Nov. 15, 2021

In one year, Sanford Health reports it paid $65 million in one-time severance and other payments to six executives who left the organization, with more than two-thirds of it going to former CEO Kelby Krabbenhoft.

The Sioux Falls-based health system reported the compensation as part of its annual filing with the Internal Revenue Service.

Krabbenhoft, who left his role a year ago, received more than $49 million from Sanford Health in 2020, a combination of his salary, incentive-based pay, severance and two lump sum payouts from supplemental executive retirement plans.

“The majority of the compensation paid to Mr. Krabbenhoft upon his departure was contractually obligated as part of retirement plans over his 24-year tenure,” Sanford Health said in a statement.

“The remainder was Mr. Krabbenhoft’s annual compensation and a severance agreement. These payments conclude Sanford Health’s financial obligations to Mr. Krabbenhoft.”

Krabbenhoft’s last reportable compensation was more than $5 million for 2020. In 2019, his salary was about $3 million. The difference is a combination of a salary increase and the timing of two compensation payments from 2019 and 2020 that were conditional on achieving certain metrics, Sanford said.

In addition, upon leaving the organization, he received $15 million in severance pay. The rest of the payment, more than $29 million, is tied to two executive retirement plans. According to Sanford’s 990, those plans provided lifetime annual payments to plan participants based on their historical salary and years of service. The plan, which Sanford began offering in 1983, was designed “to provide a similar benefit as provided by the qualified defined benefit pension plan.”

As of 2020, Krabbenhoft, with 24 years of service, and CFO/treasurer Bill Marlette, with 31 years, were the only remaining participants grandfathered into the plan. In November 2020, Sanford’s board of directors decided “to accelerate the termination of the annuity plan to limit future financial liability and because Sanford does not intend to use a pay/annuity supplemental structure on a go-forward basis.”

That means instead of receiving payments annually from Sanford for life, Krabbenhoft and Marlette were given lump sum payments that were taxable for 2020.

In Marlette’s case, it was more than $5.9 million.

In Krabbenhoft’s case, there were two plans totaling $29 million. One was similar to Marlette’s but differed in amount because of their difference in salary history. The other was unique to Krabbenhoft and offered by the board of trustees as a secondary supplemental retirement plan that was tied to his remaining with the organization and completing a succession plan.

Both Krabbenhoft and Marlette’s benefits had been “previously accrued for and disclosed as retirement and other deferred compensation” on previous 990 forms, Sanford said in its filing.

By terminating the annuity plan, Sanford also was required to terminate all other defined benefit supplemental executive retirement plans, so Marlette received his payout last year even though he is not retiring until this year. Sanford continues to offer a supplemental defined contribution plan, which is subject to market gains and losses instead of providing a benefit determined solely through a calculation provided in the plan.

Other departures

Sanford’s 990 filing also includes information about separation pay provided to several other key executives:

• JoAnn Kunkel, former CFO who left Sanford in 2020 after 28 years of service, received nearly $6.5 million in separation pay and $348,731 in money tied to the defined contribution supplemental executive retirement plan. Her annual compensation in 2020 at Sanford was more than $1.3 million.
• Dr. Allison Suttle, former chief medical officer who left a year ago, received more than $2 million in separation pay and $342,278 tied to the defined contribution supplemental executive retirement plan. Her annual compensation in 2020 at Sanford was more than $1.1 million.
• Dr. Dan Blue, longtime physician who retired with more than 30 years of service in 2020, received more than $5 million in separation pay and $236,193 tied to the defined contribution supplemental executive retirement plan. Blue also led the World Clinic program and served as president of Sanford Clinic and chief medical officer at various points.
• Kim Patrick, former chief business development and chief legal officer who retired in 2020, received $2.85 million in separation pay. He spent more than 20 years at Sanford with a final annual compensation of more than $1 million.
• Nate White, former chief operating officer who led the Fargo region at one point and was at one time considered Krabbenhoft’s presumed successor, left his role in September 2019 and was paid until April 2020, at which point he received nearly $3 million in separation pay and $311,390 tied to his defined contribution supplemental executive retirement plan. His most recent annual compensation was more than $1.5 million.

Sanford also disclosed retention plan agreements for now-CEO Bill Gassen and former executive Micah Aberson of $1.1 million each. Those were payments issued in 2020 in addition to their salaries as an incentive for them to remain with the organization. Gassen committed that amount to the Sanford Health Foundation after he was appointed CEO.

Executive severance agreements are agreed to when select officers and key employees are hired or promoted, Sanford said in its filing.

“The agreement provides that the executive will receive a multiple of his or her salary based on years of service or position as a payment in the event of a defined separation event, which can include an involuntary separation or an employee voluntarily leaving for a defined contractual reason,” Sanford said in its filing.

