There are big raises, and then there are big raises. Jonah Shacknai, chairman and chief executive of Medicis Pharmaceutical (MRX) got one of the latter kinds in 2011 — but it isn’t quite what it seems, which may be unsurprising given the company’s colorful approach to pay.
We last footnoted Medicis in August, you may recall, to write about its extreme approach to flextime, not long after two unusual deaths at Shacknai’s California mansion. (That story continues to play out, with updates as recently as this week.)
According to the proxy Medicis filed on Wednesday, Shacknai’s total compensation, as calculated under SEC rules, shot up to $19.6 million, from $6.3 million in 2010 and $6.2 million in 2009. That’s eye-opening enough: It means he earned in one year very nearly the combined amount paid to the company’s next three highest-paid executives (and none of them are exactly cheap either).
But there’s a twist here. Most of Shacknai’s pay raise came not in the form of cash, stock, options or the other familiar forms of executive pay. Rather, it came from a brand-spanking-new executive pension plan.
These days, we’re more likely to hear about the death of the private-sector pension (much over-wrought, fortunately for many a rank-and-file employee’s retirement plans) than about wholly new pensions. But at Medicis, as of June 1, 2011, the company saw fit to create a “supplemental executive retirement plan,” or SERP, also known as an executive pension.
We mentioned that pension in our August post, but noted that it wasn’t yet clear how big the benefit would be for Shacknai. Now we know: a whopping $13.1 million. Other execs start with benefits valued at $3.5 million to $4.8 million. The benefits don’t vest fully for five more years, but that’s not a long time to wait for a multi-million-dollar nest-egg.
Part of the explanation here is that his pay is generally high, around $6 million a year (which is about what he would have gotten in 2011 absent the new pension). Part of it is that Shacknai has been with the company a long time, and so gets credit for the maximum 20 years of service allowable under the plan’s formula. Oddly, nearly all the other top officers have also maxed out their years of service, even though the limits for some are different (16 years of 5 years, depending).
The pension has some other curious features as well. For one thing, it has multiple “tiers” that have slightly different benefit formulas; one tier, which includes just a single named executive in the proxy (Chief Operating Officer Jason Hanson) awards benefits of 10% of average earnings for each year of service, compared to the still-high but more-typical rates used by other tiers (2.5% and 3.13%). The company doesn’t explain, but it smells at least a little like tailoring formulas to generate certain results.
But then, this is an executive pension, not a traditional one that benefits employees broadly. Far from it, in fact: The five executives named in the proxy account for $29.5 million in total accrued benefits — or 84% of the $35 million total for all participants in the plan, according to the 10-K that Medicis filed in February. (The company is informally funding the benefit with life-insurance policies on the executives’ lives — it spent $9.8 million on the policies last year, “intends to make similar annual purchases during each of the next four years” and expects a 4% return on the assets, probably because it plans to keep the proceeds invested in accounts earning a guaranteed 2.5% annual interest rate, and in S&P 500 index funds. The mechanism, known as corporate-owned life insurance, owes much to federal tax subsidies, but that’s a post for another day.)
It’s worth noting here that Medicis’s rank-and-file employees don’t appear to benefit from a pension at all.
The new executive pension plan has ramifications for Medicis’ bottom line as well as for its executives. It turns out that crediting the execs (and presumably others not listed in the proxy) with all that prior service comes at a steep price: $33.8 million, which is going to be fed into compensation expense (and thus the income statement) between now and when the executives leave the company. This year, the company expects to recognize compensation expense of about $4.8 million for the plan.
The proxy does go into the board’s rationale for creating the executive pension — among the reasons are some familiar tropes: attracting and retaining talent, the maturation of the business, and letting executives build “meaningful financial security”. But the proxy also notes input from the company’s compensation consultant, Compensia:
“Compensia noted that while such programs are not common among Medicis— peer companies and may invite attention from stockholders, such arrangements are common in the broader marketplace and could prove to be an effective tool to promote executive officer retention, recruitment and stability.”
Indeed. The Medicis annual meeting is May 15. We’ll see how much attention the arrangement invites.
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