Compensation Rates for Blues Plan Board Members Increased in 2008, but Are Losing Momentum

AIS’s Health Business Daily, January 27, 2010

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.

*Not Affiliated With BlueCross BlueShield Association or its member companies.

By Liana Heitin, Editor ([email protected])

Many Blue Cross and Blue Shield plans upped the annual pay for members of their boards of directors last year, according to an AIS review of 2008 directors’ compensation rates — a trend that one expert says has started to slow in the wake of the economic downturn.

Ten of the 13 Blues plans that AIS was able to review for 2007 and 2008 raised the compensation for the board chairman over that time, with four of those plans increasing the compensation by more than 10% (see table, below).

The board chairman for Health Care Service Corp., Milton Carroll, was the highest- paid director in 2008 among companies reviewed by AIS. He received $782,000 in compensation — nearly three times as much as the position was allotted in 2007. Although many highly paid chairmen are also CEOs or presidents of their organizations, Carroll only serves in the director role at the Chicago-based company, which operates Blue Cross and Blue Shield plans in Illinois, New Mexico, Oklahoma and Texas.

Nine out of 13 plans increased the compensation for the highest-paid director who is not the chairman. At Blue Cross and Blue Shield of Arizona, the highest paid director earned $99,675 in 2008, a raise of $25,000 or 30% from 2007.

There has been a significant rise in compensation rates since the 2002 enactment of the Sarbanes-Oxley Act, the federal legislation that tightened governance standards after the Enron scandal, says Larry Schumer, a Boston-based principal in Buck Consultants’ compensation practice. “On the corporate side, board compensation increases were going in excess of 10% per year.” Board members had more responsibility and were putting more time into the job, he says, and were compensated accordingly. However, those compensation increases have recently started to lose pace.

According to a study by Buck Consultants, 80% of companies did not increase compensation rates in 2009 and are not expecting to do so in 2010. “That’s a big shift,” Schumer says. “It’s partially due to the economy and partially due to the fact that companies made the changes and are saying it’s OK to stop the big increases now.” Pay raises that are occurring now are often in the single digits.

For the most part, Schumer explains, an individual director’s compensation is based on the level of responsibility and time commitment. “If you’re the chair of the board, you’re much more involved than in just those board meetings.…There’s a lot of responsibility leading up to and following up on the meetings,” including frequent conversations with the CEO and other directors. Schumer says committee chairs are paid more for their enhanced responsibilities as well.

Because of this role-based compensation, pay differentials within a board are not likely to cause conflict, according to Schumer. For example, at Horizon Blue Cross Blue Shield of New Jersey, the lowest-paid director received $4,989 in 2008, while the highest-paid director (other than the chairman) received $97,667. Differences in pay rates are “totally reasonable and expected,” says Schumer. “And there are plenty of board members who are happy to get a smaller amount of money. They may be on multiple boards, or they may want to spend time in Florida.”

Some Directors Receive No Pay

Two directors at BlueCross BlueShield of South Carolina received zero compensation for their services on the board. Schumer says this is unusual, but it’s possible for directors to refuse compensation. “A lot of people on the not-for-profit side are [serving on the board] because it’s a good thing to do — the compensation is secondary. They feel it’s a civic duty.”

In most cases, those directors aren’t going away empty-handed, but instead are receiving dollars in the “other compensation paid or deferred” category. This refers to income held over from previous years or, in rare cases, extra health or life insurance in lieu of cash, says Schumer. A spokesperson for the South Carolina Blues plan would not comment on board member compensation rates.

In addition to slowing rates of increases, Schumer has also seen a movement away from per-meeting compensation in the last few years. For example, in 2007 and 2008, WellPoint, Inc. directors received $2,000 for in-person attendance at each meeting and $1,000 for meetings held over the phone. However, that payment structure is becoming less common. Paying a flat annual rate is easier from an administrative standpoint, Schumer notes. In addition, there’s a “view that this is not a job paid by the hour or by the half day,” he says, but rather a steady role to be filled. 2008 Annual Compensation for Selected Blues Plans’ Boards of Directors (ranked by salary of the board chair) Blue Cross and Blue Shield Lowest-Paid Highest-Paid Board Chair Plan Director Director Health Care Service Corp.1 $782,000 $100,000 $228,000 WellPoint, Inc. 500,000 74,502 105,002 Horizon Blue Cross Blue 151,950 4,989 97,667 Shield of New Jersey Capital BlueCross 128,800 1,500 105,864 Wellmark, Inc.2 121,255 62,133 97,438 Blue Cross Blue Shield of 120,025 36,175 99,675 Arizona, Inc. Blue Cross Blue Shield of 112,045 10,266 66,580 Michigan CareFirst BlueCross 98,000 33,000 86,000 BlueShield of Maryland

2 2008 Annual Compensation for Selected Blues Plans’ Boards of Directors (ranked by salary of the board chair) Blue Cross and Blue Shield 91,975 41,724 53,990 of Nebraska Highmark, Inc. 90,075 16,531 87,414 Independence Blue Cross 86,700 5,025 51,300 Blue Cross Blue Shield of 80,000 10,500 31,500 Montana Blue Cross and Blue Shield 74,000 6,750 42,000 of Alabama HealthNow New York, Inc. 67,250 13,791 48,500 Arkansas Blue Cross Blue 64,321 34,061 63,767 Shield Excellus Health Plan Inc. 61,665 31,568 52,244 BlueCross BlueShield of 49,200 18,000 44,100 North Carolina BlueCross BlueShield of 39,570 0 43,919 South Carolina3 Blue Cross Blue Shield of 13,900 3,100 18,900 Wyoming BlueCross BlueShield of 10,000 7,000 9,000 Tennessee 1 Former CEO Raymond F. McCaskey received $0 compensation for his services as a director, but received a total of nearly $10.6 million in 2008 for his salary, bonus and other compensation. His compensation information is not included in the table.

2 John Colloton, who earned $64,023, was lead director through April 2008. Daryl Hanze took over as lead director in May 2008, and was compensated the amount listed.

3 Malcolm Edward Sellers is CEO and chairman of the board of directors. His salary was $456,241. Joseph F. Sullivan was the chairman of the board’s executive committee last year, though BCBSSC would not confirm that he remains in this position. His compensation was $39,570, and he received $10,112 for “other compensation paid or deferred.”

Source: Compiled by Atlantic Information Services, Inc. from state insurance department filings and Securities Exchange Commission data.