CEO Seeks to Halt Stock-Based Pay At UnitedHealth [WSJ]
Move Comes Amid Scrutiny Of Options Timing, Gains; Suspensions in Vitesse Probe
By JAMES BANDLER, CHARLES FORELLE, and VANESSA FUHRMANS
April 19, 2006; Page A1
UnitedHealth Group Inc. Chief Executive Officer William W. McGuire recommended that the big health insurer suspend many forms of its senior executive pay, including stock options, in what compensation experts called an unprecedented move in recent corporate-pay practices.
Dr. McGuire made his recommendation amid scrutiny of the circumstances under which he obtained some of the $1.6 billion in unrealized gains he holds in UnitedHealth stock options. He and in some years at least 10 other top executives of the company frequently received options just before big run-ups in the company's share price, which had the effect of making the options more profitable than they otherwise would have been.
The Securities and Exchange Commission is conducting a broad inquiry to see whether options at many companies were backdated to benefit executives, which could be a violation of securities laws. UnitedHealth, a health insurer based in Minnetonka, Minn., has said that a board committee is conducting a review of current and past option-grant practices, and that it received a call from the SEC, though it didn't specify the subject of the call.
Dr. McGuire's comments came as UnitedHealth reported higher-than-expected first-quarter profit. In 4 p.m. composite trading on the New York Stock Exchange, UnitedHealth shares were down $2, or 3.9%, at $49.67.
In other developments yesterday, Minnesota Attorney General Mike Hatch said he intends to join plaintiffs tomorrow in a federal civil suit filed by a shareholder that names as defendants Dr. McGuire, UnitedHealth Chief Operating Officer Stephen J. Hemsley and several board members, alleging that shareholders were harmed by backdated option grants.
MORE ON MCGUIRE
• Option grants to Dr. McGuire in 1997, 1999 and 2000 carried dates on which UnitedHealth's stock hit its low for the year. Read more about the grants and those made to other companies' executives in The Perfect Payday (March 18, 2006) and see charts of the option grants.
Also, Vitesse Semiconductor Corp. said it placed CEO Louis R. Tomasetta and two other top executives on administrative leave and launched an internal probe of option-grant timing.
Options grants at UnitedHealth, Vitesse and several other companies were analyzed in a page-one article in The Wall Street Journal last month. That article raised questions about the timing of many of the grants. Mathematical analysis showed that if 12 UnitedHealth options grants to Dr. McGuire from 1994 to mid-2002 had been randomly dated, the odds of their occurring when they did -- at very profitable times -- were about one in 200 million. The company has said it allowed Dr. McGuire to select his option-grant dates. Since 1995, Dr. McGuire has realized at least $450 million by exercising options and stock-appreciation rights.
An option gives its holder the right to buy a stock at a fixed, or "exercise," price. The lower the exercise price, the higher the potential for an executive to profit by buying the stock low and then selling it at a higher market price. Backdating occurs when options grants are dated retroactively, presumably when the stock was trading lower to take advantage of a lower exercise price.
"It appears that there's a high likelihood" that UnitedHealth options "were granted on a retroactive basis," said Mr. Hatch, the Minnesota attorney general. "We are not saying it happened, but we have a strong interest in intervening and seeing if it did happen."
Speaking to analysts on a conference call yesterday, Dr. McGuire said the company initiated the review of its compensation practices as soon as criticism of option-grant practices of it and other companies came to light. He said he had made several recommendations to the compensation committee of UnitedHealth's board.
They include doing away with noncash "perquisites" and special "change of control" severance pay in the event of a takeover by another company; caps on supplemental executive retirement benefits; and, "for the foreseeable future," a ban on new equity-based awards -- mainly, stock options -- for the most senior and longest-tenured executives at the company.
These types of compensation and benefits are widespread at U.S. companies, and compensation experts said they could recall no precedent for an attempt to curb so many elements of executive pay at once.
"With no obvious economic reason, it is the most unusual and unexplainable executive-pay actions by a CEO," said Alan Johnson, managing director of Johnson Associates Inc., a pay consultancy in New York.
The cessation of stock-option grants would be "very unusual," said Pearl Meyer, senior managing director of Steven Hall & Partners, a New York compensation-consulting firm. Some companies have stopped giving options to highly compensated executives, Ms. Meyer said, but "where they have, they have changed the compensation program to use another long-term vehicle."
The company declined to elaborate on what sort of noncash perks would be covered. Such perks typically include use of a corporate jet, financial-planning services and the like. In his comments, Dr. McGuire didn't address options already issued but not yet exercised.
WALL STREET JOURNAL VIDEO
• UnitedHealth CEO McGuire discusses earnings, the company's options plans and responds to Tuesday's Page One story, saying, "I've never made a practice of looking for money."
• The Wall Street Journal's George Anders and executive compensation expert Brian Foley discuss the UnitedHealth CEO's hefty pay package.
