Former McKinsey Director acquires 1.3Billion Net Worth in 6 years


Update (May 3 2014): I posted this some time last year and thought it would be worth updating in light of the proxy statement that was just released before the annual shareholders meeting next week. The gist of the update is that Mike Pearson's stake in Valeant is now 10.6 million shares (or 3.2% of the company) which is worth a whopping 1.3B. Looks like this guy will be worth upwards of 5B by the time he moves on from the CEO position, which is mind boggling as far as CEO comp goes. That being said, it's hard to deny that he deserves it. The share price has gone from around 10 bucks to around 150 in just six years.

Anyway, hopefully that motivates some of you monkeys to attempt turning a failing company around.

/Update

J. Michael Pearson left McKinsey in 2008 to take the CEO position at Valeant Pharmaceutical. The terms were that he would need to buy $5MM worth of stock (it was in the gutter those days), and he would be paid 120,000 shares a year that would vest every three years if he managed a 15% per year shareholder return. If he could do 30% per year, it would 240,000 shares. 45% would mean 360,000 shares, and 60% would mean 480,000 shares.

Suffice it to say that he beat 60% per year since then. Fast forward to now and he has acquired 6.5 million shares that are fully vested, and he has another 2 million shares that will vest soon.

That means that his 8.5 million shares (at 90$ per share) is worth a metric fuckton of money.

So my question is: who the hell approved this compensation package? It doesn't sound like shareholders are complaining because of the blockbuster returns he's delivered (something like 800% over 5 years), but still. You would think over 100 million a year is excessive regardless of his performance..

What are your thoughts?

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Comments (39)

Jun 28, 2013 - 3:06pm

Anyone who gets that kind of performance deserves it. I'm not that familiar with Valeant but from my minimal understanding the company gets a significant valuation boost b/c of quality of mgmt. The performance of the stock has largely been due to their absolutely fantastic use of cash.

And also note, under the terms you described he basically gets paid nothing if it fails or even if it just does ok (assuming these were the only terms... not that I support this metric only). What's wrong with putting it all on the line? If anything that should be commended. I'm assuming 0 shares if below 15% per year? Under that scenario the majority of people wouldn't be getting paid right now so this is truly balls to the wall.

Jun 28, 2013 - 3:08pm

Yeah it's 0 shares if below 15% per year.

There's also a base salary of 1.75M, and option awards that have their own really high hurdle rates.

-MBP
Jun 29, 2013 - 1:08pm

Why is it excessive if everyone is happy?

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Jun 29, 2013 - 2:23pm

I see no problems with this comp package. Has a CEO level base salary + bonus of vesting shares ranging from 0-480K based on performance.

The guy delivered and now he can go and buy his own country for all I care.

"If you want to succeed in this life, you need to understand that duty comes before rights and that responsibility precedes opportunity."
Jun 29, 2013 - 1:52pm

He basically acquired 60+ companies in his time at Valeant -- to mention a few billion dollar ones: Biovail, Medicis, Bausch & Lomb. Revenues have grown from a few hundred million to $3+ bn. What he does especially well is acquire these companies at competitive valuations (he does all the negotiations himself, rather than through bankers) and realizes sizable operating synergies (i.e. he cost cuts).

He's changed the model of spec pharma companies in that he "bets on management (acquisitions), not R&D." Valeant spent only 2% of revenues on R&D last year (around 5-10% for most comparable companies).

Jun 29, 2013 - 4:16pm

The next generation of CEOs definitely have a high bar to meet

"Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game." - Donald Trump
Jun 29, 2013 - 5:27pm

manbearpig:

Yeah it's 0 shares if below 15% per year.

There's also a base salary of 1.75M, and option awards that have their own really high hurdle rates.

Did he have to acquire $5mm worth of stocks with his own money or was a portion of his $1.75m annual salary set aside to acquire those shares? I think the latter is more likely. Otherwise if the company failed he would be personally in the hole for $5mm (and that is assuming he had that kind of cash sitting around in the first place before taking this job).

In any case, the $500mm net worth is paper wealth. If the company goes under the bulk of his net worth would evaporate. This compensation structure makes sense, compared to the golden parachutes terms that so many other CEOs are getting.

Too late for second-guessing Too late to go back to sleep.
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Jun 29, 2013 - 10:26pm

Had to be his own money. The actual requirement was 3MM but he bought 5MM worth of stock because he thought it was cheap.

-MBP
Jun 29, 2013 - 7:16pm

iamfromcanada:

He basically acquired 60+ companies in his time at Valeant -- to mention a few billion dollar ones: Biovail, Medicis, Bausch & Lomb. Revenues have grown from a few hundred million to $3+ bn. What he does especially well is acquire these companies at competitive valuations (he does all the negotiations himself, rather than through bankers) and realizes sizable operating synergies (i.e. he cost cuts).

He's changed the model of spec pharma companies in that he "bets on management (acquisitions), not R&D." Valeant spent only 2% of revenues on R&D last year (around 5-10% for most comparable companies).

