Teva Turns to Meritocracy as Part of Turnaround Plan

After canceling its annual bonuses for 2017, Teva Pharmaceutical Industries Ltd. is rolling out a new bonus plan for 2018—one that is based on both personal and company performance. Last week, Warren Buffett’s Berkshire Hathaway Inc. disclosed it had taken a $358 million, 1.8% stake in the company during the fourth quarter of the fiscal year 2017.

For daily updates, subscribe to our newsletter by clicking here.

 

According to the new bonus policy, announced in February and recently reviewed by Calcalist, compensation of Teva employees will be tied to their performance, as well as to the company’s financial performance throughout 2018.

The Israel-headquartered company is currently struggling with around $32 billion of debt, after taking out $33.75 billion in loans to finance its 2016, $40.5 billion acquisition of Allergan’s generic unit Actavis. The deal, which was formulated to establish Teva as the unequivocal leader in the generics market, instead made Teva even more vulnerable to the changing conditions in the U.S. market, where regulatory pressure and buyer consolidation combined with protest over drug prices to lower Teva’s revenues and profit margins over several consecutive quarters.

In December, Teva’s newly appointed CEO Kåre Schultz unveiled his reorganization plan for the debt-laden generic drugmaker. As part of the strategy, which included asset closure and divestment and the layoffs of 14,000 employees, Mr. Schultz announced the company will not hand out annual bonuses for 2017, also suspending all dividends on ordinary shares and ADSs. Teva’s board of directors has also decided to cut their cash compensation in half until further notice.

According to documents reviewed by Calcalist, annual bonuses for 2018 will be tied to two key financial measurements that significantly affect Teva’s ability to meet its debt covenants: non-GAAP earnings per share (EPS) and free cash flow (FCF), which account for 50% and 25% of the final bonus payout, respectively. Both need to reach at least 85% of Teva’s stated target for 2018, meaning EPS of at least $2.1 and FCF of $2.8 billion, for Teva to pay the bonus.

“To deliver on our commitment to Teva’s patients, we need to meet all our financial obligations, stabilize the business and regain the trust of our stakeholders,” a company document describing the new bonus plan states.

Employee performance rating accounts for another 25% of the final bonus. Employees can be rated according to three categories: outstanding (110%-120%), successful (90%-110%), and needs improvement (0%-70%). The bonus package pertains to all global employees who have been with the company before October 1, 2017.

The final payout of the bonus will then be multiplied by a specific employee’s annual base salary, and by their target bonus, which is an individual percentage of the annual base salary. The overall annual bonus will be capped at 200% of the employee’s target bonus.