When a healthcare company's shares experience a free fall on the stock exchanges, it's not only bad news for shareholders. The company's executives take a hit too.
William M. Mercer consulting firm has analyzed how executives at 56 investor-owned healthcare companies fared when the stock market was hammering their companies' shares. The results: Their pay packages flattened.
For the chief executive officers of the 16 largest investor-owned firms, the decline was abrupt. Their median total direct compensation, excluding options, plunged to $2.9 million in 1998 from $7.8 million in 1997. Such compensation for the top dogs, those at the 75th percentile in 1997, fell to $8 million from $14.8 million.
In 1998 healthcare CEOs' median total cash compensation-defined as base salary plus bonus-rose 5% to $725,000 from $690,000 in 1997. When long-term incentives were added, says Mercer consultant Marty Katz, "the CEOs' total pay package at the largest healthcare companies actually declined, a rare phenomenon in the world of executive compensation."
The total compensation package amounted to a median of $2.6 million, down 8% from $2.8 million in 1997.
The companies surveyed included such national giants as Beverly Enterprises, Columbia/HCA Healthcare Corp., HealthSouth Corp. and United HealthCare, as well as smaller regional firms, such as Omnicare, Trigon Healthcare and United Wisconsin Services.
To be included, companies had to have at least $300 million in revenues. The compensation data were drawn from proxy statements.
Most large public healthcare companies enjoyed higher revenues and earnings in fiscal 1998. Yet the stock market lost confidence in this sector. The price-to-earnings ratios of healthcare stocks fell to pre-1995 levels. The median shareholder return declined 34% in 1998 and 16% in the three years ended in 1998.
The median bonus, expressed as a percentage of base salary, was 29% in 1998 after having been 47% the year before. What's more, 38% of the firms declined to pay bonuses in 1998. To substitute for them, they raised base salaries or granted more stock options.
Healthcare firms tended to rely more heavily on stock options (98%) than general industry did (81%). This poses a long-term danger for the industry, Katz says. If healthcare stocks turn around and become a "value play," these lavish option packages could become very expensive for companies and could dilute corporate earnings. "The direct influence over future earnings per share may be more significant than many companies have planned for," he says.
Boards should resist the temptation to pile on more options when performance bonuses are low or nonexistent, in Katz's view. Better to measure and pay for performance improvement in revenues, operating margin or net income over a sustained period, he says.
"Then executives can be motivated (and paid) for financial improvement on measures unrelated to stock price," Katz says.