Are CEOs paid an unhealthy amount?

Helen Palmer Feb 15, 2007

Are CEOs paid an unhealthy amount?

Helen Palmer Feb 15, 2007

KAI RYSSDAL: Health care in this country eats up 16 percent of gross domestic product. Last year, that came to more than $2 trillion. Which raises this question. Where does all that money go?

We’ve started to take a regular look at that. Last month, we told you hospitals gobble up about a third of it. But other parts of the system aren’t exactly cheap, either. For example, health care CEOs get a lot of flak for what they get to take home.

From the Marketplace Health Desk at WGBH, Helen Palmer looks at whether the bosses are worth what they get.

HELEN PALMER: If you suspect that, just maybe, some health care CEOs are getting extremely lucrative deals, let me mention a name: William McGuire

, ex-CEO of United Health Group.

PAUL HODGSON: His $1.8 billion in embedded options is certainly a record-breaker.

Paul Hodgson

of the Corporate Library, which studies pay and governance. Mcguire’s actual salary before all those stock options was mere millions. But overall, Paul Hodgson says, insurance company CEOs aren’t exactly hurting compared with their peers.

HODGSON: The median total compensation for chief executives was just under $7 million. But for the executives in the insurance industry, it was almost $11 million.

Hodgson says that pharmaceutical companies pay their CEOs pretty well, too: an average annual salary of nearly $9 million, not counting stock options.

Management experts say that gold-plated CEO salaries are justified. Shree Prakash Kothari heads the MIT Sloane School’s finance department.

SHREE PRAKASH KOTHARI: If you want to attract top talent, then you have to pay salaries that are commanded by top talent.

Or, as Michael Douglas put it more baldly a couple of decades ago:

MICHAEL DOUGLAS: Greed — for lack of a better word — is good. Greed is right. Greed works.

Well, if not greed, then perhaps ambition. Kothari says 70,000 MBAs graduate in the USA every year. A mere handful become CEOs. Health care CEOs head up businesses that employ thousands. The pay and perks reflect the responsibility and the competition.

KOTHARI: These are exceptionally talented individuals. They put in long hours for 20, 25 years before becoming a CEO. The tenure of a CEO is fairly short these days.

Kothari says CEOs are paid for performance. But Harvard Business School’s Regina Herzlinger

says the link between pay and performance is often pretty weak in health care. Take the drug industry, Herzlinger says.

REGINA HERZLINGER: How many important new drugs are you bringing to the market that will make people have better and more productive lives? They have a very poor pipeline, and yet they earn tens of millions of dollars.

Herzlinger says some CEOs pocket hefty payouts even while delivering lousy shareholder value. Merck and Pfizer both saw the stock drop around 40 percent, yet their ex-CEOs still walked away with tens of millions of dollars.

United Health got a better deal. Under William McGuire, the company’s revenues more than tripled. Making his pay-out, well . . . modest. Paul Hodgson of the Corporate Library.

HODGSON: United Health is such an enormous organization, that even the $1.8 billion that McGuire holds in stock options would represent only about 4 percent of annual revenues.

Still, some stakeholders question exactly what value a health care CEO delivers. Compared with, say, a skilled heart or brain surgeon.

David Himmelstein

‘s a professor at Harvard Medical School.

DAVID HIMMELSTEIN: Should we be paying a manager 1,000 times as much as a neurosurgeon? My answer would be no.

Medicare, Medicaid, the VA, teachers, firefighters . . . the taxpayer picks up about 60 percent of the U.S. health care tab.

Himmelstein asks: Should health CEOs really pocket so much?

HIMMELSTEIN: United Health Care is the biggest seller of Medicare Part D policies for instance. Why should their CEO make $50 million a year, when the President of the United States settles for $400,000 a year?

CEO compensation’s now getting closer scrutiny from boards and shareholders. And there’s evidence the coming proxy season will show that pay’s rising more slowly.

Nobody’s calculated exactly how much of the U.S. health care bill goes into the pockets of CEOs. It’s probably only about 2 percent. But since U.S. health care’s the size of the GDP of China, that’s around $50 billion.

In Boston, I’m Helen Palmer for Marketplace.

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