How insurance executives' compensation changed after the recession

Businessman holding money
A new study examines the changes in insurance executive compensation following the 2008 recession. (Getty/matthewennisphotography)

Insurance companies made some big changes to the way they paid their top execs in the wake of the Great Recession, a new study shows. 

Researchers at Florida International University (FIU) compared compensation packages before and after the 2008 financial collapse for executives in different sectors of insurance—including health plans.

After the recession, they found, companies of all sorts shifted toward a greater emphasis on stock options and away from cash bonuses, signaling a shift toward a greater emphasis on performance incentives. 

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The level of bonuses declined by two-thirds, the study found, while stock award and non-equity incentives doubled. Option awards increased by 70% after the recession.

What drove the changes? A lack of cash and a desire to push top execs to figure out ways to juice their numbers despite a sluggish economy, Deanne Butchey, Ph.D., lecturer in FIU’s Department of Finance and one of the study’s authors, told FierceHealthcare. 

RELATED: What the CEOs of the 8 largest insurers earned in 2018 

“When you’re in a recession, the bottom line is being affected,” Butchey said. “You’re going to want to have to pay out less to the senior leadership and you also want them to engage in activities that will help the company recover very quickly, and the way to do that is to compensate them by stock ownership.” 

As the recession left stock prices across the board quite low, offering them to executives as compensation is low-cost while giving them a direct stake in turning the company around, she said. 

Taking this approach is also a way to mitigate or avoid the “agency problem,” in which a firm encounters a conflict of interest between shareholders and management, Bakhtear Talukdar, Ph.D., an assistant professor of finance at the University of Wisconsin – Whitewater and one of the study’s authors, told FierceHealthcare. 

By converting the managers to owners through stock, it aligns leadership with the shareholders in a sense of shared ownership, he said. 

RELATED: Study reveals how Affordable Care Act, recession affected healthcare spending 

“If they make unintelligent decisions, they would also get hurt,” Talukdar said.

Talukdar noted that the accident and health insurance sector specifically had the highest total compensation packages, on average about $8.6 million in total annual compensation. Health and accident insurance are highly unpredictable in comparison to, for example, life insurance, justifying the higher pay in a riskier industry.

The average total compensation for executives in life insurance was $7.5 million, while the average for fire, marine and casualty insurance was $5.8 million. Surety insurance executives ranked last, with average compensation of $3.1 million.

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