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Com­pen­sa­tion for top-paid health­care CEOs grew faster than prof­its

Modern Healthcare - - NEWS - By Me­lanie Evans

To­tal com­pen­sa­tion for some of the high­est-paid CEOs in the health­care in­dus­try in­creased faster than their com­pa­nies’ prof­its last year, a Mod­ern Health­care anal­y­sis of the first firms to re­port ex­ec­u­tive pay found.

Cor­po­ra­tions with the most richly re­warded CEOs by sec­tor in 2014 in­cluded Com­mu­nity Health Sys­tems, a Franklin, Tenn.-based hos­pi­tal op­er­a­tor; Cen­tene Corp., a St. Louis-based in­surer; CVS Health Corp., a re­tail phar­macy and phar­macy ben­e­fit manager based in Woonsocket, R.I., and Re­gen­eron Phar­ma­ceu­ti­cals, a New York City-based biotech­nol­ogy com­pany.

Mod­ern Health­care’s early look at ex­ec­u­tive com­pen­sa­tion in­cluded more than 100 com­pa­nies that dis­closed CEO com­pen­sa­tion as of April 10. The anal­y­sis, which looked across four health­care sec­tors, found the five high­est­paid CEOs in each sec­tor en­joyed a me­dian in­crease in to­tal com­pen­sa­tion last year of 8.5%. That’s a more ro­bust gain than the 4% me­dian growth in net in­come for the 20 com­pa­nies headed by th­ese CEOs. Me­dian to­tal com­pen­sa­tion in 2014 for the 117 CEOs for whom Mod­ern Health­care col­lected com­pen­sa­tion data was $5.4 mil­lion, with a me­dian in­crease of 9.6% over the prior year.

The lu­cra­tive health­care pay packages in 2014 come as chief ex­ec­u­tives of the largest com­pa­nies over­all

en­joyed the big­gest com­pen­sa­tion gains since 2010, ac­cord­ing to a Tow­ers Wat­son anal­y­sis of 500 com­pa­nies in the Stan­dard & Poor’s 1,500 with pub­licly re­ported com­pen­sa­tion through last month. The me­dian com­pen­sa­tion of CEOs at those 500 firms rose 12.1% last year, thanks in part to larger in­cen­tive awards, Tow­ers Wat­son found.

Com­pa­nies on Mod­ern Health­care’s list of high­est-paid CEOs de­ployed var­i­ous strate­gies to in­cen­tivize their top ex­ec­u­tives, in­clud­ing eq­uity awards tied to com­pany per­for­mance, a strat­egy that is in­creas­ingly com­mon but con­tin­u­ing to evolve. “To some ex­tent, they’re testing the wa­ter” with stock or op­tion awards tied to per­for­mance, said Wayne Guay, an ac­count­ing pro­fes­sor at the Uni­ver­sity of Penn­syl­va­nia.

Re­gen­eron CEO Leonard Sch­leifer led Mod­ern Health­care’s list of high­est-paid CEOs in the sup­ply-chain sec­tor, with to­tal com­pen­sa­tion of $42 mil­lion, up 15.7% from the prior year. That was de­spite Re­gen­eron’s rel­a­tively small $2.8 bil­lion in rev­enue. Stock op­tions ac­counted for roughly 90% of Sch­leifer’s pay­out. In cor­po­rate fil­ings, Re­gen­eron cited 44% growth in its stock price last year as ev­i­dence of the achieve­ment of its top ex­ec­u­tives. But the com­pany’s net in­come dropped 18%. No one was avail­able for an in­ter­view.

Com­mu­nity Health Sys­tems’ Wayne Smith took the top spot among CEOs of provider com­pa­nies, with to­tal com­pen­sa­tion of $26.4 mil­lion. CHS awarded its CEO by far the largest in­crease in to­tal com­pen­sa­tion—199.3%. CHS’ rev­enue soared 45% with the $3.6 bil­lion ac­qui­si­tion of Health Man­age­ment As­so­ciates in Jan­uary 2014. But the com­pany saw net in­come slip 6% as it di­gested its new as­sets. CHS de­clined an in­ter­view re­quest.

