For normal people, getting hit with just a $50 parking ticket can be an unpleasant experience. I can only imagine what it feels like to get hit with a $620 million fine. That's what William McGuire, former CEO of UnitedHealth (NYSE:UNH), has agreed to pay in forgone stock options, to compensate the company for his inappropriate backdating of those options.
Most public-company executives are compensated in part with stock options granted every year or so. The options confer the right (but not the obligation) to buy the company's stock at a certain price, called the strike price. If the stock goes up, the executives reap the gains. If the stock goes down, they merely receive nothing for the options. The strike price is almost always the market price on the date of the option grant. However, many executives have backdated their options to a time when the stock price was lower than it was on the strike-price date.
More than 100 public companies over the past two years either have been accused of or have admitted to backdating options. UnitedHealth was one of the first companies to be accused, along with Affiliated Computer Services (NYSE:ACS) and Brooks Automation (NASDAQ:BRKS). Last July, the SEC charged former Brooks Automation CEO Robert J. Therrien with fraud for his role in backdating options. The SEC was also pursuing McGuire, and several pension funds had sued him and UnitedHealth on behalf of company stockholders.
McGuire agreed to forfeit a number of stock options that were granted at annual lows in UnitedHealth's stock price in 1999 and between 2003 and 2006. The total value of the options he has forfeited is about $620 million. We should not cry for McGuire, however. Even after accounting for these forfeited options, sources estimate that he was paid more than $1.3 billion between 1996 and 2006.
UnitedHealth has also reached agreements with other current and former executives to forgo backdated stock options. In total, about $900 million will be returned to shareholders. The shareholders still lose, however. UnitedHealth had reduced its stated earnings by $1.13 billion because of options backdating. Therefore, the executives still got away with $200 million in unearned compensation. Sometimes, you just can't win.
Related Foolishness:
