Heading an investor-owned rehabilitation or psychiatric hospital chain paid well in 1993.
The top executives of those hospital chains came out highest in MODERN HEALTHCARE's survey of 1993 compensation for investor-owned hospital companies.
Repriced stock options boosted the total compensation for top executives of HealthSouth Rehabilitation Corp., Continental Medical Systems and Community Psychiatric Centers.
Although the stocks for all three chains sagged in 1992, the top executives didn't need to worry about their stock options, which are a key part of executive compensation. Options give corporate boards a way to tie executive performance to the company's stock price.
At each of the three chains, the stock option price had dropped below the trading price, making the options almost worthless. To give executives the incentive to improve performance, the boards repriced those options, allowing executives to later buy the company's stock at a lower price than when the options originally were awarded.
For HealthSouth's Richard Scrushy, Continental's Rocco Ortenzio and CPC's Richard Conte, the value of the repriced options boosted their 1993 pay above that of their counterparts at publicly held acute-care hospital chains.
Formulas. To calculate total pay, business magazines have used various formulas. Business Week includes the exercise of stock options in total pay. However, those often include many years' accumulated options. For example, Business Week named Walt Disney Co. chief Michael D. Eisner as top-paid chief executive officer with $203 million in 1993. However, those options were awarded to him as far back as 1984.
To get a better idea of one year's compensation, MODERN HEALTHCARE has included the awarding of stock options in total pay because boards typically determine options annually based on performance.
With the assistance of Price Waterhouse compensation expert Ronald Eller, MODERN HEALTHCARE assessed the value of stock options awarded in 1993 according to the "Black-Scholes model of option valuation." The formula is used by many Fortune 500 companies and some hospital chains, such as Vencor.
To calculate the options for this story, the model included a 6% risk-free rate of return, a 0.3 volatility and no dividends paid. Columbia/HCA Healthcare Corp.'s options for its top executive, Richard Scott, were calculated differently to allow for the company's 3-cent-per-share quarterly dividend.
The value of repricing. Because repriced options effectively cancel previously awarded options, they're included in the 1993 compensation tables.
For example, Mr. Conte, chairman and CEO of Laguna Hills, Calif.-based Community Psychiatric Centers, received 550,000 stock options in 1993. However, 166,328 were repriced options that Mr. Conte received in exchange for giving up 332,656 options.
Those options had an exercise price of $25.94, which makes them virtually worthless when the stock is trading at $10 a share. That was the price in January 1993, when CPC decided to "reprice" the options.
Mr. Conte received 166,328 share options-exactly half as many-for $10.88, or 25 cents higher than the closing price of the company stock on Jan. 29, 1993. In the proxy, CPC reported that its compensation committee believed options held by Mr. Conte and former President and Chief Operating Officer Loren Shook should be repriced so they would "have additional incentive for their efforts."
Mr. Shook left nine months later, taking a gain of $203,750 on the repriced options. That was in addition to $776,094 in severance and deferred compensation.
Mr. Conte also received some unusually priced stock options. He was granted 100,000 shares of stock at an exercise price of $29.50-$20 above the stock's closing price when the options were awarded in May 1993. However, the exercise price of those options will decrease by $5 each year if CPC "meets specific targets or increases total return to shareholders." When the exercise price and the stock's market price are the same, the exercise price freezes, and the options can be exercised anytime after that.
Of course, repriced options aren't worth much if the company's stock continues to sag. That's the case at Mechanicsburg, Pa.-based Continental Medical, whose board repriced the options of its chairman and CEO, Mr. Ortenzio, in May 1993 from $15.75 and $13 per share to $11 per share. Unfortunately, Continental's shares are declining to just under $11 per share.
However, the same is not true for HealthSouth, where the board twice repriced Mr. Scrushy's 2.1 million in stock options from as high as $19.17 to $15.13 per share. That boosted the chairman, president and CEO's pay to the top of MODERN HEALTHCARE's compensation chart because the repricings were worth $15 million. In addition, Mr. Scrushy received 271,000 new options, worth about $2.3 million.
As a double bonus, shares in the Birmingham, Ala.-based company have nearly doubled since the repricing, giving Mr. Scrushy a potential gain on those shares of about $30 million.
Mr. Scrushy also came away with a special bonus in 1993-$1 million for inking the deal to buy 28 rehabilitation hospitals and 45 outpatient centers from National Medical Enterprises. The purchase essentially doubled the size of HealthSouth.
That additional bonus increased his salary and bonus total by 119%.
More gets less. Growing the company didn't pay quite as well for Mr. Scott, president and CEO of Columbia/HCA Healthcare Corp., even though he pulled off two of the biggest mergers in healthcare history.
Columbia, a 196-hospital chain, merged with Galen Health Care in 1993 and Hospital Corporation of America in early 1994.
Mr. Scott started 1993 with a base salary of $371,000, one of the lowest among hospital chain executives. He received a $350,000 bonus "for the key part Mr. Scott played in initiating, negotiating and accomplishing two of the largest mergers in the healthcare industry," the company's proxy said.
