United CEO says he'll take no more stock options

UnitedHealth Group Inc. CEO Dr. William McGuire has accumulated stock options worth an estimated $1.6 billion. On Tuesday, he acknowledged that might be enough.

Under fire for compensation practices that have made him one of the wealthiest executives in the country, McGuire said he will recommend that he and about a dozen other top United executives forgo new stock awards "for the foreseeable future."

McGuire long has been a lightning rod in the debate over executive compensation, particularly with health care costs rising so rapidly and the ranks of the uninsured growing.

"It's a shocking wealth transfer," said Nell Minow, editor of the Corporate Library, an organization in Portland, Maine, that analyzes corporate compensation and governance issues.

Earlier this year, McGuire cashed out options worth $124 million, and in 2004 he was the highest-paid executive in Minnesota, with total compensation of almost $125 million.

Company officials have defended those paydays by pointing to McGuire's success in transforming United from a financially ailing insurer into the second-largest in the country. The company also is a Wall Street darling; its stock price has climbed more than 200 percent in the past five years.

McGuire emphasized Tuesday that in his opinion, stock options were appropriately awarded to him and other executives according to company policy, which until last year allowed the option price to be established in periods when the company's stock was in a dip or before a sharp run-up.

"To my knowledge, every member of management is believed to have followed appropriate practices and were within [company] guidelines," McGuire told analysts. "We sleep with good conscience."

McGuire also has become a major financial giver in the Twin Cities and elsewhere. His family foundation dispensed almost $5 million in 2004 and recently pledged $5 million for a new riverfront park in downtown Minneapolis and $10 million to help pay for the college education of low-income public school students in Minnesota.

Timing of options questioned

Stock options are designed to reward executives for good performance as reflected in a company's stock value. Presumably, the better a company performs, the higher its stock shares will go and executives will benefit when they sell the lower-priced options for the higher market price.

The Securities and Exchange Commission (SEC) reportedly is looking into whether United and other companies allowed executives to backdate their stock options, thus ensuring a bigger profit when those options were sold. The question of the timing in McGuire's case was first raised in a Wall Street Journal story in March.

United has confirmed that until 2005, McGuire was allowed to select the date for his options. The company recently informed regulators that it also is conducting an internal review -- done by an independent committee consisting of nonemployee board members and outside legal counsel -- of some of its compensation practices.

Minow said the board most likely would be liable if anything inappropriate turns up. "In this case, if you believe there was a mistake, the clear thing to do is act very quickly and stop it and start over as you cooperate with the feds," she said.

The 2.3 million shares McGuire sold in February at $59 a share were optioned to him at $5 a share. The SEC filing reflecting the sale did not say when the option was set.

UnitedHealth's board is expected to consider the freeze on future option awards at its next meeting in May.

McGuire's comments Tuesday were his first public remarks about the options issue. He told analysts: "It's been very difficult to respond to reports that impugn motive. As soon as we were aware of a concern, we commenced a thorough review of our practices. We take these concerns seriously."

Goes to airwaves

McGuire also took his message to the airwaves, and he went on CNBC's "Street Signs" to discuss the company's profitable first quarter and address the compensation issue.

"I and a lot of other people at the company are very fortunate to have been part of a company that started almost as a bankrupt company and has prospered," he said on CNBC. "We're going to consider terminating or slowing down stock options for our most senior employees, and I'm one of those. We don't need to give any more. We're very attentive to the wishes of our constituency, which includes shareholders and customers."

Minnesota Attorney General Mike Hatch said late Tuesday that his office will attempt to intervene in a shareholders lawsuit that was filed against UnitedHealth over the options issue; it was filed in federal court in Minneapolis late last month.

"We've gotten a ton of calls on this," Hatch said. "We don't know if anything is wrong; we just think as a matter of public policy we want to know what's going on."

At UnitedHealth, forgoing future options still will leave top executives with sizable holdings.

At the end of 2005, McGuire's exercisable options totaled $1.6 billion, according to a proxy statement filed by the company with the SEC on April 7. Stephen Hemsley, president and chief operating officer of the Minnetonka-based health care organization, holds exercisable options of nearly $663 million. Two other executives have options worth $50 million to $60 million.

The announcement about executive compensation came on the same day that United raised its 2006 earnings estimate to a range of $2.88 to $2.92 a share, from a previous forecast of $2.85 to $2.90 a share. But United's stock price lost $2, or almost 4 percent, Tuesday, and at $49.67 is down about 12.4 percent since questions first were raised about the timing of executive options.

David Phelps • 612-673-7269