On the other hand, to­tal com­pen­sa­tion for Cen­tene Corp. CEO Michael Nei­dorff, the high­est-paid chief of an in­sur­ance com­pany, grew at a lower rate than his com­pany’s prof­its. His 2014 pay was $19.3 mil­lion, up 33% from the prior year thanks to a boost to his stock op­tions. The com­pany’s rev­enue to­taled $16.6 bil­lion, up 52% from the prior year, while net in­come reached $264 mil­lion, an in­crease of 59% from the prior year.

Thomas Kelly, an ex­ec­u­tive com­pen­sa­tion con­sul­tant for Tow­ers Wat­son, said per­for­mance-based eq­uity awards have flour­ished among the For­tune 500 com­pa­nies. But some com­pa­nies have strug­gled to iden­tify work­able per­for­mance cri­te­ria and have re­vised tar­gets

to one-year from three-year time frames. Growth tar­gets such as rev­enue or share­holder re­turn can be skewed or stymied by un­fore­seen ac­qui­si­tions, reg­u­la­tory de­lays, con­gres­sional ac­tion or mar­ket swings. “It sounds eas­ier to do than it is,” Kelly said.

That hasn’t stopped com­pa­nies from try­ing. Cen­tene ties vest­ing of stock awards to com­pany per­for­mance. So does CHS.

In the sup­ply-chain sec­tor, Ac­tavis CEO Bren­ton Saun­ders ranked sec­ond to Sch­leifer, with com­pen­sa­tion last year of $36.6 mil­lion. Last July, Saun­ders be­came chief ex­ec­u­tive of Ac­tavis, which re­ported $13 bil­lion in rev­enue.

The chief ex­ec­u­tives of Bris­tol-My­ers Squibb Co., John­son & John­son and Abb Vie also made the sup­ply chain’s high­est-paid list.

In the health­care ser­vices sec­tor, CVS Health CEO Larry Merlo boasted the high­est pay, with to­tal com­pen­sa­tion of $32.4 mil­lion, an in­crease of 3.3% over 2013. His com­pany’s rev­enue to­taled $139.4 bil­lion, up 10%, while net in­come edged up 1% to $4.6 bil­lion.

Last year “was a very strong per­for­mance year for CVS Health with record net rev­enue and ro­bust prof­itable growth in all of its busi­nesses,” said Carolyn Cas­tel, a com­pany spokes­woman. “Mr. Merlo’s com­pen­sa­tion in 2014 re­flected this sig­nif­i­cant level of achieve­ment as well as his role in po­si­tion­ing the com­pany for fu­ture growth.”

A one-time stock grant sig­nif­i­cantly boosted to­tal com­pen­sa­tion for CHS CEO Smith. That grant came as part of his com­pany’s ac­qui­si­tion of Health Man­age­ment As­so­ciates. It in­creased his stock awards from the prior year by 258%.

Kelly said such one-time awards are not un­com­mon in ex­tra­or­di­nary cir­cum­stances, such as ma­jor ac­qui­si­tions, di­vesti­tures, new ex­ec­u­tivelevel hires or when com­pa­nies make sig­nif­i­cant changes to strat­egy. Stock awards typ­i­cally can’t be cashed out un­til ex­ec­u­tives meet per­for­mance goals or un­til a num­ber of years have passed, or both. The strings at­tached to the stock—which is only as valu­able as the stock price—are one way the board seeks to en­sure CEOs work to de­liver benefits from the deal, he said. “The end re­sult is what hap­pens af­ter it closes,” he said.

Smith’s stock award re­quires him to meet per­for­mance goals. He also must wait up to three years to col­lect. Com- mu­nity Health Sys­tems must reap at least $150 mil­lion in gains from the merger through the end of 2016, but ex­ec­u­tives will see larger pay­outs if the gains ex­ceed $200 mil­lion.

Over­all, 2014 was a lu­cra­tive year for hos­pi­tal CEOs on the best-paid list.

