Valeant CEO's Pay Package Draws Praise as a Model - 24 Aug 2009 - WSJ

By JOANN S. LUBLIN

J. Michael Pearson paid plenty to become chief executive of Valeant Pharmaceuticals International in 2008. He'll be paid plenty more if he succeeds.

Mr. Pearson's unusual pay package wins praise from compensation
critics, who say it may offer a model for other public companies.
Directors of the midsize drug maker required him to buy at least $3
million in stock, forgo routine annual equity grants and hold many
shares for years before selling.

No
single element is unique, but the combination is rare -- for a public
company. G. Mason Morfit, chairman of Valeant's board compensation
committee and main architect of the package, says he wanted to mimic
executive-pay deals at businesses controlled by private-equity firms.
Mr. Morfit is a partner of ValueAct Capital, an activist hedge fund
whose 22% stake makes it Valeant's biggest stockholder.

Pay experts say the deal gives Mr. Pearson incentives to boost
long-term value for investors. For example, the 49-year-old CEO only
gets to keep certain restricted shares if Valeant's share price
increases at least 15% a year through February 2011. Mr. Pearson can't
sell most restricted shares or exercised stock options for two years
after they vest.

"It goes a substantial distance toward addressing my concerns about
executive-pay arrangements," says Lucian Bebchuk, a Harvard law
professor and frequent pay critic.

"Many companies would benefit from imitating this or moving in this
direction," adds Steven N. Kaplan, a University of Chicago business
professor and pay researcher. "More pay for performance is a good
thing."

Mr.
Pearson will certainly be well paid if Valeant performs well. Directors
awarded him equity initially valued at $18.1 million, according to the
Aliso Viejo, Calif., company's latest proxy statement. If Valeant
shares are at $37.16 or higher in February 2011, the package will be
worth $88 million, Mr. Morfit estimates.

Valeant shares closed Friday at $27.17, more than double the level
when Mr. Pearson arrived and near a seven-year high. The new CEO has
sold poor-performing businesses, slashed research spending, found a
rich partner to help introduce a promising epilepsy drug and spent $394
million to acquire three companies with approved dermatology products.

The
pay formula is no guarantee of success. Several concerns controlled by
private equity failed recently, including Chrysler Group LLC. Former
Merrill Lynch & Co. CEO John Thain bought more than $11 million of
shares during his first year, according to pay researcher Equilar Inc.
He was forced out in January after Bank of America Corp. acquired
Merrill amid mounting losses.

Some compensation specialists worry that Valeant's approach could
spur moves that briefly boost shares, but ultimately hurt the company.
Certain analysts have questioned the research cuts, for example. "It
creates some incentive to jack up the stock price in year three to hit
these [performance] hurdles," Mr. Kaplan says.

"I don't worry about that issue," Mr. Morfit replies. He says the
board keeps close tabs on management, and he talks to Mr. Pearson daily.

Valeant wasn't always on the cutting edge of pay practices. In 2003,
directors of the company then known as ICN Pharmaceuticals Inc. sued
former CEO Milan Panic to recoup a $33 million bonus. Mr. Panic, who
was ousted following a proxy fight, later agreed to repay $20 million.

Mr. Morfit, 33 years old, joined Valeant's board in May 2007. He's a
rarity, one of just 28 compensation committee chairmen at 3,367
companies holding more than a 20% stake, according to

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