In a CNBC interview yesterday afternoon, Dr. McGuire said it "could certainly be dozens of people" who would be affected, adding that it depended on whether they had already been with UnitedHealth for a long period and had considerable stock options under their belts. In addition to the considerable equity Dr. McGuire has been awarded over the years, Mr. Hemsley, the chief operating officer, has options valued at $663 million, and several other UnitedHealth executives have amassed options holdings in the tens of millions.
Dr. McGuire said he had proposed not just a moratorium, but that "we consider terminating, slowing down or stopping for the foreseeable future" options awards for such executives.
It's up to UnitedHealth's board to make such changes. Dr. McGuire said on CNBC that he is "fairly confident the board will take actions along the lines of what I've said."
It isn't clear precisely how much UnitedHealth will save if the board enacts Dr. McGuire's suggestions. In 2005, the company reported granting more than three million options to Dr. McGuire and the four other most highly compensated executives. Dr. McGuire's perks included $137,413 in "personal use of Company-provided transportation" and $51,389 for "security expenses." It also reimbursed him $69,100 for "financial planning and assistance fees."
Dr. McGuire's supplemental executive retirement plan, or SERP, outlined in a 1999 employment agreement, calls for him to receive as an annuity 65% of the average of his cash compensation in the three years preceding his departure. If he leaves because of a change in control, he receives his regular cash compensation for three years, then begins drawing benefits under the retirement program. It wasn't clear what Dr. McGuire meant by his recommendation to "cap" the SERP arrangement.
Dr. McGuire's comments yesterday were the first he had made publicly since the issue of the timing of his options grants became public last month. "To my knowledge, every member of management in this company believed at the time that we followed appropriate practices for those option grants which affected all of our employees, not simply selected executives," he said. He wouldn't specifically answer an analyst's question about whether he had received backdated options, saying only that they had been determined in a "thoughtful" manner. "We sleep with good conscience," he added.
Calls to members of UnitedHealth's compensation committee were not returned yesterday. One UnitedHealth board member, Gail Wilensky, a senior fellow at Project HOPE, an international health-education foundation, said that the board, outside of its three-member compensation committee, had not yet discussed or reviewed Dr. McGuire's recommendations. "I am interested in taking [Mr. McGuire's recommendations and any other proposals] very seriously," said Ms. Wilensky, who has served on UnitedHealth's board since 1993.
Yesterday, UnitedHealth posted higher-than-expected first-quarter profits. Earnings climbed 21% to $899 million, or 63 cents a share, in the quarter, from $743 million, or 55 cents a share, a year earlier. UnitedHealth's acquisition of PacifiCare Health Systems Inc., which it completed late last year, and its new Medicare drug-benefit plans helped fuel profits and a 58% jump in first-quarter revenue to $17.59 billion.
Dr. McGuire said the company now expects full-year earnings of between $2.88 and $2.92 a share -- a 22% to 24% increase from 2005 -- compared with its earlier projection of between $2.85 to $2.90 a share.
In the CNBC interview, Dr. McGuire acknowledged that he had been "very fortunate" in his compensation, which largely stems from an enormous rise in the company's share price -- about 50-fold during his time as CEO.
But some doubt the moves will soften the outcry over Dr. McGuire's $1.6 billion in unrealized gains on stock options. "It's nice to shut the barn door after the horse is out," noted Mark M. Reilly, a partner at 3C Compensation Consulting Consortium in Chicago. "I don't think it's going to dampen the criticism. He's almost pandering to the complaints" because "now that he has got everything, he changes the rules."
Lynn Turner, research director at Glass Lewis & Co. and a former SEC chief accountant, said that it was possible that UnitedHealth was just lucky with its option grants. "But when you see someone hitting a low point not just once and not just twice, but several times, common sense tells you that it is not just luck of the draw and that there's something else at work here and it's not a good thing."
Mr. Turner said directors should also be held accountable for backdating. "For compensation committee member it raises the question of whether there was adequate oversight and whether the right tone was being set by the corporation as well."
At Vitesse Semiconductor, Mr. Tomasetta repeatedly received options with fortuitous grant dates: Eight of his nine grants from 1994 to 2001 were dated just before double-digit price gains over the next 20 trading days. During nearly two decades at the helm of the Camarillo, Calif., chip maker, he reaped tens of millions from stock options.
In addition to Mr. Tomasetta, Vitesse also placed its chief financial officer and an executive vice president on administrative leave. Vitesse said in a statement that it was "unable to determine" whether it would need to restate results, but that the internal probe could cause the company to restate.
Messages left for Mr. Tomasetta and Vitesse's acting chief executive, Chris Gardner, were not returned.
In recent weeks, a number of companies, including Affiliated Computer Services Inc., Comverse Technology Inc. and Power Integrations Inc. have either said that they are examining their options practices or are subject of a regulatory investigation of them.
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