Medtech's High-Earners: 2016 Executive Payouts Boosted By Bonuses, Stock Awards

In the run-up to next month's launch of the annual MTI 100 league tables, Medtech Insight took a look back at last year's top 20 device companies to delve into how well these organizations rewarded their CEOs in 2016, the most recent full fiscal year.

Our analysis showed that the ten most highly-paid CEOs within these top 20 firms reaped generous compensation packages in 2016, thanks to their stock and options holdings in the companies they run. In a few cases, their pay packets were further inflated by some very healthy incentive bonuses.

Medtech Insight compiled its data on device and diagnostics company CEO pay packages by researching proxy statements at shareholders' meetings, and annual reports required to be filed and posted online by publicly traded companies with the US Securities and Exchange Commission (SEC).

The 2016 data on top executives' pay was the most recently available as of Oct. 30. Also, for large, diversified firms that make other products beyond devices, compensation information for leaders of the firms' device-specific divisions (such as the heads of GE Healthcare, or Johnson & Johnson's orthopedics subsidiary, DePuy Synthes) does not have to be filed with SEC. In these cases, we have included the pay of the group CEO. Below are the top 10 high-earners of 2016:

Top 10 Highest Paid CEOs Of Device, Diagnostic Firms in 2016

Source: Securities and Exchange Commission (SEC) filings

Two CEOs Did Well But Leadership Questioned

Despite a boost in pay in 2016 for accomplishments and increase in sales and growth at their firms, two of the top 10 earners were facing severe challenges that threatened their leadership and bonuses by late 2016, and into 2017. Among these were Zimmer Biomet CEO David Dvorak, who stepped down from his post in mid-July, following a disappointing preliminary sales and earnings report for the second quarter of 2017. (Also see "Zimmer Biomet Names New CEO Amid Disappointing Earnings" - Medtech Insight, 12 Jul, 2017.)

Also, Cardinal Health CEO and George Barrett declined to accept an incentive bonus for the 2017 fiscal year after his company – which in addition to manufacturing and distributing devices is also a supplier of pharmaceuticals – became embroiled in an opioid supply scandal and agreed to pay settlements related to charges by the federal Drug Enforcement Administration (DEA) in 2016. His incentive bonuses for the two prior years, 2015 and 2016, amounted to $2.51m and $2.39m, respectively.

Barrett faced a challenge to his leadership initiated by a major shareholder, the Teamsters union, which argued in mid-October that the CEO failed to set the "correct tone at the top" for the company due to the DEA settlements, and called for shareholders to vote to strip him of his Board Chairman's seat, at Cardinal's next stockholders' meeting on Nov. 8. (Also see "Teamsters Ask Stockholders To Replace Cardinal Health Chairman" - Medtech Insight, 18 Oct, 2017.)

But on Nov. 6, the question was settled when Cardinal announced that Barrett would step down as CEO on Jan. 1, 2018, (to be replaced in the CEO spot by current CFO Mike Kaufmann), and would remain as executive board chairman for only one more year – until after the next shareholders' meeting in November 2018. (Also see "George Barrett To Step Down As Cardinal Health CEO" - Medtech Insight, 7 Nov, 2017.) The company cited implementation of a "thoughtful succession plan" as the reason behind the change in CEOs.

Industry CEO Pay Increased By 19% In 2016, Over 2015

In addition to receiving generous pay in 2016, the combined pay packages for the top six earners – Johnson & Johnson's Alex Gorsky, Abbott Laboratories Inc.'s Miles D. White, General Electric Co.'s former CEO Jeffrey Immelt, Medtronic PLC's Omar Ishrak, Becton Dickinson & Co.'s (BD) Vincent Forlenza, and Cardinal Health Inc.'s George Barrett – increased an average of 19% from 2015 to 2016.

Raises For The Six Most Highly Paid Device Firm CEOs, 2015 vs. 2016 Compensation

For example, Gorsky saw an approximate 22.5% increase in his compensation in 2016 over the prior year, White received a 4.6% raise, and GE's Immelt enjoyed a huge increase of 71.68% in pay, primarily due to "other" compensation of $6.8m he was entitled to before departing the company in July of this year.

Further, compensation for Ishrak rose by 9.4% in 2016; Forlenza was paid 19% more in 2016 over 2015, while pay for Barrett was just slightly higher, at approximately 3% more, in 2016 than it was in the prior year.

Companies Apply Different Compensation Approaches

Different firms take varied approaches to compensating their executives. As a general rule of thumb, CEOs' base pay represents just 7.5% to 10% of their entire compensation package, although Jeffrey Immelt's base pay represented 20.86% of his pay package at GE in 2016. Some companies apply their greatest awards in the form of stocks or bonds, while others give more generous incentive bonuses or higher amounts to pension funds that can be tapped by a CEO upon retirement.

For example, in 2016, Miles White received a larger contribution to his pension funds – worth about $3.86m – than he did in his incentive bonus for the year, $3.2m. In another case, Forlenza had a $5.72m stock award, much higher than either his base pay of $1.11m, or pension fund/deferred amount of $485,787.

The pie graphs, below, show the distribution of pay for each of the most-highly paid industry executives.

Distribution Of Compensation To 10 Top-Paid CEOs

Source: SEC filings

Alex Gorsky, Chief Of Johnson & Johnson

While J&J's device division and drug business grew only slowly in 2015 and 2016, overall the company was buoyed by strong growth in its consumer products segment, as the company's CEO Alex Gorsky predicted it would in January 2016. (Also see "J&J Heralds Year Of 'Good Momentum' For Consumer Health Business" - Medtech Insight, 27 Jan, 2016.) The uptick in sales, and a $16.65m incentive bonus for 2016, helped explain an increase in Gorsky's overall compensation package from $18.14m in 2015, to $22.23m in 2016.

