Executives Forfeit $390 Million in Options
By Steve Stecklow and Vanessa Furhmans
The Wall Street Journal
November 9, 2006
The two top executives of
UnitedHealth Group Inc. agreed to forfeit about $390 million
in stock-option compensation, by far the biggest sum returned to
a company under scrutiny for backdating options awards.
The giveback was announced at the same time the giant health
insurer disavowed more than a decade's worth of earnings
Last month, an internal inquiry found that the two executives --
outgoing Chief Executive William W. McGuire and his successor,
Stephen J. Hemsley -- received options that carried dates prior
to the dates on which they were actually granted, making them
more valuable than they otherwise would have been.
Other senior UnitedHealth executives will also return
unspecified options gains. Paul Hodgson, senior research
associate at Corporate Library, a corporate-governance research
group in Portland, Maine, said the $390 million giveback by Dr.
McGuire and Mr. Hemsley may be the largest voluntary forfeiture
by corporate executives ever. "This is certainly the biggest
that I'm aware of," he said.
UnitedHealth is one of the largest companies to be ensnared in
the options-backdating scandal, in which companies manipulated
the dates that options were awarded to provide additional
compensation to executives. More than 130 companies are under
investigation by the Securities and Exchange Commission, and
many of those are also being probed by the Justice Department.
UnitedHealth also disclosed that it would have to take
"significantly greater" charges related to its backdated stock
options than it had previously estimated and that it expects the
charges to affect the past 12 years of previously reported
earnings. The Minnetonka, Minn.-based health-insurance giant
didn't specify what the new charges would be. It had previously
said it might have to restate up to $286 million in earnings,
stemming from three years' worth of earnings.
UnitedHealth also said its chief financial officer, Patrick
Erlandson, resigned his post and will be succeeded by G. Mike
Mikan, the company's senior vice president of finance. Mr.
Erlandson will be reassigned to other "operational duties," the
company said. A UnitedHealth spokesman declined to say whether
Mr. Erlandson's move was related to the stock-options issue.
More than 40 executives have lost their jobs to date in the
options imbroglio, including Dr. McGuire, who agreed last month
to step down as UnitedHealth's chairman. He will leave his post
as chief executive by Dec. 1, after 15 years at the company.
UnitedHealth's internal probe concluded that Mr. Hemsley, the
company's chief operating officer, received backdated grants,
but it made no finding that he had a role in their creation.
UnitedHealth's options troubles followed
a page-one article in The Wall Street Journal in March that
showed that Dr. McGuire had received stock options grants at
favorable times, including awards received in 1997, 1999 and
2000 whose dates coincided with those years' lowest closing
share price. The article reported that the odds of such a
favorable pattern occurring by chance were at least one in 200
million. At the time, UnitedHealth called its options-granting
Options are intended to give recipients the opportunity to
profit if the company's share price rises in the future.
Usually, the recipient can buy shares in the future at the price
of the stock on the day the option was awarded. Backdating
involves pretending that the grant was awarded on an earlier
day, when the share price was lower, giving the recipient the
potential for greater profit. If not disclosed to shareholders,
the practice can result in serious accounting and tax
UnitedHealth, in fact, faces a slew of noncash charges related
to stock-based compensation, as well as cash charges resulting
from tax liabilities. It said yesterday it would have to further
delay filing its third quarter Form 10-Q to the SEC.
Both Mr. Hemsley and Dr. McGuire agreed last month to allow the
exercise prices of previously granted options to be reset to the
highest share price during the grant year after a
board-commissioned review concluded that several option grants
had likely been backdated.
The company said Mr. Hemsley and other unnamed senior executives
had agreed not only to give up paper gains on unrealized stock
options with questionable grant dates, but also to forfeit some
money already made on previously exercised options. For Mr.
Hemsley, the actions -- including forfeiting a complex tranche
of grants that were suspended and then reactivated in August
2000 -- will reduce his past stock compensation by $190 million
in both unrealized gains and money he would return. "My decision
is in keeping with my personal goal of avoiding even the
appearance of any unintended benefit from any past option grants
to me," he said in a statement. Before joining UnitedHealth in
1997, Mr. Hemsley was chief financial officer at the accounting
firm Arthur Andersen LLP.
Dr. McGuire has also agreed not to benefit from any grants with
problematic dates that he has already exercised, although it
isn't yet clear how this will be done, according to a person
familiar with the situation. His attorney, David Brodsky, said,
"Dr. McGuire is pleased to have reached an agreement to reprice
his options. The agreement to forgo approximately $200 million
means that Dr. McGuire will receive no benefit at all from
dating issues in connection with his options."
But Dr. McGuire hasn't yet agreed to forfeit the reactivated
options in which he and other employees were effectively able to
get the same options twice, at favorable prices. For Dr. McGuire
alone, those extra options are now valued at about $250 million.
The issue of those options hasn't been resolved between Dr.
McGuire and the company, according to people familiar with the
At the end of 2005, Dr. McGuire had a cache of unexercised
options valued at $1.78 billion. Mr. Hemsley's options at the
time were valued at more than $650 million.
UnitedHealth spokesman Mark Lindsay wouldn't provide any details
on the formula the company is using to determine how much
executives have to return to the company from previously
exercised grants. He added that the company was still working
out the details on how the money would be paid back.
However the payback is handled, executive compensation experts
said the move to undo past compensation is likely to complicate
the tax liabilities that UnitedHealth faces from backdated
grants. "The IRS doesn't like that sort of thing," said James
Reda, managing director of a New York-based pay consulting firm
James F. Reda & Associates.
The company's board also set new rules for its independent
directors, prohibiting business relationships that involve
payments from company executives or any direct compensation from
the company, other than for board service, within the prior
three years. That is tougher than New York Stock Exchange
requirements, which limit other direct compensation for
independent directors to less than $100,000. The more stringent
rules come amid the resignation last month of William Spears, a
UnitedHealth board member for 15 years, after the company's
probe revealed undisclosed financial entanglements with Dr.
UnitedHealth also said it reached a new, four-year employment
agreement with Mr. Hemsley that is remarkably spartan compared
with his and Dr. McGuire's previous contracts. Under its terms,
Mr. Hemsley will receive a base salary of $1.3 million, $1
million less than Dr. McGuire earned as CEO. Far from the power
Dr. McGuire enjoyed to negotiate and, in some years, set the
date for his own option awards, Mr. Hemsley's contract doesn't
set any minimum or target level for bonuses or other
incentive-linked compensation. Rather, any additional bonuses
are "solely at the discretion" of the board's compensation
committee, the company reported in a filing with the SEC. "It's
unusual for someone to relinquish that much control over how his
bonus gets set," Mr. Reda said.
Shares in UnitedHealth fell $1.57 to $48 in 4 p.m. composite
trading on the New York Stock Exchange.
Steve Stecklow at
firstname.lastname@example.org and Vanessa Fuhrmans at