De­spite rough 2015, not all health­care ex­ecs see drop in pay

Modern Healthcare - - NEWS - By Dave Barkholz

Many of the high­est-paid health­care ex­ec­u­tives saw their com­pen­sa­tion ham­mered in 2015 as eco­nomic head­winds broadly damp­ened ex­ec­u­tive pay at pub­licly traded com­pa­nies. But more of them ap­pear to have bucked the trend.

Me­dian CEO pay at about 300 large pub­licly traded com­pa­nies fell 3.8% in 2015, ac­cord­ing to a Wall Street Jour­nal anal­y­sis, which the news­pa­per called the “worst show­ing for S&P 500 chiefs since the 2008 cri­sis.”

But me­dian pay in­creased 8% to $6.9 mil­lion among 200 of the high­est-paid health­care ex­ec­u­tives who held the same po­si­tion in 2014 and 2015, ac­cord­ing to a Mod­ern Health­care re­view of to­tal com­pen­sa­tion re­ported in 2016 proxy state­ments. Com­pen­sa­tion went up for 119 of the ex­ec­u­tives in the sam­ple and de­clined for the other 81.

To­tal com­pen­sa­tion for se­nior ex­ec­u­tives at hospi­tal com­pa­nies, in­clud­ing salaries, bonuses and stock awards, fell by 17% from 2014 lev­els.

For ex­am­ple, Com­mu­nity Health Sys­tems’ CEO Wayne Smith saw his com­pen­sa­tion in 2015 plum­met 22% to $9.3 mil­lion from $11.8 mil­lion in 2014, largely as a re­sult of his an­nual per­for­mance-based bonus fall­ing to $400,000 from $4.1 mil­lion in 2014.

The vast ma­jor­ity of se­nior ex­ec­u­tive pay in health­care is pegged to bonuses and stock awards for meet­ing fi­nan­cial tar­gets, such as ad­justed earn­ings and to­tal share­holder value, rather than base salary.

Con­se­quently, there’s a strong cor­re­la­tion be­tween ex­ec­u­tive com­pen­sa­tion and how a com­pany and its stock per­form in any given year, said Brian Tan­quilut, se­nior vice pres­i­dent of health­care equity re­search for Jef­feries & Co.

Hospi­tal stocks as a whole have been strug­gling since mid­sum­mer, when in­vestors started dump­ing them be­cause of wage in­fla­tion—a bad sign for hospi­tal costs—and a top­ping out of vol­ume in­creases from the Af­ford­able Care Act, Tan­quilut said.

That was fol­lowed in the sec­ond

half by earn­ings de­clines at CHS, Tenet Health­care Corp. and even some of the big physi­cian staffing com­pa­nies. Many stocks also were hit by a gen­eral in­vestor flight from com­pa­nies that are highly lever­aged, which is com­mon among the big hospi­tal op­er­a­tors.

CHS and Tenet, the na­tion’s sec­on­dand third-largest in­vestor-owned hospi­tal com­pa­nies, re­spec­tively, carry debt six times an­nual EBITDA from ac­qui­si­tion ac­tiv­ity. Five years ago, a ra­tio of 3.5 to 4 times would have seemed high, Tan­quilut said.

Those fac­tors caused CHS’ stock price to plunge in 2015 from a June 26 high of $64.04 to fin­ish the year at $26.53. Tenet didn’t fare much bet­ter. Its stock peaked at $60.78 in July be­fore fall­ing by half to $30.30 to end the year.

Ex­ec­u­tives for those com­pa­nies are now feel­ing that strug­gle in their own pay­checks and port­fo­lios. In a can­did let­ter to CHS share­hold­ers atop the com­pany’s 2016 proxy fil­ing, Smith took re­spon­si­bil­ity for the dis­ap­point­ing per­for­mance.

“Our re­sults for 2015 did not meet many of the (fi­nan­cial) tar­gets set forth in the em­ployee per­for­mance in­cen­tive plan, which re­sulted in mean­ing­fully lower per­for­mance bonuses paid to our ex­ec­u­tives for 2015 and no in­crease in base salary for our CEO and CFO (W. Larry Cash) for 2016,” Smith wrote.

Smith also is look­ing at a big re­duc­tion in the value of re­stricted stock awards this year. The proxy shows his per­for­mance-based re­stricted stock grant in 2016 will fall 68%, from $7.3 mil­lion in 2015 to $2.3 mil­lion this year. That goes along with a freeze in base salary this year at $1.6 mil­lion.

Tenet CEO Trevor Fet­ter, like­wise, re­ceived less com­pen­sa­tion in 2015. His to­tal com­pen­sa­tion fell 14% to $15.4 mil­lion last year from $18 mil­lion in 2014. Health­care in­vestors used med­i­cal-de­vice com­pany stocks as a haven from the trou­bles roil­ing the provider space.

Com­pen­sa­tion for the de­vice­maker ex­ec­u­tives in Mod­ern Health­care’s sam­ple shot up 119%—although that fig­ure is some­what dis­torted by huge gains un­der spe­cial cir­cum­stances at Medtronic and Masimo, which makes pa­tient-mon­i­tor­ing tech­nol­ogy (See story, p. 6).

Health in­surance ex­ec­u­tives in Mod­ern Health­care’s sam­ple saw com­pen­sa­tion rise by 20% in ag­gre­gate. The year was marked by big merg­ers and some size­able in­creases in pay for the CEOs in­volved. Aetna, which an­nounced plans for the $37 bil­lion pur­chase of Hu­mana in July, boosted to­tal com­pen­sa­tion for CEO Mark Ber­tolini to $17.3 mil­lion in 2015.

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