CEO compensation: Accomplishments translate into healthy paychecks

CEOs at top managed care firms are earning more than their counterparts in other industries. And with insurers outperforming the stock market, that's not likely to change.

By Robert Kazel, AMNews staff. May 26, 2003.

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William McGarvey, MD, a retired Indianapolis otolaryngologist, found the high pay commanded by managed care CEOs so reprehensible that, at Anthem's 2002 annual meeting, he confronted President and CEO Larry Glasscock about his multimillion-dollar pay package.

In 2001, the year covered at that meeting, Glasscock got $3.1 million in salary and bonuses, as well as a $12.4 million long-term incentive payout. In 2002, Glasscock got $3.3 million in salary and bonuses, about the average for managed care CEOs at the largest firms.

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His 6.5% raise was actually below the 17.7% average bump for the top managed care CEOs, as reported by Equilar Inc., an independent corporate research firm. But it was better than the 3% gain for all CEOs, who made an average of $2.1 million in cash -- not including stock options and other perks -- in 2002. Those gains have shareholder activists, unions and other critics of executive pay wondering why it continues to move upward during a down economy and stock market.

On top of that, many physicians, like Dr. McGarvey, feel that high pay for managed care CEOs is particularly galling considering companies are jacking up premiums by 20% or more, and tightening physician reimbursement as a means to raise profits. In their view, money that could presumably be used for care, or to make insurance more accessible, is instead heading into the pockets of paper-shufflers.

"We have 40 million people in this country who have no medical insurance because they can't afford it," Dr. McGarvey says. "They work just as hard as the CEOs. They just haven't had the breaks that they have, and it's not fair. The majority of Americans live from Friday to Friday."

Dr. McGarvey was not at Indianapolis-based Anthem's annual meeting as an activist, he's a shareholder. He declined to say how many shares he owns, but says it's "a small amount." He's bought more shares as a gift for his son, and is considering buying more for himself.

Therein lies the conundrum of managed care CEO pay. In health care terms, paying multiple millions of dollars to CEOs seems completely out of line. In corporate terms, the CEOs are getting their just rewards.

In 2002, the Standard & Poor's Managed Care Index was up 5.2%, compared with a 22.5% fall for a combination of three major S&P indexes. In the first two months of 2003, the managed care index fell 2.6%, but that was better than the 4.6% fall in the major S&P indexes. Of course, CEOs get ample stock options, so there's an incentive to do whatever it takes to get the stock price up, which also rewards investors like Dr. McGarvey.

"I don't think they're bad companies" from an investment standpoint, he says. "I do see that Anthem will be a success, even though I don't agree with [its CEO pay] philosophy."

Why pay is going up

Average compensation for the top managed care executives was more than $3.4 million in salaries and bonuses last year, in contrast with the average cash compensation of $2.1 million for CEOs at large companies in all industries. That doesn't include long-term performance bonuses, stock options or stock awards, which have the potential to yield windfalls amounting to tens of millions of dollars in additional income. At the start of next year, for instance, Glasscock will be eligible for a long-term incentive plan payout that will most likely total at least $32 million in stock and cash, a reward for his leadership during 2001-03.

A marked upward spiral in total pay among top health care executives started two or three years ago, said Gordon Hawthorne, managing director of health care consulting for the Hay Group in Washington, D.C. Managed care CEOs have enjoyed towering compensation levels during fat times and lean, even under "pay for performance" standards designed to align pay to the success of their firms.

Chiefs who command the most prosperous plans are blessed by their boards with lucrative pay packages, while top guns at struggling or recovering plans typically get huge paychecks as well, because they are deemed to be leading companies through difficult turnaround situations to future glory.

For example, on top of the $9 million salary and bonuses he pulled in for 2002, Minnetonka, Minn.-based UnitedHealth Group Chair and CEO William W. McGuire, MD, received 650,000 stock options as a reward for United's strong financial performance. The options give him the right, by the end of 10 years, to buy shares at $69.55, the price when the options were awarded. That eventually could net him $28.4 million if United stock appreciates at 5% annually, or $72 million if the return is at 10%. By contrast, if the share price falls below the options' strike price, he can choose not to exercise the options. At press time, United's share price was more than $90.

Meanwhile, Philadelphia-based CIGNA is lavishing Chair and CEO H. Edward Hanway with money for taking on a turnaround situation. The company's stock price dropped 51.2% last year as the plan felt the impact of low indemnity renewal rates, high overhead and underpricing, so Hanway didn't get a bonus.

