AFSCME Urges Shareholders to Vote against Executive Compensation at Pfizer (PFE) and Johnson & Johnson (JNJ)

WASHINGTON, April 12, 2011 /PRNewswire-USNewswire/ -- AFSCME is recommending that shareholders of both Pfizer and Johnson & Johnson vote against the executive compensation proposals at the annual meetings of both companies, which take place on April 28, 2011.  

(Logo: http://photos.prnewswire.com/prnh/20110411/DC81183LOGO)

AFSCME has led the charge to get shareholders of U.S. companies the right to vote on executive pay.  Thanks to the Wall Street Reform Act, shareholders now have a voice. "Now shareowners can use Say on Pay at all companies to register their disapproval of CEO pay," said President Gerald W. McEntee, whose 1.6 million members participate in public pension funds with combined assets worth more than $1 trillion. "It's up to investors to use this tool judiciously and send a clear message to boards of directors:  pay needs to be tied to performance."

Johnson & Johnson paid Chairman and CEO William Weldon nearly $29 million in spite of eleven recalls of JNJ drugs at a cost of $900 million.  The company lost $7 billion in market value last year.  JNJ also benchmarks its executive pay above the pay of its peers.

Pfizer's retired CEO Jeffrey Kindler received nearly $25 million, a 60 percent increase over his 2009 compensation. During Kindler's tenure, he received over $72 million in compensation during which time the stock price dropped by more than a third and Pfizer lost approximately $68 billion in market value.

"Pfizer's CEO pay is indefensible," added McEntee. "CEOs should not get massive rewards after shareholder value is destroyed on their watch. This lavish reward for failure is simply madness."

Vote No on Johnson & Johnson (JNJ) MSOP - 4/28/11 AGM Item 3

AFSCME urges shareowners to vote AGAINST management Say on Pay proposal at Johnson & Johnson (JNJ) for misalignment between executive pay and performance.  JNJ's poor pay practices have resulted in excessive pay not tied to performance.

1. Pay for Performance disconnect – Despite underperforming its peers over 1- and 3-year Total Shareholder Return (TSR) time frames, JNJ continues making Chairman and CEO William Weldon one of the highest paid CEOs making far more than his peers.(1)

2. Excessive pay and flat share performance during William Weldon's tenure. Weldon has been paid $194M in reported compensation during his nine years as CEO while shares of JNJ have dropped 6% over the same time. As can be seen in the table, Weldon's pay has tripled during his tenure despite sideways share performance over the same period of time.

3. Peer benchmarking compensation above the median – JNJ benchmarks total compensation from 50 to 75th percentile of peer group.(6) This all but guarantees pay will be higher than its peers, but fails to guarantee performance will exceed peers.(7)

4. Increased guaranteed pay– For 2010, Chairman and CEO William Weldon had a base salary of $1,851,154, far above the $1M tax deductible limit. And despite poor performance and recalls, Weldon received a 3% raise for 2011, when he is scheduled to receive $1,915,800. (8)

5. Overpaying for poor performance – JNJ notes that it ranks among the highest in revenue, net income and market cap among its self-selected Executive Peer Group comprised of 18 companies.(9) The table below reviews JNJ's 2010 compensation and TSR for 1-, 3- and 5-year time periods against its peers.(10) JNJ ranks second in total pay, but ranked 12th for 5-year TSR, 5th for 3-year and 14th for 1-year.

6. Crediting Weldon for getting JNJ out of predicaments he led it into - The Board stated that it "believes that Mr. Weldon generally met expectations during 2010, a year with many successes and very visible challenges." The Board also acknowledged that "the Company's long-standing reputation was challenged and revenue was impacted by a series of operational, quality and compliance issues, most notably at McNeil Consumer Healthcare." But despite these reputational challenges, the Board found "Mr. Weldon was instrumental in the Company's response to these issues, including the implementation of a comprehensive remediation plan at McNeil and a new operating model for supply chain, quality, and compliance spanning the enterprise."(14) The Board is crediting Weldon for leading the company out of trouble that happened under his watch. There is a disconnect between giving Weldon the credit for good news while assigning no blame for bad news.

What Others Are Saying

1. Compensation disconnect with bad news - "After a year in which Johnson & Johnson's product quality control was deemed such a shambles that the U.S. government will oversee some plants, the board had praise for Chief Executive William Weldon and awarded him almost $29 million in overall compensation.

The once golden reputation of the diversified healthcare giant was severely tarnished in 2010 by seemingly endless recalls of high profile consumer products as well as recalls of medical devices and products from other units.

