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Highly paid executive retreats on pay package

After criticism, UnitedHealth chairman and CEO William McGuire recommends limits on senior executives' new stock options.

By Times Wire
Published April 19, 2006

MINNEAPOLIS - UnitedHealth Group Inc. chairman and CEO William McGuire, under fire for a compensation package that has made him one of the nation's most richly paid corporate chiefs, said Tuesday he has recommended that his company stop awarding new stock options to senior executives.

The move, which Uni-tedHealth's board would have to approve, comes after news reports showed McGuire and other UnitedHealth executives were awarded stock options dated at low points in the company's share price, thus maximizing their profit when the options were exercised.

The comments came on the same day that the nation's second-biggest health insurer reported its first-quarter profit climbed 21 percent as revenue jumped almost 58 percent, propelled by its acquisition of PacifiCare.

UnitedHealthcare is the fourth largest health insurer in Florida and No. 3 in the Tampa Bay area, where it had 13.2 percent of the commercial market as of Sept. 30.

McGuire said he was recommending the board "forgo for the foreseeable future further equity-based grants or awards for our most-senior and longest-tenured executives, for whom equity positions are well-established from prior years of service."

McGuire has led the company since 1989.

He said the company's board would consider the idea at its next meeting in early May.

He also said he was recommending the board cap some executive retirement plans and get rid of noncash perks.

McGuire benefits from personal use of the company's aircraft, the Wall Street Journal reported Tuesday.

This month, UnitedHealth disclosed that a committee of its independent directors was looking into its "current and historic stock option grant practices" in the midst of an inquiry from the Securities and Exchange Commission.

The Journal has reported that the options were established before 2002. After that, the newspaper said, new rules curtailed backdating of options.

"I can say that, to my knowledge, every member of management in this company believes that at the time we collectively followed appropriate practices for those option grants which affected all of our employees," McGuire said.

He didn't directly answer an analyst's question about whether he backdated stock options, which would not necessarily be illegal.

"We sleep with good conscience," he said.

McGuire was paid $8-million last year and did not exercise stock options. But he exercised $114.5-million in options in 2004, and held more than $1.6-billion in unexercised options at the end of 2005, according to regulatory filings.

The arrival of the $1-billion CEO would be a head-turner in any industry.

But it's especially controversial in health care, where "people tend to view each dollar of executive pay as money that isn't spent on them," said Jonathan Weiner, a health policy expert at Johns Hopkins University.

McGuire and his supporters say the United States would be in even worse shape if it weren't for insurers such as UnitedHealth weeding out unnecessary treatments, bargaining with doctors and encouraging patients to seek out the highest-quality care.

Despite his rich compensation, McGuire has been speaking out about national health system reform and UnitedHealth has opened advanced clinics that serve some of the nation's poorest neighborhoods.

McGuire has set up a family foundation that gives away millions on behalf of education, science and the arts.

Some of McGuire's most eye-catching gifts are unrelated to health care.

In January, he said he was giving $10-million to help thousands of disadvantaged Minnesota children attend college. McGuire has given nearly $10-million to the University of Florida for a biodiversity center that includes one of the world's largest butterfly research institutes.

In its earnings report, UnitedHealth said its profit rose to $899-million, or 63 cents per share, for the January-March period, from $743-million, or 55 cents per share, during the same period last year. The results include the effect of new accounting rules requiring companies to record costs for stock-based compensation, which UnitedHealth adopted Jan. 1.

Quarterly revenue rose to $17.59-billion from $11.16-billion last year, the company said. UniitedHealth is the No. 2 health insurer behind WellPoint Inc.

As long as UnitedHealth stock keeps climbing, big shareholders say they aren't likely to badger McGuire for a pay cut.

"It's hard to say what someone like that is worth," said Tom Marsico, head of Marsico Capital in Denver, which owns about 5 percent of UnitedHealth's shares. "But compared with hedge fund managers or athletes, he's probably doing more to improve the world."

Even so, UnitedHealth directors huddled several times last year to discuss whether they have showered McGuire with too many options. His 1999 employment contract obligated the company to award him further options on 2.6-million shares each year, adjusted for splits.

The Medicare drug benefit that took effect Jan. 1 added $1.2-billion in revenue, but UnitedHealth said it lost $106-million on it because the program's costs occur disproportionately in the first half of the year.

UnitedHealth acquired West-coast insurer PacifiCare on Dec. 20, and that added $3.9-billion in revenue and $185-million in earnings from operations.

Information from Times staff writer Kris Hundley, the Associated Press and Wall Street Journal was used in this report.

[Last modified April 19, 2006, 02:08:11]