More Unconnected Dots: Pay for Malfeasance, Again?

The bandwagon to subject physicians to "pay for performance" (P4P) just keeps gathering momentum. (See most recent post here.) This movement is supposedly derived from a broader movement for pay for performance in business management.

Yet it seems in many companies, including some in the health care industry, the standards by which performance is measured for top executives are ridiculously low, so low that one pundit wanted the slogan changed to "pay for pulse." His most prominent example of a company that paid for pulse was Pfizer Inc, known as the world's largest drug company.

Last year, we posted about one example in which a subsidiary of the pharmaceutical company Schering-Plough pled guilty to a federal count of conspiracy, yet its CEO never seemed to suffer any sort of financial penalty for the actions leading to this plea. We called it an example of pay for malfeasance.

Now we have a new example. Last week we posted about how subsidiaries of Pfizer Inc, still known as the world's largest pharmaceutical company, pled guilty to one federal offense, entered into a deferred prosecution agreement for another, and agreed to pay an approximately $35 million fine for both.

Fortuituosly, Pfizer Inc has its annual meeting this month, so its 2006 annual proxy statement was recently published. From this statement one can determine (with a certain degree of difficulty) how well the company's top executives are paid, and how well its board members, who have fiduciary responsibility for the company's actions and performance, get paid.

Neither group seemed to have suffered in 2006. Board members who served for all of 2006 received from over $70,000 to more than $100,000 in fees (excluding the chair), and all earned stock awards worth at least $124,300 (see page 21). Thus all board members got more than $197,000.

The 2005 proxy statement revealed that board members who served for the full year got from $63,000 to $86,000 (excluding the chair), and all earned stock awards worth $122,084. Thus their compensation increased modestly from 2005 to 2006.

In 2006, the total compensation of the new Pfizer Inc CEO, Jeffrey B Kindler, was $9,799,234; of David L Shedlarz, Vice Chairman, was $10,275, 470; of John L LaMattina, Senior Vice President, and President, Pfizer Global Research and Development, was $7,019,667; of Ian C Read, Senior Vice President, and President, Worldwide Pharmaceutical Operations, was $4,779, 299; and of Alan G Levine, Senior Vice President and Chief Financial Officer, was $4,766, 299.

Note also that former CEO Henry McKinnell received $19,418,466 in 2006; and outgoing Vice Chairman K Katen received a whopping $28,995,078.

How publicly traded companies must reveal the compensation of top executives changed in 2006, so it would be hard to compared these figures to last year's results.

I suppose it's possible that the Pfizer leadership will be penalized financially in 2007.

But it is hard to believe that the guilty plea and the substance of the deferred prosecution agreement executed in March, 2007 were not anticipated last year. And it is harder still to see how a company whose subsidiaries just pled guilty to "willfully" offering "inflated payments on a contract to induce another party to recommend purchasing or ordering ... [its] drug products" in violation of federal law, and in a deferred prosecution agreement admitted to promoting human growth hormone for unapproved uses, and admitted that this "conduct was unlawful," could justify having paid current top executives total compensation from over $4.5 million to over $10 million.

Maybe the shareholders, who it seems will ultimately pay for the $35 million fine, should ask the board members, who are supposed to have fiduciary duty to protect the stockholders' financial interests, why their hired executives do not seem to be suffering any penalty for presiding over a company whose subsidiaries admitted to committing federal crimes.

Meanwhile, rather than pay for performance, it appears that the reigning compensation philosophy was again pay for malfeasance.

WHAT YOU CAN DO? - If you own stock in a public for-profit health care company that has recently admitted to misconduct or has had to make a huge financial settlement in response to civil litigation (see the Health Care Renewal archives for examples), demand changes in your company's governance such that negative incentives apply to the leaders responsible for these problems.

If you are a physician, demand that P4P must apply to the whole health care system if it is to apply to physicians.

And maybe everyone should write their congresspeople demanding better regulation of the leaders of health care organizations, at least sufficient to hold people responsible for their worst decisions.