$50 million package for IHS founder


Integrated Health Services founder Dr. Robert N. Elkins will get a package worth more than $50 million for resigning as chief executive, if his separation agreement is approved by U.S. Bankruptcy Court in Wilmington, Del.

Most of the amount would come in forgiveness of loans from IHS to buy company stock - which is now nearly worthless - and the taxes due on that amount, according to a motion filed by IHS late Thursday with the bankruptcy court. Elkins also would receive a $1,494,000 payment and would get to keep three oil paintings valued at about $1.1 million.

"The amounts seem large, they seem excessive, they seem like you're rewarding somebody for dismal failure - but they don't seem unusual," said Kevin J. Murphy, an executive compensation specialist who is a professor at the University of Southern California.

Another compensation expert, Graef Crystal, a columnist for Bloomberg News who has written critically in the past of Elkins' compensation, said of the termination agreement, "The board of directors of this firm has not been known for its wisdom, but you would not normally expect a board to do something like that."

Crystal said Elkins had received lavish salary, bonuses and perks while running IHS. "As a psychiatrist," Crystal said, "he should be suffused with guilt."

Elkins founded IHS in 1986 and built it from scratch into a Fortune 500 company, but along the way the company amassed $3 billion in debt through its aggressive acquisitions. Then the federal government cut Medicare payments and IHS, along with other nursing home chains, filed for bankruptcy protection.

If the court approves the agreement, Elkins would immediately step down as president, chief executive officer and chairman. Joseph A. Bondi, a turnaround consultant from the New York firm Alvarez & Marsal, Inc., who has joined IHS as "chief restructuring officer," would become CEO when Elkins departs, according to the IHS motion.

The company said it had initially resisted a call by the creditors' committee to replace Elkins "with a new manager more familiar with the restructuring and reorganization process." Eventually, IHS continued in the filing, "it was ultimately recognized by all parties that a consensual negotiated resolution of the matter would best serve the interests" of the creditors and the company.

A negotiated agreement, IHS argued, avoids litigation with Elkins and related companies he controls, which "would be counterproductive to the reorganization effort and demoralizing to employees. Moreover, it would constitute an unnecessary distraction and divert the time and energies of management at a time when the Debtors' businesses demand management's full attention."

In a letter submitted with the IHS motion, the official creditors' committee said, "The committee believe that consummation of the transactions provided for in the agreement is in the best interests of the debtors, their estates and their creditors."

Other creditors have a chance to file objections with the court; if there are any, the court will hold a hearing on the agreement.

Elkins, Bondi, representatives of IHS and lawyers for IHS and the creditors' committee all declined comment or did not return telephone calls.

One creditor, not on the committee, who did not want to be quoted by name, said he was unfamiliar with the terms of the Elkins agreement, but thought that it was important to bring new leadership to the company. "A turnaround guy brings total objectivity and lack of any connection to the past," he said.

"It makes a lot of sense you would have someone new come in," said Premila Peters, a high-yield bond analyst at KDP Investment Advisors in Vermont.

Key elements of the package, according to the IHS motion, are:

Forgiving $33.5 million in loans that were used to buy stock or pay taxes related to exercise of stock options.

James P. McElligott Jr., a compensation specialist with the Richmond law firm McGuire Woods, said many companies lend executives money to buy stock. "If the corporation later lands in bankruptcy, it's not unusual for the executive to seek forgiveness for these stock purchase loans," he added.

Murphy, who read Elkins' compensation agreement, said the amount of stock he owned - 5 percent of the company in shares and options - "puts him on the high side for executives."

Crystal said that, while some of Elkins' loan agreements called for his loans to be forgiven if he left or was fired, others did not. "I'm deeply suspicious of loaning anybody money and then forgiving it," he said. "It's hard to think of where it hasn't led to some debacle."

Since the loan forgiveness would be taxed, IHS would pay $18.5 million in federal, state and local taxes.

McElligott said this, too, was not an unusual request for departing executives. He noted that he was not familiar with the Elkins agreements, and was speaking about compensation in general.

But Crystal said, "No, no, no, no, no! Why would the creditors want to do that?"

IHS and Elkins agree in various ways not to sue each other, including over deals in which Elkins sold some nursing homes to a company of which he is an executive and a contract in which IHS leased an executive jet from a company that Elkins owns. With Elkins' departure, the jet lease will be terminated.

The agreement also includes a $35,000 payment for Elkins' "personal assistant" if she decides to leave the company.

Of the Elkins package, Murphy said, "I'd quit for that. Wouldn't you?"

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