While not as controversial as stock options, supplemental health care benefits for executives must be treated with care.
It can be hard to feel sorry for corporate executives with their fancy offices, corporate jets and fat bonuses. But sympathy—and a loud corporate wake-up call—comes easier when they die.
The recent deaths of two McDonald’s Corp. chief executives—James Cantalupo of a sudden heart attack in April 2004 and Charlie Bell of cancer nine months later—got the attention of the board of directors of Enodis plc, a British food-service equipment manufacturer that counts McDonald’s among its major customers.
The deaths were not only tragic, but caused an “incredible business disruption,” says Robert Eimers, Enodis’ Florida-based executive vice president of global human resources and a member of its board. They also prompted Enodis to begin offering its top officers company-paid physical exams two years ago.
“It’s not a perk. It’s a business necessity,” Eimers says. “It really pays to keep these people healthy.”
Many executives receive annual physicals, reimbursement for out-of-pocket medical expenses and retiree medical insurance in addition to coverage under regular group health plans. These extras don’t cost much compared with an executive’s salary and bonus, and they’re not as controversial as stock options, consultants say. Still, it behooves HR managers to make sure these benefits fit a company’s overall business needs and compensation strategy and to anticipate questions from the rank and file.
Falling Out of Favor
It’s no surprise that chief executive officers, chief financial officers and other senior executives get some nice perquisites. Cell phones, handheld devices, company cars and travel on private jets are common. Less common are extra health insurance and medical services, grouped under “supplemental benefits” with executive retirement plans and extra disability and life insurance.
“The vast majority of companies do not distinguish between an executive and a regular employee” in health benefits, says Dave Sugar, a senior consultant at Hewitt Associates, an HR consulting firm based in Lincolnshire, Ill. Only 10 percent to 15 percent of the 500 large companies that Hewitt tracks offer extra medical coverage for executives, he says.
Annual physicals are more common, offered by 31 percent to 48 percent of organizations, depending on size, according to the 2005 Hay Benefits Prevalence Report, a survey of 760 for-profit and nonprofit organizations. (See “ Prevalence of Executive Health Benefits”.)
A different survey that asked 340 organizations only about direct reports to the CEO, president or owner found that annual physicals were offered by 12 percent of organizations with fewer than 100 employees, 22 percent with 100-499 employees and 46 percent with 500 or more employees. ( 2006 HR Practices in Executive-Level Compensation Survey Report by the Society for Human Resource Management in Alexandria, Va.)
In an era of rising health care costs that has many employees paying higher premiums, co-pays and deductibles, some employers are loathe to give executives extra medical benefits, compensation experts say. “Senior management is keenly aware that it’s difficult to ask employees to shoulder more of the burden and ask executives not to pay the penalties,” Sugar says.
Recent corporate scandals that revealed some CEOs’ stratospheric pay and perks have also had an impact. “From a worker standpoint, it’s annoying, especially since the executives make so much. Having the company pay for better health care [for them] appears to be unseemly,” says Charles M. Elson, a business professor at the University of Delaware and director of its Center for Corporate Governance.
Yet executive health benefits have their place, others note. “It’s not about ability to pay. It’s about the company’s ability to recruit and retain top talent,” says Karen Roberts, senior vice president of Aon Consulting’s health and benefits practice in Las Vegas.
Health benefits are too small a part of compensation to make or break a deal at large companies, but they could matter in specific situations, such as when executives or members of their families have ongoing health concerns, says Ed Pudlowski, who heads the health and welfare practice of consulting firm Ernst & Young.
“It could be the leverage needed to get someone to come or stay,” says Don Lindner, manager of executive compensation at WorldatWork, an association of compensation and benefits professionals in Scottsdale, Ariz.
Annual physicals seem to be the most defensible health benefit because they can find health problems that, if undetected, could result in an executive’s illness or death and derail a company, at least temporarily.
“These executives may be better off than average financially, but they’re not better off than average in their health,” says Dr. Steven Masley, medical director of Carillon Executive Health, a program of Baycare Health System in St. Petersburg, Fla. “They’re at risk, and they don’t have time to go to the doctor.”
Eimers adds, “Executives lead lives that aren’t conducive to good health,” with frequent travel, lots of entertaining and little time to exercise, not to mention stress and long hours.
