Wednesday, June 25, 2014

A Real Example of Public Relations Talking Points to Justify Outsize Executive Compensation - and Why We Should No Longer be Fooled

We frequently discuss outsize executive compensation in health care organizations as both a symptom and a cause of these organizations' poor leadership and governance, and hence of widespread health care dysfunction.

The Latest Stories of Huge CEO Pay

Stories of gargantuan compensation appear almost daily.  For example, some headlines about pay at hospitals and hospital systems in the last few months included,

Millionaire health care?
With high costs and insurance premiums in Garfield County, focus falls on pay of a hospital’s chief executive
Audit faults UMass Medical School for improper documentation of $2 million in bonus compensation
St Thomas CEO's salary, benefits soar
MaineHealth defends top executives' pay despite major cuts

Then there were stories about the amazing pay given to CEOs of top for-profit health insurance companies, e.g., via IFAwebnews,

According to research published by a single-payer advocacy group, average compensation for nine CEOs at large health insurance companies rose by more than 19% in 2013, with some chief executives seeing steep increases in pay, while others received less remuneration.

Healthcare-NOW!, a non-profit that says its goal of single-payer health coverage is also known as 'improved Medicare for all,' analyzed recent financial reports of the Fortune 500 health insurance carriers.

According to Healthcare-NOW!, the highest compensation increase went to Aetna CEO Mark Bertolini, who received a $30.7 million compensation package in 2013. The Bertolini pay package, which included a large “special one-time performance-based retention award,” represented a 131% increase over his $13.3 million compensation in 2012.

Molina Healthcare and Centene, insurers that specialize in privately managed Medicaid plans, roughly doubled CEO compensation in 2013. J. Mario Molina received $11.9 million, up from $5 million in 2012, while Centene’s CEO Michael Neidorff made $14.5 million, up from $8.5 million.

Overall, average CEO pay across Fortune 500 health insurers rose from $11.6 million in 2012 to $13.9 million in 2013.

Here we go again.  In May, 2014, I summarized how discussion of executive compensation, particularly in non-profit hospitals and hospital systems, seemed to follow a clear pattern.

The Pattern

Nearly all non-profit hospitals must release minimal data on the total compensation of a few of the highest paid executives.  When these reports come out, sometimes the local media take a look, either at an individual hospital or hospital system, or at a number of local hospitals.  They almost inevitably find that some, usually most executives make what appears to be lots of money.  This could be hundreds of thousands of dollars at small community hospitals, or millions of dollars at larger hospitals and hospital systems.  Sometimes the reports end there.  Sometimes the reporters ask hospital representatives or local experts to explain the apparently exalted compensation figures. 

The Talking Points

 The explanations are usually very similar, and so we have called this part of The Pattern The Talking Points.

It seems nearly every attempt made to defend the outsize compensation given hospital and health system executives involves the same arguments, thus suggesting they are talking points, possibly crafted as a public relations ploy.   We first listed the talking points here, and then provided additional examples of their use here, here here, here, here, and here, and here

They are:
- We have to pay competitive rates
- We have to pay enough to retain at least competent executives, given how hard it is to be an executive
- Our executives are not merely competitive, but brilliant (and have to be to do such a difficult job).

The talking points are usually supplied by hospital public relations personnel, sometimes by hospital trustees or executives, sometime by various health care consultants.  The talking points are rarely questioned.

There Really Were Talking Points, at Least at Cigna

I hypothesized that perhaps public relations managers at various hospitals might actually have organized these talking points, since so many news stories of executive compensation in health care seemed to faithfully follow the pattern.  That was, however, speculation.  However, now there is anecdotal evidence that public relations executives really did use these talking points to defend their bosses' compensation.

Wendell Potter is the former head of public relations for for-profit health insurance company Cigna who defected, and now advocates for honest, fair health care.  On June 9, 2014, he wrote in his blog about the latest revelations about outrageous executive compensation given to health insurance CEOs (as summarized above). 

When I handled financial communications for Cigna, the day I dreaded most every year was the day we filed the company’s proxy. That’s because I knew I would get calls from reporters wanting to know how we could justify paying the CEO so much when most other employees were lucky to get 3 percent raises.

I always had talking points drafted with plenty of help from the company’s lawyers and HR executives. They didn’t vary much from year to year. Basically, all I said was, hey, this is a very big company, the CEO has a very big job and his pay is in line with what other firms of similar size pay their top guys.

