Drug Company CEO Compensation Makes as Little Sense This Year as It Did Last Year

Last Updated Mar 15, 2010 11:24 AM EDT

It's no secret that CEO compensation is largely uncorrelated to the performance of the company or its stock, and recent disclosures from Pfizer (PFE), Allergan (AGN), Bristol-Myers Squibb (BMY) and Genzyme (GENZ) illustrate that in spades.

All four CEOs got reduced pay in 2009, according to their SEC filings. If these companies are bellwethers for the drug sector as a whole, we may see an overall decline in top brass compensation for last year. But it's not clear why that should be: Three of the companies saw their revenues increase, and yet their leaders' rewards were reduced. Three saw their stock rise or maintain its value, and yet they took home fewer riches.

This chart shows how those bosses' total compensation changed and compares it to the change in value of the company's stock over the same period and its change in revenues. You can see that there is no obvious relationship between any of the factors:

Certainly, each company faced a different environment this year. Genzyme had a catastrophic failure in one of its factories that prompted the FDA to fast-track approvals of competing drugs. CEO Henri Termeer gave up his bonus as a result. But the company will eventually get back on its feet and revenue only sank 3 percent, yet Termeer's pay was lopped by a quarter. On the other end of the scale is Allergan's David Pyott. He piloted his company to sales growth in a recession -- not bad when your product portfolio is driven by discretionary luxuries such as Botox. And he made his investors rich: the stock was up by more than 50 percent. Yet for some reason, Pyott gets a pay cut.

The picture was similarly dislocated last year, when most CEOs got generous raises even as their stocks plunged.

Of course, there are different ways to value CEO compensation which changes over time as the value of the stock and options which makes up the bulk of their pay changes over time. And certainly, revenues and stock price are only two factors on which a CEO ought to be judged. But as they indicate the overall health of the company and rewards returned to investors, you'd think there would be some relationship between them and CEO compensation. Why do companies employ CEOs if not to make the strategic decisions that lead to increased revenues and higher stock?

Image by Flickr user AMagill, CC. Related: