Blue Cross and Blue Shield of Maryland President William L. Jews, who was paid more than $52,000 a month last year, is putting himself in line to receive what may be a far greater reward.
The company is proposing that officials of the current nonprofit Blue Cross receive stock options as part of a plan to create a new for-profit subsidiary that would sell stock to the public next spring.
Blue Cross officials say the options plan isn't fully developed, so they can't say who would receive options or under what terms. But stock option plans are often extremely lucrative for top executives and directors.
It's unclear whether Maryland Insurance Commissioner Dwight K. Bartlett III has authority over issuance of stock options, even though this is an unusual case in that a nonprofit insurer is creating a for-profit, publicly held subsidiary.
The board of directors of the new company and ultimately its shareholders would have to approve a stock option plan. The vast majority of current Blue Cross employees would become employees of the new company. Mr. Jews would head the new company as well as its nonprofit parent.
Blue Cross documents filed with the state Insurance Administration reported that Mr. Jews earned $474,179 in total compensation for the nine months of 1993 that he worked for the Blues. That works out to about $52,686 a month, or $632,000 a year.
Four Blue Cross plans in other states have created publicly held companies. In California, the Blue Cross plan sought to offer its executives options at the time of the initial stock sale in 1993, but regulators advised the company to wait a year. The company is awaiting regulatory action on a new options proposal, says spokesman Larry Bryant.
One common option plan is to give executives the option to buy stock at the price at which it is initially sold. If a new company's investment advisers have planned properly, that price could well jump the very next day as market trading unfolds, giving those with options to buy at the opening price a potential windfall.
A common feature of such a plan is a schedule of times, over five years, at which the options may be exercised by the actual purchase of stock. This permits executives to hold off buying the stock until it has risen above the option price, an arrangement that carries no risk. On the other hand, there may be restrictions on when executives can sell their stock, so the notion of a windfall is diminished.
Investment bankers typically encourage stock option plans for executives and directors of a new company to help persuade outside investors to buy stock. The idea is that the people who are running the company should have compelling incentives to make it succeed. From this viewpoint, stock options are performance related, because the executives profit most when, through their efforts, the company also profits and stock increases in value.
"Underwriters and analysts like to see a strong linkage between shareholders performance and the compensation of executives," said Larry L. Parks, an executive compensation consultant in the Washington area office of Towers Perrin.
But some business strategists condemn the typical option plan, saying it favors executives over shareholders.
Suppose an executive who has an option to buy stock at $10, the initial price, buys it a year later after it rises just 50 cents. That executive makes a 5 percent profit overnight. But the shareholder who bought at the outset has made only a 5 percent gain in that year, below what shareholders typically expect for tying up their money that long.
This kind of plan is a "very poor device to motivate employees to act in the interests of shareholders" because they benefit even if shareholders see little gain, said Joel M. Stern, managing partner of Stern Stewart and Co., a strategic finance policy advisory firm in New York.
He proposes that executives receive option plans in which the price that executives can buy stock rises about 10 percent a year.
This gives executives more incentive to make sure company stock grows significantly in value, he says, adding that some companies are doing this.
John A. Picciotto, Blue Cross general counsel, said in an interview that the company is planning to set up a stock option plan "on the advice of advisers who said this makes sense." Blue Cross' investment advisers include Alex. Brown Inc. and Legg Mason Inc.
Mr. Picciotto explained the rationale this way: "If somebody's going to take their money and bet it on a horse, they would like to know that the jockey or jockeys are committed to the horse, want to see the horse succeed."