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Essay Subject: Contrasts executive compensation at two pharmaceutical companies.... More...

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Paper Abstract: Contrasts executive compensation at two pharmaceutical companies. Pfizer, Inc. and Bristol-Myers Squibb. Highlights differences at the two companies. Suggests ways for Pfizer, Inc. to minimize conflict between stockholders and corporate executives, and maximize shareholder wealth. Background. Pfizer's multi-level structure executive compensation plan. Incentive payments. Criteria. Paper Introduction: EXECUTIVE COMPENSATION POLICY REPORT Introduction This research contrasts the executive compensation policy at Pfizer, Inc., a major pharmaceutical manufacturer, with that of one of the company’s major competitors, Bristol-Myers Squibb. The focus of the contrast analysis is to highlight the differences between the executive compensation policies at the two companies. The identification of the differences allows the development of suggested ways for Pfizer, Inc. to minimize agency conflict and maximize shareholder wealth. Background The Economist noted that executive compensation is a major issue in the general concern in the United States over the lack of confidence in corporate leadership. Many economists advocate allowing the ma Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. To obtain the information, stockholders and investors mustobtain the proxy statement, as the company does not include the data in theannual report or the Form 1 -K. A review of the criteria presented in thisresearch indicates that the generality of the policy allows the Board ofDirectors to award executive compensation as it sees fit. The identification of thedifferences allows the development of suggested ways for Pfizer, Inc. Pfizer states that the company does not rely on any specific formulafor determining the value of executive bonuses and long-term stock optionsawards. Business Week reported that a large number of corporate chiefexecutive officers received increased levels of compensation in 2 1 as (1)the economic performance of their companies dropped and (2) the marketvalue of the companies' common equity stock dropped to an even greaterextent ("Getting a Better Handle on Total Compensation", 2 2). (2 2, April 15)). D., & Shrieves, R. New York: Bristol-Myers Squibb.Getting a better handle on total compensation. DEF 14-A [Proxy Report]. The focus of thecontrast analysis is to highlight the differences between the executivecompensation policies at the two companies. The market value of the company's common equitystock plummeted. identifies six executive officers of the company whoqualify for the company's executive compensation plan. Restricted stock awards (value of the company's common stock at the time of the award) . In thecontemporary corporate environment in the United States, there is little ofthe relationship of principal and agent between boards and corporateexecutives. Other annual (tax payments made by the company in relation to company provided transportation and counseling) > Long-term compensation . Performance-benchmarked portfolios: Unlike traditional stock options, benchmarking performance to company- specific risk creates a more accurate incentive and reward mechanism. 11). DEF 14-A [Proxy Report]. Executive compensation policies, thus,should provide incentive plans that related executive compensation levelsto outcomes that provide benefits to the shareholders as a means ofminimizing agency conflicts ("Taken for a Ride; Economics Focus", 2 2). to Similar Policies at Bristol-Myers Squibb Pfizer, Inc. Securities underlying options (number of shares) . E. Background The Economist noted that executive compensation is a major issue inthe general concern in the United States over the lack of confidence incorporate leadership. With respect to long-term incentives, stockoptions awards are based on the creation of incremental stockholder valueand the attainment of long-term financial goals. (2 2, April 5). Like Pfizer, five of theseexecutives are current operating officers, while one is the immediatelyformer CEO. tominimize agency conflict and maximize shareholder wealth. LTIP payouts (amounts earned under the Company's previous Performance-Contingent Share Award Program) > Other compensation (company matching funds for executive contributions to the Pfizer savings plan) In 2 1, the total annual compensation for the five current Pfizerexecutives ranged from a high of $4.3 million to a low of $1.4 million, upfrom a high in 2 of $2.4 million and a low of $1.3 million. The annual compensation components include both salary andbonus. Contrasting Executive Compensation Policies at Pfizer, Inc. At Bristol-Myers Squibb, annual incentive payments for executives aretied to annual pretax operating earnings targets, annual sales growth, andannual cash flow targets. Salary . Rather, the Board considers a number of performance indicators, asfollows: > Leveraging our strategic focus as a health care company by integrating the former