However, Mr. Scott's stake in the Louisville, Ky.-based company is considerable, which some may argue makes up for his lower compensation. Mr. Scott owns 6.1 million shares of Columbia/HCA, a 1.9% equity stake worth $240 million.
At a smaller chain, William J. Schoen, Health Management Associates' chairman, president and chief executive officer, received one of the largest total acute-care hospital chain salaries in 1993-$13 million, which includes 1.5 million new stock options. Mr. Schoen's salary and bonus of $837,500 in 1993 is dwarfed by the options, some of which were awarded at fair-market price and others at above-market price as an additional inducement.
Typically, stock options are awarded at market price, giving an executive the incentive to grow the company and its share price. By putting half of Mr. Schoen's options above the market price, the board dangled the carrot further than most investor-owned chains. To profit from the options, Mr. Schoen not only had to increase the company's share price, but increase it several dollars a share.
However, that apparently hasn't been a problem. HMA shares are now trading at about $35, far above the $16.83 to $21.67 option price at which the shares were awarded.
Other carrots. Options are just one way hospital chains award their top executives. They also pay them salary and bonuses that hinge on company performance.
For example, this year, Universal Health Services, a King of Prussia, Pa.-based chain of 26 hospitals, instituted a new executive incentive plan, the terms of which are contained in the company's proxy.
In 1993, the company's chairman, president and CEO, Alan Miller, was eligible for a bonus of as much as 50% of his base salary if company targets were achieved. Those targets were achieved, the proxy reports, and Mr. Miller received a bonus of $426,000, or 60% of his salary, because the compensation committee elected to increase the amount of the bonus.
Under the company's new 1994 executive incentive plan, Mr. Miller will be eligible for a bonus if Universal increases its net income and its return on capital for the year. The bonus can be as much as 130% of Mr. Miller's salary, and 20% of the bonus will be paid in stock, according to the proxy.
Of the 20 hospital chain CEOs included in the survey, 11 received raises in salary and bonus that ranged from 6% to 125%.
Not so generous. However, not everyone got big salary and bonus increases. For example, Vencor's chairman, president and CEO, W. Bruce Lunsford, received $525,000, the same as in 1992.
"We're the kind of management team that's going to lead by example," said W. Earl Reed III, the company's vice president of finance, who didn't get a raise either. "We were trying to lead the parade on cost-containment."
None of Vencor's top three executives took pay raises. However, Mr. Reed said, the same was not true of Vencor employees, who received raises that averaged 4% to 5%.
For those executives whose salary and bonus dropped, most didn't reach prescribed earnings targets for their companies. For example, at NovaCare, Chairman, President and CEO John Foster's compensation dropped 48% because he didn't receive any bonus when the company failed to meet certain earnings-per-share targets.
American Medical's chairman and CEO, Robert O'Leary, saw his salary and bonus drop 12%. However, Mr. O'Leary received other bonuses-$155,850 from a long-term incentive plan and $218,362 from the forgiveness of a company loan. When Mr. O'Leary was hired in 1991, he received an interest-free loan of $600,000, which is forgiven in monthly installments.
Quorum Health Group's president and CEO, James E. Dalton Jr., saw his salary and bonus drop 41% in 1993. However, he received another bonus when he exercised options on 333,334 shares at $1.50 per share. That gave him a paper profit of $750,000, assuming he would cash out those shares at $6 each. However, that profit would be even greater because Quorum went public last month at $15 per share.
Charter Medical Corp.'s chairman, president and CEO, E. Mac Crawford, also received less in salary and bonus. That total dropped 42%, apparently because Charter didn't do as well as the year before. What's odd is that the year before, Charter filed for bankruptcy, so it seems that anything would be better.
However, Mr. Crawford's bonus is determined by whether Charter meets certain targeted operating income. In 1992, Mr. Crawford received a $500,000 bonus to complete the company's financial restructuring and a $403,000 bonus for exceeding certain financial targets. In 1993, the hurdle was higher. Charter's operating income was 103.7% of the target, and that worked out to a bonus of 56.4% of his salary, or $293,380.
Lucrative exits. Some of the highest-paid hospital chain executives in 1993 took their checks on the way out.
Topping the field was William A. Fickling Jr., Charter's former chairman, president and CEO. The nation's largest psychiatric hospital chain, Charter filed for Chapter 11 reorganization in 1992, and Mr. Fickling was forced out in March 1993.
By that time, Mr. Fickling had accumulated 2.2 million stock options, which would become even more valuable if he was "terminated without cause." When that happened last year, Mr. Fickling could exercise those shares for just 25 cents each-not the $4.36 or $9.60 per share exercise price at which they originally were granted. That was worth $52 million, according to Charter's proxy statement.
In addition to the stock options, Mr. Fickling also received $2.3 million in severance and incentive bonus pay.