An expensive two weeks for Boston Scientific…

September 20, 2011

If we were shareholders of Boston Scientific Corporation (BSX), after reading yesterday’s 8-K we would brace ourselves for the grown-up version of a significant raid on the company’s piggy bank.

First, we have the three new employment agreements that got a nod on the Dow Jones Newswire late yesterday afternoon. However, the executives are actually getting a lot more than the broad strokes in the summary suggest.

Take Michael F. Mahoney, for example, the recently-departed Johnson & Johnson executive who will start as Boston Scientific’s president on October 17. Yes, as reported, he’s getting two sign-on bonuses worth a collective $2.25 million (a bit more than 1/3 of which will be paid only after Mahoney becomes CEO, on November 1, 2012); a base salary of $900,000; and deferred stock units (“DSUs”) worth more than $9.53 million.

But Mahoney’s Offer Letter gives him quite a bit of additional compensation. He’s also getting a “2012 Equity Award” worth $7.2 million under the long-term incentive plan, to be paid as 50% non-qualified stock options, 25% DSUs and 25% Performance Share Units (“PSUs”). He gets to participate in the 2011 Performance Incentive Plan (“PIP”) on a pro-rated basis; since the filing states that Mahoney’s target incentive is 120% of his salary, or $1.08 million, if the company meets its performance goals, he could be eligible for as much as an extra $221,917.50. If that happens, the math works out to $2,958.90 per day for the 75 days that Mahoney will work in 2011.

And there’s more: The filing adds that he is

“…eligible to receive a prorated incentive award as well as an incremental cash payment (not under the PIP) representing the additional amount of the award he would have received had his hire date been September 21, 2011.”

It’s not clear how much that is worth, but it’s in addition to the pro-rated share of the potential $1.08 million that Mahoney may get under the 2011 PIP.

And to further sweeten the deal, Mahoney will get up to $100,000 per year in personal use of the corporate jet, company-paid temporary housing in the Boston area for up to 18 months and relocation assistance, up to $90,000 to reimburse him for the legal fees incurred to negotiate his employment agreement, a “supplementary cash payment of $69,230”, and plenty of protection if he loses his job because of a change in control or resigns for cause.

William H. Kucheman, who is stepping in as interim CEO until Mahoney takes over in the fall of 2012, is also getting more than just a $900,000 base salary. The filing and his Offer Letter disclose that Kucheman’s 2012 Equity Award will be worth $3 million, his 2011 PIP Incentive target is 120% of salary (or $1.08 million), and he, too, gets up to $100,000 worth of personal use of the corporate plane.

But there’s a second matter that Boston Scientific disclosed last week (in an 8-K filed Sept. 12) which may result in an even deeper dip into the corporation’s coffers. The filing revealed that the company had received a Notice of Deficiency from the IRS which claimed that Boston Scientific owes additional net taxes of $154 million, plus interest, based on an audit of the 2006 and 2007 tax years. The company had warned in its August 5 10-Q that it expected to receive such a notice, although it couldn’t predict the amount. It has already been wrangling with the IRS over prior tax years; a December, 2010 Notice of Deficiency asserted that $525 million plus interest was owed for tax years 2001 – 2003. Boston Scientific disputes the amounts, claiming that it has a difference of opinion with the IRS over “transfer pricing methodologies,” and it has vowed to defend itself and present “meritorious defenses” in the U. S. Tax Court.

There is no doubt that Boston Scientific will eventually resolve its differences with the IRS, leaving the new, high-priced executive talent an opportunity to set a bold and profitable vision for the company’s future. For the sake of the shareholders, and for the company’s piggy bank, let’s hope so.

Image source: taxbrackets.org

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