COVER STORY

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Health­care CEOs saw their com­pen­sa­tion slip rel­a­tive to other in­dus­tries but still earned big pay­days last year. “2010 was a great year for cor­po­rate earn­ings and stock per­for­mance,” says Steve Ka­plan, left, a pro­fes­sor of fi­nance and en­trepreneur­ship. “Part of the rea­son for the in­crease in pay is that the CEOs de­liv­ered in 2010.”

Health­care ex­ec­u­tives reaped big re­wards in 2010, with re­turn­ing hos­pi­tal CEOs see­ing a 58.2% gain in com­pen­sa­tion I t may be hard to re­mem­ber given the fi­nan­cial roller coaster of the past few weeks, but 2010 was a good year for stock mar­kets and cor­po­rate earn­ings. And, broadly speak­ing, CEO pay for 2010 re­flected those good re­sults.

In cor­po­rate health­care, how­ever, the re­turns were mixed: The sec­tor slipped from the top spot to No. 2 among those rep­re­sented in the Stan­dard & Poor’s 500, ac­cord­ing to one data firm’s anal­y­sis. Yet the high­est-earn­ing hos­pi­tal ex­ec­u­tive in Mod­ern Health­care’s an­nual look at cor­po­rate pay took home dou­ble the haul of the top CEO in 2009, and the over­all com­pen­sa­tion of the nine hos­pi­tal CEOs to make the list in both years in­creased 58.2%, to $101.9 mil­lion. The top earn­ers in two other cat­e­gories—in­sur­ers and spe­cial­ty­care providers—saw much lower com­pen­sa­tion in 2010 af­ter cash­ing out far fewer stock op­tions than they did the pre­vi­ous year, ac­cord­ing to se­cu­ri­ties fil­ings.

CEOs who worked for the same S&P 500 com­pa­nies in 2009 and 2010 saw a me­dian com­pen­sa­tion boost of 28.2% last year, ac­cord­ing to Equilar, an ex­ec­u­tive-com­pen­sa­tion data firm. In com­par­i­son, the S&P 500 in­dex in­creased 12.8%. And al­though health­care ex­ec­u­tives as a group saw a smaller year-over-year in­crease in me­dian to­tal com­pen­sa­tion—5.8%—than did their peers in other fields in 2010, they still ranked sec­ond over­all in pay, with a me­dian com­pen­sa­tion of $9.7 mil­lion.

Only ex­ec­u­tives in the ba­sic-ma­te­ri­als and en­ergy sec­tor were more highly paid (See chart, p. 16).

In gen­eral, “2010 was a great year for cor­po­rate earn­ings and stock per­for­mance,” said Steve Ka­plan, a pro­fes­sor of fi­nance and en­trepreneur­ship at the Univer­sity of Chicago Booth School of Busi­ness. “Part of the rea­son for the in­crease in pay is that the CEOs de­liv­ered in 2010.”

In­sur­ing big re­turns

Mod­ern Health­care’s an­nual re­port on cor­po­rate CEO pay looks at the 10 largest com­pa­nies by net rev­enue in three sec­tors— hos­pi­tals, in­sur­ers and spe­cialty-care providers—that file pe­ri­odic re­ports with the U.S. Se­cu­ri­ties and Ex­change Com­mis­sion and there­fore dis­close ex­ec­u­tive com­pen­sa­tion an­nu­ally. The last sec­tor ex­cludes com­pa­nies that pro­vide pri­mar­ily skilled­nurs­ing or as­sisted-liv­ing ser­vices.

An­nual com­pen­sa­tion (See chart) in­cludes salary, bonus, re­stricted stock grants and changes in pen­sion and de­ferred con­tri­bu­tion plans as re­ported in proxy state­ments or other fil­ings with the SEC. Listed un­der “ex­er­cised stock op­tions” are the net pro­ceeds that the ex­ec­u­tives re­ceived on ac­tual sales of shares ac­quired via stock op­tions. To­tal dol­lar com­pen­sa­tion is the sum of these two amounts.

For the sec­ond year in a row, Stephen Hemsley of Unit­edHealth Group topped the over­all and in­sur­ers lists. Hemsley re­ceived $6.3 mil­lion in com­pen­sa­tion in 2010, in­clud­ing salary, re­stricted stock, nonequity in­cen­tive pay and other com­pen­sa­tion, and he cashed out stock op­tions for pro­ceeds of $43.5 mil­lion. That’s less than half of the $98.6 mil­lion that Hemsley reaped from ex­er­cis­ing stock op­tions in 2009 (Aug. 16, 2010, p. 6).