U.S. consumer product sales fell by more than 19 percent in 2010 as recalls cost the company $900 million in sales, and the company's 2011 forecast for earnings growth of only 1 to 3 percent fell shy of Wall Street projections.

J&J has lost about $18.5 billion in market value since the end of 2009, its share price declining $6.75 through Wednesday's close.

Weldon's compensation was trimmed 7 percent, but in what appears to be a disconnect with a steady stream of bad news."(15)

2. Pay should be cut in half - "Does paying a guy $23.2 million express any sense of concern about what has happened at that company?" remarked Erik Gordon, an analyst and professor at University of Michigan's Ross School of Business. "The board has shown what they're willing to do: nothing." Gordon, who has stated that Weldon should retire due to the recent recalls, said the board should have cut the CEO's compensation in half.(16)

3. Nominee for 2010's Worst CEO - "Cramer said shares of Johnson & Johnson have dropped 6% since William Weldon became CEO in April 2002. Over that same time period, he added, the S&P 500 declined by 3%. 'I think Weldon would be right at home on the Wall of Shame, having squandered a good franchise with manufacturing problems no less,' argued the Mad Money host."(17)

4. Heads he wins, tails shareholders lose - "Any reasonable person looking at Weldon's compensation in detail will come away scratching their heads, wondering why someone who delivered one of J&J's worst ever annual performances could possibly be worth a staggering $28.7 million. Here's the context:

• The company experienced 11 drug recalls in 2010 (19 in total since the Tylenol crisis began).
• The recalls cost J&J $900 million.
• Sales were slightly down at $61.6 billion.
• JNJ shares sunk from $64.21 to $61.85 during a year in which the S&P 500 rose 13 percent.
• The company's McNeil Consumer Healthcare unit was such a shambles the FDA no longer trusts it to monitor itself.

...[i]n comparison with previous years, when the company performs well Weldon is rewarded for the success, but when the company performs poorly he's rewarded for 'deal[ing] with the issues.' Heads he wins, tails shareholders lose!"(18)

Pfizer - Vote No MSOP and for One Year SOP - 4/28/11 AGM

AFSCME urges shareowners to vote AGAINST management Say on Pay proposal at Pfizer (Item 3) for misalignment between executive pay and performance.  Pfizer’s poor pay practices have resulted in pay for failure through a golden goodbye to retired CEO Jeffrey Kindler and a golden hello to its new CEO Ian Read. Additionally, we urge shareowners to vote FOR “One Year” for the frequency of future advisory votes executive compensation (Item 4).

I. Pay for Performance Issues

A. Pay for Failure - Pfizer’s board has paid for failure twice now in the last five years. First former Chairman and CEO Hank McKinnell walked away with a reported $200M (19) when he was fired in 2005. Now former Chairman and CEO Kindler is walking away with 2010 compensation that is a $10M raise over what he was paid for 2009, despite Pfizer’s underperformance. For 2010, despite resigning, Kindler still received a $3.25M bonus.(20)

B. Pay for Performance Disconnect - Kindler received over $72M in reported compensation for 4.5 years of service during which time the stock price dropped by more than a third. As the table shows, Kindler’s yearly pay increases did not track Pfizer’s yearly stock price decreases.  

And despite underperforming its peers over one- and three-year time frames, Pfizer paid Kindler over $53M the same three-year time period, including a 60 percent increase in total compensation for 2010. (24)

C. Golden Hello to new CEO Ian Read. Read was named President and CEO on December 5, 2010 for a year in which he was CEO for a month. Read’s total compensation rose from $9.4M to $17.4M. Approximately $11M of this was the result of an increase in pension and deferred compensation largely based on a policy that offers boosted pension benefits for those whose age and years of service at Pfizer equal 90. (26)

II. Problematic Pay Practices

1. Performance payouts for below median performance – Performance shares are paid out even when Pfizer underperforms two-thirds of its peers. In 2010, this system of below median payout resulted in awards of $535,834 for Kindler and $226,252 for Read for when Pfizer’s TSR ranked 7th out of nine companies for the 2008-2010 Performance Period.(27)  Payout for below median performance subverts pay for performance and rewards below average results.

