CEO pay at valeant : does extreme compensation create extreme risk?

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