Cerner’s Neal Patterson collects payday 21 years in the making

Neal Patterson, who spoke at the Cerner Health Conference in Kansas City last year, collected on a $26.9 million payday that was 21 years in the making.
Neal Patterson, who spoke at the Cerner Health Conference in Kansas City last year, collected on a $26.9 million payday that was 21 years in the making.

Neal Patterson, co-founder and chief executive of Cerner Corp., just collected on a $26.9 million payday that was 21 years in the making.

The big score came from stock options that the company issued to Patterson in June 1995. A week ago, they delivered $50.27 million worth of Cerner stock when Patterson exercised the options to collect his shares.

Of course, he didn’t get to keep all of that.

Patterson forfeited some of the Cerner shares he already owned to cover his costs of exercising the options. The options allowed him to buy shares at the deeply discounted price of $3.70 each. Instead of writing a $2.777 million check, he gave up some shares.

Patterson forfeited additional shares to cover withholding taxes on his payday.

Net of those, Patterson was left with more than 400,000 shares of Cerner. He sold them for $26.9 million, or more than $67 each.

If the size of the payday seems unusual, the lifespan of his stock options was equally unusual — a quarter of a century.

“This one runs for 25 years, very strange,” said Paul Dorf of Compensation Resources Inc. “I have never seen a 25-year option.”

Companies typically give executives stock options that are good for 10 years. They allow the holder to buy the company’s stock — any time over the next 10 years — at the price where shares traded the day the options were granted.

It’s incentive for the executive to work toward making the share price go up, which makes shareholders happy. The executive’s options have value only if the stock price climbs. If the stock price falls, the options can become worthless because it would be cheaper to just buy the shares in the open market.

Ten years is a long time to get the stock price to climb.

Patterson’s 1995 stock options were different. They didn’t allow him to do anything for the first 10 years. His first chance to cash in came on June 28, 2005. And at that point, Patterson still had 15 years to decide when to use his options.

Dorf said the unusual options were something of “an arranged marriage” between the executive and the board of directors. The possibly unique options would help tie an executive to a company longer than standard 10-year options, he said.

A Cerner spokesman said the company now generally awards 10-year stock options and that the shares Patterson sold were a relatively small portion of his ownership in the North Kansas City-based business. According to a recent public filing, Patterson held 7.74 percent of the company’s shares at the end of last year

A lot had happened in the 21 years that Patterson waited before exercising these options.

Cerner ballooned as a business. These days it takes in as much revenue in eight weeks as it took in during all of 1995, the year Patterson got the options. Cerner had begun in 1995 with 1,091 employees and started this year with 22,200 worldwide.

The company still grows so quickly that it is building a company campus that will ultimately support 16,000 employees.

Cerner’s stock price has climbed, too. The $3.70 a share represents the price of Cerner’s shares back in 1995 adjusted for the four times Cerner has split its shares since then. Each stock split doubled each shareholder’s number of shares (and stock options) while the price essentially fell by half.

Like Cerner and its stock price, Patterson’s payday promises to keep growing. He exercised 750,000 of his 1995 stock options on Aug. 5. He still holds options to buy 1,138,000 more Cerner shares at $3.70 apiece. The stock closed Friday at $66.45.

Mark Davis: 816-234-4372, @mdkcstar