UnitedHealth CEO Makes Recommendation on Pay
By DINAH WISENBERG BRIN and VANESSA FUHRMANS
Wall Street Journal
Originally published April 18, 2006
UnitedHealth Group Inc. Chairman and Chief Executive William W. McGuire said Tuesday he is recommending that the insurer, which is under scrutiny for the timing of past stock-options awards, forgo equity-based payments and grants for most senior executives.
The company also said it posted higher-than-expected first-quarter earnings but lowered its guidance for next year. Earnings at the country’s second-biggest health insurer climbed 21% to $899 million, or 63 cents a share, in the quarter, from $743 million, or 55 cents per 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, as a well as a 58% jump in first-quarter revenues to $17.59 billion.
As a result, Dr. McGuire said the company now expects full-year earnings 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.
Dr. McGuire prefaced his discussion of the company’s performance with his first comments on the controversy over his massive financial windfall from stock options, now totaling $1.6 billion in unrealized gains. In a move that could prove to be a significant pullback from what has been an enormously generous remuneration package, Dr. McGuire said he was recommending that the company eliminate change-in-control severance payments and “noncash perquisites,” for the most senior executives, as well as capping supplemental retirement plans and eliminating further equity-based grants “for the foreseeable future.” UnitedHealth’s board will consider that idea at its next meeting in May, he said.
Dr. McGuire’s suggestion does not restrict him or other executives from exercising options they’ve already received, and a company spokesman declined to specify what perks Dr. McGuire suggested be eliminated.
Earlier this month, UnitedHealth said a committee of its independent directors would review the company’s options-grant practices in light of Securities and Exchange Commission scrutiny of options grants at numerous companies, including UnitedHealth.
The Wall Street Journal reported last month that Dr. McGuire’s options grants were regularly dated just before substantial run-ups in share price and after a sharp fall.
Monday, Comverse Technology Inc. said that after a preliminary review of its stock-option practices, it expects to restate more than five years of financial results because the grant dates used in its accounting “differed” from the actual grant date.
Several UnitedHealth executives frequently received stock-options grants dated at or near quarterly low points in the company’s share price, raising questions about how the Minnetonka, Minn., health insurer timed options grants, the paper reported this week.
“I and all of us at UnitedHealth Group take these concerns seriously,” Dr. McGuire said. “It is extraordinarily difficult and frustrating not to respond to media reports” about company options practices, especially those that “impugn” management, Dr. McGuire said.
“To my knowledge, every member of management in this company believed at the time that we followed appropriate practices” for granting options executives and other employees, he said. The CEO, questioned by an analyst, wouldn’t specify whether he had received backdated stock options, saying the company didn’t want to bias the independent review committee. “We sleep with good conscience,” he added.
By the quarter’s end, UnitedHealth had signed up about 70 million consumers, an increase of 27% over the prior year. The company said it had 4.5 million seniors using its Medicare Part D prescription drug benefit, generating $1.2 billion in revenue for the quarter. The company’s Part D plans saw their margins squeezed due to the costs of assimilating new members, but it said it expects to see margins expand by year’s end.
Dr. McGuire was the subject of a Page One article in The Wall Street Journal today that looked at how an elite group of companies is getting rich from the nation’s fraying health-care system. Many of them are middlemen who process the paperwork, fill the pill bottles and otherwise connect the pieces of a $2 trillion industry.
UnitedHealth directors in the late 1990s allowed Dr. McGuire the rare freedom to time his stock-option grants. In several cases the grants carried dates when the company’s share price was particularly low, allowing him to profit when it recovered.
The Journal’s analysis of 12 options grants to Dr. McGuire from 1994 to mid-2002 found that if the options had been randomly dated, the odds of their occurring at such propitious times were about 1 in 200 million. It raised the possibility that the options grants were backdated. Backdating an options grant isn’t necessarily illegal, but civil or criminal actions could be brought if disclosure of the practice was inadequate, securities lawyers say.
Write to Dinah Wisenberg Brin at dinah.brin@dowjones.com10 and Vanessa Fuhrmans at vanessa.fuhrmans@wsj.com11
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.