But he still received a salary of more than $1 million and an outright stock grant equal to that amount. He also cashed in $3.9 million in stock options. Though board members, in the company's 2003 proxy statement, noted disappointing results for CIGNA's health care operations, they gave Hanway points for such plusses as "financial stewardship and integrity" and "people-building."

"If a company is in trouble and wants to hire a CEO to turn itself around," Hawthorne says, "it will need to pay incentives to get one."

Fat CEO pay levels are by no means confined to the health care field. In all industries, top-level executive compensation has escalated during the last decade, leading to increased shareholder pressure on boards of directors to place a lid on compensation. In some instances, shareholders are proposing policies that would link lucrative stock option awards to "indexes" that would tie their magnitude to specific management goals, says Steven Schaeffer, an Atlanta compensation attorney.

But sky-high CEO pay is a simple fact of boardroom life, say its defenders, because a system that fails to reward top executives can't prevent them from fleeing to rival companies at the first opportunity. The number of executives with the background and acumen to capably command a big managed care plan, the argument goes, is limited.

"If there were a lot of people out there who could take this job, the price would drop," says R. Lawrence Van Horn, PhD, MPH, a health economist at New York's University of Rochester. "You can't just plug anyone in there and expect them to be as good. I really want to have smart people solving those problems. You get what you pay for."

If a leading health plan tries to economize simply by cutting CEO pay, says New York compensation attorney Donald Carleen, "you're just going to get a different breed of individual there. You're not to going to get stars."

Enthusiastic defenders of corporate capitalism insist that high CEO pay has nothing to do with unfairness.

"Is it 'fair' that [NBC anchorwoman] Katie Couric makes $70,000 a morning just for looking perky?" Dr. Van Horn asks.

No sign of change

Physicians who gripe about CEOs' pay based on their own frustrations over managed care policies don't have "a complete view of the world," Dr. Van Horn adds. "They don't see the added value in building the companies, in making the pie bigger. These managers have the ability to materially affect health care."

Amanda Fox, head of the managed care practice of Chicago-based Spencer Stuart, a global executive search firm, points to the example of Glasscock, whom she says has proven to be a "juggernaut" since the health plan became for-profit. "Anthem had no clear direction, discipline or focus," before Glasscock was named CEO in 1999, Fox says.

There generally is no connection between managed care CEO pay and physician satisfaction. Still, adding such a measure to compensation committees' deliberations would make sense, Hawthorne says.

"If I were the CEO of a managed care network, I think one of my greatest assets would be my physician network," Hawthorne says. "I would be focused on trying to make my managed care company attractive to physicians."

But introducing some doctor surveys as a means to rate CEOs might not mollify critics of mounting executive compensation, who fear that the cash box is already wide open and hope for reform is nowhere in sight. CEO contracts and compensation policies continue to get ratified by nonconfrontational boards year after year, they say, and in the managed care sector in particular, there is little reason to expect change.

Money to CEOs apparently will flow as long as profit streams do, and shareholders -- save the occasional disillusioned doctor with a stock certificate -- are not yet audibly upset.

Still, one researcher who has studied managed care pay is amazed by the numbers he hears about.

"If someone is earning $10 million a year or $20 million a year, that seems quite excessive, given what we are experiencing with health care," says Frank Sloan, PhD, a professor of economics at Duke University. "It just creates an upward spiral. I'm not really ready for regulation, but I think we need to worry about these multiples [of CEO pay versus average wages]. These multiples are discouraging to people. ... A lot of us work because we love the work. We just do it out of a love of it, and we don't have to be paid $7 million to do it."

When Dr. McGarvey challenged Anthem's Glasscock over his pay, he said the response was "silence." Glasscock would not comment for this story, but spokesman Edward West said Glasscock's pay was effectively determined by financial performance, plan size and quality of care. After all, West says, businesses would leave Anthem if they weren't satisfied. Anthem also aims to set core pay to be in the median range of what comparable CEOs are earning, he says.

To Dr. McGarvey, that is precisely the problem: All top insurers are paying their CEOs at wildly excessive levels, and the median is exactly in the middle of the excess. "I'm a capitalist, but I'm concerned," Dr. McGarvey says. "Let them make multimillions in business, fashion, entertainment ... but not by depleting valuable health care dollars."

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