business

Stephen Hemsley, a serious and studious man, is known for his marathon-like work schedule, which regularly includes Saturdays and Sundays, in his role as chief executive of Minnetonka-based UnitedHealth Group.

Now, he also is known as the highest-paid CEO in Minnesota with a 2009 pay package totaling $101.96 million, six times the amount paid to the next CEO in the Star Tribune's annual survey of the state's 100 highest-paid chief executives at publicly traded companies.

But Hemsley's big pay package is also a vestige of the company's former practice of loading executive compensation heavily with stock options, a practice that changed in the wake of a crippling backdating scandal four years ago.

Those options, granted under a different regime of board directors, accounted for $98.6 million of Hemsley's income in 2009.

It is common for executives to exercise their options and then sell the shares, converting their stock to cash. But Hemsley retained ownership of the stock he received from options (minus those sold to pay taxes), thereby sending a signal to shareholders that he believes in the future of the company, analysts said.

Nonetheless, the size of Hemsley's payday will raise eyebrows.

"It's the gift that keeps on giving," Sheryl Skolnick of CRT Capital Group said of the options, which were originally granted in 1999 during the era of then-CEO and Chairman William McGuire. "They [options] are clearly a holdover from a previously generous compensation committee. But when I see senior executives exercising options and holding on to the shares, that's a very bullish statement about the company's prospects."

Those options, which led to McGuire's departure from the company in 2006 for the backdating imbroglio, were set to expire last year. Indeed, options awarded to McGuire fueled payouts that made him the top-paid Minnesota CEO five times in the last 10 years.

'Genetic throwback'

"That's not the most sophisticated compensation system for a sophisticated company," said Paul Hodgson, senior research associate for the Corporate Library, a corporate governance research organization. "This [Hemsley's pay package] is like a genetic throwback. Whatever lesson they learned, we'll be able to tell in the future."

The backdating controversy, in which option prices were selected at favorable periods when the stock price was low or about to run up, spawned shareholder lawsuits that resulted in a 2008 settlement in which the company and its executives agreed to reprice the options to more accurately reflect the price at which they were awarded.

"Even repriced, they were extremely valuable," said Karl Cambronne, one of the shareholder attorneys.

UnitedHealth was not the only company caught up in the backdating debate at the time but it had one of the highest profiles.

UnitedHealth officials assert that Hemsley's 2009 pay package minus the 10-year-old options was $8.9 million, far less than the compensation paid to CEOs in other health insurance organizations. Aetna's CEO made approximately $18 million last year, according to the company's proxy statement; the CEO of WellPoint made a shade over $13 million.

Hemsley's package included the same $1.3 million base salary he's had for the past three years, a $1.9 million cash incentive and performance-related restricted stock units as well as stock appreciation rights.

"The board thought that was appropriate compensation recognizing his overall leadership and positioning of the company for success in a difficult environment," said Don Nathan, UnitedHealth's chief communications officer.

The company's 2009 proxy statement noted, "The compensation committee and Mr. Hemsley agree that it [the package] is sufficient to motivate and retain him."

Nonetheless, Hemsley has already put up good compensation numbers for 2010 with the exercising of additional options granted after 1999 worth $21 million. He also controls 6 million exercisable and unexercisable options, half of which are underwater or below the stock's current value.

Restricted stock focus

John Fossum, professor emeritus at the University of Minnesota's Carlson School of Management where he studies compensation issues, said Hemsley's new pay package is more in line with others in corporate America.

"Companies tend to focus more on restricted shares of stock, which focuses more on steady, long-run growth," Fossum said of a stock-award system in which shares are allocated to executives at the time of the award but they don't gain value until after a vesting period. "There's less dilution for shareholders than with options."

Wall Street seems to embrace what Hemsley and his management team are doing in a weak economy and in an industry that has managed through the welts and bruises of a grueling debate over health care reform for the last year.

Following a meeting with UnitedHealth executives earlier this month, UBS securities analysts Justin Lake and Ken LaVine told investors, "We came away increasingly confident that a strong business momentum and breadth of assets should allow UNH to remain relevant as HC [health care] reform changes industry dynamics going forward."

Joshua Raskin of Barclays Capital attended the same meeting and wrote, "We believe that the focus of the company is back to levels not seen since prior to 2006 [when the backdating news hit] .... We would argue that this group is as cohesive as any time in its history."

David Heupel, a fund manager for Thrivent Financial, said shareholders didn't mind the large executive payouts during the McGuire years because the company's performance was so strong, with double-digit growth and numerous stock splits.

Going forward, getting those kinds of returns and profiting on stock options "is not the layup it used to be," Heupel said. Yet, he's optimistic about UnitedHealth's business prospects and believes compensation numbers "will change dramatically" as options play less of a role.

"I've seen some real signs of [corporate performance] improvement. I've been impressed with what they've shown us in the last couple of quarters," Heupel said.

Star Tribune staff writer Patrick Kennedy contributed to this story.

dphelps@startribune.com • 612-673-7269