Weird, I used the Arch Linux sdlmame packages (u7, u8 respectively) and the chdman binaries contained therein. As for settings, what would those be? What I did was extract some segacd/psx chd's I had:
chdman extractcd -i foo.chd -o foo.cue
and then compress them again using the u7,u8 chdman versions
chdman createcd -i foo.cue -o foo.chd