Warner-Lambert Company > Improving operating margins > Revenue growth versus industry > Earnings per share growth > Exceeding the merger-related synergy/cost savings targets > Continued optimization of organizational effectiveness and productivity > The breadth of the current product portfolio, and the acceptance of those products in the marketplace, which drove considerable sales growth resulting in the Company's position as the number one pharmaceutical company > The number of promising product candidates under development by the Company Bristol-Myers Squibb (2 2) also includes six executives in thecompany's executive compensation plan. Threeof the more important reasons are (1) the magnitude of stock options, (2)the financial reporting of stock options, and (3) ties in executivecompensation policies between distribution of the options and performanceoutcomes that benefit stockholders. Business Week (3778), 82-83.Harvey, K. Journal of financial Research, 24(4), 495-513.Kwak, M. MIT Sloan Management Review, 43(3), 11-12.Pfizer, Inc. Unfortunately, insuch a situation, stockholders lose their representation, as the boardbecomes more closely aligned with the interests of corporate executivesthan of stockholders. Second, by not reporting stock options as an expense,corporations inflate earnings. The Economist (US), 34- 35. The former CEO realized $25.3 million in 2 1 from theexercise of stock options. (2 2, July 13). Executive compensation structure and corporate governance choices. (2 1, Winter). ReferencesBristol-Myers Squibb. The useof stock options also has been at the heart of recent controversy involvingcorporate financial performance and reporting for several reasons. One tool for providing such incentives that has increased inpopularity is the use of stock options (Harvey & Shrieves, 2 1). Rather, the relationship is more that of a private club or afraternity where all members look out for one another. (2 2, Spring). The long-term executivecompensation structure at Bristol-Myers Squibb is the same conceptually asthat at Pfizer. executive compensation policy report Introduction This research contrasts the executive compensation policy at Pfizer,Inc., a major pharmaceutical manufacturer, with that of one of thecompany's major competitors, Bristol-Myers Squibb. Pfizer's executive compensation plan has amulti-level structure, as follows (Pfizer, 2 2): > Annual compensation . In the case of Pfizer, however,the general decline in stock values appears to be a greater cause of thismismatch than actual business performance. (2 2, March 14). In turn, the inflation of earnings createsan agency problem as corporate executive benefit at the expense ofstockholders. At Bristol-Myers Squibb, profits fell, as revenueincreased marginally, and the market value of the company's common equitystock dropped sharply. One of the problems with the establishment of executive compensationpolicies is the cozy relationship between tope corporate executives andboard members ("Taken for a Ride; Economics Focus", 2 2). Of these sixexecutives, five are current operating officers and one is the immediatelyformer CEO. At Pfizer, profitability increased dramatically, while revenuesincreased only slightly. Mary Kwak(2 2), writing in MIT Sloan Management Review, stated that: "In the bullmarket of the 199 s, options enriched many a mediocre CEO, while theeconomic slump that opened this decade has punished weak and strongperformers alike" (p. First, the magnitude of stock optionvalues in many cases appears excessive in relation to the change instockholder value. In relation to stock options exercised in 2 1, the five currentoperating officers at Pfizer realized values ranging from $2.9 million to$11.4 million. In 2 1, total annual compensation ranged from a high of $2.4million to a low of $1. Pfizer could minimize agency problems and enhance share value be beingmore precise in the criteria applied in the determination of levels ofexecutive compensation. The formerCEO received annual compensation in 2 1 of $2.4 million compared with $4.8million in 2 . Conclusion In relation to shareholder value neither Pfizer nor Bristol-MyersSquibb had a good match between executive compensation and the market valueof the companies' common equity stocks. Bonus (incentive compensation awarded by the Board based on performance) . The former CEO received $3.8million in 2 1, up from $2.7 million in 2 . for the five current executives, up from a high of$1.3 million and a low of $9 , in 2 . New York: Pfizer, Inc.Taken for a ride; Economics focus. Third, in a growing number of cases, there appears to be notie between the distribution of stock options to executives and thefinancial performance of the firm to benefit stockholders (Kwak, 2 2). Many economists advocate allowing the market toestablish level of executive compensation, where boards of directorsdevelop executive compensation policies to minimize the problem of agency[e.g., the conflict between the interests of corporate executives (agents)and stockholders (principals)]. 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