Monday, October 04, 2010

Pay for What? - Redux: Surrealistic Pay for Health Care Corporate CEOs

Pay-for-performance has been a persistently fashionable mantra for health care business leaders and policy advocates, particularly as applied to physicians to control costs and perhaps even improve quality.  We have been highly critical of current methods proposed to measure performance and tie pay to it (e.g., here), and other bloggers, notably Dr Robert Centor at DB's Medical Rants, have vigorously pursued this issue (e.g., here).

It is beyond ironic that meanwhile, the pay of health care organizations' leaders seems less and less related to their performance.  For example, in a recent series on local executive pay in the Boston Globe there were these examples:

Hologic Inc. gave its chief executive, John W. Cumming, a $1.5 million “retention payment’’ as part of his $10.5 million pay package last year. He was promised the payment in mid-2006 if he remained with the company through the end of 2008. At the same time, the Bedford women’s health care products company posted a $2.2 billion loss, largely resulting from a big write-down related to the 2007 purchase of Cytic Corp. Cumming has since stepped down as chief executive, but remains chairman. Hologic declined to comment.

Charles River Laboratories
Charles River Laboratories International Inc. chief executive James C. Foster received $1.3 million in deferred compensation in a year when the company disclosed plans to cut 300 workers, or 3 percent of its workforce. Charles River declined to comment.

Note that a Charles River board member was one of the authors of an Institute of Medicine report advocating P4P for physicians, as we posted here. Ah, the irony.

Boston Scientific
New Boston Scientific Corp. CEO J. Raymond Elliott started midyear and received a $1.5 million bonus. Boston Scientific posted a $1 billion loss last year.
Elliott got a lot more than that, as reported in a companion Boston Globe article:
Elliott, whose experience includes running another medical device company, Zimmer Holdings Inc., was paid a performance bonus of nearly $608,000 last year, in addition to a $1.5 million signing bonus and $29.4 million in stock awards and options.

Meanwhile, the company's losses continue to mount:
And in February, Boston Scientific agreed to pay $1.7 billion to settle patent infringement charges from rival Johnson & Johnson, making it likely the company will post another loss this year.
Note that Boston Scientific has had its ethical as well as financial failings, especially involving the case of the faulty implantable cardiac defibrillators, which resulted in settlements of civil lawsuits alleging that it hid data about the defects, and two guilty pleas by a company subsidiary to charges that it did not notify the FDA about these problems (see post here).

Vertex Pharmaceuticals Inc
At Vertex Pharmaceuticals Inc., chief Matthew W. Emmens, who took over five months into the year, received $2.8 million performance award last year, a year in which the company lost $642 million.

He actually got a lot more than that, too, as per the second Globe article:
His pay package included more than $15 million in restricted stock and options.


At the same time, an op-ed by Michael Hiltzik in the Los Angeles Times noted that a health care company had the most unfairly paid CEO, according to "veteran compensation consultant Fraef Crystal,"
Cephalon Inc., ... CEO, Frank Baldino, Crystal identifies as the most overpaid chief executive in his database. (Baldino's $11.1 million pay last year is 832% of what would be fair, Crystal calculated.)

Note that Cephalon settled charges of off-label promotion of narcotics for over $400 million in 2008 (see post here).


So the general rule seem to be that top executives of health care organizations make large, sometimes enormous amounts of money, and that occurs regardless of company or personal performance. The riches keep flowing even if the company loses millions or billions, or lays off significant chunks of its workforce.

Hiltzik identified corporate executive pay as:
the No. 1 scandal of American business — executive pay that bears scant relationship to what these people are worth.

The CEO pay curve has been galloping out of control for so long that it has achieved the status of a cliche. In 1965 the average U.S. CEO earned 24 times the pay of the average worker. Four decades later the ratio was 411 to 1..

The dismal reality of CEO pay is that it comprises two problems, not one. Top executive pay generally is too lavish in the U.S. no matter what performance standard you apply. Good performance or bad, the pay disparity between the CEO and the rank and file is larger than in any other country, contributing to rising income inequality and to its consequent social pathologies.

It's also based on several flawed assumptions, argue Jay Lorsch and Rakesh Khurana of Harvard Business School in a recent article for Harvard Magazine. One is that money is the only motivating factor behind executive performance.

Another is that shareholders are the only stakeholders in corporate performance whose interests matter. This is a relatively recent paradigm, they observe; as late as 1990 business groups recognized the importance of a corporation's responsibility to stakeholders such as employees, customers, suppliers and the community.

The flaw in the latter assumption is that it ties CEO pay to stock prices, which they can't influence on their own. But the picture of the CEO as virtually the sole auteur of a corporation's fate permeates American society. Listen to a Meg Whitman campaign ad talking about 'the EBay Meg created.' If you pay attention you may catch a reference to the 15,000 employees who were there when she left, at least a few of whom must have had something to do with the company's success.

A further problem is that the pay of top corporate leaders is generally set not by the share-holders, that is, the owners of the company, but by boards of their cronies, many of whom are also members of the CEO club.  As Hiltzik noted,
although most corporate boards make a show of placing pay decisions in the hands of a committee of 'independent' directors, the members are almost always current or former top executives themselves, members of a tight club.

By the way, as we posted here, a member of both the Hologic and Vertex boards was a former hospital CEO who got a generous retirement package despite its financial straits.

So while their policy flacks continue to push pay-for-performance for physicians, maybe health care corporate leaders should set an example by embracing real pay for performance themselves.

To repeat, again, again, again,.... Until they do, top executives remain really different from you and me.  If we do not hold health care leaders accountable, if we do not provide them with incentives that are proportional to their actual performance, why should we expect health care organizations to do any more than satisfy their leaders' self-interest?