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Pay for Top PBM Executive Keeps Pace With Performance – With One Exception
05/13/11
Drug Benefit News
Eyebrows raised and jaws dropped when the news broke in March that CVS Caremark Corp. Chairman and CEO Thomas Ryan, who stepped down as CEO on March 1, took home $50.4 million last year in vested stock awards and exercised stock options in addition to his 2010 total compensation package of $29.2 million. Add to that the $58.4 million he took in a lump sum in lieu of annuity payments for his pension benefits, and after adjustments, Ryan walked away with a cool $125 million, according to AIS’s review of company proxy statements filed with the Securities and Exchange Commission.
“The CEO’s role is to increase shareholder value, and you can only increase it two ways: one, increase the earnings per share [EPS], which then translates into bigger dividends or money reinvested in the company, or increase the share price,” Paul Dorf, managing director of Compensation Resources Inc., a compensation consultancy based in New Jersey, tells DBN.
Dorf says one industry standard for evaluating CEO compensation entails looking at a company’s stock value over three years’ time. CVS Caremark’s stock decreased from $40.03 per share on Dec. 31, 2007, to $35.19 on Dec. 31, 2010, a decline that is slightly misaligned with the CEO’s total compensation. Another industry metric tracks a company’s EPS growth over time. CVS Caremark’s earnings per share went from $2.23 in 2008 to $2.51 in 2010. Ryan’s total compensation rose from $23.9 million in 2008 to $30.4 million in 2009, but dipped to $29.2 million for last year.
Regarding compensation for its top executives, CVS says it has a “strong commitment to paying for performance — both short- and long-term.” Among the examples CVS gave in its proxy statement were: “The compound annual growth rate of earnings per share, which was the metric for our LTIP [long-term incentive plan] for the three-year cycle ending on December 31, 2010, did not meet the threshold performance level necessary to generate an award. Consequently, no LTIP payout was made to any NEO [named executive officer] or other LTIP participant.”
Elsewhere in the proxy, CVS made it clear that it was tying long-term incentives to the company’s overall performance:
“Despite the industry-leading same store sales and record operating margin produced by our retail business and the robust selling season for the PBM business, overall profitability for the Company fell short of the goals we set for ourselves at the beginning of the 2010 fiscal year. Accordingly, our 2010 annual cash incentive awards, which were funded based on Operating Profit and adjusted downward based on a number of factors including the impact of regulatory fines, resulted in payments at levels below the target amounts.”
By comparison, Medco Health Solutions, Inc.’s share price rose from $50.70 to $61.27 for the same 2007-2010 period. In 2007, Medco reported EPS of $3.64 prior to a stock split and EPS of $1.82 following the split; EPS had risen to $3.40 the full-year 2010. Total compensation for David Snow, Medco’s chairman and CEO, was $14,382,068 in 2008, $13,372,037 in 2009 and $16,413,227 in 2010.
Public scrutiny of and indignation over CEO compensation has been running high since a number of top executives exited foundering Wall Street financial firms during the 2008 meltdown with astronomical pay packages. Accordingly, best practices in setting compensation for CEOs of publicly traded companies have shifted away from unqualified payouts to performance-based pay or long-term incentives that are aligned with the companies’ goals.
PBMs Tie Pay to Growth
“We’ve seen a movement away from plain vanilla bonuses to performance-based incentives such as stock options,” Joe Sorrentino, a managing director of Steven Hall & Partners LLC, tells DBN. He explains that companies increasingly are linking CEO compensation to a host of variables.
Bottom-line financials such as revenue growth and earnings per share remain popular as target goals incentivizing CEO performance. In some cases, compensation is even correlated to industry-specific goals, which for the publicly traded PBMs — CVS, Medco, Express Scripts, Inc., Catalyst Health Solutions, Inc., and SXC Health Solutions Corp. — might mean annual prescription volumes or generic dispensing rates.
A July 2010 research report from Sanford Bernstein & Co. evaluating executive compensation across the pharmaceutical industry concluded that “compensation plans have been effective in rewarding executives managing companies with stronger earnings per share growth.” The report went on to single out pharmacy benefit managers for exemplary performance in this area: “Compensation at the PBMs has grown more quickly than wholesalers in recent years in keeping with superior EPS growth.”
Bernstein’s report said compensation plans in the pharmaceutical industry had successfully promoted alignment of CEO performance with shareholders’ interests. Thanks in part to this trend, stock performance across the industry has exceeded compensation growth. As a result, executive compensation trends merit continued monitoring given their potential for driving long-term value creation.
Again, the report cited the PBM sector for outperforming the field. “We remain positive on the PBM story as we foresee continued margin expansion from the generic wave, resulting in double-digit EPS growth over the next 3-5 years,” the report stated. Bernstein issued an optimistic “outperform rating” for Medco stock with a target price of $73 per share. The investment research firm even took a benevolent view of CVS Caremark’s troubled stock, awarding it a target price of $39 per share, stating “we view the current share price as an opportunity to own a solid retail business with a low-priced option on a PBM turnaround.”
Paul Dorf says public companies often pay CEOs out of proportion to their less-than-sterling performance due to a “Rasputin-like” hold some charismatic executives seem to exert over boards of directors and compensation committees. Ideally, companies should reward chief executives for leading the company toward realizing its goals. “Compensation committees are starting to wake up and understand that, but they certainly don’t seem to get it in some cases,” he says.
Total Compensation for PBM CEOs in 2010
Company Name Total Annual Comp Increase/Decrease
Catalyst Health Solutions, Inc. David T. Blair 2010: $4,354,194
2009: $2,243,572 94%
CVS Caremark Corp. Thomas M. Ryan 2010: $29,216,536
2009: $30,429,113 -4%
Express Scripts, Inc. George Paz 2010: $10,311,196
2009: $10,627,774 -3%
Medco Health Solutions, Inc. David B. Snow 2010: $16,413,2
2009: $13,372,037 22.7%
SXC Health Solutions Corp. Mark Thierer 2010: $3,736,000
2009: $3,051,000 22.4%
SOURCE AND METHODOLOGY: Total compensation is derived from company proxy statements and includes base salary, bonuses, stock awards, options/Stock Appreciation Right (SAR) awards, non-equity incentive plan compensation, non-qualified deferred compensation earnings and all other compensation. May 2011
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