Well Paid Insurance CEOs vs. 45 Million Uninsured Americans
Anthem, UnitedHealth, Wellpoint Pay CEO Fortunes: Graef Crystal
Oct. 6 (Bloomberg)
While 45 million Americans don’t have health insurance, the chief executive officers of the major companies that provide health coverage to much of the nation are munificently paid.
Among 12 U.S. health insurers, all with 2003 net sales of $1 billion or more, the median and average total pay came to $9 million and $15.2 million, respectively.
At the top of the compensation ladder are Anthem Inc.’s Larry Glasscock, UnitedHealth Group Inc.’s William McGuire and WellPoint Health Networks Inc.’s Leonard Schaeffer. Their respective 2003 total pay amounted to $50.9 million, $30 million and $27.4 million. To get to the fourth-most-highly-paid CEO — Aetna Inc.’s John Rowe — you would have to drop down to $16.2 million.
(Total pay consists of the sum of base salary; annual bonus; my estimate of the present value of stock options granted in 2003 and valued at the date of grant using the Black-Scholes model; the value at grant of free share awards made in 2003; payouts in 2003 under other forms of long- term incentive compensation; and miscellaneous compensation. Data for this study were obtained from Aon Consulting’s eComp database.)
What’s going on here is an extremely heavy emphasis on rewarding for size of net sales. UnitedHealth, WellPoint and Anthem occupy, respectively, the first, second and fourth slots on the net sales rankings, while Aetna came in third.
What About Performance?
Too bad the boards of these companies didn’t place more emphasis on performance, or for that matter, any emphasis at all.
The average 2003 revenue of the three highest-paid health-care executives was $22 billion, while their average total return for the single year ended Dec. 31, 2003, was 31.6 percent. For that, the three CEOs received average pay of $36 million each. Indeed, Glasscock produced the lowest total return of the group of 12, yet he earned the highest pay by far.
Yet the three best performers in terms of total return last year were none of the above. They were PacifiCare Health Systems Inc. (total return of 140.6 percent); Sierra Health Services Inc. (128.6 percent) and Humana Inc. (128.5 percent). For those magnificent performances, the three CEOs averaged $6.8 million apiece, a figure that was just 19 percent of the pay of their much bigger brothers.
Bigger Is Better
Face it, we Americans have a fixation with size. We boast about our buildings, our gross national product and our huge weaponry. Bigger is better. It seems never to have dawned on those worthies who sit on boards of directors that maybe there’s a different, more compelling mantra they should be reciting: Better performing is better.
Let’s focus more closely on Glasscock’s 2003 pay package of $50.9 million. Included in that amount was a long-term cash payment of $21.2 million, along with free shares valued at the same $21.2 million.
Anthem pointed out that the $42.4 million total was generated, not by Glasscock’s performance in 2003, but rather for his performance in the years 2001 through 2003.
It’s certainly correct that 2003 was an unusually good year for Glasscock. Still, don’t cry about his meager pay in earlier years because for 2001 through 2003, he still averaged a princely $26.3 million annually in remuneration, just a tiny bit behind McGuire’s $27.1 million. Not so for his company’s three-year average net sales, which were 48 percent lower than those of UnitedHealth.
Read the Footnote
In its proxy filed in 2002 and covering the year 2001, Anthem, following disclosure rules promulgated by the U.S. Securities and Exchange Commission, informed shareholders that Glasscock had been given the opportunity to earn $4.1 million for “target” performance in the years 2001 through 2003.
It also said his “threshold” payout — below which the next stop is zero — would be $2 million. The company went on to declare that whatever Glasscock earned at the end of the three-year performance period would be predicated on “specific strategic objectives such as growth in net income, operating margin and comparison of performance against peer companies.”
Those same proxy disclosure rules also require a company to tell shareholders what the maximum payout would be under any long-term incentive grant — the payout for hitting all the bases. Yet there was no maximum column in the case of Anthem’s long-term incentive table included in its proxy. Instead, there was a footnote.
If you were a shareholder at Anthem at the time, you might have missed that footnote. Nonetheless, it stated, quite plainly, that “Under the LTIP (long-term incentive plan), there is no maximum limitation.”
Some Understatement
That sure turned out to be an understatement. With his ultimate payout of $42.4 million, Glasscock ended up earning 10.5 times his target award.
Anthem’s income statement did look fabulous during the three-year period. Yet its total return of 23.1 percent a year for the two years ended Dec. 31, 2003, ranked it only ninth among the companies in the study whose stock had been publicly traded for at least two years. (A three-year total return couldn’t be computed because Anthem didn’t go public until Oct. 29, 2001.)
Exhibiting more prudence this time out, Anthem told its shareholders in its 2004-filed proxy that, under a new long-term incentive grant, there wouldn’t be just threshold-award and target levels, but also a maximum-award one.
The imposition of a maximum-award level demonstrates what the lawyers call “consciousness of guilt” on the part of Anthem’s board compensation committee.
Cake or Crumbs?
Glasscock and Schaeffer are trying to merge their two companies. Both have been high-performers. When I look at the pay of the two CEOs and consider that each company has a long tradition of rich compensation, I begin to wonder if the shareholders of the combined company will be eating cake — or just crumbs on the cake plate.
Below is a table showing for each of the 12 CEOs in the study the company’s total return for the single year ended Dec. 31, 2003, the 2003 total pay of the CEO and the percentage by which that pay was higher or lower than a hypothetical “going rate” of pay adjusted for the relative size of the company.
Company / CEO / 1-Year Return / 2003 Pay (millions) /Above or Below Market
Anthem Inc. / Larry Glasscock / 19% / $50.9 / 138%
Coventry Health / Allen Wise / 122% / $14.6 / 81%
Wellpoint Health / Leonard Schaeffer / 36% / $27.4 / 11%
Sierra Health / Anthony Marlon / 129% / $3.6 / 2%
UnitedHealth Grp. / William McGuire / 39% / $30.0 / -6%
Amerigroup Corp. / Jeffrey McWaters / 41% / $2.9 / -21%
Wellchoice Inc. / Michael Stocker / 44% / $6.9 / -24%
Aetna Inc. / John Rowe / 64% / $16.2 / -28%
Pacificare Health / Howard Phanstiel / 141% / $10.2 / -35%
Oxford Health / Charles Berg / 19% / $5.4 / -41%
Health Net Inc. / Jay Gellert / 24% / $7.9 / -50%
Humana Inc. / Michael McCallister / 129% / $6.6 / -61%
Low / 19% / $2.9 / -61%
Median / 42% / $9.0 / -23%
Average / 67% / $15.2 / -3%
High / 141% / $50.9 / 138%
To contact the writer of this column:
Graef Crystal in San Diego at graefc@bloomberg.net.
To contact the editor responsible for this column:
Bill Ahearn at bahearn@bloomberg.net.