This strategy coincides with what I read in the book The Outsiders, especially the strategy used by John Malone, also former McKinsey. The main similarities being great capital allocation led by the CEO and CEO led negotiations.

Jun 29, 2013 - 9:38pm

This is a very cool story. Too bad the leftist communist traitor media won't make a fuss out of it.

alpha currency trader wanna-be
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Best Response
Jun 30, 2013 - 2:01pm

brandon st randy:

manbearpig:

Yeah it's 0 shares if below 15% per year.

There's also a base salary of 1.75M, and option awards that have their own really high hurdle rates.

Did he have to acquire $5mm worth of stocks with his own money or was a portion of his $1.75m annual salary set aside to acquire those shares? I think the latter is more likely. Otherwise if the company failed he would be personally in the hole for $5mm (and that is assuming he had that kind of cash sitting around in the first place before taking this job).

In any case, the $500mm net worth is paper wealth. If the company goes under the bulk of his net worth would evaporate. This compensation structure makes sense, compared to the golden parachutes terms that so many other CEOs are getting.

Yeah, $5 million is a pretty big chunk for someone who spent 25 years at McKinsey. Actually, wait, it's not.

One of those lights, slightly brighter than the rest, will be my wingtip passing over.
  • 3
Jun 30, 2013 - 6:18pm

2x2Matrix:

brandon st randy:
manbearpig:

Yeah it's 0 shares if below 15% per year.

There's also a base salary of 1.75M, and option awards that have their own really high hurdle rates.

Did he have to acquire $5mm worth of stocks with his own money or was a portion of his $1.75m annual salary set aside to acquire those shares? I think the latter is more likely. Otherwise if the company failed he would be personally in the hole for $5mm (and that is assuming he had that kind of cash sitting around in the first place before taking this job).

In any case, the $500mm net worth is paper wealth. If the company goes under the bulk of his net worth would evaporate. This compensation structure makes sense, compared to the golden parachutes terms that so many other CEOs are getting.

Yeah, $5 million is a pretty big chunk for someone who spent 25 years at McKinsey. Actually, wait, it's not.

There is a difference between net worth and cash on hand. I doubt Pearson had $5mm plus sitting idle in his check account when he took the Valeant job. He probably had to liquify a good chunk of his other investments to buy in.

It looks like Pearson really took a chance with this company and put his own net worth on the line by acquiring $5mm worth of shares with his own money. That his shares are now worth $500mm plus (and counting) is justified compensation for the investment decision he made and the risk he took.

Too late for second-guessing Too late to go back to sleep.
  • 3
Jun 30, 2013 - 9:19pm

Rewarding the guy for managing a company well through a series of well-executed acquisitions and putting his own money on the line? Absolutely.

Here's a guy who actually has some skin in the game and executes. Hats off to Pearson for re-working the model into the Danaher/ITW of Pharma.

Jul 1, 2013 - 2:23am

this guy put his own money on the line to turn around a sinking ship, I don't know any other highly compensated CEO that did that. I think he's compensated accordingly and it's not excessive at all. I only consider excessive CEO compensation on those that added zero value to their firms or drove it to the ground and still got paid.

Jul 1, 2013 - 1:36pm

I suppose I find the notion of someone becoming a billionaire (quite likely for Pearson) by running a company they didn't start a bit unsettling. With that said, I do agree that if anyone deserves it it's this guy. He's almost single handedly created over 20B of shareholder value in the last 5 years so giving him a small percentage of that is not outrageous.

-MBP
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Jul 1, 2013 - 10:11pm

manbearpig:

I suppose I find the notion of someone becoming a billionaire (quite likely for Pearson) by running a company they didn't start a bit unsettling. With that said, I do agree that if anyone deserves it it's this guy. He's almost single handedly created over 20B of shareholder value in the last 5 years so giving him a small percentage of that is not outrageous.

If he created 20B in shareholder value in 5 years he definitely deserves some of it, a lot of it.

In my observation, if the company had been run well and was easily grown to this level then they: 1. wouldn't have fired the previous CEO and hired Pearson and 2. they would've already gotten to this level before Pearson.

Jul 1, 2013 - 11:28am

brandon st randy:
Did he have to acquire $5mm worth of stocks with his own money

Looks like it

or was a portion of his $1.75m annual salary set aside to acquire those shares?

Generally doesn't make much sense to finance someone's equity... I've seen it done in the car business (I used to run a car dealership) and it never ended well.

I think the latter is more likely.

You should have read more closely, then:

From the WSJ article:
He ended up buying $5 million of shares, at an average price of $16.65. "I thought it was a great deal," he says.

Mr. Pearson and fellow directors then adopted the same approach for new senior executives, requiring them to buy big chunks of company stock. The requirement restricted Valeant's management talent pool to affluent risk takers.

brandon st randy:
Otherwise if the company failed he would be personally in the hole for $5mm

That's kind of the point

(and that is assuming he had that kind of cash sitting around in the first place before taking this job)

The guy did 20+ years at McKinsey and was global head of a practice area--I'd be pretty surprised if he didn't.

