Strong performance

It may be hard to remember given the financial roller coaster of the past few weeks, but 2010 was a good year for stock markets and corporate earnings. And, broadly speaking, CEO pay for 2010 reflected those good results.

In corporate healthcare, however, the returns were mixed: The sector slipped from the top spot to No. 2 among those represented in the Standard & Poor's 500, according to one data firm's analysis. Yet the highest-earning hospital executive in Modern Healthcare's annual look at corporate pay took home double the haul of the top CEO in 2009, and the overall compensation of the nine hospital CEOs to make the list in both years increased 58.2%, to $101.9 million. The top earners in two other categories—insurers and specialty-care providers—saw much lower compensation in 2010 after cashing out far fewer stock options than they did the previous year, according to securities filings.

CEOs who worked for the same S&P 500 companies in 2009 and 2010 saw a median compensation boost of 28.2% last year, according to Equilar, an executive-compensation data firm. In comparison, the S&P 500 index increased 12.8%. And although healthcare executives as a group saw a smaller year-over-year increase in median total compensation—5.8%—than did their peers in other fields in 2010, they still ranked second overall in pay, with a median compensation of $9.7 million.

Only executives in the basic-materials and energy sector were more highly paid.

In general, “2010 was a great year for corporate earnings and stock performance,” said Steve Kaplan, a professor of finance and entrepreneurship at the University of Chicago Booth School of Business. “Part of the reason for the increase in pay is that the CEOs delivered in 2010.”

Modern Healthcare's annual report on corporate CEO pay looks at the 10 largest companies by net revenue in three sectors—hospitals, insurers and specialty-care providers—that file periodic reports with the U.S. Securities and Exchange Commission and therefore disclose executive compensation annually. The last sector excludes companies that provide primarily skilled-nursing or assisted-living services.

Annual compensation includes salary, bonus, restricted stock grants and changes in pension and deferred contribution plans as reported in proxy statements or other filings with the SEC. Listed under “exercised stock options” are the net proceeds that the executives received on actual sales of shares acquired via stock options. Total dollar compensation is the sum of these two amounts.

For the second year in a row, Stephen Hemsley of UnitedHealth Group topped the overall and insurers lists. Hemsley received $6.3 million in compensation in 2010, including salary, restricted stock, nonequity incentive pay and other compensation, and he cashed out stock options for proceeds of $43.5 million. That's less than half of the $98.6 million that Hemsley reaped from exercising stock options in 2009 (Aug. 16, 2010, p. 6).

UnitedHealth Group declined to comment for this story. Hemsley has worked for the insurance giant since 1997 and became its president and CEO in November 2006. Hemsley's predecessor, William McGuire, topped the list in 2004 and 2005 on the strength of large exercises of stock options. McGuire resigned in 2006 over allegations that he improperly manipulated the dates of stock option awards to his benefit. McGuire later agreed to cancel 3.675 million options and paid $30 million to settle a shareholder lawsuit.

An insurance executive who dropped off the list actually raked in the most compensation last year. Ronald Williams stepped down as CEO of Aetna on Nov. 29, 2010, so he doesn't qualify for the list, but his compensation last year totaled $71.1 million, according to Aetna's proxy statement. Williams earned just under $1.1 million in salary and received stock grants worth about $14.3 million on the date of the grant as well as other incentive payments and compensation for a total of $20.7 million.

In addition, Williams cashed out 2.4 million options, realizing net proceeds of $50.4 million. Williams retired as chairman of the company in April. Williams topped the annual compensation report in 2008 (July 28, 2008, p. 6).

Leading the hospital sector for the first time is Richard Bracken, chairman and CEO of Nashville-based HCA. Bracken's predecessor, Jack Bovender Jr., topped the hospital and overall lists in 2007 (July 30, 2007, p. 6) thanks to HCA's leveraged buyout in November 2006. Bracken succeeded Bovender on Jan. 1, 2009, and steered the company through the third initial public offering in its history this year (March 14, p. 10).

