Jews' golden chute glitters

CareFirst chief's deal is `excess parachute' by IRS standards

March 09, 2002|By Robert Little | Robert Little,SUN STAFF

The bonus and severance package being offered to CareFirst BlueCross Blue- Shield President William L. Jews is far more than what the Internal Revenue Service considers a reasonable "golden parachute" for executives at his pay level, tax and compensation experts say.

The IRS standard established in the bull-market heyday of the mid-1980s calls for departing corporate executives to receive no more than three times their annual salary in special compensation. Anything more is considered an "excess parachute" and is subject to a 20 percent excise tax.

Jews makes roughly $2 million a year and stands to gain at least $9.1 million if CareFirst converts to a for-profit corporation and is sold to WellPoint Health Networks Inc. - and perhaps $16 million, or more.

"The three-times-salary standard was set back when it seemed like golden parachute payments were getting out of hand, and it would certainly seem that he's well over three times annual salary here," said Jan Koors, vice president of the New York executive compensation firm Pearl Meyer & Partners.

"That's not too unusual for a publicly traded company," she said. "But it is when no stock options are involved" as is the case with CareFirst.

The payments to Jews and other executives at CareFirst were revealed Thursday in testimony submitted to Maryland Insurance Commissioner Steven B. Larsen. He will hold hearings next week to determine whether the state should approve CareFirst's $1.3 billion merger with WellPoint.

Word of the proposed payments fueled the growing doubt about the deal in Annapolis, further raising the ire of legislators who want to block the deal.

Consumer advocacy groups are also pledging to derail the merger, calling the management bonuses proof that the proposed merger was crafted to serve the interest of CareFirst executives, not necessarily the public.

"We don't think it's appropriate for these kinds of compensation packages to be used at a nonprofit like CareFirst," said Vincent DeMarco, executive director of Maryland Citizens' Health Initiative. "CareFirst should not be treated like any for-profit company. It was created by the state of Maryland to help access to quality, affordable health care."

Jews' employment contract - which includes country club memberships and five weeks of annual vacation - is comparable to those found on Wall Street, Koors and others said. CareFirst officials would not comment yesterday, preferring to wait for next week's hearings, but they seemed largely unapologetic.

While Maryland's largest health insurer is not a typical for-profit company, neither is it a nonprofit charity. It is a multibillion-dollar business that competes with for-profit health insurers, and its officials argue that high salaries are necessary to be competitive.

"The fact that CareFirst is not-for-profit is not terribly relevant here," said Gene E. Bauer, managing director of Hay Group Inc., a compensation consultant to CareFirst. "Our position is that we see CareFirst as a big, complex, $6 billion organization. Our point of view is that the right comparator is other organizations of similar size and complexity that have gone through similar deals."

In July, CareFirst approved a "merger incentive" agreement that will pay Jews $9.1 million if the company is sold. The payment was designed to remove any disincentive that Jews might have to negotiate a deal that would cost him his job.

Jews' employment contract, approved years before the WellPoint merger was contemplated, already includes a $3.9 million "change of control" payment if the company is sold and his management responsibilities are altered considerably. It also calls for a $3.2 million severance payment if he leaves the company, in exchange for a promise not to work for a competitor.

As far as the IRS is concerned, those three payments amount to one $16.2 million golden parachute payment, pay experts say.

That would result in a compensation package roughly equal to eight times his annual salary - one more befitting a large, for-profit, publicly traded company than a not-for-profit insurer.

"I think that's highly unusual," said Kevin Murphy, professor of finance at the University of Southern California and a consultant on executive compensation. "It's an awfully generous bonus on top of an already generous change-of-control payment, and all this guy's doing is supposedly what's best for the company."

Given Jews' position as head of a $6 billion company, however - and his marketability with for-profit companies that could offer stock options and other incentives - others are less surprised.

"As a total package, he's probably still below market both in terms of his compensation and his change-in-control bonus," said Koors. "His compensation is all cash. Other people at his level get more than just cash."

Sun staff writer M. William Salganik contributed to this article.

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