Download Blues Plans Are Criticized on Executive Compensation

Blues Plans Are Criticized on Executive Compensation; Some Adjust Pay
Based on Economy
Reprinted from The AIS Report on Blue Cross and Blue Shield Plans, a hard-hitting
independent monthly newsletter on business strategies, products and markets,
mergers and alliances, and financing of BC/BS plans.
By Chris Meehan, Editor, ([email protected]), May 4, 2009
While Blue Cross and Blue Shield plans' executive compensation may seem
insignificant compared to corporate bonuses and golden parachutes at many large
for-profit companies, the plans are not immune to criticism for their compensation
and severance packages, especially in a severe recession. Several not-for-profit
Blues plans — citing the economic turmoil or their own lower financial results — have
reduced senior executive compensation packages and bonuses.
Tim Bartl, a spokesperson for the Center on Executive Compensation, tells The AIS
Report that companies are making changes to executive compensation plans
"directly as a result of the economic downturn. These changes involve reducing
salaries and changing the short-and long-term incentive opportunities to reflect the
expectations of lower performance going forward." Overall, he says, "According to
Equilar, Inc., total compensation of S&P [i.e., Standard & Poor's] 500 executives at
companies that have filed their proxy statements so far, CEO pay has dropped by
6.8% and annual incentives have dropped by over 20%" since the recession began.
Bartl contends that the majority of public outcry against senior executive pay has
been against financial service executives. Their packages often "involved a modest
salary, with a large discretionary annual incentive, which comprises the vast majority
of pay."
Some Blues Plans Criticized for Severance Pay
Still, Blues plans have received criticism of the packages paid to their leaders. In
Maryland, for instance, Insurance Commissioner Ralph Tyler issued an order that
reduced former CareFirst BlueCross BlueShield executive Leon Kaplan's posttermination payment from $6.7 million to $2.7 million. The company sought to lower
Kaplan's termination pay under a Maryland statute to what was considered "fair and
reasonable" for work performed. Tyler authorized the lower payment.
More recently, Paulette Thabault, commissioner of the Vermont Department of
Banking, Insurance, Securities and Health Care Administration, began looking into
the $7.2 million retirement package that Blue Cross and Blue Shield of Vermont
(BCBSVT) paid to former CEO William Milnes Jr. in 2008.
"That amount was larger than we expected," Thabault said. She added, "I am not
going to rule out a regulatory response." Thabault does not have the same authority
to approve a change in executive compensation that the Maryland commissioner
does, but can "investigate BCBSVT and all insurers, and to craft supplemental orders
whenever necessary," spokesperson Peter Young tells The AIS Report.
Indeed, the department required BCBSVT to "implement a number of changes
related to executive compensation as a result of a detailed inquiry in 2007 into
BCBSVT's administrative costs," Young says. While he did not go into details, he
explains that the commissioner required the company to follow up on some of the
recommendations resulting from the inquiry regarding the structure of bonus
compensation at BCBSVT.
Last month Blue Cross and Blue Shield of North Dakota (BCBSND) fired CEO Mike
Unhjem. When the plan said that his severance package included $2.2 million in
payments under his 2007 employment agreement, state House Democratic leader
Merle Boucher responded by proposing a bill that would have levied a 70% tax on
earnings of more than $1 million for not-for-profit CEOs. But House Republicans
rejected the proposal, and the bill died.
Still, those amounts pale in comparison to the $15.3 million Gail Boudreaux received
when she left her position as president of Blue Cross and Blue Shield of Illinois, a
Health Care Service Corp. (HCSC) subsidiary. Boudreaux's resignation was
announced a month after the company named Patricia Hemingway Hall CEO in
November 2007.
Strategies on Compensation at Blues Plans
While HCSC spokesperson Ross Blackstone did not comment on the Boudreaux's
severance package, he explains that its executive compensation "is a pay-forperformance plan" based on company accomplishments. The program "is designed to
allow us to compete for and retain talented employees to lead our company and
provide our members with the best value in products and services," he adds.
Blackstone contends that the company and its Blues plans in Illinois, New Mexico,
Oklahoma and Texas "have performed very well over the past several years."
The compensation practice, he asserts, is reviewed annually "to ensure it's in line
with our industry's expectations. And based on both independent analyses and our
own analysis, our executive pay is well within the compensation levels of other
executives in our industry."
Other Blues plans, such as Excellus BlueCross BlueShield, are reducing executive
salaries in 2009. In its 2008 results, the plan said CEO David Klein, who received
total compensation of $2.7 million in 2008, will be paid 25% less in 2009. Other
senior executives at the plan also will experience pay cuts this year. But "senior
management executives earn performance incentive pay on a lag basis for multiple
prior years' performance," the plan said. So "compensation reported for 2008 may
have risen due to favorable performance in 2007 and earlier years." The plan, which
posted a net loss for 2008, changed executive compensation as part of a larger effort
to recover financially in 2009.
Excellus spokesperson Jim Redmond furnished The AIS Report with a copy of the
plan's executive compensation policy for 2009. The plan explains that executive
compensation packages are determined on a case-by-case basis. And packages are
designed without the ability to offer stock options, as for-profit firms can. Excellus
says senior executives are enticed to join and stay with the company through a
combination of long-term and short-term performance-based incentives. The rewards
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are tied to goals, including financial stability and customer service, the company
says.
The board's compensation committee is assigned to conduct "rigorous national
reviews of executive compensation" for the CEO and other company leaders,
according to Excellus. The committee also uses benchmark compensation
information, "particularly among health plans of similar size, and recommendations"
from independent national compensation consultants, such as Mercer LLC and
Watson Wyatt Worldwide, Inc., according to the plan. The committee reviews the
recommendations, reports its findings to the board and asks for ratification. "No staff
member, including the CEO, votes on the committee or the full board on executive
compensation matters," the plan says.
HMSA Freezes CEO's Salary
Hawaii Medical Service Association (HMSA) in its full-year 2008 results release said
CEO Robert Hiam volunteered to freeze his base salary in 2009 at $1.3 million, an
action the board approved in light of the recession.
HMSA's compensation and human resources board committee determines executive
compensation and looks at local and national companies with traits similar to HMSA
to help determine the appropriate level of pay. As with Excellus, a human resources
consulting firm helps the committee establish appropriate levels of executive
compensation.
Performance incentives received by HMSA executives in 2008 are "based on strategic
measures met for 2005, 2006 and 2007," the company said.
Other Blues plans reducing executive compensation include Blue Cross Blue Shield of
Michigan (BCBSMI) and Blue Cross Blue Shield of Massachusetts (BCBSMA). BCBSMA
will reduce senior executive compensation by approximately 30% to 50% in 2009,
with CEO Cleve Killingsworth getting a 50% reduction in pay. The plan said this is
part of a series of steps to reduce administrative spending. BCBSMI said that senior
executives would take a 5% annual salary cut and won't receive a 3.8% annual
increase. BCBSMI says the 3.8% represents a freeze on executive salary for the
second time in the past three years. The plan is making the moves "to partly offset
projected losses on BCBSMI's individual health plans."
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