2. Increased guaranteed pay– For 2010, former Chairman and CEO Jeffrey Kindler had a base salary of $1.8M, and received $1,620,455 in salary, far above the $1M tax deductible limit. New CEO Ian Read received $1,199,000 in salary for 2010. And for 2011, Read’s salary has been increased to $1.7M, once again far above the $1M tax deductible limit and a more than 40% increase from his 2010 salary.(28)

3. Annual Cash Incentive Awards based on discretionary judgment – “Decisions about individual compensation elements and total compensation are ultimately made by the Committee, using its judgment, focusing primarily on each Named Executive Officer’s performance against his or her individual financial and strategic objectives, as well as Pfizer’s overall performance. The Committee also considers a variety of qualitative factors, including the business environment in which the results were achieved. Therefore, the Committee determines each Named Executive Officer’s compensation based on multiple factors, including the competitive market, individual performance, internal equity and affordability.”(29) Discretionary bonuses allow compensation to be paid when actual performance targets are missed and a compensation committee decides to give award bonuses anyway.

The AFSCME Plan is an institutional shareholder activist with more than $850 million in assets. AFSCME’s 1.6 million members provide the vital services that make America happen. With members in hundreds of different occupations — from nurses to corrections officers, child care providers to sanitation workers — AFSCME advocates for fairness in the workplace, excellence in public services and prosperity and opportunity for all working families.

(1) Excessive pay has been linked to company underperformance. One study finds that firms pay their CEOs in the top ten percent of pay earn negative abnormal returns over the next five years of approximately -9% (Cooper, Michael J., Gulen, Huseyin and Rau, Raghavendra, The Cross-Section of Stock Returns and Incentive Pay (February 1, 2011)).

(2) TSR figures are based on Morningstar data as of 12/31/10.

(3) Johnson & Johnson 2011 Proxy, p. 46.

(4) Total pay taken from JNJ Proxy Statements: 2003, pgs. 18-19; 2004, pgs. 21-22; 2005, pgs. 22-24; 2006, pgs. 25-27; 2007, p. 29; 2008, p. 43; 2011, p. 46.

(5) Average closing price of JNJ stock for April, 2002, when Weldon became CEO.

(6) JNJ 2011 proxy, p. 28.

(7) "Compensation Peer Groups at Companies with High Pay," IRRC Institute, June, 2010. (The study identified a subset of S&P 500 companies with high pay that is not aligned with high performance, finding high executive pay companies self-select larger than appropriate peers ­ in terms of market capitalization and revenue ­ for compensation benchmarking purposes. These companies also compensate chief executive officers (CEO) an average of more than double, or 103 percent, above the median of the self-selected peer group.)

(8) 2011 JNJ proxy, p. 44.

(9) 2011 JNJ Proxy, p. 27.

(10) TSR figures are based on Morningstar data as of 12/31/10.

(11) All pay figures taken from company 2011 proxy statements except for Merck and Intel.

(12) This is the pay total for 2009, as 2011 proxy with 2010 pay figures was not yet released as of 4/1/11.

(13) 2009 pay figure, as 2011 proxy was not released as of 4/1/11.

(14) 2011 Johnson & Johnson Proxy, p. 38.

(15) Bill Berkrot and Ransdell Pierson, "J&J Gives CEO Praise, High Pay Despite Low Year," Reuters, March 16, 2011.

(16) "J&J CEO Compensation Stung by Recalls," AP, 3/16/11.

(17) "Who Is the Worst CEO in 2010," CNBC, 8/4/10.

(18) Jim Edwards, "J&J CEO's Pay Is Rigged to Reward Him Even When He Fails," BNET, 3/16/11.

(19) Mike Huckman, “Pfizer’s McKinnell – the $200 Million Dollar Man,” CNBC, 12/22/06.

(20) Excessive pay has been linked to company underperformance. One study finds that firms pay their CEOs in the top ten percent of pay earn negative abnormal returns over the next five years of approximately -9% (Cooper, Michael J., Gulen, Huseyin and Rau, Raghavendra, The Cross-Section of Stock Returns and Incentive Pay (February 1, 2011)).

(21) Total pay taken from PFE Proxy Statements: 2007, p. 59; 2008, p. 55; 2009, p. 63; 2010, p. 65; 2011, p. 63.

(22) Pfizer’s closing stock price on 7/31/06, the day Kindler was named CEO.

(23) Pfizer’s closing stock price on 12/4/10, the day Kindler resigned.

(24) Tom Murphy, "Former Pfizer CEO Saw 2010 Compensation Swell," AP, March 22, 2011.

(25) TSR figures are based on Morningstar data as of 12/31/10.

(26) 2011 Pfizer proxy, p. 63.

(27) 2011 Pfizer proxy, pgs. 53-54.

(28) 2011 Pfizer prxy, pgs. 45, 62.

(29) 2011 Pfizer proxy, p. 48.

SOURCE American Federation of State, County and Municipal Employees

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