May 8, 2019
President and CEO John Milligan stepped down from his position at Gilead Sciences in December 2018. His total disclosed compensation of $25.9 million reflects a steep increase from prior years. Included in that total are a stock award of $9.8 million and option awards of $11.3 million. In general, these forms of compensation are designed to promote long-term retention, so one would not expect to see large numbers under these columns for a departing executive. In this case, these figures represent, in part, an accelerated vesting of Milligan’s unvested stock options.
This was part of the same separation agreement, entered into in August 2018, which “waived the continuous service condition on his outstanding performance share awards to provide for full settlement.” The company notes that, “Although $9.2 million in incremental expenses was included in the 2018 Summary Compensation Table for the equity modification, Dr. Milligan did not realize or receive any intrinsic value from these awards in 2018 and their realizable value is dependent upon future revenue and stock price performance.”
The proxy statement points out – more than once – that options granted to Milligan and other executives “over the past four years were underwater, or ‘out of the money’.” Basically this means the stock price has gone down since the awards were granted. What is not pointed out, however, is that executives reaped amazing windfalls in stock options that were exercised and cashed in when the stock price was higher. Milligan, for example, recognized $48.3 million, $74 million, and $64.7 million in value through the exercise of stock options in 2016, 2015, and 2014 respectively. The last time I wrote about Gilead Science was in 2016, I discussed how the former CEO John Martin had exercised stock options and realized hundreds of millions value while the stock was at its near high.
Milligan’s separation agreement also provided that the company would pay Milligan $8.2 million in “exchange for execution of release of claims.” This figure was not included in the summary compensation table because it was not paid in 2018. The separation agreement also provided for a 2019 bonus in the amount of $1.5 million and a cash payment of $59,441 “to partially offset costs of Dr. Milligan’s health care continuation coverage for 24 month.” The company even reimbursed the former CEO legal fees of $32,056, for the cost of the negotiations involved in his departure.
The company has timed executive changes in such a way that the generous separation package and generous new hire package do not show up in the same table. However, elsewhere in the proxy, the new hire package for Daniel O’Day, who assumed the position of CEO in March 2019, is described. In addition to salary of $1.6 million (higher than most) and annual equity awards valued at $12 million, the company is providing “make whole” payments which are “intended to compensate Mr. O’Day for compensation and other benefits forfeited when he left his employer of 30 years to accept our offer.” This includes restricted stock units worth $8.5 million that will vest over three years and a one-time cash payment of $5.6 million. In addition, the company will contribute $750,000 dollars annually for five years into O’Day’s deferred compensation plan for the next five years.