The day after HealthTrust-The Hospital Co. buys Epic Healthcare Group, Epic's chairman, Kenn George, gets a $23 million payday.
How do Epic's shareholders-who consist mainly of its employees and American Medical International-feel about the size of that compensation package? Or for that matter, how do they view the total $11.5 million severance package for executives plus additional cash from their "stock appreciation rights"?
They'll vote on it this week, and that vote could have an effect on whether the Internal Revenue Service imposes a 20% excise tax on HealthTrust for "excess parachute payments" to Epic's executives.
It's not everyday that employees get to tell their boss how they feel about his paycheck, but at the Dallas-based chain of 34 hospitals, the employees are owners as well. Epic's 15,000 employee-owners hold 61% of the company through their employee stock ownership plan. As such, they have until this week to tell the ESOP trustee how to vote on the merger and the compensation plan.
The Epic shareholder vote will precede what's expected to be a May 4 acquisition of Epic by HealthTrust to form a 115-hospital chain. Following the $1 billion purchase, HealthTrust will be the nation's second-largest investor-owned hospital company.
There's not much doubt about the outcome of the Epic shareholder vote, however. HealthTrust's $7-per-share acquisition of Epic widely is viewed as a windfall for its employees and AMI, a Dallas-based hospital chain that holds a 26% stake in the company. AMI expects a pre-tax gain of $69 million on its stock; the after-tax yield will be $43 million.
What's more, AMI and the ESOP trustee have agreed to vote for the merger.
The compensation package may be a different matter, though. Whether the employee-owners realize the multimillion-dollar value of the executive parachutes depends on how well they deciphered the 40-page stockholder proxy statement.
"Obviously, some people are going to say we did this whole deal so he (Mr. George) can make a lot of money," said Gary Griffith, Epic's human resources officer. However, he stressed that the employee-owners are getting a good deal, and Epic "went to fairly great lengths to communicate the value of this merger" to its employees.
About the compensation plan, AMI's vote was undecided last week. "AMI is reviewing (the compensation package) and hasn't reached a final decision, although we're leaning toward a favorable vote," said Alan Chamison, the company's chief financial officer and an Epic director.
Last year, AMI sued Epic over an alleged plan to pay $13.8 million in capital gains taxes for Epic executives (Nov. 15, 1993, p. 12). The suit was later dropped.
Like AMI's suit, the shareholder vote is about taxes. In this case, Epic hopes to demonstrate shareholder support for the payments so the IRS doesn't penalize it for paying large severance benefits without stockholder consent. Under the IRS' "golden parachutes" provision, if 75% of shareholders approve the payments, the company may not have to pay a 20% excise tax on them.
Just in case the IRS levies the tax, HealthTrust has set aside $6 million for such payments.
Epic, with $1 billion in annual revenues, never made money, racking up losses that amounted to $118 million over its five-and-a-half years of existence.
Despite such financials, Epic's top 12 executives will emerge with an $11.5 million severance package plus additional cash from their "stock appreciation rights," or SARs.
For example, most of Mr. George's compensation will stem from SARs that he has accumulated since the company was spun off from AMI as a separate corporation in 1988.
Unlike most stock options that are awarded to executives at a specific exercise price, SARs are granted free to executives and employees. Epic's executives received them as part of their deferred compensation. Mr. George has 2.2 million SARs that will vest immediately when the merger is completed.
Those rights convert to $15.4 million in cash. On top of that, Mr. George will receive $8.25 million in severance.
His stock ownership is far higher than some other corporate CEOs', according to a Hewitt Associates survey. Based on its survey, Hewitt recommended a CEO have stock ownership valued at between three to five times his salary. Mr. George's ownership was worth 27 times his 1994 salary of $550,000. The Hewitt survey didn't include healthcare firms, but a spokeswoman said a similar survey on healthcare firms hadn't been done.
Mr. George and the other top 11 executives will lose their jobs when the merger is approved. However, the chain's other 228 corporate employees in Dallas are unsure of whether they'll have jobs either. Mr. Griffith said employees hadn't received "any official communication about what HealthTrust plans for this facility and these people."