How is it possible that the CEO of Johnson & Johnson received nearly $30 million in pay in 2020, even as Johnson & Johnson booked more than $5 billion in settlement charges for the company’s role in the opioid epidemic?
In a new Investor Brief published by the Investors for Opioid & Pharmaceutical Accountability (IOPA), new research outlines the reality that when pharmaceutical companies set targets for executive compensation based on performance, they often use profit metrics that are not based on Generally-Accepted Accounting Principles (like “Adjusted Earnings Per Share”) and which routinely filter out legal settlement costs and fines from the end result.
By excluding the $5 billion in opioid charges from the calculation of its key earnings metric (“Operational Earnings Per Share”), for example, the board at Johnson & Johnson inflated CEO payouts by more than $2 million in 2019 and 2020.
For investors, this inflated payout is not just a problem of mis-allocated dollars. It’s also a problem because performance metrics for executives help incentivize the right level of risk-taking.
If they routinely filter out the real-world results of that risk taking–such as the deadly opioid epidemic that took hold following intensive over-marketing and over-prescription of opioids promoted by pharmaceutical firms–the incentives are skewed and executives are not held accountable for their decisions.
SHARE and our colleagues in the IOPA have been engaging with selected pharmaceutical companies, asking them to adopt a policy which reverses the onus when calculating executive performance metrics. Rather than ordinarily excluding one-time large legal settlement charges from the calculation of performance metrics like Adjusted Earnings Per Share, we proposed that boards and compensation committees ordinarily include those charges unless there is a compelling reason to exclude them.
For the 2023 proxy season, we’ve helped our clients and other IOPA members file shareholder proposals at seven pharmaceutical firms, to make accountability a core part of executive compensation decisions.
The proposals have been filed at Teva Pharmaceutical Industries Ltd (TEVA), Abbott Laboratories (ABT), Johnson & Johnson (JNJ), Pfizer Inc. (PFE), Abbvie Inc.(ABBV), Rite Aid, and Bristol-Myers Squibb Company (BMY).
As a direct result of these proposals, we have already won these changes at Pfizer, Teva, Abbvie and Bristol-Myers Squibb. Discussions with the others are ongoing.
We are willing to take the proposal to a vote at key companies like Johnson & Johnson if they are not forthcoming. Last year, a vote on the IOPA proposal at Johnson & Johnson won 47.7% of the shareholder vote, and we intend to make that a majority vote this year if the company does not move voluntarily.
If we are able to make the same changes at all of these companies, we’ll have made an important improvement in executive accountability across the industry, which will help dissuade excessive risk-taking, now that an executive’s own pay is on the line.