Valeant Pharmaceuticals has won rare praise for designing a pay package for its CEO that rewards long-term success. Ironically, the company reported a key failure in a mid-stage trial the same day the Wall Street Journal echoed some high-profile kudos for the way the developer is compensating Chief Executive J. Michael Pearson.
First, the trial results. A mid-stage study of retigabine as a treatment for pain associated with shingles failed to hit its primary endpoint. "The treatment duration was relatively short and with limited statistical powering for the study overall," said CEO Pearson in a statement. "There are many additional analyses that have yet to be undertaken and these will be performed over the next several months."
Retigabine has also been studied for epilepsy, and Valeant is still planning to file for an approval in Europe and the U.S. by the end of this year.
Now, back to the pay package. When Valeant hired Pearson as CEO in 2008, the compensation committee set out to reflect the way private equity-backed outfits pay top executives. That is intended to keep Pearson focused on the long-term increase in its stock price. He was required to buy $3 million in company stock when he signed on. And in order to keep his hands on certain restricted shares, the company's stock price has to rise an average of 15 percent a year through February, 2011.
"Many companies would benefit from imitating this or moving in this direction," Steven N. Kaplan, a University of Chicago business professor, tells the Journal. "More pay for performance is a good thing."
Bottom line for Pearson today: Not good. Valeant's share price dropped eight percent, with investors more focused on the short-term pain than Pearson's plans for long-term gains.