So there you are.  First, at least at this company, it appears that an important responsibility of the company public relations department was to defend the CEOs pay.  In my humble opinion, this confirms my suspicion that corporate public relations and marketing often put the personal interests of the top company executives ahead of everything else, including the interests of shareholders of for-profit companies in fair executive compensation, and the interests of patients in reasonable health care costs.

Second, there really were talking points used at least in this company's public relations that were pretty similar to those I hypothesized:

 - We have to pay competitive rates = "his pay is in line with what other firms of similar size pay their top guys."

- We have to pay enough to retain at least competent executives, given how hard it is to be an executive = " this is a very big company, the CEO has a very big job"

- Our executives are not merely competitive, but brilliant (and have to be to do such a difficult job) = by implication.

You heard it here first.

So maybe we should all be a lot more skeptical about executive compensation.  Unfortunately, Mr Potter suggests we may be getting less so.

I made frequent use of those talking points the first couple years. But toward the end of my 15 years at the company, I would rarely get more than one or two calls. By 2008, the year I left, the phone didn’t ring at all, at least not from the media. Fewer and fewer reporters even bothered to look at the proxy statements.

Of course, that may have something to do with the general decline of journalism, perhaps partially due to the transformation of journalism into a pursuit of a few big corporations, lead by overly compensated executives.

Furthermore, instead of the talking points, consider some recent ideas about causes and effects of excess executive compensation.  We have discussed some of these frequently, but here are some recent versions.

Causes of Excess Executive Compensation

Cronies on the Board

- from an Associated Press story via US News and World Report,

Some board members defer to a CEO's judgment on what his or her own compensation should be. There's a good reason: Many boards are composed of current and former CEOs at other companies. And in some cases, board members are essentially hand-picked or at least vetted by the CEO. Not surprisingly, the boards' compensation committees offer generous bonuses.

In more detail, from an op-ed in the Minneapolis-St Paul Star Tribune,

 Under current practice, a nominating committee made up of current board members selects nominees to be presented to the shareholders for approval. Since there are rarely any more nominees than open positions, being nominated virtually assures election. These elections are the same as what you would expect in a communist country where voters vote yes or no on a single candidate. 

The nominating committee is usually selected by the board chairman and the CEO (in too many cases, the same person). The CEO and the chairman are almost always on the nominating committee. It is in the CEO’s interest to select board members whose loyalty can be trusted. In many cases, a nominee’s primary qualification is loyalty to the CEO and the board chairman, with little knowledge of or experience in the business. Often there is a prior business or personal relationship to the nominee and very often the CEO and/or the chairman serves on the board of a nominee, a cozy mutual back-scratching arrangement.

Serving on the board is prestigious and lucrative and abounds in perks. Besides cash and/or stock options or grants, perks such as company-paid travel to foreign trade shows, board meetings in posh resorts (with spouses, of course) and other company benefits make continuing on the board the first priority of most board members, with shareholder interests a distant second priority. This is akin to a politician whose first priority is to get re-elected and whose constituents’ interests come next.  To maintain continuation of this bonanza of benefits, the board member must be assured of being renominated by the nominating committee. Since the CEO and the chairman are on the nominating committee, which they selected, they have great influence over the ultimate choices for nominees. Now, if you are a board member and want to be assured of being renominated, it pays (literally) to be looked upon favorably by the CEO and the chairman.

Note that both of these accounts referred to for-profit corporations, but could easily apply to boards of non-profit organizations as well.   Note further that crony boards violate the expectations of their charges, which are to defend the organizations' mission and the interests of all their stakeholders, not just a few top executive cronies.

The Ratchet, or "Lake Wobegon" Effect

-  from an Associated Press story via US News and World Report,

Robert Solow, a Nobel Prize-winning economist, recently observed that CEOs live in 'Lake Wobegon,' that fabled town created by radio show host Garrison Keillor where, it is said, 'all the children are above average.' Solow didn't mean it as a compliment.

Corporate boards often set CEO pay based on what the leaders of other companies make. No board wants an 'average' CEO. So boards tend to want to pay their own CEO more than rival CEOs who are chosen for benchmarking compensation packages.

This will 'naturally create an upward bias' in pay, Charles Elson and Craig Ferrere of the University of Delaware concluded in a 2012 paper. '(T)he compounded effect has been to create a significant disparity between the pay of executives and what is appropriate to the companies they run.'

Note that the Lake Wobegon effect is based on a logical fallacy.  All CEOs cannot be above average. 