Unit­edHealth Group de­clined to com­ment for this story. Hemsley has worked for

Pri­vate-equity pay­offs

the in­surance gi­ant since 1997 and be­came its pres­i­dent and CEO in Novem­ber 2006. Hemsley’s pre­de­ces­sor, Wil­liam McGuire, topped the list in 2004 and 2005 on the strength of large ex­er­cises of stock op­tions. McGuire re­signed in 2006 over al­le­ga­tions that he im­prop­erly ma­nip­u­lated the dates of stock op­tion awards to his ben­e­fit. McGuire later agreed to can­cel 3.675 mil­lion op­tions and paid $30 mil­lion to set­tle a share­holder law­suit.

An in­surance ex­ec­u­tive who dropped off the list ac­tu­ally raked in the most com­pen­sa­tion last year. Ron­ald Wil­liams stepped down as CEO of Aetna on Nov. 29, 2010, so he doesn’t qual­ify for the list, but his com­pen­sa­tion last year to­taled $71.1 mil­lion, ac­cord­ing to Aetna’s proxy state­ment. Wil­liams earned just un­der $1.1 mil­lion in salary and re­ceived stock grants worth about $14.3 mil­lion on the date of the grant as well as other in­cen­tive pay­ments and com­pen­sa­tion for a to­tal of $20.7 mil­lion.

In ad­di­tion, Wil­liams cashed out 2.4 mil­lion op­tions, re­al­iz­ing net pro­ceeds of $50.4 mil­lion. Wil­liams re­tired as chair­man of the com­pany in April. Wil­liams topped the an­nual com­pen­sa­tion re­port in 2008 (July 28, 2008, p. 6).

Lead­ing the hos­pi­tal sec­tor for the first time is Richard Bracken, chair­man and CEO of Nashville-based HCA. Bracken’s pre­de­ces­sor, Jack Boven­der Jr., topped the hos­pi­tal and over­all lists in 2007 (July 30, 2007, p. 6) thanks to HCA’s lever­aged buy­out in Novem­ber 2006. Bracken suc­ceeded Boven­der on Jan. 1, 2009, and steered the com­pany through the third ini­tial pub­lic of­fer­ing in its his­tory this year (March 14, p. 10).

In 2010, Bracken reaped the ben­e­fits of three dis­tri­bu­tions that HCA made to its own­ers, three pri­vate-equity groups and mem­bers of the Frist fam­ily. As part of the dis­tri­bu­tions, which to­taled $4.25 bil­lion, the com­pany also made cash dis­tri­bu­tions to em­ploy­ees on vested stock op­tions, ac­cord­ing to HCA’s proxy state­ment filed with the SEC. For Bracken, those dis­tri­bu­tions to­taled nearly $21.8 mil­lion, or more than half of his $41.3 mil­lion in com­pen­sa­tion for the year.

Bracken also re­ceived dis­tri­bu­tions on the com­pany shares he held last year. Bracken owned 563,580 shares in HCA as of April 1, 2010, and he held 673,348 shares as of Feb. 1, 2011, ac­cord­ing to two se­cu­ri­ties fil­ings. Those fig­ures sug­gest that Bracken re­ceived be­tween $24 mil­lion and $26.7 mil­lion in dis­tri­bu­tions as a share­holder.

Two of Bracken’s peers, Char­lie Martin of Nashville-based Van­guard Health Sys­tems and David White of Ia­sis Health­care, Franklin, Tenn., also re­ceived pay­outs in con­nec­tion with dis­tri­bu­tions made to their com­pa­nies’ pri­vate share­hold­ers last year, ac­cord­ing to the com­pa­nies.

The dis­tri­bu­tions that Martin re­ceived as a share­holder as part of $300 mil­lion that the com­pany re­turned to its in­vestors last year aren’t con­sid­ered com­pen­sa­tion that would be dis­closed in se­cu­ri­ties fil­ings, said Gary Wil­lis, se­nior vice pres­i­dent and chief ac­count­ing of­fi­cer at Van­guard. That’s be­cause they are re­turns based on Martin’s orig­i­nal in­vest­ment in the com­pany, rather than an in­cen­tive pay­ment that would be dis­closed, Wil­lis said. As of Aug. 15, 2010, Martin held a 7.5% stake in Van­guard, but that stake de­clined when the com­pany com­pleted its IPO in June (June 27, p. 14).

