Health Care

Sanford Health’s $49 million payout to its former CEO, explained

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Former Sanford Health CEO Kelby Krabbenhoft’s $49 million payout is raising eyebrows this week, but it’s mostly an artifact of a ’90s-era retirement plan that was common when he started.

The bulk of the money—almost $30 million—came from a type of retirement plan that’s rarely used anymore but was typical in 1996, when Krabbenhoft first took the helm of the Sioux Falls, South Dakota-based health system. Most CEOs of that era have long since retired.

Another $15 million came in the form of severance, money Krabbenhoft would not have received had he been terminated. Krabbenhoft stepped down a year ago after saying he wouldn’t wear a mask at the height of a global pandemic. The ensuing chaos came as Sanford explored a merger with Intermountain Healthcare. Sanford called off the deal about a week later.

“That does honestly go to the question of whether he should have been terminated for cause, which means he wouldn’t have gotten that $15 million,” said Theo Sharp, a senior client partner at Korn Ferry.

Had that been the case, Krabbenhoft still would have gotten the retirement payout. Sharp said it’s common for severance to be three times an executive’s salary and bonus pay, which is right in line with Krabbenhoft’s. His 2020 salary was $3 million, plus another $2 million in bonus and incentive pay.

Most of Krabbenhoft’s windfall comes from a supplemental executive retirement plan. They’re not common anymore at for-profit or not-for-profit health systems, Sharp said. The purpose of SERPs was to allow companies to contribute to executives’ retirement plans beyond the maximum federal limit. It was often viewed as a retention strategy.

“Over a long period of time, those can get large if you have high base salaries,” Sharp said. “So it didn’t surprise me at all, actually. It’s just the nature of that type of SERP.”

Few health system CEOs can match the length of Krabbenhoft’s tenure. One who comes close is Wayne Smith, who until the end of 2020 was CEO of investor-owned Community Health Systems, a position he had held since 1997.

Like Krabbenhoft, Smith is set up to get a massive payout when he retires. His SERP was valued at almost $50 million at the end of 2019. Smith didn’t retire when he stepped down as CEO; he became CHS’ executive chairman.

That said, it’s hard to find outgoing not-for-profit health system CEOs whose payouts matched Krabbenhoft’s.

Dr. David Feinberg, who left Geisinger Health System at the beginning of 2019 after serving as CEO since 2015, made $4.8 million in total compensation in the year ended June 30, 2019, $3.3 million of which was his base salary.

Geisinger’s revenue was more than $7 billion in 2020, compared with Sanford’s $6.7 billion. Feinberg’s tenure at the helm of Geisinger was much shorter than Krabbenhoft’s, however.

CommonSpirit’s former CEO Kevin Lofton, who retired June 30, 2020, made $5.6 million in the year ended June 30, 2020. Although Lofton had only served as co-CEO of CommonSpirit since its early 2019 formation, he had been CEO of legacy Catholic Health Initiatives since 2003. CommonSpirit draws more than $30 billion in annual revenue.

Anthony Tersigni spent more than 15 years as CEO of Ascension, a not-for-profit Catholic system with north of 140 hospitals. He stepped down in June 2019 and became chair of Ascension’s investment arm the following month. Tersigni made $10.6 million in the year ended June 30, 2020, more than his replacement at the helm of Ascension. Ascension draws more than $24 billion in annual revenue.

In a statement, Sanford underscored that most of Krabbenhoft’s compensation was contractually obligated as part of retirement plans. The system said the payments made conclude its financial obligations to Krabbenhoft.

“We look forward to continuing along our journey in Sanford Health’s next chapter that focuses on our employees and their commitment to bringing life-changing care to the communities we serve,” the system said.

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