UnitedHealth's CEO Weighs His Options

Another one bites the dust. Another executive, that is.

As the options backdating scandal continues sucking ever more companies into its vortex, UnitedHealth (NYSE: UNH  ) has said CEO William McGuire will retire by December, but will step down immediately as chairman and director. He was one of the prime beneficiaries of the backdating that occurred at the health insurer and his stock options were worth nearly $1.8 billion -- yes, that's a "b" there -- at the end of 2005, though the stock has sold off since the scandal first broke back in April.

McGuire's not the first executive to leave his post as a result of getting easy money through changing the date when options were granted after the fact. Software provider McAfee (NYSE: MFE  ) had its chairman and CEO retire, while the company fired its president for his role. And online media company CNET Networks (Nasdaq: CNET  ) had its CEO resign after its internal backdating investigation found "deficiencies" in how options were granted. Monster Worldwide (Nasdaq: MNST  ) , Broadcom (Nasdaq: BRCM  ) , Rambus (Nasdaq: RMBS  ) , and Boston Communications (Nasdaq: BCGI  ) have all had executives or directors step down, step aside, resign, or get fired because of options backdating.

While options are said to align shareholder and management interests, and an executive who shepherds his company through difficult times to greater periods of growth should be rewarded for his efforts, the backdating scandal has shown that sometimes some people just aren't satisfied if they're not squeezing every possible penny for their own profit.

McGuire grew UnitedHealth from a company with $600 million a year in revenues to one with $70 billion over the past 15 years. That's a 37% annual rate of growth! Few executives can lay claim to such performance, and being compensated for his stewardship in that time of prosperity is his due. Yet his employment contract has seen a few changes over the years and has grown more generous with the passage of time.

But don't lament McGuire's departure, as his severance package is anything but sickly. UnitedHealth will pay the 57-year-old executive $5.1 million a year for life, according to the Corporate Library, as well as a $6.5 million lump sum payment to assuage the pain of separation. McGuire's also voluntarily agreed to reprice all of the options awarded him from 1994 through 2002 to the highest price of the year "to eliminate any possible financial benefit from options dating issues."

It's a nice gesture, but a little hollow at this point. Knowing after the fact that you were successful (and getting a more-than-generous severance package at the end) makes it easy to say you'll reprice your options to a higher price since you already know the stock is above that.

According to UnitedHealth's report on the backdating probe, McGuire was granted 1 million options upon renewal of his employment agreement in 1999. When some three-quarters of them became "underwater" due to a pullback in the stock price, UnitedHealth "suspended" the options and issued new ones. After the stock price rose again, the company then "reactivated" the suspended options, amounting to a "substantial new grant of options at a significant discount" which it never recognized in its financial statements. As a result, the company will undoubtedly delay its quarterly report and will have to restate its finances. Those "reactivated suspended" options need to be accounted for.

So another leader who should have been able to bask in the fullness of his accomplishments -- and they were legion -- will instead have his name associated with a money-grubbing scheme to wring even more money from an already generous pay package. The company has attempted to spin the controversy by saying it believed options were "the best means of offsetting what it saw as the Company's below-market cash compensation" and used options backdating as a means to adequately reward them. UnitedHealth has underscored what Warren Buffett has said all along: "If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And if expenses shouldn't go into the calculation of earnings, where in the world should they go?"

It seems to be yet another example of an executive's fall from grace, if not to ignominy, then certainly to discomfiture. Better to have bitten the bullet at the outset than to bite the big one at the end.

UnitedHealth is a recommendation of Motley Fool Inside Value. A 30-day guest pass lets you take stock of all the value picks that are currently beating the market by a full four percentage points.

UnitedHealth is also a Motley Fool Stock Advisor recommendation. Check out Stock Advisor today, and we'll send you a free report.

CNET is a Rule Breakers selection. McAfee is a former Stock Advisor pick.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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