Alan Miller, CEO of Uni­ver­sal Health Ser­vices, King of Prus­sia, Pa., en­joyed one of the big­gest in­creases in to­tal com­pen­sa­tion, re­ceiv­ing 40.1% higher pay than in 2013. Uni­ver­sal, the small­est of four hos­pi­tal op­er­a­tors rep­re­sented on Mod­ern Health­care’s high­est-paid CEO list, in­creased Miller’s op­tion awards by one-fourth and his cash in­cen­tive pay­out by roughly two-thirds. The com­pany’s fi­nan­cial per­for­mance and re­turn on cap­i­tal earned Miller the largest bonus he was el­i­gi­ble to re­ceive— 2.5 times his $1.5 mil­lion salary.

At Nashville-based HCA, CEO R. Mil­ton John­son saw his com­pen­sa­tion in­crease roughly 90% with his pro­mo­tion to chief ex­ec­u­tive in Jan­uary 2014 from pres­i­dent and chief fi­nan­cial of­fi­cer.

But not all hos­pi­tal CEOs re­ceived a raise last year. Tenet Health­care Corp. CEO Trevor Fet­ter saw his to­tal com­pen­sa­tion drop 21%. That fol­lowed a spe­cial stock award in 2013 for his ten­ure and per­for­mance that raised his stock com­pen­sa­tion that year to $17.5 mil­lion. In 2014, the value of his stock com­pen­sa­tion fell to $8 mil­lion.

McKes­son Corp. CEO John Hammergren and Aetna CEO Mark Ber­tolini ended the year with com­pen­sa­tion down 49.9% and 51%, re­spec­tively.

Hammergren’s pen­sion value saw a sig­nif­i­cantly smaller in­crease in 2014 com­pared with the prior year; that largely ac­counted for the sharp drop in his to­tal 2014 pay. Ber­tolini’s re­ceived a one-time re­ten­tion award in 2013, ex­plain­ing his much lower to­tal 2014 com­pen­sa­tion. Sim­i­lar to CHS, Aetna tied the re­ten­tion award to per­for­mance.

In­creas­ingly, com­pa­nies use per­for­mance—rather than sim­ply length of time since the grant of stock or op­tions—to de­ter­mine whether ex­ec­u­tives can cash in on th­ese awards. Per­for­mance mea­sures are ap­plied not only to one-time awards, but more com­monly to vest­ing an­nual eq­uity pay­outs as well, said Steven Sul­li­van, vice pres­i­dent at Pearl Meyer & Part­ners, a com­pen­sa­tion con­sult­ing firm. “Per­for­mance shares are kind of ev­ery­where.”

Re­gen­eron Phar­ma­ceu­ti­cals, how­ever, dropped per­for­mance mea­sures from its eq­uity awards in 2013 af­ter adopt­ing them in 2008. The com­pany said its in­dus­try peers don’t use per­for­mance to re­strict whether their CEOs can vest eq­uity awards.

Mid­sized com­pa­nies have moved more slowly to adopt per­for­mance shares, said Tow­ers Wat­son’s Kelly.

CVS Health does not tie re­stricted stock and op­tions to per­for­mance cri­te­ria, but does of­fer its ex­ec­u­tives a long-term in­cen­tive plan that in­cludes cash and stock awards. “Mr. Merlo’s com­pen­sa­tion, as well as the com­pen­sa­tion of other ex­ec­u­tive of­fi­cers, re­flects a base salary as well as short­and long-term in­cen­tives, with an em­pha­sis on long-term in­cen­tives,” CVS spokes­woman Cas­tel said.

Merlo’s pay­out for cash tied to longterm in­cen­tive ac­counted for 35% of his to­tal com­pen­sa­tion, the high­est of any of his top-paid peers. “This ap­proach aligns the in­ter­ests of our ex­ec­u­tive of­fi­cers and stock­hold­ers and fos­ters an eq­uity own­er­ship en­vi­ron­ment,” Cas­tel added.

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