Despite Recalls, Legal Settlements, Guilty Plea, Johonson & Johnson Board Paid CEO $29 Million, Says He "Met Expectations"

For our latest story about the tremendous disconnect between the pay and performance of leaders of health care organizations, we turn to Reuters. 

Astronomical Pay

Despite having a very bad 2010, Johnson and Johnson continued to reward its CEO royally:

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 by seemingly endless recalls of widely used consumer products as well as recalls of medical devices and products from other units in 2010.

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

Weldon's compensation was trimmed 7 percent, but in what appears to be a disconnect with the reality of its situation, J&J's (JNJ.N) board, in a year-end regulatory filing, said his performance 'generally met expectations' despite a year in which 'operational sales declined and fell below the goals for the year.'

'The board believes that Mr Weldon provided strong leadership during a very demanding year and has worked to resolve multiple challenging issues and position the company for future growth,' it said in the filing.

The rash of consumer medicine recalls in 2009 and 2010 were largely responsible for the first back-to-back years of company sales declines since World War Two.

Last week, U.S. health regulators filed a consent decree against J&J's McNeil consumer unit that will put some of its manufacturing plants under government supervision for at least five years.
The McNeil unit has recalled more than 300 million bottles and packages of Tylenol, Motrin, Rolaids, Benadryl and other products in the past year over faulty manufacturing and quality control problems.
The recalls cost the company $900 million in sales last year and hurt earnings, and Weldon was called to testify before Congress about problems that left pharmacy and supermarket shelves without Children's Tylenol.

But Weldon's 2010 compensation fell just 7 percent to $28.7 million from the $30.8 million he received in 2009. His performance bonus for 2010 was down 45 percent to $1.98 million.

The Wall Street Journal article on Weldon's pay also mentioned that Weldon also received " perquisites and other benefits in 2010 [which] included personal use of company aircraft, valued at $89,796; a car and driver for commuting and other personal transportation valued at $29,635; and a nominal amount of home security system monitoring fees."

The 2011 Johnson and Johnson proxy statement also noted that the other four of the five most highly paid Johnson and Johnson executives received compensation valued from $5,632,285 to $8,851,965 in 2010. In particular, Ms Colleen A Goggins, who retired under fire as head of the embattled Johnson and Johnson consumer group, walked away with $7,738,614 in 2010.

Other Aspects of Bad Company Performance

The WSJ Health Blog has been keeping an eye on the running total of Johnson and Johnson recalls. On 9 March, 2011, the list included 18 separate recalls of various different drugs and devices since July, 2009, from over-the-counter cold medications to sutures and hip replacements.

While suffering such a massive breakdown of the ability to perform the company's most basic function, to supply pure, unadulterated medicines and well-made devices, the company has also suffered from ethical lapses which were not listed in the Reuters article. In 2010, these included a jury verdict that the company had committed marketing fraud in its promotion of the atypical anti-psychotic drug Respirdal (see post here), and a guilty plea to a misdemeanor for and civil settlement of charges of "misbranding" Topamax by Johnson and Johnson subsidiary Ortho-McNeil-Janssen Pharmaceuticals (see post here).

Of course, we once speculated that the Johnson and Johnson CEO commanded such astronomical pay in part based on his ability to influence US government health policy in favor of his and his company's interests (see this post).

Who Made Up the Board Who Was Responsible?

Responsible for the astronomical amounts paid to Mr Weldon despite his company's ongoing inability to make pure, unadulterated medicines, and to other executives who presided over the company's recalls, guilty plea, and legal settlements was the company's board of directors.  Its members are listed below.  For explanation of the color coding, see the explanation below:

• Mary Sue Coleman - President, University of Michigan.
• James G Cullen - Retired Chairman and CEO, Bell Atlantic Corp
• Ian E L Davis - Senior Advisor, Apax Partners; Former Chairman and Worldwide Managing Director, McKinsey & Company, non-executive director, BP plc
• Michael M E Johns - Chancellor, Emory University, Past Chair of the Council of Teaching Hospitals, member of the editorial board, JAMA, chair of the publication committee, Academic Medicine
• Susan L Lindquist - Member and Former Director, Whitehead Institute for Biomedical Research, Co-Founder of FoldRx Pharmaceuticals, Inc, a subsidiary of Pfizer Inc.
• Anne M Mulcahy - Former Chairman and CEO, Xerox Corp, director of the Washington Post Company, previously director of Citigroup Inc, and Federal National Association (Fannie Mae)
• Leo F Mullin - Retired Chairman and CEO, Delta Airlines, director of Education Management Corporation
• William D Perez -Senior Advisor, Geenhill & Co, Inc, Trustee of Cornell University and Northwestern Hospital
• Charles Prince - Senior Counselor, Albright Capital Management LLC, Retired Chairman and CEO, Citigroup
• David Satcher - Director, Center of Excellent on Health Disparities, Director, Satcher Health Leadership Institute and Poussaint-Satcher-Crosby Chair in Mental Health, Morehouse School of Medicine, and trustee of the Kaiser Family Foundation

Of Johnson and Johnson's 10 directors (excluding its CEO), four have leadership positions at teaching hospitals, academic medical centers, medical schools or their parent universities.  Of these, two also had leadership positions at other influential non-profit health care organizations, including medical journals, a teaching hospital association, and a charitable foundation.

One had a management position at a competing pharmaceutical company.

Four had leadership positions in  financial services corporations, including some that were implicated in the global financial collapse, and/or required massive federal bail-outs to avoid collapse.

Three had had leadership positions in other organizations now under fire , that is, McKinsey, for the role of one of its former executives in an alleged insider trading scandal (e.g., latest coverage in the NY Times); several for-profit higher education companies caught up in allegations of luring students destined to fail in order to collect tuition funded by government loans;  and BP, under investigation for its role in a massive oil spill.

Summary

So here we have the latest striking case that indicates the confluence of forces that can lead to health care dysfunction.  Not only has the compensation given to health care leaders got so large that it is per se a cause of increased health spending, but also, and more importantly, such compensation often provides perverse incentives that perpetuate mismanagement, raising costs and lowering quality.  This situation appears to be enabled by governance by individuals who are often fellow members of the CEOs' club, and hence who may feel more sympathy with the executives they are supposed to supervise than the stockholders whose financial interests they are supposed to protect, or the public whom the companies' products and services are supposed to benefit.  Moreover, these individuals often have conflicts of interest which may mitigate against objective scrutiny of the executives they are supposed to oversee.  Finally, these individuals often may come from corporate cultures which do not espouse the values that we in health care are supposed to uphold.  (See this post and its links for other examples of the sorts of people who are supposed to provide stewardship to health care organizations.)

So to repeat once more-

I strongly believe that there needs to be much more investigation, academic, journalistic, and perhaps legal, of the identity, nature, and culture of the leaders of health care, and their relationships. A few bloggers cannot do it all. Obviously, the anechoic effect mitigates against medical and health care academics looking into their own leaders. However, failing to understand who is leading our march to the brink of health care failure ought not to be something such academics would want on their conscience.

Finally, and obviously, health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research.

If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.

ADDENDUM (17 March, 2011) - Also see comments on by Jim Edwards on the Placebo Effect blog: "heads he wins, tails shareholders lose," as do patients and doctors.