Astral earnings

The job that Dave Brennan got in 2006 had several upsides and one big downside. As chief executive of AstraZeneca , he presided over 11 drugs each commanding over $1bn (£630m) a year in sales. Earnings were on their way to trebling over a five-year period. Free cash flow was over $10bn a year, financing nearly $5bn of research and development (R&D) and $7bn of share repurchases and dividends.

The downside was hardly less spectacular, although it was quite a long way ahead. Starting from 2012, a lot of patent expiries on these fantastically profitable drugs were coming up. Unless all that R&D delivered half a dozen blockbusters by 2016, AstraZeneca would have gone backwards. For many chief executives, the task in hand might be blurred by planned retirement. But not in this case. Aged just 52 when he got the top job (after nearly 30 years with AstraZeneca or its predecessors), Dave Brennan's major mission was clearly to launch these replacement blockbusters.

This is a challenging job spec, even with a huge R&D budget. In this situation, how would you pay someone? Of course, Dave Brennan was responsible for keeping the existing show ticking over: milk those cash cows until their expiry dates. But even making the most superb job of this would yield next to nothing unless some bounteous results emerged from the research pipeline.

The task of how to incentivise Dave Brennan fell to John Varley, well-known to UK investors as the Bob Diamond's predecessor at Barclays. A veteran of knotty executive pay problems, he has been chairman of AstraZeneca's remuneration committee since 2007.

Given the rate at which the company's successful drugs were to expire and the likely rate at which replacements could be established, it was clear even then that it would be impossible to gauge Dave Brennan's real performance in his major mission for a decade, assuming he was going to last that long. And if he didn't, he clearly would not have given much value to AstraZeneca during his slot on the top job. If there was ever a crying need for a proper long-term incentive plan, Dave Brennan was it.

He didn't get one. Instead, he got handsome year-to-year pay including giant discretionary elements, while AstraZeneca steadily failed to resolve its big problem.

For example, justifying that beefy bonus in 2010, the remuneration committee cited the abandonment of two drugs in development, greater efficiency, good employee engagement and the promotion of a culture of responsibility.

2010 also saw the timely launch of a new share incentive scheme. As its share price plateaued, AstraZeneca's long-standing share option scheme has come to the end of its natural life. It had paid out nothing to Dave Brennan in 2007 and 2008, and only a derisory $12,000 in 2009. Although the option scheme had been buttressed by a new 'performance share plan' from 2006 - which unlike the option scheme did not rely on share price improvements - large companies like to have two of these big share schemes going. So in came the AstraZeneca Incentive Plan, with big annual allocations to senior executives which would vest after four years subject to - wait for it - the dividend being increased (without dividend cover falling below 1.5 times). Between 2010 and 2014, it's a fair bet this modest hurdle will be achieved.

The remuneration committee's report for 2011 was a classic case of ignoring the overall picture in favour of the good bits: overall revenue and operating profit declined, but good performances by individual drugs were noted favourably as was a continuation "of work promoting a culture of responsibility…".

However, the most cynical aspect of last year's report was the enhancement of Dave Brennan's 2008 performance share plan award. This had already been enhanced by dint of the share price being at a low point in 2008 when the award was made. As the award basis is essentially a percentage of salary, this meant that an extra large dollop of shares were earmarked for Dave Brennan that year. By a happy chance, when this award crystallised at the end of 2010, AstraZeneca's shares had recovered against its peers, meaning that he was awarded the whole dollop, worth £4.6m.

So pleased was John Varley's committee, that it decided to use its discretion to enhance the award by a further £1.1m. Since it made that decision, AstraZeneca has given up almost all this outperformance.

AstraZeneca's shareholders are now coming to terms with Dave Brennan's failure to replace those blockbusters and he may not see the year out. Hopefully, they will also reflect on the fact that they have paid him over £30m on the way.

Dave Brennan's pay (£000)

visible-status-Public story-url-NoFreeLunch_AstralEarnings_110412.xml