Who is the biggest paid CEO is the healthcare industry’s 2016?

Have you hard of Valeant?  Their CEO, Joseph Papa, was paid $62.7 million in 2016.  He’s the highest paid executive in healthcare in 2016.  And keep in mind he only worked a partial year at Valeant. And under Papa, who was recruited to Valeant from Perrigo in May, Valeant’s stock price slid 67% to less than $10 per share. The company ended the year with a $2.4 billion loss.

Obviously, some shareholders are uneasy about the results. Valeant’s board this month took the unusual step of defending the company’s pay structure in a special proxy filing.

In healthcare and other industries, the trend is to peg compensation to long-term stock options and other awards that require those executives to sustain company growth in share price and return on investment over a number of years rather than just annually, said David Hofrichter, a senior partner for Aon Hewitt’s executive compensation and governance practice.

That has the effect of prompting executives to put in place robust long-term strategic plans for the companies they lead by putting future pay at risk, he said.

Meanwhile, Tenet Healthcare Corp. says it’s on the road to improvement with the divestiture of its Atlanta hospitals last year and strong earnings in its free-standing surgery center business. But not all shareholders are buying it.

The International Brotherhood of Teamsters, whose $100 billion pension and benefit funds hold a sizable chunk of Tenet shares, is asking shareholders at the hospital chain’s May 4 annual shareholder meeting to reject the company’s executive compensation plan.

Under the 2010 Dodd-Frank Act, public companies must take an advisory shareholder vote on executive compensation. The proxy item is known as “say on pay.”

In a letter this month to Tenet shareholders, Teamsters General Secretary-Treasurer Ken Hall says pay for CEO Trevor Fetter is set to rise again in 2017, even after Dallas-based Tenet had a dismal year in 2016.

Hall notes that long-term stock incentives for Fetter, which totaled $7.3 million of his $12.4 million compensation, will increase to $9 million in 2017 or back to 2015 levels.

He particularly takes issue with the low stock-price targets that would grant Fetter the at-risk awards. Fetter needs to get Tenet’s depressed stock price up only 25% any time over the next three years to collect the money.

“For a stock that has given up more than 70% since September 2014 . . . it is not clear this award is a particularly efficient or effective means of incentivizing and rewarding executive decision-making,” Hall said.

Tenet shares, which traded as high as $59.43 in July 2015, closed on April 13 at $17.48. The company suffered a net loss of $192 million in 2016 on revenue of $19.6 billion.

Tenet declined to comment on the letter and Fetter’s compensation.

But they’d likely be able to make a case for the pay strategy. Currently, anywhere from 65% to 85% of senior executive pay at publicly traded healthcare companies comes in the form of long-term stock options and other performance-based awards compared to a fraction of that eight years ago, said Mike Halloran, a senior partner specializing in executive compensation in the Dallas office of Mercer.

That performance largely focuses on financial measures, such as profits and stock price, he said.

That’s different from not-for-profit hospitals and providers, which still rely on base salary for a big chunk of total compensation, Halloran said.

Not-for-profit executives, with their duty to the communities they serve on a tax-exempt basis, are expected to take fewer risks than executives at for-profits whose first obligation is providing a return to shareholders, he said.

Papa and Herendeen were brought in under extraordinary circumstances to clean up a mess at Valeant. When they arrived, Valeant was under numerous federal and state investigations and the company’s share-price plunge was well under way.

Though Papa didn’t cause the slide, he wasn’t able to stop it either. That’s going to make it harder for him to eventually collect all of the $62.7 million earned last year.

According to the Valeant proxy, $52 million of the total compensation is in long-term stock incentives that he will collect over four years if the company’s stock price improves. He gets the full amount only if he can navigate Valeant’s stock price at or above $60 per share over the four years from the $9.48 per share it closed on April 13.

Moreover, Valeant paid Papa an $8 million signing bonus largely to compensate him for awards he lost for leaving Perrigo, a large generic drug and healthcare products manufacturer and distributor.

That Valeant would defend Papa’s performance and compensation in a proxy supplement says something-that a shareholder or shareholders complained about either the amounts or structures of the compensation for senior executives, Halloran said. “Someone’s been critical,” he said.

Valeant media and investor relations representatives did not return phone calls seeking comment.

Companies that ignore shareholder unease over executive pay are playing with fire, said Brian Tanquilut, senior vice president of healthcare equity research at Jefferies & Co.

He said activist investors wanting to get involved in governance and try to foist changes on management see high executive salaries as a red flag that could attract other investors to help in their cause.

When it comes to Say on Pay, 98% of companies get approval on the yes or no vote, with three in four achieving better than 90% approval of the ballots cast, Halloran said.

So when a company falls under 70% on the vote, it suggests a certain shareholder restiveness on the issue that probably deserves some scrutiny by the board of directors and management.

Valeant’s say-on-pay vote was 62% at last year’s annual shareholders meeting held just before Papa succeeded CEO Michael Pearson.

That gave rise to a board review of Valeant’s compensation structure that led to reforms, including lower change-of-control payouts and pegging more compensation to long-term incentives, the company said in its April proxy supplement.

“Valeant was disappointed that shareholder support for its 2016 say-on-pay vote was 62% but has tried to be proactive in soliciting feedback and reflecting it in future decisions,” the company said.

Boards set executive pay and have shown interest in pegging executive pay to at-risk stock incentives. That can give rise to wide swings in executive pay year over year.

Last year’s highest-paid healthcare executive was Joe Kiani, CEO of patient-monitoring device maker Masimo. His $119.2 million in compensation surprisingly topped his better-known counterparts at other healthcare companies when he was granted an $111 million golden parachute in the event he left Masimo. His prior-year pay was $4.5 million.

Last year’s No. 2 on the executive compensation ranking also involved special circumstances.

Horizon Pharma CEO Timothy Walbert pulled in $93.4 million in 2015 as a reward for executing a series of mergers with companies selling high-priced drugs for rare diseases.

On the other side of the spectrum this year, performance bonuses were lean again for Community Health Systems CEO Wayne Smith and CFO Larry Cash as the two top executives at the struggling hospital company attained just 13% and 15%, respectively, of their financial and operating targets in 2016.

Smith will receive $640,000 in incentive compensation for 2016, while Cash, who is retiring in May, earned $255,000. Smith’s total compensation fell to $5.8 million in 2016 from $10.4 the previous year, largely as a result of a $5 million drop in restricted stock rewards to $2.3 million in 2016.​

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