Executives due $33 million with CareFirst sale

Momentum to block deal builds among irate Md. lawmakers

CEO would get $9 million

March 08, 2002|By M. William Salganik and Michael Dresser | M. William Salganik and Michael Dresser,SUN STAFF

Executives of CareFirst BlueCross BlueShield stand to pocket $33.2 million - including $9.1 million for chief executive William L. Jews - if the company's proposed sale goes through, but news of the payments triggered angry reactions from legislators, making it more likely the deal would be blocked.

Revelation of the incentives deal came yesterday when CareFirst filed prepared testimony and exhibits with state Insurance Commissioner Steven B. Larsen.

He will conduct hearings next week on whether he should approve a plan under which CareFirst would convert to for-profit operation and be sold to WellPoint Health Networks Inc. of California for $1.3 billion.

While Larsen has authority under current law to approve or reject the deal, based on whether it is deemed in the public interest, some lawmakers had already been pushing legislation to block it.

That effort quickly picked up steam as word of the payments swirled through the General Assembly yesterday.

"CareFirst is losing the P.R., and this is just another nail in their coffin," said Senate Finance Committee Chairman Thomas L. Bromwell. "I'm for trying to let the process continue, but I'm like a salmon swimming upstream."

Consumer and provider groups were also angered.

"There's an inherent conflict here," said Bob Brandon, a spokesman for a group called CareFirst Watch Coalition. "The executives have incentive to sell the company cheaply and thereby shortchange the owners - the policyholders and taxpayers.

"They have every incentive to argue the deal is in the best interest of the public, when we know it's in the best interest of the executives."

On the contrary, countered CareFirst's compensation consultant, Gene E. Bauer, who is managing director of Hay Group Inc., a Kansas City compensation consultant.

Since the "merger incentives" to top executives are based on the purchase price, he said, "They can earn more on the upside if they drive for a higher price."

That, in turn, benefits the public, Bauer said, because the purchase price would be paid to foundations in Maryland, Delaware and the District of Columbia, where CareFirst operates.

A nonprofit is considered to be essentially the property of the public, and it gets tax breaks and special considerations not accorded to for-profit businesses. So when it converts to for-profit status, what it has gained is supposed to be returned to the public through such foundations.

Also, Bauer said, the merger incentive payments are designed "to retain executives and keep key people focused on ongoing operations at a time they're getting calls from headhunters."

Bauer said CareFirst's board of directors approved the packages in July, as it was considering the WellPoint deal.

In addition to the $33.2 million in "merger incentives" and "retention bonuses" related directly to completion of the WellPoint sale, the executives stand to collect $48.9 million - $18.9 million of that for Jews - if they are terminated by WellPoint or leave the company for "good reason," such as a transfer out of town.

T. Michael Preston, executive director of the state medical society, said that CareFirst had defended the sale by saying local management would remain in place, "but this gives them a pretty good incentive to go away."

However, Bauer said, the termination payments, an amalgam of deferred incentives, executive retirement pay and other payments, stemmed from employment agreements between the executives and CareFirst that dated from before the WellPoint deal was contemplated.

"Those exist today, and those are an obligation of the company," he said. "They have nothing to do with the merger with WellPoint."

Jews and Daniel J. Altobello, chairman of CareFirst's board, declined to answer questions on the payout plan. Altobello said in a prepared statement, "The Board believes it is critical to keep in place the management team that has been so responsible for transforming CareFirst into the successful company it is today."

Bauer defended both sets of payments as "reasonable and common industry practice."

He said the merger incentives were based on a review of 13 deals of similar scope and the CareFirst payments were 20 percent below the median because "we just wanted to be on the side of the angels, because it's not for profit and CareFirst hasn't paid aggressively relative to the marketplace."

None of those deals, he said, involved nonprofits.

Legislators, however, said the compensation was wrong for a nonprofit that has benefited from state tax breaks.

"A corporation that has been propped up by state funds should not see any executive or group of executives receive a windfall, especially at the expense of citizens in need of health care," Senate President Thomas V. Mike Miller said.

Michael Morrill, spokesman for Gov. Parris N. Glendening, said the governor wanted to see CareFirst executives "put more effort into serving Marylanders in need" and worry less about their own financial considerations.

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