National Medical Enterprises will ask its stockholders later this month to approve a new compensation plan that would exceed a $1 million cap on the annual compensation of chairman Jeffrey Barbakow and four other top executives.
Hoping to rein in excessive corporate pay packages, Congress last year imposed a $1 million limit on the amount of executive pay that is tax-deductible. According to the new law, a company cannot deduct as a business expense amounts over $1 million for an executive's compensation.
However, there's a loophole: A company can pay an executive as much as it likes and deduct the amount if the compensation is linked to performance.
That's prompted dozens of corporations to devise new compensation plans that link pay to performance. For example, a recent study by Hewitt Associates, Lincolnshire, Ill., showed that 52% of the 104 companies that would be affected by the new cap indicated in their proxies this year that they were making changes to conform to the new rules. Of those, 56% were seeking shareholder approval to change their short-term incentive plans.
NME, a Santa Monica, Calif.-based chain of 35 acute-care hospitals, is required to gain shareholder approval to adopt a new performance-based system that will allow the board to pay Mr. Barbakow more than $1 million a year. According to the company's proxy, the new plan would allow Mr. Barbakow's bonuses to rise to $1.5 million a year.
However, NME, may not be alone in this effort. The top executives of five other hospital chains received more than $1 million in salary and bonus in 1993 (June 20, p. 52).
NME shareholders will vote on the proposal at the company's annual shareholders meeting Sept. 28 in Santa Monica. The NME plan is designed to "enhance shareholder value and promote the attainment of significant business objectives of the company by basing a portion of an employee's compensation on the performance of such employee," the proxy reported.
Mr. Barbakow already draws a salary that's in the top 25% of its peer group of other investor-owned hospital companies, according to NME's proxy statement. In fiscal 1994 ended May 31, he received $1.8 million, which included $850,000 in salary, an $892,500 bonus and $110,000 in other compensation, which included the cost of his personal use of NME's corporate airplane. The new limit on deductibility wasn't in effect for that fiscal year.
Mr. Barbakow's bonus was based on the board's belief that he and his managers had "done an outstanding job in managing the company through its difficulties and enhancing shareholder value," the proxy reported.
Since taking the top spot at NME in June 1993, Mr. Barbakow has settled extensive litigation and a sweeping criminal probe of the company's psychiatric operations. In addition, he's divested NME's rehabilitation and psychiatric hospitals.
Christy Sulz-bach, NME's associate general counsel, also noted that Mr. Barbakow's performance is not solely based on financial criteria. "There's a strong quality-of-care component to it," she noted.
Mr. Barbakow's financial status also is buoyed by his stock holdings. When he was named president and chief executive officer in June 1993, he was granted stock options now valued at $18.5 million, based on the $9.50 exercise price and last week's $18.75 trading price for NME stock.