CEOs as "Great Men"

- from an op-ed in the Washington Post,

It is a system that rests on the Great Man theory of history: a school of thought that attributes virtually all important developments through time to heroic individuals.

Think back to Jack Welch’s 20-year reign as chief executive of General Electric. He was lauded as a corporate leader and management guru who, seemingly single-handedly, grew the company’s revenue and market capitalization many times over. Before long, GE had become a synonym for Jack Welch (or was it the other way around?).

The theory is from the 19th century,

 As a historian trying to parse America’s enthrallment with superstars, I keep coming back to the Great Man theory of history. Popularized in the mid-19th century by the Scottish essayist Thomas Carlyle, this concept holds that history is largely attributable to the actions of great individuals, who because of their personal (and often mysterious) qualities — such as intelligence, wisdom, deftness, goodness and energy — use their agency to make a big impact. 'In all epochs of the world’s history,' Caryle wrote in his 1841 book, 'On Heroes, Hero-Worship and the Heroic in History,'' 'we shall find the Great Man to have been the indispensable saviour of his epoch.'

But it makes no real sense,

 Such lionization is misplaced. Operating a sustainable enterprise, as any executive, manager or employee knows well, is inherently a team sport. Across companies and industries, this activity depends on many people working in concert in all kinds of groups, at all levels of the organization. Such interdependence means that it is hard to precisely delineate, much less quantify, any one individual’s contribution, even that of the most senior manager, to a firm’s performance.

This is particularly true in health care, and particularly in organizations that provide direct patient care.  In my humble opinion, it is ridiculous to lionize managers when health care professionals actually take care of patients, using tests and treatments developed by other professionals and scientists. 

Effects of Excess Executive Compensation

Declining Morale of all Other Employees

-  from an Associated Press story via the UK Guardian,

 'There's this unbalanced approach, where there's all this energy put into how to reward executives, but little energy being put into ensuring the rest of the workforce is engaged, productive and paid appropriately,' says Richard Clayton, research director at Change to Win Investment Group, which works with labor union-affiliated pension funds.

The CEO Disease

- per Dan Quiggle, who invented the term, in Exchange Magazine, which leads to:

You either hear really good things from your people…or nothing at all.
You don’t trust the feedback you receive.
You take criticism too personally.
In general, your employees don’t seem engaged.
Your best employees are unhappy or leaving.
You don’t connect with people in a way that leads to loyalty.

That is, bad management, and hence...

Poor Organizational Performance

- from a Forbes column by Susan Adams,

 Across the board, the more CEOs get paid, the worse their companies do over the next three years, according to extensive new research. This is true whether they’re CEOs at the highest end of the pay spectrum or the lowest. 'The more CEOs are paid, the worse the firm does over the next three years, as far as stock performance and even accounting performance,' says one of the authors of the study, Michael Cooper of the University of Utah’s David Eccles School of Business.

Since most health care CEOs seem to know more about finance and health care, I wonder if this effect is even more pronounced on health care quality and patient outcomes?

Income Inequality and a Declining Economy

- from an editorial in FierceHealthcare,

Indeed, the continual rise of executive paychecks may contribute to inequities in the U.S. economy, according to a new Roosevelt Institute paper, 'Taking Stock: Why Executive Pay Results in an Unstable and Inequitable Economy.'

'The toxic combination of stock-based executive pay and open-market stock repurchases has contributed to not only the growing concentration of income at the top but also the failure of the U.S. economy to sustain existing middle-class jobs and create new ones,' wrote author William Lazonick, professor and director of the Lowell Center for Industrial Competitiveness at the University of Massachusetts.

Civil Unrest

- from a Washington Post op-ed by Robert J Samuelson,

Americans dislike aristocracies. Unless companies can find a more restrained pay system, they risk an anti-capitalist public backlash. This is the ultimate danger.


So far, the rise of executive compensation in health care has been inexorable.  Much of the public and many health care professionals have been lulled into complacency, or paralyzed by learned helplessness.  Yet the talking points used to justify outrageous executive pay are nonsense.  Rising compensation seems to be really due to crony capitalism, logical fallacies, and false historical analogies.  Rising pay may lead to poor management, poor organizational performance, worsening social inequality, a failing economy, and ultimately civil unrest.  Although the transition of executives into a new aristocracy is a society wide, if not a global problem, we in health care cannot be complacent that someone else will solve it.  True health care reform would enable accountable leadership that puts the health care mission and patients' and the public's health ahead of personal gain.   

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