Articles on Pharmacy Benefit Management

Pay for CVS Caremark Chairman Ryan Dwarfs Compensation at Rival PBMs

Reprinted from the July 3, 2009, issue of DRUG BENEFIT NEWS, biweekly news, data and business strategies for health plans, PBMs and pharmaceutical companies.

Thomas Ryan, chairman, president and CEO of CVS Caremark Corp., last year earned about double the pay of the leaders of CVS’s two closest PBM competitors, according to DBN’s annual salary rankings for the highest-paid executives at five publicly traded PBMs.

See Table: Executive Compensation for Highest-Paid PBM Executives in Selected Large Publicly Traded Firms

Ryan, ranked 24th on the Forbes list of the 500 highest-paid executives at publicly traded firms, received $24.1 million in 2008 total annual compensation. Medco Health Solutions, Inc. Chairman and CEO David Snow took home $13.1 million in total annual compensation, while Express Scripts, Inc. Chairman, President and CEO George Paz came away with $12.8 million.

Since CVS Caremark owns a large retail pharmacy chain in addition to its PBM operations, it uses different benchmarks in setting compensation levels. CVS Caremark said in a Securities and Exchange Commission (SEC) filing that it compares itself to retail giants such as Home Depot, Inc., Target Corp. and Walgreen Co., as well as health care firms like Medco, McKesson Corp., WellPoint, Inc. and Aetna Inc. By contrast, Medco and Express Scripts include in their peer groups large health insurers, PBMs and drug companies.

Ryan’s compensation actually fell 7.6% from the 2007 level of $26.1 million. In an SEC filing, CVS Caremark said one factor was the company’s failure to meet its operating profit goal — the primary measure used to set executives’ annual incentive payments. CVS Caremark fell $176 million short of the $6.2 billion operating profit goal, which would have represented a 28.6% increase over the prior year. As a result, Ryan’s non-equity incentive plan compensation fell from $7.8 million in 2007 to $4.6 million in 2008.

CVS Caremark also paid Ryan a variety of perquisites, including $110,854 for personal use of company aircraft, $2,885 for personal use of a company car, $13,413 for financial planning services and $5,798 for home security.

Medco allotted Snow a 24% increase in 2008 compensation over the prior year, driven primarily by hikes in stock-option awards and non-equity incentive plan compensation. In its SEC filing, Medco said it judged Snow’s performance on “financial goals tied specifically to the company’s operating plan, as well as non-financial objectives relating to leadership, innovation and other strategic initiatives.”

The PBM met two of the three financial goals used to set executives’ incentive payments: earnings per share of at least $2.21 and net new sales of at least $1.3 billion. But the company fell short of the goal client retention rate of 96.6%, as measured by billed drug spend, less drug spend from lost business, divided by billed drug spend. Still, Snow received a $3 million incentive payment, representing a 15% increase over the prior year. Medco also said Snow received 2008 option grants that cost the company an estimated $6.5 million in accounting expenses, a 48% increase over 2007.

Express Scripts’ decision to almost triple Paz’s stock award in dollar terms helped drive his total 2008 pay up 60% to $12.8 million compared with the level in the previous year. The PBM estimated that Paz’s 2008 stock award was worth $6.7 million, compared with $2.6 million in 2007. Express Scripts said it has decided to bring the CEO’s pay to near the 50th percentile among peer-group companies, with a larger portion of compensation weighted to stock awards.

Paz’s 2008 non-equity incentive payment was $2.5 million, the maximum allowed by the company. To set such payments, Express Scripts uses financial goals such as earnings per share and earnings before interest, taxes, depreciation and amortization.

Compensation levels at the three large PBMs dwarfed pay at two smaller companies, Catalyst Health Solutions, Inc. and SXC Health Solutions Corp., where the chief executives each received $2 million in total compensation.

In its SEC filing, Catalyst explained that it benchmarks compensation levels against a peer group that includes smaller health services companies, such as AMERIGROUP Corp., Magellan Health Services, Inc. and Molina Healthcare, Inc. Catalyst also reviews compensation practices at Express Scripts and Medco, but it noted that although both companies are “direct competitors of ours, [they] have significantly greater revenues, scale of operations and number of employees.”

In setting overall compensation, Catalyst considers a variety of financial measures, including annual earnings growth, annual cash flow from operations, working capital management and return on invested capital. Catalyst also uses client retention measures, growth in revenues and prescription volume, and success in adding new clients and integrating acquisitions.

Among the measures used in Catalyst’s annual incentive program are “net income, total revenue, gross margin, number of prescriptions processed, client retention rates, number of new members from new client wins, new client implementation success metrics, acquisition integration milestones, consummation of an acquisition(s), [and] specific cost reduction strategies or benchmarks,” according to its SEC filing.

One reason for lower overall compensation levels at Catalyst is the company’s decision in 2005 to stop granting stock options in light of the financial accounting expense requirements such grants require.

In giving CEO David Blair a 10% increase in overall compensation, Catalyst noted that the company completed two acquisitions, had a 28% increase in 2008 net income versus 2007, a 37% increase in revenue and a client-retention rate of more than 97%. “Based on Mr. Blair’s performance relative to his goals, he was awarded a $400,000 cash bonus and grant of 45,000 shares,” the PBM said. His salary was not changed given “the current economic climate,” it added.

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