return targets are met generally are seen as friendly to investors. But they can incentivize executives to sacrifice long-term investments to boost the share price, according to a 2016 paper by David Larcker and Brian Tayan from the Stanford Graduate School of Business.

Papa, who wasn’t awarded any equity in 2017 and will get a US$10-million long-term incentive this year, is seeking to turn around the debt-laden firm tainted by scandals involving a controversial distribution model and price hikes.