There has already been much speculation about the multi-million dollar compensation of UnitedHealth Company CEO, William McGuire. The concern is underlined by rising consumer and business premiums and increasingly limited coverage for health insurance. Now, reports of very high compensation and millions of dollars in stock options for the Insurance company’s Board of Directors are raising more eyebrows.
A former University of Saint Thomas business professor calls corporate board membership a "part-time" job. "They're not entitled to excessively high compensation for what they do," scoffs Fred Zimmerman.
Zimmerman has served or is serving on more than a dozen Boards of Directors himself. "You know, a few thousand shares a year, you know, that's maybe about par for a New York Stock Exchange type company, but tens of thousands, that's inappropriate."
More alarming to Zimmerman is a practice of allowing senior management and possibly board members to 'back date' the stock options. "I have never, ever heard of anyone being able to pick the date for an option to be granted."
Here’s how "back dating" stock options works. A company awards or grants an employee the option of buying shares of stock, even millions of shares. What makes the deal suspect is allowing the employee to pick the date of the grant with 20-20 hindsight. Say the company stock sold a few months ago for $6 a share. Now the stock is worth $60 a share. The employee exercises his option to buy the company stock now, but 'back dates' the purchase to that earlier $6 price. There is no risk and he makes an instant profit of $54 per share because he is able to 'backdate' the options. The U.S. Securities and Exchange Commission is reportedly investigating UnitedHealth for this alleged practice.
Jared Harris of the University of Minnesota’s Carlson School of Management warns that the independence of Boards of Directors may be compromised by excessive compensation since the boards are appointed by the executives and executive pay is determined by the boards. "It's hard to argue that a board is objective if it's being paid handsomely," said Harris.
Harris has been studying the pay policies of 800 companies over six years. UnitedHealth is not one of them, but Harris agrees with Dr. Zimmerman that allowing 'back dating' stock options is a bad business.
"It's money that's just being given away. It's not really an incentive. Then, it starts to look a little bit more like an entitlement and not as much like an incentive. It’s what we call premium pay for pulse and not for performance. "
As for UnitedHealth Company, Harris understands public concern. "They’re in our health care system and there’s so many problems in the health care system, rising premiums, rising health care costs for consumers. There’s a huge problem with uninsured, even among the middle class. Within this system, you now have a top management team that is doing very well for themselves at an insurer and that looks like we should worry about that."
How big is the stock option compensation at UnitedHealth? CEO William McGuire has accumulated options presently worth more than $1.5 billion. McGuire has said he will ask the UnitedHealth Board to suspend the stock option program indefinitely for senior management.
McGuire has donated to local causes including $10 million for new medical research facilities at the University of Minnesota and $5 million for a new riverside park next to the new Guthrie Theatre in Minneapolis.
By Allen Costantini , KARE 11 News
(Copyright 2006 by KARE. All Rights Reserved.)