The health care industry was thrust into the spotlight in 2020 to contend with the COVID-19 pandemic. And, as a result, health insurance plans shifted into focus for many employers and employees alike.
And while revenue growth for these health insurance companies were modest (3%), total direct compensation for top executives was not. According to a survey by BDO, executive compensation rose 8-14% year over year at these health insurance companies.
This finding by the BDO survey was cause for some surprise, as executive pay levels typically increase alongside company size. For instance, the median salary for CEOs in companies with revenues greater than $4 billion is about 20% higher than the median salary for CEOs at companies with revenues of less than $4 billion. However, Judy Canavan, BDO’s managing director of global employer services, noted that that doesn’t necessarily mean larger companies overpay their CEO.
“We compared pay levels relative to revenues and found that larger-sized companies seem more efficient with regard to the revenue earned per dollar of CEO pay,” Canavan said.
The economic volatility of 2020 has been vexing for boards and compensation committees when it comes to goal setting and incentives — this is no different for health insurance companies. At the same time, there’s also more scrutiny than ever around executive compensation, especially so at public companies.
Canavan noted that the primary focus for boards has been expanded beyond shareholders to include additional stakeholders including employees, suppliers, customers and the community. Committees are now focused on thinking about how executive compensation should be structured to address the impact to these additional stakeholders. This has a significant effect on selecting metrics for annual and long-term incentive plans, especially environmental social and governance (ESG) measures.
“These days, the crystal ball needed for setting goals looks more like a snow globe that has recently been shaken,” Canavan said. “Boards face two challenges related to setting goals: their awareness of the high degree of uncertainty of the upcoming year and the heightened scrutiny and accessibility of information about their decisions.”
A few solutions, Canavan said, include implementing relative performance measures, which compares like companies, as well as broadening the performance ranges to address the potential for more volatility of financial indicators. Another strategy being deployed is increasing communication between management and the board to ensure the board is aware of any deviations from initial planning.
Canavan said the pandemic’s most noticeable effect on executive pay came via incentives. There were instances where these plans payed out below target due to performance below the goals that were established before the pandemic. While this might be welcome news to other stakeholders, there could be scenarios where executives performed well and their leadership saved the organization from larger losses, despite missing pre-pandemic targets.
The inverse is also problematic, as some health insurance companies could have experienced a strong performance in 2020 for a variety of factors — a reduction in claims for elective procedures being one of them.
“No matter the reason, above target incentive payments could be perceived negatively by other stakeholders,” Canavan said. “In addition, the performance might be more a result of external forces than executives’ efforts. In this case it might be prudent to make a discretionary reduction to the incentive payout.”
It’s also relevant to note that while increases in revenue and profits are commonly used measures in incentive metrics, they do not necessarily reflect true organic growth. Revenue increases can be a result of pricing increases and profits can be impacted by reduced utilization. Thus, alternative growth metrics such as membership and/or market share should carry more weight in the health insurance industry, Canavan said.
“These both demonstrate true organic growth,” she said. “Conversely, increases in revenues may be a result of the increase in the cost of medical treatments (for instance, years ago there were only radiographs as an imaging technique, now there are also MRIs and CT/CAT scans — all of which are significantly more expensive. Premiums go up to cover new techniques and services, thus revenues increase as well.”
Similar to many other industries, ESG measures are growing in as an important aspect of compensation for health insurance executives. However, executing the implementation of these measures to drive desired outcomes is still murky at the moment, Canavan said.
“Practices will evolve over time as more data is available for benchmarking,” Canavan said “However, based on the conversations we have with executives, every effort is being made to create meaningful goals and objectives related to ESG.”
About the Author
Brett Christie is the managing editor of Workspan Daily.