Healthcare CEO Pay is Out of Control; Impacting Shareholder Returns

STAT magazine’s Bob Herman recently reported on the CEO compensation of the seven largest health insurance and services companies over the past decade. 

Herman found that these seven companies paid out $1.77 billion in total compensation to their CEOs. In 2021 alone, the seven chief executives were paid $283 million. 

That’s a lot of cash. Did any of the seven get their money’s worth? I’ll take a closer look.

The Best and Worst Returns Over 10 Years

The average annualized total return of the seven companies over the past 10 years through May 11 was 21.08%. This compares with 20.58% for the Healthcare Plans industry and 13.04% for the entire U.S. market over the same period. 

Of the seven companies, the best performance was Molina Healthcare (MOH) at 27.45%, while the worst was CVS Health (CVS) at 9.71%. If you exclude CVS, the average for the other six improves by 190 basis points to 22.98%.

So, if you plunked down $1,000 each in 2012, today, your $7,000 investment would be worth $47,405. Who says it doesn’t pay to bet on health care?

Here’s a breakdown of all seven companies and their 10-year performance:

Source: Morningstar.com 

According to Herman’s reporting, Cigna’s CEO, David Cordani, took home over $91 million last year -- 88% was stock options and awards that vested  -- and $366 million since 2012. Cordani has been in the top job at Cigna since 2009. The average tenure of an S&P 500 CEO isn’t much more than five years, so Cigna’s CEO is one of the fortunate few. 

Since Cordani became CEO, Cigna stock’s gained 1,518% on a cumulative basis. In some respects, he’s also fortunate to have become CEO when he did at the beginning of a 13-year bull run. 

Cigna’s CEO was paid the most over the past decade of the seven companies. Cordani owns 1.24 million shares worth $320.8 million. His 2021 compensation was 297x the median employee’s total compensation.

It seems obscene that one individual could amass so much wealth from being a paid employee, but that’s a subject for another day. I’m happy about my cumulative returns if I'm a Cigna shareholder.

The Best Value  for the Money

You don’t have to be a rocket scientist to see which companies got the best bang for their buck over the past decade. Not only did Molina Healthcare have the best stock performance over the past 10 years, but it also paid out the lowest amount to its CEO.

Molina’s current CEO is Joseph Zubretsky. He took the top job in November 2017. He was an external hire. Since taking the job, Molina’s share price has gained 265% over 4.5 years. In 2021, Zubretsky received $47.33 million in stock awards that vested. 

Kudos to Herman for using the vested amount rather than the stock options and awards granted in 2021. If we were to go by the latter metric, Zubretsky earned $19.96 million last year.     

However, to Zubretsky’s credit, he’s hung on to most of his shares since taking the top job. On March 7, he held 630,157 shares, good for 1.08% of the company. At today’s price, they’re worth $181.5 million. He’s accumulated shares worth 57% of Cordani’s haul in one-third of the time. 

Translation: He walks the talk far more often than Cigna’s CEO.  

The Bottom Line

As Herman points out in his article, the CEOs of these seven companies are some of the highest-paid chief executives in health care. That’s led many to label insurance companies as greedy.

Based on data from MyLogIQ LLC, the median pay for an S&P 500 CEO in 2021 was $14.2 million. The average pay for the CEOs of the seven companies discussed in this article was $40.6 million, almost three times more than the median pay for all the CEOs of companies tracked by the index. 

At the very least, Molina Healthcare proves that you can pay a CEO well without giving away the entire store to keep them happy and engaged. 

As stocks go, Molina is reasonably valued at 0.58x sales, with a free cash yield of 10.9%. I consider anything above 8% to be in value territory. If you own MOH stock, keep holding. It’s the best of a very well-paid bunch of CEOs.