Health plan CEO pay declines in weakened economy

Health plan executives, who for years enjoyed billion-dollar profits for their companies, saw a reversal of fortune in 2008 as stock options, retirement contributions and perquisites dried up with profits and stock prices.

Chief executive officers at the seven largest publicly traded health plans experienced an average 12% drop in total compensation in 2008, compared with 2007, according to documents filed with the Securities and Exchange Commission.

That decrease is steeper than the average among the CEOs of companies in the S&P 500 Index, who saw an average drop of 6.8%, according to an analysis by executive compensation research firm Equilar.

For the top brass at the big health plans, there also was a wide range in pay changes between 2007 and 2008. Three executives -- Jay Gellert, president and CEO of Health Net; Angela Braly, president and CEO of WellPoint; and Aetna Chair and CEO Ronald Williams -- saw boosts in total compensation. Williams' went up by 5%, from $23 million to $24.3 million; Braly's by 8%, from $9 million to $9.8 million; and Gellert's by 20%, from $3.6 million to $4.4 million.

On the other end of the spectrum, the pay package for UnitedHealth Group President and CEO Stephen Hemsley dropped 75%, from $13.1 million in 2007 to $3.2 million in 2008.

Total compensation also dropped for three of his counterparts at the largest health plans: Cigna Chair and CEO H. Edward Hanway's total pay dropped 53% from $25.8 million in 2007 to $12.2 in 2008. Coventry Health Care's President and CEO Dale Wolf, who was replaced in January 2009, made $9 million in 2008 compared with $14.8 million in 2007 (-39%). Humana's President and CEO Mike McCallister made $10.3 million in 2007 and $4.7 million in 2008 (-54%).

The recession has prompted health plans to make adjustments to executives' other compensation, from bonuses to stock options, and many plans announced further changes to take effect this year.

"One of the huge challenges with bonuses is setting performance targets in the future," said Alexander Cwirko-Godycki, research manager at Equilar. "There's still a lot of uncertainty."

For a few health plan CEOs whose bonuses were based on per-share earnings or growth, 2008 was considerably less lucrative than 2007. Bonuses, or "nondeferred incentive pay," were $0 for CEOs of Health Net, Humana and Coventry Health Care.

But bonuses didn't disappear completely: Hanway took home $6.6 million in performance-based pay; Williams made a $1.9 million bonus; Hemsley made $1.8 million in incentive pay; and Braly received $73,810 as a performance-based bonus.

Health plan "clawback" policies

Health plans were part of some broader trends in executive pay, including passing so-called "clawback" policies that allow a company to take back incentive pay if an executive is found to have done something illegal or harmful to the company.

UnitedHealth Group was party to one well-known clawback, when former Chair and CEO William McGuire, MD, was forced to return some of his stock options after a backdating scandal. He forfeited some of his options upon his resignation, then gave up more to settle a government investigation and a lawsuit brought by United shareholders.

"The situation at UnitedHealth is still unique, and it's one of still a small handful of cases you've actually seen a clawback," Cwirko-Godycki said. "The threshold a company would need to take back money is coming down."

Among Fortune 100 companies, 18% had clawback policies in place in 2006; 64% did by 2008, he said.

Another widespread trend was the further paring down of perquisites. Companies across all industries have been eliminating tax gross-ups -- paying an executive's personal income taxes for things such as personal use of a corporate jet.

Among companies in the S&P 500, 61% paid gross-ups in 2007 to top executives, while 59% did in 2008, Cwirko-Godycki said. This year, he expects another 10% to 15% drop, with fewer than half of these companies paying executives' tax bills for job perks.

Although a drop in compensation in one publicly disclosed area used to mean a boost in another part of a pay package, the adjustments that companies are making now to executive pay are less likely to be offset in benefits that go under the radar, Cwirko-Godycki said.

"That's certainly a possibility, but it's unlikely -- people are definitely paying attention," he said.