Their CEOs were paid a lot, so they can’t merge

Posted by Marc Hodak on April 19, 2008 under Executive compensation | Be the First to Comment

That sounds like a silly argument, but it’s basically what the State of New York is telling a couple of HMOs. Here’s the line of argument:

Two of the largest HMOs are seeking approval for a merger, which would make them the largest HMO in the state. Each of CEOs had performance-based incentive plans last year–plans that put a significant amount of their pay at risk. It worked. Their firms performed well, and they doubled what they took home the year before.

“We are very concerned about HIP’s announcement that it has doubled the salaries of its top 10 executives at a time when the company has not been performing well,” a spokesman for the department, David Neustadt, wrote in an e-mail message. “As we consider its pending merger with GHI and conversion to a stock company, we will be asking the executives tough questions about this decision.”

So, in one statement, this state official makes three errors, two of fact and one of logic.

Fact #1, their salaries didn’t budge over the two years; what increased were their bonuses, which was pay they had at risk. Fact #2, against what standard had this HMO not performed well? Apparently against some standard that doesn’t account for revenue and profit, the two metrics upon which the bonus plans were based. In fact, the state offers no argument whatsoever that the incentive plans were not reasonably designed. (I personally don’t like rewarding managers for buying revenue, but I wouldn’t call that unreasonable.) They only object that these plans actually paid out more money to the top executives, and call it a “salary” increase.

Logically what does performance-based pay for the executives have to do with any rationale for approving or disapproving a merger? I’ll admit my eyesight isn’t as good as it used to be, but I don’t remember seeing “CEO pay” as a criterion in the antitrust statutes. In fact, the state offers no logic; they only promise to “ask tough questions,” once the cameras are in place.

It’s a shame that we can’t ask these tough questions of the State Inquisitors…er, state officials.