CEO Pay at Valeant: Does Extreme Compensation Create Extreme Risk?

12 Pages Posted: 28 Apr 2016 Last revised: 1 Jun 2016

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business

Brian Tayan

Stanford University - Graduate School of Business

Date Written: April 28, 2016

Abstract

The litmus test for an effective compensation program is whether it provides “pay for performance.” While the concept of pay for performance is simple, its implementation is not. In particular, boards must consider not only whether a compensation plan encourages executives to pursue corporate objectives and build shareholder value but also the unintended consequences of pay. We consider these issues through the example of Valeant Pharmaceuticals, whose CEO received a compensation package that offered exponential rewards for exceptional long-term performance.

We ask:

How can shareholders tell whether the right balance has been struck between “pay for performance” and risk? • To what extent were the problems that occurred at Valeant directly a result of the incentives placed on its CEO? Would they have occurred if the incentives were less aggressive? • Did the board fail to identify red flags that should have warned them that the company’s approach was not sustainable? Did a rising share price make them complacent in their oversight?

The Stanford Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance and executive leadership. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance.

Keywords: CEO compensation, executive pay, pay for performance, correlation of pay to performance metrics, compensation committees, risk management, corporate governance research

JEL Classification: G3, G34, J3, J33, M52,

Suggested Citation

Larcker, David F. and Tayan, Brian, CEO Pay at Valeant: Does Extreme Compensation Create Extreme Risk? (April 28, 2016). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-56; Stanford University Graduate School of Business Research Paper No. 16-22. Available at SSRN: https://ssrn.com/abstract=2771358

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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