Helping executives better maintain their health has paid off at Enodis. Eimers says that about 17 of 30 eligible executives have had physicals, resulting in the detection of some chronic conditions as well as some problems that required surgery and, more often, changes in diet and exercise habits.
While health benefits are small potatoes compared with executive salaries, they still can cost a company tens of thousands of dollars annually, depending on the number of executives and types of services covered.
Entergy Corp., a New Orleans-based electric utility, last year paid $23,034 for three officers to get physicals, including $16,886 for CEO J. Wayne Leonard, according to its 2006 proxy statement. Leonard’s tab, incurred at the Mayo Clinic in Jacksonville, Fla., was “atypical,” says Entergy representative Morgan Stewart, declining to provide details for privacy reasons. A more typical fee is $1,000.
Extremely comprehensive physicals, generally given during a one-day visit to a hospital-based program, include everything from screenings for heart disease, skin cancer and vision problems to fitness tests, bone scans, genetic screenings and other specialized tests.
“We’re not just doing all the screenings; we’re trying to identify what the executives are willing to do and change,” Masley says. “I’m looking at ‘Are you at optimal function?’ rather than ‘Are you diseased?’ ” Most Carillon patients are in their 40s and 50s; 65 percent are men, and 35 percent are women.
Carillon’s one-day program offers more than 100 different tests with same-day results, consultations with physicians, breakfast and lunch. Price tag: $2,100 for a basic evaluation, $2,760 for a women’s 40+ exam and $2,895 for a men’s 40+ exam. On average, insurance covers 30 percent to 50 percent of the cost, says marketing manager Glenda Fahey.
The two-year-old program is popular—it books three months in advance—because it is comprehensive and convenient for time-pressed executives, she adds. Carillon delivers services in one day that normally require 11 to 13 separate appointments and follow-up calls for test results, she says.
Carillon also offers a weekend package for couples, and this fall it will offer its services in conjunction with Eckerd College’s Leadership Development Institute. Executives who attend a particular program will hear Masley speak and have the option of adding a Carillon physical.
Another type of executive health benefit—supplemental medical coverage—can take different forms. Most often it’s a reimbursement account of $5,000 or less that covers out-of-pocket medical costs and services, such as orthodontia, not covered by the regular health plan.
Less common are separate executive medical plans, sold by niche carriers and large life insurance companies. They can cost $10,000 to $20,000 per year, says Jack Dolmat-Connell, of DolmatConnell & Partners, a compensation consulting firm in Waltham, Mass. The accounts and the plans usually cover executives, their spouses and dependents.
Unlike physicals, supplemental medical is considered a pure perk, consultants say. “It’s not common because it’s politically incorrect,” says Michael Carter, a vice president at the Hay Group in Philadelphia. Many executives don’t want extra company-paid medical benefits—and the negative publicity they may draw—when other employees pay more to get less coverage, he explains.
“We don’t believe in it,” says Eimers. Enodis executives get the same health plan as everyone else, he says, with the addition of insurance that covers their health care during foreign travel.
A third type of benefit, retiree medical coverage, is waning for all retirees. “It’s still around in a lot of heavy industries, but there’s a lot of tinkering with it. Executives want it. They negotiate it as part of their employment contract,” says Elliot Dinkin, executive vice president of Cowden Associates Inc., a Pittsburgh-based actuarial and benefits consulting firm. Spouses are generally covered, too.
If a company self-insures for retiree medical coverage for executives, the value of the benefit is taxable to those executives. But if a company provides such coverage through an insurance policy that it has purchased, the benefit is not taxable. Either way, it’s expensive—about $10,000 per year, so executives normally help pay for it.
“You’re asking an insurance company to cover an individual who’s older and more prone to medical problems,” which is why executives want it, says Paul R. Dorf, managing director of Compensation Resources Inc. in Upper Saddle River, N.J.
Taxes and Other Details
At large employers, the compensation committee, with advice from HR and approval by the full board, decides which executive benefits to provide and to whom. At smaller firms, the top officer makes those decisions.
Eligibility for executive health benefits is generally restricted to the CEO and his or her direct reports but can filter down to senior managers, too. For example, 16 percent of the firms offering retiree medical coverage provide it to the CEO alone, 33 percent to all top officers, 22 percent to senior managers and 29 percent to all managers, according to the Hay Group survey.
