CareFirst retention pay might be illegal

Consultant sees conflict with state anti-bonus law

February 05, 2003|By M. William Salganik | M. William Salganik,SUN STAFF

Retention payments for executives of CareFirst BlueCross BlueShield if the company is sold appear to violate the "anti-bonus" law passed last year by the Maryland legislature, a consultant to the insurance commissioner testified yesterday.

The planned retention bonus - $4.7 million for Chief Executive Officer William L. Jews and from $763,000 to $1.3 million each to seven executive vice presidents - "is not compensation for continued employment with the company," said Jay Angoff, a former Missouri insurance commissioner.

Last year's law defines an illegal bonus as one that is triggered by a sale and is not payment for continuing work.

Angoff's testimony isn't the final word on the bonus question but does show that, despite junking an earlier - and much more lucrative - bonus plan, CareFirst hasn't put the issue to rest.

Officers of WellPoint Health Networks Inc., the company that wants to buy CareFirst, defended yesterday the legality of the retention bonuses.

"These payments are for services rendered to WellPoint after the close," Thomas C. Geiser, executive vice president and general counsel, told Insurance Commissioner Steven B. Larsen, who is conducting the hearings. "We wanted to achieve full compliance with Maryland law."

The CareFirst executives would be eligible for the payments if they stay with WellPoint for two years after the sale, or if they are fired or demoted.

Geiser said WellPoint will provide Angoff and Larsen with reports from its compensation consultant and accountant to support the bonuses. Angoff is expected to make a fuller report next week after reviewing the material.

"The commissioner has to decide if this is compensation for continued employment," Geiser said. "We feel strongly that it is."

Overall, according to testimony by Geiser and by Marc Nathan, WellPoint's vice president for compensation and benefits, the top eight CareFirst executives could collect more than $46 million (more than $17 million of that for Jews) if they don't quit before the deal closes. Of that, $11.6 million would be retention bonuses, and most of the rest would be payments due under existing CareFirst pension and long-term incentive plans.

Over $100 million

That compares with more than $100 million that could have gone to the eight under the old plan, junked last month. The dropped payments included $24.7 million in deal-related bonuses and a variety of severance payments and tax benefits.

Geiser said the $24.7 million is gone: "These dollars are in no way reflected elsewhere."

Even if Larsen agrees that the payments are illegal, he could approve the deal on the condition that the bonuses not be paid. His decision will be based on whether the deal is in the public interest, considering factors such as impact on consumers, whether the $1.37 billion price is fair and the benefits of a health foundation to be endowed with the purchase price.

Larsen is scheduled to announce Feb. 20 whether he will approve the deal. He said yesterday that he will keep his hearing record open after the last session today to allow for Angoff's further analysis, but that he still expects to keep to his timetable for a decision.

`Just another way...'

The author of last year's anti-bonus legislation, Del. Dan K. Morhaim, said yesterday, after listening to an account of the hearing testimony, that the retention bonuses were "just another way of funneling money into the executives' pockets.

"I think the CareFirst executives are working as diligently as they can to get the bonuses," the Baltimore County Democrat said.

"They're doing everything they can to circumvent the law and hide it from the regulator."

Angoff began his testimony on a less-contentious note, complimenting WellPoint for its work in renegotiating the executive compensation, which was part of the November 2001 sales agreement between the companies.

"WellPoint has a very, very tough job here," he said, trying "to come up with a solution to comply with a law that was enacted after the deal was agreed to, and also they had to come up with a solution after a more generous program had already been agreed to."

Not only are the payouts less than half as much as the previous plan, he said, but it's harder for a CareFirst executive to qualify. Now, the executive has to stay two years, or be fired or demoted, to collect.

"But the original CareFirst plan allowed the guy, the executive, even if WellPoint wants to keep him in the job ... he had the power to say, `No, I don't want the job; I want the money,'" Angoff said.

`Already receiving...'

However, Angoff said, the retention bonuses aren't compensation for continued employment because "the executive is already receiving compensation for continued employment with the company. He's already receiving an annual salary, an annual bonus ... stock options that he gets like any other WellPoint executive."

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