The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Here’s an excerpt from this Forbes article:

And there’s some truth to all of those things. But the ultimate culprit here is something for which until recently Valeant was lauded far and wide as a role model for other corporations: its executive compensation plan.

Valeant’s plan was praised for years by everyone from activist hedge fund billionaire Bill Ackman to top executive-pay experts at the University of Chicago and Harvard Law School for its unique incentive model. Pearson and other top executives would receive relatively little in the way of cash compensation but massive amounts of incentive stock and options. And that stock would be tied up for extremely long periods (an extended vesting period–then for Pearson another three years). In short, Pearson and his team would be paid handsomely if they could create long-term value, in lockstep with their shareholders. There would be no easy cash-out.

On paper it worked brilliantly, and Pearson went on a tear that created tens of billions in value and continued for several years. Ackman, who invested $4 billion in the company, compared him to Warren Buffett. But the plan also put an inordinate amount of pressure on Pearson to sustain the growth, and the stock price, by whatever means he could. Valeant was built to become a pressure cooker. And eventually the lid exploded, taking the chef out with it.