Business

Shareholders oppose Vertex’s big pay deals

Vote at meeting not likely to stop retention bonuses

Boston, MA., 04/27/15, Jeffrey Leiden, CEO, Vertex Pharmaceuticals Suzanne Kreiter/The Boston Globe
Suzanne Kreiter/Globe Staff
Vertex chief executive Jeffrey Leiden.

Shareholders at Vertex Pharmaceuticals Inc. have spoken, and their message is clear: The Boston biotech company went too far when it lavished huge pay packages on its top executives.

In a rare rebuff of management, Vertex’s investors objected to the company’s executive compensation, including a tops-in-the-state $36.6 million awarded to chief executive Jeffrey M. Leiden for 2014.

Vertex plans a total of more than $53 million in one-time “retention” bonuses for a dozen executives — nearly $15 million for Leiden alone — if its new medicine for cystic fibrosis, a life-threatening lung disease, tips the company into profitability.

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The outlays would be a lot of money for a business that has been in the red every year except one since going public in 1991. The payment would make Leiden the highest-paid chief executive of a publicly traded company in Massachusetts, according to the compensation research firm Equilar Inc.

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Because the shareholder vote (55 percent of shares cast were against the payouts) was not binding, the company is expected to go ahead with them.

Still, there could be a cost.

“Clearly, the message is maybe they should dial it back a bit,” said James Love, director of the Washington public-interest group Knowledge Ecology International, which focuses on high drug prices. “If you’re charging high prices and generating controversy over the pay of your executives, it draws attention in ways that could eventually hurt the shareholders.”

The company faces a crucial test within weeks, when the Food and Drug Administration issues its decision — expected to be positive — on US approval of the new cystic fibrosis drug.

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Two advisory firms, Institutional Shareholder Services Inc. and Glass, Lewis & Co., last month recommended that investors vote against the compensation packages, terming them “excessive” and “exorbitant.”

Both firms cited the retention bonuses, which would be payable in three years if the company earns one annual profit during those years.

“It’s very unusual, especially because the stock has been up and they’re a top performer,” Mark Williams, a finance and economics professor at Boston University’s School of Management, said of the shareholders’ vote. “But shareholders are saying enough is enough. Success is one thing, but excess is another.”

Nationally, stockowners so far this year have voted against executive compensation only 2 percent of the time in “say-on-pay” votes at nearly 1,400 publicly traded companies, according to Institutional Shareholder Services. In more than three-quarters of cases, at least 90 percent of shares supported the pay packages. The votes were required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009, which took effect in 2011.

At many public companies, including Vertex, most shares are owned by large institutional investors, such as pension and mutual funds, not individuals.

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A Vertex spokesman, Zach Barber, said the company had no plans to rescind the retention awards, approved by the board last year.

“It’s an advisory vote,” he said. “The board will take this into account as it reviews the compensation process going forward.”

Company officials disclosed the results of the vote, but did not discuss them at a low-key annual shareholders meeting Thursday at Vertex headquarters that drew about 30 people, mostly directors and employees, and took about 15 minutes.

After the meeting, Leiden declined to talk about the shareholder vote. In an April interview, he defended the retention bonuses as critical to preventing talented executives from defecting to other companies in the Boston area’s booming biotech industry.

Vertex investors followed the advice of management by rejecting a resolution proposed by the UAW Retiree Medical Benefits Trust of Ann Arbor, Mich. It sought to require Vertex to report to stockowners on the risks from a potential backlash against high drug prices.

The company, which has priced its current cystic fibrosis drug at more than $300,000 annually, is expected to charge hundreds of thousands of dollars a year per patient if the FDA approves its new combination therapy. Critics have said the retention bonuses could give executives an incentive to price the drug high.

“Vertex should be providing enough information to investors about the structure of their incentive program to allow investors concerned about unsustainable drug prices to determine the extent to which a compensation program design contributes to decisions that are not in the company’s long-term interests,” Cambria Allen, corporate governance director for the UAW retiree trust, told the annual meeting.

Analysts have projected that Vertex will generate billions in sales and profits in the coming years as its medicine, called Orkambi, hits the marketplace — initially for about 8,500 Americans, but eventually for about half of the 30,000 Americans and 70,000 people worldwide who suffer from the most common form of the lung disease.

Vertex stock has soared in anticipation of FDA approval, appreciating by 75 percent over the past year. The share price gained 2 cents, to $126.94, on Thursday.

While there was no debate on compensation at the annual meeting and Leiden spoke only to introduce board members, one independent shareholder who attended said that she voted in favor of the pay packages.

“I think we’re in a competitive market,” said stockowner Nancy P. James, who owns an insurance agency in Concord. “Vertex’s [financial] results speak for themselves, and we thank management for that. I’m not here to dispute the pay. I work hard, and I have no complaint against the 1 percent.”

Robert Weisman can be reached at robert.weisman@globe.com. Follow him on Twitter @GlobeRobW.