Fred Hassan In Graceland: Lots Of Cheap Options
When Schering-Plough shareholders show up in the oh-so convenient location of The University of Memphis next Friday for the annual meeting, their proxy statements won’t include one detail about Fred Hassan’s compensation. Although page 34 notes that the ceo received about $30 million in compensation last year, a more recent award of 836,000 options isn’t listed.
Now, the drugmaker may argue that an annual grant was also awarded last year after the proxy was filed and, unlike last year, there were no scandals causing shareholder and government scrutiny. So what’s the big deal? But consider that the latest options award, which we estimate are currently worth about $6.7 million based on the value assigned last year’s options award (see page 37), have an exercise price of just $18.85.
Why is this interesting? Well, 80 percent of the options aren’t based on performance critieria and can be exercised over the next three years - at what Fred himself insists is a low price. Schering-Plough stock closed yesterday at $18.18. Meanwhile, Fred has been complaining for months - ever since the Vytorin scandal sunk the $30 share price - that the stock is undervalued. Shearlings Got Plowed has picked this apart a couple of times now - here and here.
So why would the board’s compensation committee award him so much stock at this price? Or put another way - why wasn’t the exercise price set higher, since Fred himself has argued the stock is undervalued? Why is Fred getting so much at a price that doesn’t seem to depend on anything but showing up on Jim Cramer’s Mad Money to complain that the media is confused about cholesterol? We asked the drugmaker for an explanation and we received gobbledy-gook:
“If you look at the bottom of page 29 of the proxy, ‘Grant Prices for Stock Options and Other Equity Awards,’ you will see that Schering-Plough makes one annual grant on the same business date to all eligible employees which is the first business day of May. The closing price last Thurs May 1 on the NYSE was $18.85 and Fred Hassan received 836,000 options. Please note that these options are not yet vested and with today’s closing price on the NYSE would have no value. This stock option grant will be referenced in the next proxy which will cover 2008.”
Perhaps shareholders will receive more illuminating info next week in Graceland.
SP 1
Obscene!!!! This kind of award while hard-working rank and file employees are being terminated! This is corporate swine behavior. The Board of Directors should be ashamed for approving this type of compensation for a CEO who is emerging as a big failure. And they should act to clean the dirty house in Kenilworth.
condor
Again — I bow before you, Ed (tugging forelocks!). . . .
This is much more plainly-put than mine. And perfectly-pitched.
Thank you!
Roy Sherman
u are right Ed. You get what you pay for….freddie got us the best third phase research pipeline in the entire pharma industry. That is worth billions. Man, i am not jealous of the guy…..What did you make? I am sure you also got according you what you produced…..not much by my guess!
SP 2
Fred Hassan hasn’t done anything for Schering-plough yet but make his employees miserable by squeezing blood out of a turnip while he treats himself like royalty. Let’s see - private security, private limo, corporate jet, hundreds of thousands of stock grants, huge salary, more bonus. In my mind, he’s a big fake!
Zetia and Vytorin were already there when he arrived, so he can’t claim them. Bayer wants its money and is suing SP. Integrilin was a disaster. Organon was a desperate move by a company shut out of meaningful mergers
Ed Silverman
Hi Roy,
Well, we can go back and pick through the pipeline to see how much was under way before Fred arrived. But Wall Street really liked the stock because patent expirations aren’t the big issue it is for SGP rivals. Throw in a few big-selling franchise products and you have curb appeal.
And feel free to take as many shots at me as you want. I don’t mind, but will say that I more than earn my keep. As to how much I produce, specifically, feel free to try doing what I do and let me know what you think.
Thanks for stopping by,
ed
Chris
I read the post and don’t see objectively what’s in dispute. The comment from S-P doesn’t seem too complicated - if that’s their standing policy there’s no deviation, and if the grants are issued at the price on May 1 how else should they perform this? Why should Hassan have received his at a higher exercise price: punishment? $18.85 might feel wrong but that really isn’t the point because they will only be worth anything if the share price improves and that’s something that benefits everybody holding S-P stock.
