What might normally have been a year for big increases in executive bonuses at Baxter International Inc. turned into reductions last year after the company was linked to more than 50 deaths of dialysis patients around the world.
Baxter executives met all of the company’s 2001 performance goals for sales, income and cash flow, and the company’s stock outperformed most of its rivals in the drug and medical product industries.
Under normal circumstances, hitting or exceeding operational targets would mean the top 20 Baxter executives “would receive 100 percent or more of their target bonus,” company documents say.
Yet Baxter’s compensation committee is tying a key part of executive pay–the bonus–to accountability.
The Deerfield-based medical product giant in November acknowledged that its dialysis filters may have played a role in the deaths of 53 patients in seven countries, including the United States.
“Due to the seriousness of the issue in connection with the company’s Althane series dialyzers, the committee, after thoughtful deliberation, decided to cap the executive officers’ bonus amounts for 2001 at 80 percent of their target awards,” Baxter said in a preliminary proxy statement filed this month. “Actual bonus amounts awarded for 2001 ranged from 50 percent to 80 percent of the individual officers’ bonus targets.”
For Baxter Chief Executive Harry Kraemer, the committee awarded a 2001 bonus of $528,000, which represented 60 percent of his target bonus amount, the preliminary proxy said. That’s less than half the $1.3 million bonus Kraemer received in 2000; his salary was unchanged at $880,000.
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Other executives listed on the proxy who have been with Baxter for two full years also saw their bonuses fall, though none as dramatically as Kraemer’s.
Baxter’s proxy also noted that “consistent with its pay-for-performance philosophy,” the compensation committee “focused on increasing Mr. Kraemer’s long-term incentive compensation for 2001.” The company eliminated restricted stock awards, but gave Kraemer a grant of 600,000 options at an exercise price of $49.54, with a potential realizable value of nearly $19 million at 5 percent annual appreciation over the 10-year term of the option.
Kraemer has earned high marks from Wall Street and company observers for his quick actions, recalling filters and putting aside up to $150 million to close plants and compensate victims’ families in November when it became clear that Baxter’s dialyzers were indeed to blame.
Now, Baxter and Kraemer are scoring points with observers of executive compensation.
“At a time in which we are all feeling a little cynical about corporate executives, it’s nice to see some taking responsibility,” said Nell Minow, editor of The Corporate Library, a Web site that analyzes executive compensation issues. “That should give customers, employees and investors more confidence in the management of this company. Despite whatever the company’s financial performance was, there are reputation and other costs.”