In 2010, Bracken reaped the benefits of three distributions that HCA made to its owners, three private-equity groups and members of the Frist family. As part of the distributions, which totaled $4.25 billion, the company also made cash distributions to employees on vested stock options, according to HCA's proxy statement filed with the SEC. For Bracken, those distributions totaled nearly $21.8 million, or more than half of his $41.3 million in compensation for the year.

Bracken also received distributions on the company shares he held last year. Bracken owned 563,580 shares in HCA as of April 1, 2010, and he held 673,348 shares as of Feb. 1, 2011, according to two securities filings. Those figures suggest that Bracken received between $24 million and $26.7 million in distributions as a shareholder.

Two of Bracken's peers, Charlie Martin of Nashville-based Vanguard Health Systems and David White of Iasis Healthcare, Franklin, Tenn., also received payouts in connection with distributions made to their companies' private shareholders last year, according to the companies.

The distributions that Martin received as a shareholder as part of $300 million that the company returned to its investors last year aren't considered compensation that would be disclosed in securities filings, said Gary Willis, senior vice president and chief accounting officer at Vanguard. That's because they are returns based on Martin's original investment in the company, rather than an incentive payment that would be disclosed, Willis said. As of Aug. 15, 2010, Martin held a 7.5% stake in Vanguard, but that stake declined when the company completed its IPO in June (June 27, p. 14).

No Iasis employees owned any of the $120 million in preferred shares that Iasis repurchased last year as a way to distribute returns to shareholders, said Eric Descher, vice president of finance. White and other managers, however, did receive payments when some of their options were repurchased, accounting for nearly $2.5 million of White's compensation that was disclosed in a securities filing, Descher said. White stepped down as CEO after the end of the company's fiscal 2010. He was succeeded by Carl Whitmer.

Kent Thiry topped the specialty-care provider list for the second year in a row and the fifth time in the nine years that Modern Healthcare has conducted its analysis. The chairman and CEO of dialysis provider DaVita took in nearly $9.4 million in salary, bonus, restricted stock, incentive payments and compensation in 2010, and cashed in stock options for net proceeds of nearly $6.3 million.

DaVita's results for patients and shareholders under Thiry speak for themselves, company spokesman Skip Thurman wrote in an e-mail. Thiry's compensation in 2010 was based on long-term incentives, including equity awards and a bonus, Thurman wrote.

While public ire is focused right now on federal politicians because of the debt-ceiling deal, the wrath over executive compensation rarely stays muted for long. Modern Healthcare's initial review of corporate CEO pay in 2003 featured two significant targets in the debate—Jeffrey Barbakow and Richard Scrushy, the former CEOs of Tenet Healthcare Corp. and HealthSouth Corp., respectively. As noted, UnitedHealth's McGuire stepped down after outcry about his compensation. Insurance executives in particular faced significant criticism during the debate on healthcare reform and even after the Patient Protection and Affordable Care Act was signed into law (Aug. 16, 2010, p. 6).

Greater disclosure of executive pay—as mandated by SEC rules that took effect in December 2006—has not had any discernable effect on compensation, which has tended to follow the overall performance of the economy, the University of Chicago's Kaplan said.

Taking the longer view, Kaplan said, corporate CEO pay peaked in 2000 and is down about 40% in real terms since then. Even with the increase in 2010, CEO pay hasn't reached 2007 levels, let alone those seen in 2000, he said.

Moreover, a further measure, included as part of the Wall Street and banking reform law passed in 2010 and known as Dodd-Frank, suggests that shareholders are satisfied with the pay arrangements of the executives who lead their companies, Kaplan said. Dodd-Frank required companies, starting with annual meetings held this year, to give shareholders an advisory vote on executive compensation—a “say on pay.” Research shows that shareholders approved of pay arrangements 98% of the time this year, and 90% of companies received votes of 70% or greater in favor, he said.

“That's pretty overwhelming support for pay practices,” Kaplan said, “when shareholder activists were saying there was a problem.”