Average executive pay among health insurers outpaced revenue growth by up to 10 percentage points in 2020, according to a new report.
BDO's recent Health Insurance Executive Insights Report found that total direct compensation for health insurer leaders increased by up to 14% from 2019 to 2020, higher than the average 3% revenue increase at these insurers. Companies' top financial executives were awarded the highest year-over-year increase in total direct compensation at 13.5%, while annual growth in compensation remained the slowest among top legal executives at 8.5%. At all levels, insurance CEOs and top financial, legal and human resources officers' total direct compensation—which is their base salary combined with their annual and long-term incentives—increased at rates faster than their companies' typical merit increase for employees of 3%.
Judy Canavan, managing director of compensation and benefits at BDO's global employer services division, said insurers rely on this annual report to figure out the market pay rate for their executives. In 2020, BDO compared salary and compensation information submitted by 20 of the largest insurers to construct competitive incentives for their leaders. She declined to comment on what companies participated in this year's survey.
Competition for top talent is pushing executives' salaries up at these large insurers, Canavan said.
"Having a good person at the helm is extremely important with these organizations," Canavan said. "They need to make sure that you're insured, they have the responsibility of all the employees and they want to make sure that that company is viable for their employees, for the people who are insured and for the community. It's a lot of responsibility."
At companies that generated upwards of $4 billion in revenue annually, CEOs' average compensation was about 20% higher than executive heads at insurers earning revenues of less than $4 billion. This does not mean that larger companies overpay their CEO, Canavan said. Executives at bigger insurers typically generated $1,970 in revenue for every dollar they were paid, while CEOs at smaller companies generated $1,046 for every dollar they earned, according to the report. In addition to generating higher revenues, Canavan added that CEOs at larger organizations often have more responsibility.
"They may have a broader geographic reach, they can have a broader reach in terms of their service offerings, it's just a higher level of complexity," Canavan said. "There's more risk when you're managing a bigger organization."
Along with a set salary, executives can receive bonuses tied to their ability to reach short- and long-term goals. More than 85% of insurers said they offer incentive pay bumps to executives that grew their annual contract sizes, enrollee numbers and increased member satisfaction. Fifty seven percent awarded incentives to those that grew profits.
Common long-term goals include increasing membership—with 46% offering incentive pay based on that metric—along with 54% offering bonuses to those that decrease the company's pool of risk-based capital.
Because a large part of executives' overall compensation is tied to their ability to meet these goals, the amount an individual is paid can vary from year to year. The COVID-19 pandemic has complicated this process, Canavan said, since many of the goals tied to bonus payments were set before it was truly understood how the coronavirus would complicate operations at insurers.
"So now there's payouts that are going to come in 2021 that are going to reflect performance in 2020 based on predictions made pre-COVID. So there's a lot of complication there," she said.
Going forward, insurers are struggling with how to select goals for 2021. Canavan said this uncertainty underscores the need for consistent and frequent communication between management and companies' board of directors.
"Everybody needs a crystal ball, but right now the crystal ball looks like a snow globe that we just shook up," Canavan said. "So they're really thinking carefully about how to select goals and performance measures that are going to make sense going forward."