Ed Silverman
Hi Chris,
Rather than punishment, perhaps incentive is another way of looking at it. The stock is already trading at that level which, as I noted, Fred calls undervalued. So why not set the bar higher? If the share price doesn’t improve from the $18.85 level, where its currently hovering, he still collects over the next three years. The options are supposed to be a reward for achieving goals, not just showing up - in an ideal world, that is.
Cheers
ed
Chris
Hi Ed
As I understand options - as opposed to grants which is how I incorrectly labelled them - they are only worth exercising when the price is over the option price. So he will collect them over three years but if the price stays at $18.85 he won’t make a nickel. I agree the incentive is to improve the share price but I’m unclear on how or why an arbitrarily higher option price should be set just for Hassan’s deal. Some would certainly consider recent events as justifying a higher price for his options (at best) but these things follow policy which seems to have been met here. Of course the subject of options raises a much wider issue in context of executive comp but you’ve covered that in an earlier post.
Solution
It would make more sense for the Board to modify the grants and options according to overall company performance. While SP had been doing well according to their releases, it seems that it’s in quite a difficult situation right know with a lot of uncertainty as to its’ future direction. What irritates folks the most is that these benefits are not altered when things are going bad, The way that Fred Hassan has handled things is to announce that he’s going to lay off 10% of his workforce. When over 5000 dedicated people are going to lose their jobs, shouldn’t the top executives take their hits as well? One can argue that they need to be held accountable as they had a lot to do with creating the mess, but that doesn’t seem to be the case at good old SP!
Ed Silverman
Hi Chris,
I harped on Fred because he’s the ceo - he gets paid the most, he’s the leader and he’s been complaining about the reasons for the low stock price. But I agree that the same terms should be set for the other execs. I don’t mean to imply otherwise and, therefore, want to use this opportunity to clarify the point.
As to the stock price, since its already near $18.85 - it closed at $18.71 today - it isn’t a big stretch to hypothesize that, perhaps, it will rise. Unless, of course, there’s more disappointing news of some sort.
The question is whether he should be given options with a still higher exercise price as an incentive, since 80 percent of the options aren’t performance based - they will simply be his to exercise. So why not create more incentive and set them at, say, $23 to use an arbitrary, but not ridiculous number.
Incentives are supposed to be rewards for work done and goals achieved. If the stock price remains within the existing range - again, a hypothesis - he simply has to show up and then collect 80 percent of the 836,000 over the next three years. Doesn’t sound like true incentive.
ed
Disgusted
Nobody is worth the kind of money that these CEOs make! In japan, the CEO pay is limited so that they don’t make obscene money compared with the average employee. Why should they be paid this much? Because they make tough decisions like putting people out of work?
Options are options and they have a strike price - it’s the same for all employees. I don’t think you can make it higher for some and not others. perhaps they could make the strike price retroactive to October 2007, when the stock was above $30 a share? Now that would be incentive!
Grants are more problematic because they’re outright gifts! If you get 100,000 shares @ $18.85, it’s worth about $2 million. If you get 800,000 shares, it’s worth about $15 million. Not a bad chunk a change to receive as a gift!
It’s almost enough to make you reject capitalism!!!!
DeWaarheid
As a recent adoptee of SP, I am quite annoyed about the fiasco that surrounds this place. We were sold a steady diet of ethics, ethics, ethics leading up to the take over of OBS by SP, but this place reeks of insincerity and Orwellian doublespeak. Our gracious leader Fred was so kind to grant we plebes 1000 options at around $22.50 in mid-January. Isn’t it nice to know that as we (and I mean Sales & Marketing) dig ourselves out of this mess, Fred stands to make about $750k on his recent personal $2M investment in company stock and $3.5M in the most recent option grant before any of us have made a nickel on these options?!?!? And that (you know, it rhymes with a synonym for scratch) CC had the audacity to chuckle in the background of the conference call regarding the projected layoffs. This place is a cesspool and I hope that there is a strong enough block of shareholders who have the strength to unseat this leadership team. No Fred, the media isn’t attacking SP, SP left the ammo in plain sight for anyone with a little sleuthing ability to find. It is an even bigger travesty that your hand picked board is rewarding your incompetence in such a way.
gary gemian
Hi Ed,
I was at SP for more thatn 10 years and left just before Fred came in. His predecessor and he have similar industry CEO traits; it seems both overlooked key middle management contributors moving their business, low to no recognition and early push out of people approaching middle age. A lot of excellent people left SP becasuse CEOs bring in yes men(and women) and their cronies. They are top heavy with compensation and bonuses while the results oriented managers, diectors and some VPs get squat!
