Robert Pallari, former CEO and president, received $5.5 million in compensation in 2008 after signing a non-compete agreement
February 3, 2011 – Legacy Health System is experiencing the impact of a down economy – lower patient volumes and higher than anticipated charity care – and has been forced to reduce its work force by 64 positions.
That number includes 22 people who’ve been laid off, and 42 positions that will remain unfilled. Physicians, nurses and other medical staff have not been impacted by these layoffs.
Legacy’s financial picture speaks for itself. During the first six months of its fiscal year which ended September 30, discharges at all five hospitals declined 8.5% compared with the previous year. Total net revenues were down 2.2%, and operating income was $22.2 million with a 3.4% margin compared to $29.4 million with a 4.6% margin in 2009. Overall Legacy’s hospitals budgeted for a 5.1% operating margin, according to an email sent to employees on October 28 by Pam Vukovich, senior vice president and chief financial officer.
“It’s essential that we achieve at least a 4% operating margin in order to earn the capital that will fund the strategies of the future,” Dr. George Brown, CEO and president, told employees in a January 26 memo. “This is a tough goal during current economic times, yet I know we can (and must) achieve this level of financial performance.”
While Legacy faces a concerted effort to reduce costs and meet its financial targets, advocates are questioning why Robert Pallari is still on the payroll.
Although Pallari resigned as Legacy’s CEO and president in 2005, he received $5.5 million in compensation in 2008, according to IRS documents filed with the Oregon Department of Justice. He’ll receive a final pay out sometime this year for an undisclosed amount.
There’s absolutely no connection between Pallari’s compensation and Legacy’s financial situation, according to Brian Terrett, director of public relations. Those pay outs are a result of a non-compete agreement Pallari signed before he retired, stipulating that he would not immediately go to work for another hospital or health organization.
“That money had been set aside,” Terrett told The Lund Report. “Legacy Health was able to make these payments without impacting the quality of healthcare we deliver to the community every day. Upon his retirement, Legacy Health asked Mr. Pallari to sign a non-compete agreement. Large organizations typically ask departing CEOs to sign such agreements in order to protect their competitive position. A majority of the pay-out reported on the 2008 Form 990 came as a result of Mr. Pallari successfully fulfilling part of this non-compete agreement with Legacy Health.”
Pallari was paid another $3.5 million in 2008, according to the IRS document. However, this amount represents “various funds paid into Mr. Pallari’s retirement over the course of nine years between 1996 and 2005,” Terrett said. “They are simply being re-reported as an aggregate on the 2008 Form 990 because of a new IRS requirement.”
The year he retired, Pallari, who was 56, earned $1.2 million, deferring $1 million as retirement compensation. “Most of the amount paid to Mr. Pallari came from compensation he had received at the time of his employment, which he chose to defer,” Terrett said. “The amount also includes investment earnings on that deferred compensation. Because these dollars had already been set aside, Legacy Health was able to make these payments without impacting the quality of healthcare we deliver to the community everyday.”
Pallari, who spent 16 years at Legacy, served as president and CEO for just over seven years, ending his career in 2005. He could not be reached for comment.
“It is also important to point out that industry and regulatory practices regarding executive compensation, especially in healthcare, have evolved over the years, and Legacy Health’s current practices reflect those changes,” Terrett said.
“The compensation philosophy for leadership matches the compensation practices for all Legacy Health employees, which ensures that pay is fair and equitable,” he added. “We strongly support a pay for performance culture through the use of incentives, as well as the flexibility to reward individual accomplishments and organizational success.”