Blue Cross CEO severance from proposed merger disclosed in report

May 28--WILKES-BARRE -- The head of Blue Cross of Northeastern Pennsylvania stands to walk away with a hefty payout when the nonprofit health insurance company merges with Highmark Inc.

The details of the compensation for Denise Cesare were contained in the May 19 report of Blackstone Advisory Partners L.P., a financial adviser to the Pennsylvania Insurance Department which is reviewing the merger announced last year.

The report was one of two that looked at the deal between BCNEPA, the smallest of the Blue Cross/Blue Shield provider in the state, and the largest Pittsburgh-based Highmark, and determined it met the statutory requirements of the department and would not create a monopoly limiting competition for health insurance in the region.

Department spokeswoman Alison Fogarty said Wednesday there is no timeline to make a decision. A BCNEPA spokesman did not respond for comment by deadline.

Cesare, president and chief executive officer of BCNEPA, would receive two and half times her annual salary and bonus, under a change in control agreement. Cesare receives an annual base salary of $793,632. A 60 percent target incentive could increase it to $1.2 million, according to the Blackstone report.

Highmark's health plan president Deborah L. Rice-Johnson received a lower base salary of $612,663 but had target incentives that could increase it to $1.6 million annually.

The agreement for Cesare, was not the norm in the industry, according to a compensation consultant referred to by Blackstone. The name of the consultant that in 2013 provided BCNEPA's board of directors a comparison of the company's change in control agreements to market practices was blacked out in the report.

"The CEO contract contains benefits that are on higher end of current market practice. While the (chief administrative officer) contract provides benefits that are in line with current market practice, both agreements contain features that are no longer prevalent in (change in control) protection packages. However, a cap on overall benefits keeps actual value received in line with current market standards," the consultant said in a summary.

Most large public companies have a double trigger for executives -- the change in control and an ensuing termination. But Cesare and Brian Rinker, chief administrative officer, are the only two among eight BCNEPA executives who have what is known as a "modified single trigger" that ensures the change in control alone does not result in the agreed upon severance payouts. The other six participate in a separate change in control plan.

In general under modified triggers the executive must either be terminated without cause or initiate termination with "good reason," the report said. But in their cases, they "may initiate a good reason termination for any reason beginning 6 months following the (change in control) and ending 6 months thereafter," the report said.

"Outright single triggers (payment upon CIC) and modified single triggers (similar to BCNEPA's agreements) have been characterized as a poor pay practice, so most public companies have moved away from them," the compensation consultant said in the report.

Rinker's agreement calls for one and half times salary and bonus. He receives an annual salary of $362,882 and a 40 percent target incentive that could raise his compensation to $508,034, the report said.

"Among smaller public companies and larger Blue Cross organizations, 2x (two times) is the most common practice for CEOs and the top 3 or 4 executives. Below that benefits range from 1x to 2x," the compensation consultant said in the report.

Cesare would receive twice her salary in cash severance and Rinker, his salary, if they leave voluntarily after six months without any other good reason, according to the consultant's findings, the report said.

Whether they leave on their own also affects other benefits.

Cesare would be reimbursed for company provided cost of medical, dental, life and disability coverage for "the duration of the separation period" or two and half years and Rinker, one and a half years. If they leave voluntarily without good reason, the coverage time drops to two years for Cesare and one year for Rinker, the report said.

Coverage or cost reimbursement of dental and medical is "quite common," the report said. But it's "much less common to see continued coverage for the cost of life or disability insurance, " the report said.

The report also said the enhanced retirement benefits provided BCNEPA executives was uncommon. The continued participation in retirement plans for the separation period is something mostly found in legacy agreements, the report said.

"As with other trends in this area, we are currently seeing the prevalence of this enhancement declining even further, " the report said.

Reach Jerry Lynott at 570 991-6120 or on Twitter @TLJerryLynott

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