J&J's outlook could improve even more over this fall and winter due to strong sales in its orthopedic division, as buyers continue to respond favorably to DePuy Synthes' hip and knee products. During a July 18 earnings call Gorsky said there was particular customer enthusiasm for the Actis hip implant system, and that the company plans some additional launches in its Attune knee group.

Miles D. White, CEO At Abbott Laboratories

Compensation for Abbott Laboratories' CEO Miles D. White rose by approximately 4.6% last year – from $19.4m in 2015, to $20.29m in 2016 – aided by a boost in stock awards and option awards of $5.25m in each category, and a $3.2m incentive bonus that year. And while revenue from Abbott's medical device unit was relatively flat at just 0.7% in the fourth quarter of 2015, by the first quarter of 2016, sales were up at Abbott 5% year-over-year, and were particularly strong in emerging markets including China, India and Russia, where sales increased 12% on an operational level.

White remained upbeat during early 2016, saying he wanted to focus on "business fundamentals" for Abbott, and by January 2017, the company's diagnostic business was announcing CE marks and the European launch of its Alinity system for blood and plasma screening, and its Alinity ci series of instruments for clinical chemistry and immunoassays. (Also see "To Alinity And Beyond: Abbott Dx Launches Into Its Next Phase" - Medtech Insight, 26 Jan, 2017.) The move to increase Abbott's presence in the diagnostics sector "is an extremely ambitious undertaking and one that will strengthen our competitive position tremendously," White said during a Jan. 10 earnings call.

White could also benefit, and see an increase in his bonus for 2017, from Abbott's merger with St. Jude Medical in early January this year, giving it a share of the cardiac rhythm management market (Also see "Abbott Becomes CRM Player Overnight By Completing St. Jude Deal" - Medtech Insight, 5 Jan, 2017.), alongside a strong series of novel device approvals this summer, including the HeartMate 3 left-ventricular assist device and the firm's companion diagnostic RealTime IDH2 assay, indicated for select candidates to be treated with Idhifa (enasidenib) for relapsed or refractory acute myeloid leukemia, marketed by Celgene Corp. and Agios Pharmaceuticals Inc.(Also see "US Approvals Analysis: Abbott Leads Another Strong Month For Novel Approvals" - Medtech Insight, 13 Sep, 2017.)

Alternatively, when reviewing White's performance over the last year, Abbott's board of directors could take a dim look at the company's trial failures on its Absorb GT1 BVS bioresorbable drug-eluting stent during the first quarter of 2017, which showed Absorb was statistically inferior to the firm's earlier, Xience everolimus-eluting stent or coronary artery bypass graft (CABG). Abbott ultimately decided to pull its Absorb first-generation bioabsorbable coronary stent off the market Sept. 8, although it will continue with an ongoing trial on its Absorb GT1 BVS. (Also see "Abbott Pulls Absorb Stent Off The Market, Citing Low Sales" - Medtech Insight, 8 Sep, 2017.)

Incoming GE CEO John Flannery Heralds Belt-Tightening Phase

As already pointed out, GE's former group CEO Jeffrey Immelt did quite well as head of the conglomerate, and, as a result, garnered a 71.68% increase in his pay from 2015 to 2016 when he earned $18.22m upon his mid-June retirement. But the new CEO, John Flannery, who formerly ran GE's Healthcare division and officially took over the lead post at GE on Aug. 1, (Also see "GE Taps Healthcare Again For New Group Head" - Medtech Insight, 12 Jun, 2017.) has already signaled a desire to boost profits even more at the overall company (including the GE Healthcare division) by cutting operating costs and shutting down some divisions and sectors.

Flannery also has started at a much lower annual compensation level than Immelt – with base pay of $2m (Immelt's base pay was $3.8m in 2016), plus a target of $3m for Flannery's incentive bonus (Immelt's incentive bonus was $4.3m last year) for a total of $5m, according to a June 12 8-K reportfiling by GE with the SEC. Of course, Flannery is also expected to be paid in shares of GE common stock, on top of his base pay and incentive bonus, depending on his performance this year and next, said the 8-K report.

As a key sign of Flannery's drive to save dollars at GE, during an Oct. 20 third-quarter 2017 earnings call, he told investors that third quarter results "are completely unacceptable," and that his future plans are to "drive sweeping change" in the firm's varied businesses and corporate culture, and be "much more disciplined at all levels of the company on capital allocations," and reduce the overall company's complexity.

Grounding The Corporate Jets

Another example of Flannery's desire to cut costs is his early August decision to ground all six of GE's corporate jets, stopping the practice of the company running a second, empty "backup" jet behind former CEO Immelt's plane as he flew around the world. The second jet was required so that Immelt wouldn't be held up by mechanical or security problems with his primary jet, said a recent Wall Street Journal report.

Flannery also promised during the Oct. 20 earnings call to divest certain businesses – including non-health-care segments in GE's power and transportation divisions, although GE Healthcare itself did quite well and will probably be spared. Company executives reported during the earnings call that health-care orders were up 6% in the third quarter of 2017 over the 2016 third quarter, driven by an 11% increase for ultrasound products (including GE's LOGIQ, Voluson and Vivid), and an 8% increase in orders for its mammography equipment (such as the Senographe Pristina system) and CT equipment (Revolution CT GSI Xstream).