Medical device companies are shifting the way they pay their CEOs, moving away from equity-based awards toward compensation pegged to financial metrics that are more aligned with shareholders’ interests, according to a report from Morgan Stanley.
Yet many companies – 40% of Morgan Stanley’s coverage universe – still use earnings per share as a part of their short-term incentive programs, even though short-term EPS metrics aren’t correlated to total shareholder return, according to the report. Only 15% of the companies the investment house reviewed – Baxter (NYSE:BAX), Becton, Dickinson & Co. (NYSE:BDX) and Medtronic (NYSE:MDT) – used return on invested capital as a metric "and most underweight the metric," the Morgan Stanley analysts wrote.
Absolute compensation is largely correlated to company size, except in Baxter’s case, where CEO Robert Parkinson Jr.’s pay is about 30% more than predicted by its market capitalization, according to the analysts. Forty-five percent of the medical device companies review in Morgan Stanley’s 3rd annual CEO pay review do not base their long-term incentive programs on operating metrics.
The average medtech CEO’s pay among the 30-odd companies reviewed was about $9.2 million last year, according to the report. The average total compensation from 2011-2013 ranged from the $23.3 million paid to Abbott (NYSE:ABT) CEO Miles White to the $4.0 million average Intuitive Surgical (NSDQ:ISRG) CEO Gary Guthart pulled down during those years, according to regulatory filings.
A few companies are adapting to the evolving healthcare system, which is squeezing medtech’s control over pricing, the analysts wrote, including BD and Abbott.
"Several companies are going above and beyond. BDX remains a standout, the only company in our analysis to use ROIC as a primary metric for long-term incentives and to have threshold requirements for both revenue and returns," according to the report. "ABT resized compensation downward after the AbbVie spin, matching comp levels to company size, and remains 1 of only 4 companies to use a return measure [return on equity] in its long-term incentive structure."
"Underperformance is never welcome, but we were impressed EW and ISRG eliminated CEO bonuses in response; no company awarded a CEO zero bonus in the prior 3 years of our review," they wrote, noting that Intuitive cut Guthart’s compensation by about 50% in 2013.