Former Pfizer Inc. CEO Henry “Hank” McKinnell is a prime example of pay for failure. During his tenure as CEO, Pfizer’s stock dropped nearly 40 percent. During that same period, McKinnell received $60 million in salary and other compensation. In December 2006, McKinnell left the company but not before taking an exit package of more than $200 million, including an $82 million pension.
If you ask McKinnell though, he probably wouldn’t think his compensation was excessive. The Business Roundtable, under its then-Chairman McKinnell, commissioned a report on executive compensation, which stated that the media has been “flooded with multitude of distorted, misleading and oftentimes erroneous statistics to portray U.S. CEOs and board governance in a negative light.”
But when one considers that compensation consultant Frederic W. Cook & Co. Inc. prepared the report, its objectivity becomes questionable. Frederic W. Cook & Co. also is the “independent outside compensation consultant” for Pfizer.
One might think that McKinnell would be a strong supporter of Social Security’s defined benefit structure given his large pension. But under McKinnell, the Business Roundtable also supported groups in favor of Social Security privatization.
Part of McKinnell’s exit package was guaranteed by his employment agreement that he entered into when he became CEO in 2001. However, an executive does not need an employment agreement to be entitled to a large severance payment.
Most of McKinnell’s exit package—his $82 million pension, continued participation in the performance shares plan and deferred compensation—were provided for by the terms for those particular benefit plans. Another benefit not included in McKinnell’s employment agreement, but given to him anyway, is continued health benefits under Pfizer’s retiree medical program.
New Pfizer CEO Jeffrey Kindler does not have an employment agreement, but he does have a change in control severance agreement, which Pfizer estimates will pay out about $25 million, a dramatic decrease from McKinnell’s severance. However, because this amount is more than 2.99 times Kindler’s average earnings over the past five years, the Internal Revenue Service may assess Kindler an excise tax of $7 million. Pfizer has agreed to pay (or gross-up) Kindler’s tax, in addition to the tax the company would have to pay due to exceeding the 2.99 limit.
Investors generally do not support including tax gross-ups as part of an executive’s severance package. Moreover, the AFL-CIO generally supports shareholder approval of golden parachutes that exceed 2.99 times an executive’s base salary and bonus. Institutional Shareholder Services (ISS), a leading proxy advisory service, believes companies should not have to pay taxes incurred on golden parachute payments awarded to executives and tends to support policies that ensure this. ISS also believes companies should not have to pay a CEO’s excise tax gross-ups incurred on golden parachute payments.
The AFL-CIO has asked Pfizer to reconsider these issues, and Pfizer’s management has indicated they will be bringing these matters before Pfizer’s board.
