UnitedHealth's McGuire
Could Leave With $1.1 Billion
By CHARLES FORELLE and MARK MAREMONT
October 17, 2006; Page B1
UnitedHealth Group Inc.'s soon-to-be-former chief executive, William McGuire, could walk away from the company with about $1.1 billion in stock options, retirement payouts and other benefits, according to an examination of securities filings.
Dr. McGuire agreed to leave the CEO post Sunday in the wake of an internal report that found that millions of stock options were improperly backdated at the company during his watch. The lawyers who conducted the report also found that he signed certificates granting backdated options to employees.
Although Dr. McGuire was under pressure to resign, according to people familiar with the matter, some experts say his employment contract gives him a strong hand in negotiations with the company over terms of his departure.
The $1.1 billion that he could retain would be on top of about $530 million that Dr. McGuire has earned since 1992 running UnitedHealth, according to Standard & Poor's ExecuComp. Much of that sum was related to a stock price that soared in the ensuing years. UnitedHealth said Sunday that Dr. McGuire, who has been CEO since 1991, would immediately step down as the company's chairman following an internal review of backdated stock options but would remain as chief executive until Dec. 1. That gives the company and Dr. McGuire's lawyers several weeks to hash out the precise details of his exit.
Options give their recipients the right to buy a stock at a strike price that most companies -- including UnitedHealth -- tell shareholders will be the fair-market value on the day of the grant. In backdating, companies secretly pretend the grant was made at an earlier date so that the strike price can be lower and the profits for recipients can be greater.
The stakes in the negotiations between UnitedHealth and Dr. McGuire are big. At one extreme, the company could seek to fire Dr. McGuire by Dec. 1 and argue that his options -- the root of his vast fortune -- were improperly issued and should be canceled outright. At the other, Dr. McGuire could insist that he is entitled to retire and retain nearly everything.
Dr. McGuire's employment agreement, signed in 1999, gives him a wide berth. A 2005 amendment deems just about any departure short of firing to be a "retirement," under which nearly all of his options immediately vest and continue in force for another six years and he begins to draw a pension of more than $5 million a year.
What's more, the contract takes a fairly restrictive view of what constitutes grounds for firing: in effect, either a felony conviction or repeated failure to remedy a serious problem despite repeated notices demanding that he clean it up.
"I suspect that he has a stronger hand," says Bill Coleman, a senior vice president for compensation at Salary.com Inc. "Their definition of bad behavior is bad behavior that wasn't fixed after he was warned."
In announcing Dr. McGuire's planned departure, UnitedHealth said that he had agreed to reprice his options granted between 1994 and 2002 to the highest price of the year. It couldn't immediately be determined exactly how much that will shave off his potential take, but the figure is probably more than $100 million, still a small fraction of his total haul.
David Brodsky, a lawyer for Dr. McGuire, declined to address any negotiations, but said: "I expect that the company is going to be fair in its assessment of his enormous contribution to the company." A spokesman for UnitedHealth declined to comment on any negotiations or on what sums Dr. McGuire might depart with.
Subtracting the roughly $100 million he could lose in options would leave Dr. McGuire with about $1 billion of options, all of which would vest immediately upon his retirement.
In addition, under his employment contract, Dr. McGuire is entitled to an executive pension that will pay him a lump sum of $6.4 million, plus about $5.1 million a year for life; his wife will receive half of that each year if she outlives him. Brian Donohue, a managing director at the consulting firm CCA Strategies who examined the contract, estimates that the pension is worth about $90 million if paid out as a lump sum.
The contract also provides that Dr. McGuire and his wife are entitled to lifetime health-care coverage, as well as health coverage until age 25 for his children. He has to continue paying his share of the cost. He also gets to keep using the company's aircraft for personal business under the same terms as before, and gets a company-paid office and secretary, for three years. It appears he might get a company-paid "allowance" for security and "tax and financial planning expenses" as well.
In addition, the company could choose to keep him on as a consultant for three years at roughly his current cash pay, or between about $8 million and $10 million, depending on whether certain incentive payments are included. The company must also pay his disability and other insurance premiums for three years, including premiums on a special $5.5 million life-insurance policy.
If the payments to Dr. McGuire run afoul of federal "golden-parachute" taxes, UnitedHealth is obliged to pay the excise tax, plus any state or federal taxes Dr. McGuire owes because of this tax reimbursement, also known as a "gross-up."
Facing questions in May about the suspicious timing and the enormous size of Dr. McGuire's option grants, UnitedHealth said that the board adopted certain changes, including capping the pension benefits and eliminating many of the perks, such as postretirement health insurance.
But in its press release Sunday announcing Dr. McGuire's departure, the company said that it was "initiating the process" of dumping the perks, suggesting that it hadn't yet done so.
The internal report that led to Dr. McGuire's departure gave one example of how options could become so lucrative. The report, by the firm of Wilmer Cutler Pickering Hale & Dorr, described an unusual options swap in which Dr. McGuire and others managed to get the same options twice.
In October 1999, the report says, Dr. McGuire suggested in a memo that "employee morale and retention" were being hurt by old options that carried strike prices above the company's then-market price. The board agreed to suspend a total of two million out-of-the-money options and replace them with a similar number of new options, which were priced at the lowest point of the year. The Wilmer report concluded the new options likely were improperly backdated to that low point to give the insiders an extra boost.
By the following August, however, the company's stock price had risen significantly. The board then agreed to reactivate the suspended options. So in effect, Dr. McGuire and the others double-dipped, getting back their original options while also keeping the replacement options.
In Dr. McGuire's case, the Wilmer report found, the maneuver in essence got him an extra 750,000 options, with an instant paper gain of about $26 million. Those options are now valued at about $250 million because of share splits and an increased stock price.
The report also concluded that the company failed to properly disclose and account for the complex transaction.
The stock market spent much of the day after the news of Dr. McGuire's departure sorting out what developments at the company meant. UnitedHealth shares rose briefly before closing down 2.48%, or $1.21, at $47.54.
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