$trong Earnings in 2010 Led to Hefty Paydays for Top Health Plan Executives

Strong revenues and earnings in 2010 translated to hefty paydays for executives at many publicly traded health insurance companies. While salaries for top executives fluctuated little between 2009 and 2010, stock awards and bonuses soared, according to HPW’s annual analysis of proxy statements filed in April with the Securities and Exchange Commission.

The meltdown of the stock market that began in 2008 prompted boards at some publicly traded companies to award larger-than-usual stock grants to their top executives, explains Paul Dorf, managing director of Compensation Resources Inc., a consulting firm in Upper Saddle River, N.J. “Compensation committees at some companies thought they needed to retain their top executives during those difficult times,” he explains. “Now, because many of those options have vested, [executives] are taking advantage of strong stock prices by cashing in.”

With more than $20 million in salary, stock awards and bonuses, recently retired Aetna Inc. CEO Ronald Williams was the highest compensated health plan executive in 2010. He ranked second last year (HPW 5/24/10, p. 1). Williams’ annual salary of just over $1 million (about $527 an hour based on a 40-hour work week) is unchanged from a year ago. His hourly rate — based on $20 million in total compensation in 2010 — jumps to about $9,600 when stock awards and bonuses are included (see table, p. 6). Moreover, previously awarded stock options that he exercised in 2010 are valued at more than $50 million, and he has a pension worth more than $9 million. He’ll also be staying on with Aetna for the next 36 months as a consultant — with a salary of $20,000 a month and an office and support staff, according to the proxy statement.

Last year’s top compensation honor went to former CIGNA Corp. CEO H. Edward Hanway, who took home more than $18 million in overall pay and left the company with a retirement package worth more than $100 million when he retired in December 2009. His replacement, David Cordani — the company’s president since 2008 and CEO since December 2009 — saw a 130% bump in pay in 2010. In 2010, his first full year heading the company, Cordani’s total compensation was $15.2 million — up substantially from the $6.6 million he earned in 2009. Along with a $1 million annual salary, Cordani received $7.3 million in non-equity incentive plan com-pensation, $4.5 million in stock awards and $2.2 million in option awards in 2010.

But health plan executives aren’t alone in seeing big bonuses. A compensation study conducted by the Hay Group determined that CEO bonuses at 50 major corporations jumped 30.5% in 2010.

Reform Provision Could Impact Exec Pay

Few health plan CEOs had a salary of much more than $1 million. Under a law in effect since 1992, corporations can deduct up to $1 million each year in executive salary.

But there are no limits on compensation that is considered to be performance-related, such as stock options. Despite the deductibility limit, a growing number of corporations are paying salaries above $1 million a year, says Sam Pizzigati, associate fellow at the Washington, D.C.-based Institute for Policy Studies. The trend, he suggests, might be part of a push to reduce bonus outlays and move more compensation into “less-headlinegrabbing” salary outlays.

A deductibility provision included in the “fine print” of the health reform law could cause health insurers to revamp the way they compensate their top executives. The rule, which won’t go into effect until tax years that begin after Dec. 31, 2012, will limit the deductibility of executive compensation to just $500,000 (down from $1 million now). But the loophole that allows corporations to boost compensation through “performance-based” pay will not apply to health insurance executives, Pizzigati says.

And a separate bill enacted last year requires all corporations, including health insurers, to annually disclose the ratio between their top executive pay and compensation for their median workers. “This ratio mandate could prove highly significant,” says Pizzigati. For example, states could determine that to participate in an insurance exchange, health insurance companies can’t pay their top executives above a specific multiple (i.e., 25 or 50 times more than the median compensation for the company’s workers).

Regulations for the mandate, provision 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, are forthcoming. Dorf adds that while Dodd-Frank is aimed at financial services firms, it will also impact other industries.

Optimism about the future of Medicaid managed care under the health reform law helped to push AMERIGROUP Corp.’s stock price up more than 60% in 2010.

That trend helped to nearly double total compensation for James Carlson, the company’s president and CEO. While Carlson’s salary in 2010 was $789,615 — just $14,000 more than in 2009, bonuses and stock awards brought his total compensation to nearly $10.5 million. In 2009, he earned $5.2 million in total compensation. For all of 2010, the company’s net income was $273.4 million ($5.40 per share), versus net income of $149.3 million ($2.85 per share) for full-year 2009. Total revenue for the fourth quarter of 2010 was $1.5 billion, a 10.2% increase over the fourth quarter of 2009 and a 5% increase over the third quarter of 2010. AMERIGROUP said it ended 2010 with 1.9 million members — an increase of 143,000 from the end of 2009.

Although his $850,000 a-year salary in 2009 didn’t increase, Molina Healthcare Inc. CEO J. Mario Molina, M.D., saw his overall compensation double in 2010 to $3.7 million. Molina’s stock price increased 21.8% in 2010 from the end of 2009.

By contrast, the stock price for another Medicaid managed care firm, WellCare Health Plans, Inc., fell 17.8% in 2010. Despite a salary increase, Executive Chairman Charles Berg saw his annual compensation fall by 35.6%. The company is bouncing back from a 2007 raid by federal agents of its Tampa, Fla., headquarters (HPW 10/29/07, p. 1). Investigators alleged that the company inflated what it spent on its state-sponsored insurance programs. Last summer, the company agreed to pay $137.5 million to federal agencies to settle civil lawsuits. To search complete proxy statements for each health plan, visit www.sec.gov