Chief of troubled Blues has hefty retirement deal

October 16, 1992|By Patricia Meisol and Ann LoLordo | Patricia Meisol and Ann LoLordo,Staff Writers

At a time when the reserves of Blue Cross and Blue Shield of Maryland had fallen to their lowest level ever, the insurer's board of directors set up a $1.7 million retirement fund for then-chairman Carl J. Sardegna.

The Blues board unanimously approved the retirement package in March 1990, weeks after it had heard a review of the insurer's 1989 results. That year, the insurer's reserves declined to their lowest level ever, despite the Blues' first operating profit in several years.

At the same time, the health insurer's administrative expenses rose to an unprecedented 13 percent of its revenues, among the highest for Blues plans nationwide, and its service to customers dropped drastically -- the backlog of unpaid claims more than doubled by the end of the year.

The nest egg established for Mr. Sardegna can be claimed in a lump sum or paid out in annual installments, and it will grow. If Mr. Sardegna remains with the Blues another five years and retires at the age of 60, he would be entitled to an estimated $2.9 million in the first decade of his retirement, based on recent salary figures.

The amount would increase if his salary at retirement is higher, and it includes some benefits that existed before the board's action.

Mr. Sardegna's retirement package, recommended by a New York consultant, is pegged to his salary and is based on the average of his three highest-earning years. He could receive from 30 percent to 45 percent of that average, depending on how long he remains with the company.

Based on his cash compensation in the past three years, Mr. Sardegna would receive estimated payments totaling nearly $2 million in the next decade if he left today at age 55. The payout would be reduced to account for his regular company pension plan and half of his primary Social Security benefits, according to a description of the retirement plan developed by the Ayco Corp., an executive compensation company, and contained in minutes of the board's compensation committee.

Mr. Sardegna said yesterday that he was unsure how much he would receive in retirement compensation. "I don't know. I really don't know," he said. "I don't do those calculations. The final payment is based on a whole series of facts."

Told of the $1.7 million trust fund described in board minutes, Mr. Sardegna said, "I'm surprised." He knew of the package, he said, "but that amount of money for me? Again, it is an estimate."

Mr. Sardegna added that he would not receive other payments after leaving the company.

The package, agreed to when Mr. Sardegna had been with the company for 4 1/2 years, is not tied to performance. If he takes the entitlement in annual installments, he would be paid roughly $195,000 a year for life if he retired today.

The Blues board removed Mr. Sardegna as its chairman last week following a highly critical report on the company's management by a U.S. Senate subcommittee, which subpoenaed extensive internal documents from the insurer and held two days of hearings last month that spotlighted poor management decisions, excessive "perks" and executive compensation levels, and failure to properly inform state regulators of its business practices.

The insurer was criticized in the Senate report for excessive use of such perks as club memberships, travel by limousine, and tickets to the Olympic games.

His newly elected successor, retired businessman Frank A. Gunther Jr., said last night that Mr. Sardegna's retirement package, as well as executive salaries and the pay and benefits of board members, are under review by the board.

When the board approved Mr. Sardegna's retirement package, Mr. Gunther explained, the Maryland Blues "had been through a very, very difficult time." The board was "very pleased with the leadership and the direction we thought we were turning in with Carl's leadership," he said. "The concern was what if he were to leave and we were left without a CEO."

Mr. Gunther said the consultants recommended a package that they said was comparable with retirement benefits for other company presidents and "appropriate . . . to make Mr. Sardegna content to stay here and lead Blue Cross and Blue Shield of Maryland."

At the time, the board's regular salary consultant, Towers Perrin, offered a different opinion, calling Mr. Sardegna's retirement package too low "compared with arrangements made for other very senior executives of similar organizations."

The consultant, Towers Perrin, was the same firm that recommended the compensation for Mr. Sardegna on which his retirement package is based. Its recommendations were discredited during a congressional investigation of the Blues on grounds that they were based on dissimilar companies -- most of those compared were for-profit finance and banking companies, not non-profit health insurers of last resort.

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