Express Scripts' Pay Push

It appears to have its own compensation issues.
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An ugly bidding war seems to have been just the tonic for

Express Scripts

(ESRX)

.

The St. Louis-based mail order pharmacy is on the brink of losing out in its winter-long pursuit of Nashville, Tenn., rival

Caremark

(CMX)

. Caremark shareholders, after much ado, are slated to vote Friday on a $26 billion merger with drug store chain

CVS

(CVS) - Get Report

.

With Woonsocket, R.I.-based CVS having sweetened its merger plan three times and Express Scripts having stood pat on its own bid earlier this week, Wall Street has swung firmly into the CVS camp. Caremark shares have been trading in line with the CVS offer, and some observers have put the prospects of a CVS victory at 90%.

Though its play for Caremark appears destined to fail, the last few months have been sunny indeed for Express Scripts. Shares have soared 19% since the company unveiled the Caremark bid back on Dec. 18. The merger battle has given Express Scripts countless opportunities to criticize compensation arrangements and other matters between Caremark and CVS.

"It is outrageous that Caremark would spend stockholder money attempting to defend the lavish payments that its senior management would receive in a combination with CVS," Express Scripts said in response to a Caremark-CVS newspaper ad back on Jan. 31. "We have trouble understanding how a 'merger of equals' could possibly warrant almost $100 million in sweetheart 'change of control' payments to people who will largely continue to be employed by the merged company."

Yet some observers say Express Scripts has its own compensation warts.

Before choosing George Paz -- an accounting whiz and the company's former CFO -- as its new leader in late 2004, Express Scripts regularly awarded stock options to company executives a couple of weeks after reporting its annual results. With Paz taking over, however, the company suddenly changed its ways.

Express Scripts issued stock options to its executives a day before reporting strong results for 2005. To meet tax withholding requirements, records show, Paz and some of his colleagues immediately sold a portion of that stock back to the company at the market price of $77.28 a share.

Then the stock rocketed, giving the executives a gain of more than $400,000 in a matter of days. Afterwards, records indicate, company leaders essentially voided their previous transactions and sold the company back fewer shares -- at higher prices -- in order to satisfy their tax bills.

The following year, Express Scripts reversed course. This time, the company issued no stock options ahead of its annual results. However, Paz and several other executives went ahead and sold some stock to the company -- at a price of $93.05 a share -- in anticipation of options-related tax bills.

Express Scripts issued disappointing guidance the following day, causing its stock to fall. The company awarded stock appreciation rights to Paz and others a week later, with the stock now under pressure, but applied proceeds from their recent stock sales -- at much higher prices -- to their resulting tax bills.

"George Paz was a partner at Coopers & Lybrand

a major accounting firm before joining Express Scripts," says one critic who has no position in any of the stocks mentioned. "He definitely understood the accounting and

Securities and Exchange Commission reporting issues of these moves."

For its part, Express Scripts has defended its compensation practices. Still, the company has reportedly secured some extra legal protection for its leaders in recent months. On Dec. 22, the company agreed "to provide certain indemnification rights to

its top officers and directors in exchange for their continued service to the company," a regulatory filing in December notes.

"It's somewhat curious -- especially given their own allegations against Caremark -- that Express Scripts beefed up indemnifications for its board and officers immediately after announcing their hostile bid," the critic says. "Maybe they realize they live in a glass house after all."