Tuesday, July 15, 2008

Maryland State Insurance Commission Nixes Nonprofit CEO's $18 Million Severance Package

The Maryland State Insurance Commission, in the wake of Richard Grasso's successful defense of his $180 million salary from the nonprofit New York Stock Exchange, has determined that the former CEO of Carefirst BlueCross BlueShield, a Maryland, state-chartered nonprofit health insurance organization, is not entitled to the $18 million severance package the nonprofit's board approved for him.  Instead, according to an article in the Baltimore Sun, the former CEO is entitled to only $9 million.

Maryland's top insurance regulator ruled today that William L. Jews is only entitled to half of his almost $18 million retirement and severance package from Carefirst BlueCross BlueShield, saying the former chief executive abandoned the insurer's nonprofit mission during his final years as chief executive.  In a 65-page order, state Insurance Commissioner Ralph S. Tyler determined that CareFirst's board had violated a 2003 state law requiring executive pay for the nonprofit to meet a "fair and reasonable" standard. The decision marks the first test of the law, which was passed by lawmakers furious with Jews for trying to convert CareFirst to a for-profit and sell it for $1.3 billion. The deal included potentially $39 million in bonuses for Jews and led to sharp criticism over the insurer's pay to executives.

The ruling finds that the Carefirst Board of Directors violated a state statute that limited compensation for officers and directors of nonprofit health care plans to that which is "fair and reasonable" for "work actually performed."  In a press release, the Insurance Commission summarized the reasons leading to the conclusion that the proposed severance package was neither fair nor reasonable, including:

  • the public purpose mission of Carefirst
  • the inconsistency between the company's statutory nonprofit mission and its proposal to pay its departing CEO $18 million
  • the fact that under Mr. Jews' leadership the company strayed significantly from its nonprofit mission
  • the failure of the Carefirst board to act to restrain the CEO's compensation
  • the fact that $18 million is almost seven times Mr. Jews' total annual compensation
  • the substantial compensation Mr. Jews received while CEO (more than 16.5 in his last six years as CEO, plus another $1.6 million in deferred compensation)
  • the former CEO's mixed record of achievement, prominently including the failed transaction which he championed to conver the company to a for-profit entity and have it acquiried
  • the fact that some of the compensation that CareFirst proposed to pay is contrary to the practice at entities similar to Carefirst;
  • the fact that Carefirst proposed to continue to pay Mr. Jews his base salary (approximately $1 million) for one year beyond the expiration of the non-compete provision in Mr. Jews' employment contract
  • the fact that Mr. Jews was CEO for 13 years, andd
  • the fact that more than $2.4 million of the $9 million for previously deferred payments.

Some of the factors appear similar to those articulated as the proper basis to determine reasonable compensation under IRC 4958, except  that order seems to have applied an intuitive approach to determining "fair and reasonable" under the statute interpreted.  And, of course, under IRC 4958, compensation need only be reasonable, a concept that does not necessarily require fairness.  The full text of the 65 page order is available here.

dkj

http://lawprofessors.typepad.com/nonprofit/2008/07/maryland-state.html

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