Aetna sale spotlights CEO pay

Aetna Inc. CEO Mark Bertolini will collect about half-a-billion dollars when and if Aetna's sale to CVS Health closes, according to the Wall Street Journal.

After combing through Aetna's public filings, my math totaled up to a different number, but it's at least in the hundreds of millions of dollars for Bertolini before taxes.

This big payday presents an interesting case in the fairness of CEO compensation. If pay is supposed to be tied to performance, maybe Aetna should have no apology to make, what with Aetna shares last week worth about six times what they were on Bertolini's first day as CEO seven years ago.

That outcome is what a lot of extra pay from so-called change-in-control provisions for executives is supposed to buy. Boards of directors want their CEO's full attention on the task of making a lot of money for shareholders. So here the Aetna directors got what they paid for.

But shareholders still must be grumbling, as the stocks of all the big health insurers have done well since Bertolini took over Aetna. Even with the deal announcement, Aetna's has appreciated only about as much as the stock of Minnetonka-based UnitedHealth Group.

And isn't a CEO already paid well to work every day for the owners? They are not supposed to stiff-arm an acquisition overture just because there's not enough in it for them. Certainly rank-and-file employees can be forgiven for concluding that change-in-control deals for top executives are just another way corporate executives manage to get their hands on a wildly disproportionate share of the payroll.

One of the justifications for granting them is certainly true, however, and that's that nearly everybody does it.

Health plan benefits might get continued and retirement pay might be stepped up, too, but the big dollars usually come from the instant vesting of stock options, stock appreciation rights and other forms of pay tied to company stock.

Executives don't necessarily get more options or shares, but options and stock rights that couldn't be touched for years are suddenly worth a lot.

A change of control isn't always defined as a complete takeover or merger out of existence, either, as in Aetna's case the threshold to trigger extra payments happened to be a party getting just 20 percent of the voting power of the stock.

Bertolini took over as CEO of Connecticut-based Aetna in November 2010. While more or less customary stock grants turned out to be worth a lot, much of the big number tied to his expected payday with the sale to CVS comes from a special deal he received in the summer of 2013.

That's when the board, as later explained in a securities filing, had concluded that the company was entering "a period of unprecedented industry change." So it quietly dumped hundreds of thousands of additional performance-stock units and stock-appreciation rights on Bertolini.

But the prediction of an industry upheaval certainly was spot on. What followed was a period of jockeying and dramatic deal-making among the largest companies in the health insurance business.

By taking care of Bertolini, this board seemed to have decided it would be just fine if Aetna turned out to be a seller. And Bertolini had just been given plenty of additional incentive to not mess that up.

Minnetonka-based UnitedHealth Group, as the industry leader, was in a strong position no matter what happened in this round of consolidation, yet it was one of the first to try a move. It starting talking with Aetna in the summer of 2014.

When a formal proposal came, the price was about half of what CVS just agreed to pay, so Aetna looked elsewhere. Eventually it agreed to acquire Humana, another insurer, for about $37 billion in cash and stock.

That deal later was derailed by a federal judge, but the day before it was announced in the summer of 2015, no one could have known that. That's when Louisville, Ky.-based Humana completed a revised compensation package for its CEO, Bruce Broussard, accelerating the vesting of equity awards and tweaking other provisions if he left his job within two years of Aetna's taking over.

UnitedHealth is the largest company in Aetna's industry, and one of the things that often happens when companies get on top is these change-in-control provisions start to drop off. The median annual revenue of companies that decide to go without them, as of the last time the consulting firm Equilar looked at it, was $108 billion.

UnitedHealth Group blew past $108 billion in annual revenue a while ago. It's also worth well more than $200 billion in the market and is now one of America's most valuable companies. It's not clear who could buy the company, yet it hasn't completely outgrown its desire to make sure executives do well in a change in control, what with the promised accelerated vesting of equity awards described in the latest proxy statement.

Maybe this board thinks iPhone maker Apple someday will come knocking.