April 20, 2006: UnitedHealth extended its bounty to directors

This article first appeared on April 20.

Senior managers at UnitedHealth Group Inc. are not the only ones to reap millions from stock gains at the nation's second-largest insurer. Its board of directors also has enjoyed the fruits of the company's Wall Street success.

In the past five years, the current 10 outside directors have cashed in stock options worth $159.2 million, minus the reduced price they paid for the shares, according to a Star Tribune review of filings with the Securities and Exchange Commission (SEC).

The latest trade occurred two weeks ago when directors William Spears and Thomas Kean each sold 32,000 shares of UnitedHealth stock at the market price of $53.60 after paying an option price of $6.83 a share. Both netted nearly $1.5 million.

"That's ridiculous," said Fred Zimmerman, a retired manufacturing professor at the University of St. Thomas and expert in corporate governance who has experience as a director. "The whole issue of executive compensation is out of whack, particularly at UnitedHealth."

Corporate directors are responsible for determining CEO pay, and over the years United's board, citing the company's extraordinary success, has allowed CEO William McGuire to accumulate options currently worth about $1.6 billion.

But now regulators are looking at whether McGuire and executives at other companies received preferential treatment in dating their stock options, thus ensuring a bigger profit when later sold.

UnitedHealth also is investigating its past practices and has been in contact with the SEC about the matter.

On Tuesday, McGuire said he would ask the board to suspend the stock-option program for senior management for the indefinite future. He also said that UnitedHealth executives believed they had followed appropriate practices and were within company guidelines regarding stock options.

McGuire didn't address the board's compensation, and the company declined to make directors available Wednesday to talk about it. But in a statement, UnitedHealth said the value of the options was based solely on the company's performance. "Since 1994 UnitedHealth Group common stock has increased more than 1,000 percent. (This is compared to an increase of 181 percent by the S&P 500 during the same period.) The value of the options in question reflects that growth," the statement said.

It is not unusual for directors to receive shares in the company on whose board they serve, but some corporate governance experts believe the practice can create conflicts of interest.

"The usual argument is that the director is the representative of the shareholders and they should have their interests financially aligned with the shareholders," said Rajesh Aggarwal, an associate professor of finance at the University of Minnesota's Carlson School of Management. "But the question that people raise is: If management is responsible for granting the options, will directors be more responsive to management than shareholders?"

Aggarwal said the size of the option program for directors at the Minnetonka-based UnitedHealth is on the high end for boards of publicly traded companies.

"It appears the option granting practice for the UnitedHealth board has been generous and has been consistent with the option granting practice for the CEO," Aggarwal said.

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Focus on stock

Compensation for board members at UnitedHealth focuses heavily on the company's stock. Upon joining the board, each members is granted 58,000 stock options. Directors subsequently are eligible for 8,000 more options every three months, or 32,000 shares a year.

Board members also receive a $30,000 annual stipend, plus $1,500 for each board meeting they attend ($750 if by phone) and $1,000 for each committee meeting they attend ($500 if by phone). Directors have the choice of deferring the cash portion of their compensation and converting it into stock options.

Since 2001, the option payouts have been handsome for several board members. For example, Richard Burke, a former CEO of a predecessor company to UnitedHealth, sold options totaling $55.8 million. Zimmerman, who has sat on 16 boards of directors, said he never had it that good. At Winnebago Industries, he received a one-time grant of 9,000 stock options and several years later started to receive 2,000 options on an annual basis. "None of us thought we were underpaid," he said

"The fees are out of line for a company that size," Zimmerman said of UnitedHealth Group, "but not as far out of line as the stock options are."

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David Phelps - 612-673-7269 - dphelps@startribune.com Patrick Kennedy - 612-673-7926 - pkennedy@startribune.com

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The board of directors: $159.2 million since 2001

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The 10 directors

William Ballard

Richard Burke

James Johnson

Thomas Kean

Douglas Leatherdale

Mary Mundinger

Robert Ryan

Donna Shalala

William Spears

Gail Wilensky

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Their background

Ballard: Director of counsel to Greenebaum Doll & McDonald, a law firm in Louisville, Ky.

Burke: Has been a member of the board since its inception and is a former CEO of a predecessor company.

Johnson: Vice chairman of Perseus LLC, a private merchant banking and investment firm. Chairman of the UnitedHealth compensation committee.

Kean: Former New Jersey governor and retired president of Drew University in New Jersey. Chairman of President Bush's 9/11 Commission.

Leatherdale: Retired chairman and CEO of the St. Paul Companies Inc.

Mundinger: Dean of School of Nursing at Columbia University. Member of the UnitedHealth compensation committee.

Ryan: Retired senior vice president and chief financial officer of Medtronic Inc.

Shalala: President of University of Miami in Florida since June 2001. U.S. health and human services secretary during Clinton administration.

Spears: Senior principal of Spears Grisanti & Brown, an investment counseling firm, since 1999. Member of the UnitedHealth compensation committee.

Wilensky: Senior fellow at Project HOPE, an international health foundation, since 1993.

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Director since

Ballard: 1993

Burke: 1977

Johnson: 1993

Kean: 1993

Leatherdale: 1983

Mundinger: 1997

Ryan: 1996

Shalala: 2001

Spears: 1991

Wilensky: 1993

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Shares sold and total value since 2001

Ballard: 224,000 shares, $6.54 million

Burke: 1,948,000 shares, $55.77 million

Johnson: 354,400 shares, $10.83 million

Kean: 448,000 shares, $17.66 million

Leatherdale: 990,000 shares, $26.86 million

Mundinger: 88,000 shares, $2.42 million

Ryan: 122,000 shares, $2.96 million

Shalala: 122,000 shares, $5.43 million

Spears: 704,000 shares, $23.84 million

Wilensky: 294,000 shares, $6.89 million

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PROXY STATEMENT

The company's executive compensation filing is at www.startribune.com/a1220.

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5 years

10 outside directors

$159.2 million in stock options