As required by the Health Insurance Portability and Accountability Act (HIPAA), boards are not privy to personal medical information about officers unless the officers agree to disclose it, attorneys say. In practice, an executive may disclose a serious health problem without detailing it if “it’s material to the continuing operations of the company. You don’t have to say what it is,” Dolmat-Connell says.
Federal law and tax rules prohibit employers from discriminating in offering benefits—that is, one group of employees can’t receive richer benefits than another—but there are exceptions, lawyers say.
Annual executive physicals are exempt from the nondiscrimination requirement, so companies can legally offer paid exams to executives but not to other employees, says Margaret Bernardin, a lawyer in the Orlando, Fla., office of Ford & Harrison LLP. The exemption covers diagnostic services but not treatment and testing for specific medical complaints or known injuries.
In addition, a fully insured medical plan for highly compensated employees can provide better benefits than a regular group health plan, says Mark L. Stember of Kilpatrick Stockton LLP in Washington, D.C. But self-insured executive-only health benefits are taxable as income, so executives often receive extra salary to cover the cost, says Antoinette Pilzner of Butzel Long PC in Ann Arbor, Mich.
She adds, “A lot of large employers provide discriminatory benefits to executives, and they don’t tax them,” a failure the Internal Revenue Service doesn’t seem to enforce. However, Stember says, a new tax rule has prompted many employers to require executives to pay a discriminatory health plan’s full premium in return for higher salary.
Finally, executive-only health plans have no disclosure and reporting requirements but must follow other parts of the Employee Retirement Income Security Act, the federal law that governs private employee benefit plans. There has to be a plan document, and regulations under COBRA and HIPAA must be followed.
Status Quo Expected
The future of executive health benefits is expected to remain stable, experts say. Companies that offer them will continue to do so, although some may pull back when new federal disclosure rules on executive compensation take effect next year. (See " Disclosure Rules Impact Unclear".)
Some tweaking may occur. For example, “executive flex packages,” in which executives receive 15 percent or so of salary to pay for their choice of supplemental benefits, may spread from health care to other industries, Carter says. And expect to see more bridge medical programs that cover people between retirement and the start of Medicare at age 65, Dinkin says.
Employers without executive health benefits are unlikely to add them because they don’t want to draw unwanted attention to their executives’ pay, consultants say. “It’s very sensitive from an employee relations point of view,” says Carter.
Dinkin adds, “You always have to worry about internal disparity when you create compensation and benefit packages.” HR can raise the question, “How is everyone else treated?” to guard against morale problems stemming from too-wide gaps in pay and perks across job levels.
Carolyn Hirschman is a business writer in Rockville, Md., who specializes in HR and benefits issues.
SHRM report: 2006 HR Practices in Executive-Level Compensation Survey
SHRM white paper: New EEOC Guidance on Discrimination in Employee Benefits
Disclosure Rules’ Impact Unclear
New federal rules on the disclosure of executive compensation could prompt some companies to decrease or drop health benefits for top officers to avoid public attention, but in many instances the benefits will remain small enough to fly under the radar, compensation experts say.
The rules adopted by the U.S. Securities and Exchange Commission (SEC) require public companies to, among other things, disclose perquisites worth $10,000 or more, compared with $50,000 previously. The rules will take effect in 2007. Interpretive guidance will be provided for determining what is a perquisite, the SEC says.
Consultants agree that boards of directors will likely scrutinize health benefits and other executive perks. I think boards are exercising a lot more care and scrutiny. If it doesnt make sense, they wont do it, says Jack Dolmat-Connell of DolmatConnell & Partners, a compensation consulting firm in Waltham, Mass.
Although health benefits are a relatively small piece of executive compensation, they could top the SECs new threshold, consultants say. Some of these benefits run into a lot of money, says Karen Roberts, senior vice president at Aon Consulting. A weekend at the Mayo Clinic can be an expensive proposition.
The entire area of executive pay, especially stock options, is undergoing intense government and media scrutiny in the wake of corporate accounting scandals. Its also an internal issue because of disparities between executive pay and company performance and between the salaries of executives and rank-and-file employees.
The average total cash compensation (base salary plus bonus) per executive set a new high of $5,162,298, or 41 percent higher than in 2005, according to a May report by ERI Economic Research Institute in Redmond, Wash.