No Ia­sis em­ploy­ees owned any of the $120 mil­lion in pre­ferred shares that Ia­sis re­pur­chased last year as a way to dis­trib­ute re­turns to share­hold­ers, said Eric Descher, vice pres­i­dent of fi­nance. White and other man­agers, how­ever, did re­ceive pay­ments when some of their op­tions were re­pur­chased, ac­count­ing for nearly $2.5 mil­lion of White’s com­pen­sa­tion that was dis­closed in a se­cu­ri­ties fil­ing, Descher said. White stepped down as CEO af­ter the end of the com­pany’s fis­cal 2010. He was suc­ceeded by Carl Whit­mer.

Kent Thiry topped the spe­cialty-care provider list for the sec­ond year in a row and the fifth time in the nine years that Mod­ern Health­care has con­ducted its anal­y­sis. The chair­man and CEO of dial­y­sis provider DaVita took in nearly $9.4 mil­lion in salary, bonus, re­stricted stock, in­cen­tive pay­ments and com­pen­sa­tion in 2010, and cashed in stock op­tions for net pro­ceeds of nearly $6.3 mil­lion.

DaVita’s re­sults for pa­tients and share­hold­ers un­der Thiry speak for them­selves, com­pany spokesman Skip Thur­man wrote in an e-mail. Thiry’s com­pen­sa­tion in 2010 was based on long-term in­cen­tives, in­clud­ing equity awards and a bonus, Thur­man wrote.

Never far from spot­light

While pub­lic ire is fo­cused right now on fed­eral politi­cians be­cause of the debt-ceil­ing deal, the wrath over ex­ec­u­tive com­pen­sa­tion rarely stays muted for long. Mod­ern Health­care’s ini­tial re­view of cor­po­rate CEO pay in 2003 fea­tured two sig­nif­i­cant tar­gets in the de­bate—Jef­frey Bar­bakow and Richard Scrushy, the for­mer CEOs of Tenet Health­care Corp. and HealthSouth Corp., re­spec­tively. As noted, Unit­edHealth’s McGuire stepped down af­ter out­cry about his com­pen­sa­tion. In­surance ex­ec­u­tives in par­tic­u­lar faced sig­nif­i­cant crit­i­cism dur­ing the de­bate on health­care re­form and even af­ter the Pa­tient Pro­tec­tion and Affordable Care Act was signed into law (Aug. 16, 2010, p. 6).

Greater dis­clo­sure of ex­ec­u­tive pay—as man­dated by SEC rules that took ef­fect in De­cem­ber 2006—has not had any dis­cern­able ef­fect on com­pen­sa­tion, which has tended to fol­low the over­all per­for­mance of the econ­omy, the Univer­sity of Chicago’s Ka­plan said.

Tak­ing the longer view, Ka­plan said, cor­po­rate CEO pay peaked in 2000 and is down about 40% in real terms since then. Even with the in­crease in 2010, CEO pay hasn’t reached 2007 lev­els, let alone those seen in 2000, he said.

More­over, a fur­ther mea­sure, in­cluded as part of the Wall Street and bank­ing re­form law passed in 2010 and known as Dod­dFrank, sug­gests that share­hold­ers are sat­is­fied with the pay ar­range­ments of the ex­ec­u­tives who lead their com­pa­nies, Ka­plan said. Dodd-Frank re­quired com­pa­nies, start­ing with an­nual meet­ings held this year, to give share­hold­ers an ad­vi­sory vote on ex­ec­u­tive com­pen­sa­tion—a “say on pay.” Re­search shows that share­hold­ers ap­proved of pay ar­range­ments 98% of the time this year, and 90% of com­pa­nies re­ceived votes of 70% or greater in fa­vor, he said.

“That’s pretty over­whelm­ing sup­port for pay prac­tices,” Ka­plan said, “when share­holder ac­tivists were say­ing there was a prob­lem.”

HCA’s Bracken topped the hos­pi­tal CEO com­pen­sa­tion list by earn­ing $41.3 mil­lion in 2010, in­clud­ing $38.2 mil­lion in an­nual com­pen­sa­tion.

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