Some people tried to even get back in right after Fred and Carrie came in but were told the “old SP culture” was not welcomed. WEll I guess the stock price could use some of the old guard performers back again.
condor
What DeWaarheid wrote above, bears repeating — and amplifying, as s/he left a similar comment on mine.
If DeWaarheid’s is accurate, middle management must row for their lives on their $22.50 options, they’ll need to acheive a 20 percent increase in stock price, just to make a penny (with the stock now at $18.65). . . .
AND if they row that hard, and that fast, for that long — Hassan will already have made about $4.3 million in gains ($22.50 minus $18.85 times 836,000).
That is fairly astonishing — the high officers may sit back, and count on middle management to row like crazy — and every penny over $18.85 is gain to the top officers.
Clearly, Hans Becherer needs to pay more attention during the Board’s Compensation Committee meetings, or he needs to start getting more proactive advice. [Ira T. Kay: are you getting this?]
This state of affairs is, and should be, fairly demoralizing to Schering’s middle management — not at all in line with creating sensible incentives for excellent performers.
I agree that it seems the board hasn’t switched comp. philosophy to keep pace with the significant challenges Schering now faces.
It is time for Mr. Hassan to renounce this option grant. It is inconsistent with being a “roll-up ones’ sleeves”, turn-around CEO — if that is, in fact, what he professes to be.
Great dialogue here!
[As an aside: Nothing in the applicable law, rules or the Schering plans, would prohibit granting the "above market price" options to the top six-to-twelve-officers, and at (or nearer) the "current market price" options to the rest of the house. Yes, I've looked -- and looked carefully. That is a very common Fortune 500 practice, in situations like this one -- deeply declining stock prices.]
DeWaarheid
In reply to Condor and to clarify my earlier post:
I seemed to have transposed a number, but on Jan 22, FH granted the employees of SP 1000 options at the days close of $20.26. Although that tempers the gap a little. we nonetheless will be enriching FH into the millions before we make a cent. Realistically, does HE need this money more than most of the rest of it do? As a member of the field sales force, this mountain will be climbed with the management team on our backs!!! They really need to re-think their plans for compensating us for correcting their missteps (I think that is an extremely kind and conservative characterization of our present situation!!!).
DeWaarheid
Gary:
I think I strive to emulate you as a former employee of SP. FH had the nerve to send out an e-mail this past week touting the positive feedback and support for the direction and management of this company he received from a number of high performers at awards presentations this past week. As you stated, this is a perfect example of the yes-man mentality that exists here. Did FH really expect to here anything negative at a meeting like this? (Don’t bite the hand that feeds you.) And if he did, woould you really expect him to let the field know. (Maybe through a public flogging!!!) Based on how the adopted OBS managers have changed the way they treat reps who have admired and trusted them for years, I really believe that a culture of fear and intimidation exists in the upper levels of SP management. I don’t know that SP was ever a great company, but is surely IS NOT one now!!!
Outraged
Nobody is worth this kind of remuneration. It has become very obvious in the past few months that FH only cares about himself and his over-paid cronies. He keeps on protecting them despite the very questionable activities that have come to light. Schering-Plough has apparently become a jester’s paradise full of fools!
Doc
CEOs in general seem to be over paid. If you look at the majority of companies where a highly paid CEO leaves, most continue to perk along, relatively unfazed.
I think the main point here is, if the BOD decides on CEO pay, options, restricted stock, perqs such as planes, etc - the BOD needs to be held accountable.
I have little trouble that most of those who complain, including me, would take the same package if offered, had we made it to the CEO level. And like most CEOs, probably think we deserved every penny.