How much CEO pay is too much CEO pay? Aetna Inc.’s CEO Mark Bertolini is in the spotlight these days since CVS Health Corp. announced a few weeks ago its $69 billion acquisition of Bertolini’s company. If the deal is finalized, Bertolini stands to reap about $500 million, The Wall Street Journal said. But a more recent compensation analysis puts the figure higher. A consultant who works to help companies increase shareholder value calculates that when CVS buys Aetna at $207 per share, Bertolini’s 10-year compensation will reach $640 million. That, he asserts, means Aetna’s CEO is being overpaid by $440 million.

Stephen O’Byrne, president of the consulting firm Shareholder Value Advisors, contends that fair pay for Bertolini, given Aetna’s size, its industry, relative total shareholder return (TSR) and pay risk is $200 million.

In a Dec. 20 analysis on the Seeking Alpha website, O’Byrne asserted that Aetna’s board follows the principle that relative pay should track relative performance. But the company’s board nevertheless approved a compensation package for Bertolini that gives “huge rewards for industry average performance.”

O’Byrne’s analysis looks at pay and performance for the decade that Bertolini has been Aetna’s president or CEO. He says he calculated Bertolini’s actual pay, then compared it with market pay adjusted for Aetna’s relative TSR and Bertolini’s pay risk. “His actual pay is cumulative ‘mark to market’ (or ‘realizable’) pay, a total of $636 million at the acquisition price of $207,” O’Byrne says. “Cumulative market pay is $115 million, so Bertolini’s actual pay is 553% of market pay. His actual pay will be fair pay if an appropriate adjustment for relative TSR and pay risk is 5.53x.”

He says that relative TSR and pay leverage do warrant market pay multiples of 5.5x or more for some companies, including Apple, MasterCard and Netflix, but not Aetna.

Aetna declined to respond by press time to AIS Health’s request for comment on O’Byrne’s recent analysis. But in its 2017 proxy statement, the company says its executive compensation is designed to be competitive “with other large health insurers as well as other companies we compete against for talent and capital.”

The insurer said that its executive compensation for 2016 “reflected our strong performance last year.” While bonus amounts for individual executives varied according to the performance of their own organizations, the overall bonus payout to all employees for 2016 exceeded $346 million, the company noted.

Aetna added that its executive compensation philosophy “reinforces the importance of delivering value to our shareholders,” claiming that, ultimately, “pay decisions for senior leadership are based on the competitive environment and each executive’s contributions toward achieving financial and other goals that are linked to the Company’s business strategy.”

by Judy Packer-Tursman

Adapted from the 12/25/17 issue of AIS’s Health Plan Week

Published by AIS Health
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