Jul 1, 2013 - 3:07pm

manbearpig:

I suppose I find the notion of someone becoming a billionaire (quite likely for Pearson) by running a company they didn't start a bit unsettling.

That is basically the business model of the entire VC/PE industry; by investing in companies started by others then exit at much higher multiples when the company is sold/goes public.

The Pearson-Valeant case is interesting because the company didn't so much "hire" him as their new CEO(an employee) as bringing him onboard as a new investor, through his $5mm cash investment as well as his sweat equity contribution, realized in the form of incremental stock grants upon hitting hurdle rates. Sure he also gets paid an annual base salary but that can be considered as dividends deriving from Pearson's equity stakes.

Looking at it this, it almost like Pearson is an one person PE firm that bought out Valeant Pharma, turn it around then cash in on the capital gains from his investment.

Too late for second-guessing Too late to go back to sleep.
  • 3
Jul 1, 2013 - 8:23pm

This is an interesting explanation, but a little difficult to digest. I have absolutely no issue with the PE/VC model, in which investors buy a stake in a company, influence its direction and cash out big when they decide to sell their stake. But in the case of Pearson, he's more an employee than an investor. After all, his 5M investment only got him around 300K shares. The remainder of the 8.2M shares were given to him as a result of his employment contract. I think your explanation would be much more valid if the majority of his shares were bought with his own money, and far fewer were granted to him as a result of his work there.

-MBP
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Jul 2, 2013 - 1:16pm

As a tangent, what do you guys think about Tim Cook's compensation package? He was given a whopping 1 million RSUs as a signing bonus for taking on the CEO role. I think it's completely outrageous...

-MBP
Jul 2, 2013 - 4:24pm

manbearpig:

I suppose I find the notion of someone becoming a billionaire (quite likely for Pearson) by running a company they didn't start a bit unsettling. With that said, I do agree that if anyone deserves it it's this guy. He's almost single handedly created over 20B of shareholder value in the last 5 years so giving him a small percentage of that is not outrageous.

Why? Just because you don't "start" a company doesn't mean you don't mold it into your own. The Company was in the shitter from the sounds of it. The guy came in and restructured the way the Company was going to run, so SHAREHOLDERS made out.

Guy deserves more than what he got.

Jul 3, 2013 - 12:02pm

I believe at this point Tim Cook have proven he is over paid. Apple needs an innovator to lead, not an operator. Tim might be better at a tech firm that produces highly commoditized goods like cheap hard drives.

Tim is not even able to maintain shareholder value, let alone create them. His salary and that 1 million RSU was way over the top and should be clawed back with Apple's lackluster performance.

Jul 5, 2013 - 4:38pm

LR1400:

manbearpig:

I suppose I find the notion of someone becoming a billionaire (quite likely for Pearson) by running a company they didn't start a bit unsettling. With that said, I do agree that if anyone deserves it it's this guy. He's almost single handedly created over 20B of shareholder value in the last 5 years so giving him a small percentage of that is not outrageous.

If he created 20B in shareholder value in 5 years he definitely deserves some of it, a lot of it.

In my observation, if the company had been run well and was easily grown to this level then they: 1. wouldn't have fired the previous CEO and hired Pearson and 2. they would've already gotten to this level before Pearson.

Good point, but you cannot exclude macro factors (i.e. luck) that have significantly helped Valeant's stock performance. Things such as aging populations in the developed world, ObamaCare, and lots of M&A activity in healthcare are pretty significant tailwinds for valuations in the entire healthcare space. Not to mention that the Fed's monetary policy incentivizes anyone with a pulse to buy stocks currently.

Also, you can juice the stock just by making the company bigger. You don't even need multiple expansion. For example, a company that trades at 20x EPS can increase its stock 2/3 by taking EPS from $3 to $5.

The problem I have with pay packages like this is that, if things go well, the CEO makes a ton of money for things that are out of his control. If things don't go well and he ends up failing, he still gets paid like a McK partner. This is not risk taking. It's "heads, I win. Tails, shareholders lose."

On Apple, it's tough for me to believe that Cook is overpaid at the moment. Up until the last quarter, Apple was posting astonishing numbers in the midst of a pretty significant global recession. Apple's strategy has always been profit margin over market share. As a result, the company has refrained from reducing prices in order to compete with players like Samsung who are ok with pricing products at cost. Of course, this means that they must continue to be the first mover in other product categories in order to succeed. If we're sitting here 1.5-2 years from now wondering when/if Apple is going to release a cheap iPhone for EMs, an iWatch, a unique service, or something else, then the criticism of Cook is valid. Until then, I think you have to view Apple as an undervalued stock. At the current valuation, people are forecasting negative growth for the next couple of years.

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