Thomas Kelly, an executive compensation consultant for Towers Watson, said performance-based equity awards have flourished among the Fortune 500 companies. But some companies have struggled to identify workable performance criteria and have revised targets to one-year from three-year time frames. Growth targets such as revenue or shareholder return can be skewed or stymied by unforeseen acquisitions, regulatory delays, congressional action or market swings. “It sounds easier to do than it is,” Kelly said.
That hasn't stopped companies from trying. Centene ties vesting of stock awards to company performance. So does CHS.
In the supply-chain sector, Actavis CEO Brenton Saunders ranked second to Schleifer, with compensation last year of $36.6 million. Last July, Saunders became chief executive of Actavis, which reported $13 billion in revenue.
The chief executives of Bristol-Myers Squibb Co., Johnson & Johnson and AbbVie also made the supply chain's highest-paid list.
In the healthcare services sector, CVS Health CEO Larry Merlo boasted the highest pay, with total compensation of $32.4 million, an increase of 3.3% over 2013. His company's revenue totaled $139.4 billion, up 10%, while net income edged up 1% to $4.6 billion.
Last year “was a very strong performance year for CVS Health with record net revenue and robust profitable growth in all of its businesses,” said Carolyn Castel, a company spokeswoman. “Mr. Merlo's compensation in 2014 reflected this significant level of achievement as well as his role in positioning the company for future growth.”
A one-time stock grant significantly boosted total compensation for CHS CEO Smith. That grant came as part of his company's acquisition of Health Management Associates. It increased his stock awards from the prior year by 258%.
Kelly said such one-time awards are not uncommon in extraordinary circumstances, such as major acquisitions, divestitures, new executive-level hires or when companies make significant changes to strategy. Stock awards typically can't be cashed out until executives meet performance goals or until a number of years have passed, or both. The strings attached to the stock—which is only as valuable as the stock price—are one way the board seeks to ensure CEOs work to deliver benefits from the deal, he said. “The end result is what happens after it closes,” he said.
Smith's stock award requires him to meet performance goals. He also must wait up to three years to collect. Community Health Systems must reap at least $150 million in gains from the merger through the end of 2016, but executives will see larger payouts if the gains exceed $200 million.
Overall, 2014 was a lucrative year for hospital CEOs on the best-paid list.
Alan Miller, CEO of Universal Health Services, King of Prussia, Pa., enjoyed one of the biggest increases in total compensation, receiving 40.1% higher pay than in 2013. Universal, the smallest of four hospital operators represented on Modern Healthcare's highest-paid CEO list, increased Miller's option awards by one-fourth and his cash incentive payout by roughly two-thirds. The company's financial performance and return on capital earned Miller the largest bonus he was eligible to receive—2.5 times his $1.5 million salary.
At Nashville-based HCA, CEO R. Milton Johnson saw his compensation increase roughly 90% with his promotion to chief executive in January 2014 from president and chief financial officer.