At a time when the reserves of Blue Cross and Blue Shield of Maryland had fallen to their lowest level ever, the insurer's board of directors set up a $1.7 million retirement fund for then-chairman Carl J. Sardegna.
The Blues board unanimously approved the retirement package in March 1990, weeks after it had heard a review of the insurer's 1989 results. That year, the insurer's reserves declined to their lowest level ever, despite the Blues' first operating profit in several years.
At the same time, the health insurer's administrative expenses rose to an unprecedented 13 percent of its revenues, among the highest for Blues plans nationwide, and its service to customers dropped drastically -- the backlog of unpaid claims more than doubled by the end of the year.
The nest egg established for Mr. Sardegna can be claimed in a lump sum or paid out in annual installments, and it will grow. If Mr. Sardegna remains with the Blues another five years and retires at the age of 60, he would be entitled to an estimated $2.9 million in the first decade of his retirement, based on recent salary figures.
The amount would increase if his salary at retirement is higher, and it includes some benefits that existed before the board's action.
Mr. Sardegna's retirement package, recommended by a New York consultant, is pegged to his salary and is based on the average of his three highest-earning years. He could receive from 30 percent to 45 percent of that average, depending on how long he remains with the company.
Based on his cash compensation in the past three years, Mr. Sardegna would receive estimated payments totaling nearly $2 million in the next decade if he left today at age 55. The payout would be reduced to account for his regular company pension plan and half of his primary Social Security benefits, according to a description of the retirement plan developed by the Ayco Corp., an executive compensation company, and contained in minutes of the board's compensation committee.
Mr. Sardegna said yesterday that he was unsure how much he would receive in retirement compensation. "I don't know. I really don't know," he said. "I don't do those calculations. The final payment is based on a whole series of facts."
Told of the $1.7 million trust fund described in board minutes, Mr. Sardegna said, "I'm surprised." He knew of the package, he said, "but that amount of money for me? Again, it is an estimate."
Mr. Sardegna added that he would not receive other payments after leaving the company.
The package, agreed to when Mr. Sardegna had been with the company for 4 1/2 years, is not tied to performance. If he takes the entitlement in annual installments, he would be paid roughly $195,000 a year for life if he retired today.
The Blues board removed Mr. Sardegna as its chairman last week following a highly critical report on the company's management by a U.S. Senate subcommittee, which subpoenaed extensive internal documents from the insurer and held two days of hearings last month that spotlighted poor management decisions, excessive "perks" and executive compensation levels, and failure to properly inform state regulators of its business practices.
The insurer was criticized in the Senate report for excessive use of such perks as club memberships, travel by limousine, and tickets to the Olympic games.
His newly elected successor, retired businessman Frank A. Gunther Jr., said last night that Mr. Sardegna's retirement package, as well as executive salaries and the pay and benefits of board members, are under review by the board.
When the board approved Mr. Sardegna's retirement package, Mr. Gunther explained, the Maryland Blues "had been through a very, very difficult time." The board was "very pleased with the leadership and the direction we thought we were turning in with Carl's leadership," he said. "The concern was what if he were to leave and we were left without a CEO."
Mr. Gunther said the consultants recommended a package that they said was comparable with retirement benefits for other company presidents and "appropriate . . . to make Mr. Sardegna content to stay here and lead Blue Cross and Blue Shield of Maryland."
At the time, the board's regular salary consultant, Towers Perrin, offered a different opinion, calling Mr. Sardegna's retirement package too low "compared with arrangements made for other very senior executives of similar organizations."
The consultant, Towers Perrin, was the same firm that recommended the compensation for Mr. Sardegna on which his retirement package is based. Its recommendations were discredited during a congressional investigation of the Blues on grounds that they were based on dissimilar companies -- most of those compared were for-profit finance and banking companies, not non-profit health insurers of last resort.
Mr. Sardegna's total compensation could exceed $900,000 this year, following approval in February by Blues directors of a 6 percent raise. According to a ranking of the cash salaries of executives at private commercial insurance companies in the Aug. 31 issue of Business Insurance (which did not include Mr. Sardegna), he would be among the top 20 highest-paid executives in that branch of the industry.
He also is one of the highest-paid executives of a comparable-sized Blues plan nationwide, according to the Senate report.
The growth and size of the salaries of executives at U.S. public companies have been heatedly criticized in the past few years by stockholders, policy-makers and economists who say such compensation is unjustified in light of poor corporate results.
The criticism led the Securities and Exchange Commission yesterday to approve new rules that could give shareholders a greater say over executive compensation by requiring corporations to more fully disclose how executives are paid and how their compensation relates to their companies' performance.
Unlike publicly traded companies, Blue Cross has no shareholders. It is overseen by a private board of directors who function as the company's owners. Board members reappoint themselves and are not accountable to the public or to traditional investors, as directors of public companies are.
The board's compensation panel approved in April an increase in annual retainer and meeting fees for the directors, as well as other benefits.
Minutes of the April 23 meeting of the full board, however, do not state how much the full board approved for itself. As of last year, directors earned up to $17,600 annually, depending on the number of meetings attended.
Since Mr. Sardegna joined the company in late 1985, the number of Blues employees who earn more than $100,000 has increased fourfold, to more than 40.
Mr. Sardegna's own compensation rose nearly 300 percent in five years, to $850,193 as of Dec. 31, 1991, a period during which the company suffered significant losses.
He also has presided over the company's increased use of unusual accounting methods to shed a more favorable light on its financial picture. Those methods were checked by state regulators this year, and the company will have to follow industry rules in the future.
In the same month Mr. Sardegna's retirement package was approved, Blue Cross reported an operating profit of $16 million after three years of losses. However, its reserve, or net worth, sank to an all-time low of $16.5 million, a figure viewed skeptically by regulators at the time.
Throughout the year, state regulators questioned the company's reserve levels and financial condition as reported in previous years, ultimately discounting the Blues' net worth by at least $12 million.