“Final separation payments might vary from the amount provided in the agreement as a result of negotiations surrounding early retirements and post-separation obligations and incentives.”

Executives terminated for cause do not receive a separation payment or a supplemental executive retirement plan, Sanford said.

While agreeing to answer some questions in writing, Sanford declined an interview about the payments. Its statement about the 990 concludes with:

“We look forward to continuing along our journey in Sanford Health’s next chapter that focuses on our employees and their commitment to bringing life-changing care to the communities we serve.”

However, Gassen today sent an all-staff email with the subject line “Understanding the IRS Form 990.”

The email did not disclose any specific information from the filing other than the fact that it included information on Krabbenhoft’s compensation. It noted Gassen’s efforts in “establishing a smaller executive team and reducing administrative overhead, while investing more in providers and front-line caregivers.”

“While employee separations are confidential, I would like to honor my commitment to transparency to the greatest extent possible and provide some context to the news that will become public later today,” Gassen wrote. “I recognized the information regarding Mr. Krabbenhoft’s compensation released in today’s filing will raise questions, especially given the unexpected nature of his departure, so I would like to share the following details with you.”

Those details were:

• The majority of compensation paid to Krabbenhoft upon his departure was contractually obligated as part of retirement plans over his 24-year tenure.
• The remainder was Krabbenhoft’s annual compensation and a severance agreement.
• Krabbenhoft’s compensation was reviewed annually by a nationally recognized independent firm and outside legal counsel to ensure it was reasonable and competitive.

Krabbenhoft’s compensation package ultimately was approved by the board of trustees, which declined to speak about its decision other than through an organizational statement saying the system “consistently benchmarks CEO compensation with the help of Sullivan Cotter, a nationally recognized independent firm, as well as outside legal counsel,” it said. “That process ensures that our compensation remains on par with other large nonprofit health care systems of our size, scale and complexity.”

Members of the board in November 2020 when the decision was made were:

• Brent Teiken, chair
• Don “Jake” Jacobs, vice chair
• Neil Gulsvig, treasurer
• Andy North, secretary
• Mark Paulson
• Barb Everist
• David Beito
• James Cain
• Maria Bell
• Patrick Durick
• Mark Lundeen

Krabbenhoft’s departure was two years earlier than he had previously announced he planned to retire and was preceded by an all-staff email he sent during the fall surge of the COVID-19 pandemic.

In it, he told more than 50,000 employees he would not be wearing a face mask at work because he had recovered from COVID-19 and believed he could not transmit it.

It prompted Sanford Health to issue a statement clarifying that the email reflected Krabbenhoft’s personal opinion about the virus and masking, and he later said it played only a minor role in his decision to leave.

“And, of course, all the furor and the noise, which is not a stranger to me. I think I just decided this is a good time to step away. A good group of people I’ve had a big hand in bringing into the leadership there, they will do a great job. You start sizing up just whatever situation you’re in. I’ve always done that, and I compare that to where I’m at in my life.”

After Krabbenhoft’s departure, Sanford withdrew from conversations about a potential merger with Utah-based Intermountain Healthcare. None of his compensation in 2020 was “in any way tied to or in anticipation of the Intermountain merger,” Sanford said.

Gassen, Krabbenhoft’s successor, previously was chief administrative officer. His CEO salary was not disclosed on the 990 for 2020 but will be for 2021.

Sanford reported $6.7 billion in revenue for 2020. No philanthropic dollars were used in any of the executive compensation, Sanford said.

“Any donation revenue Sanford Health receives is held in a separate fund and only used for its specified purpose,” it said.

Going forward, Sanford said it will continue to annually evaluate and benchmark all aspects of executive compensation, including severance agreements, “and make changes as appropriate.”

Across-town comparison

Avera Health, which also saw departures of its two top executives in recent years, did not provide severance to either.

The system also does not have leaders sign an executive severance agreement upon hiring or promotion, though it does use a noncompete agreement.

Retiring CEO John Porter received almost $1.8 million in reportable compensation and $38,688 in other compensation in his final year, which was in 2019 and included overlap transitioning with his successor, Bob Sutton.

Retiring COO Fred Slunecka, who retired in August 2018, showed almost $3.5 million as his last reportable compensation and $28,609 in other compensation. That includes deferred compensation tied to a 457(b) tax-deferred retirement account.

“It’s not unusual in retirements, especially for long-term executives, to see an ending payment that includes base, bonus and incentive, deferred comp, benefit payments and retirement,” Avera said in a statement.

Executive compensation expert weighs in on Sanford’s approach