By Jay Mallin
Bloomberg News
April 15, 2010

Giant paydays are back at UnitedHealth Group.

Chief executive Stephen Hemsley pulled in $102 million in 2009, with $98.6 million coming from exercised stock options, according to a filing with the Securities and Exchange Commission Wednesday.

That’s the biggest payday at the Minnetonka-based health insurer since 2006, when former chief Dr. William McGuire collected $127 million.

It’s also a big leap from Hemsley’s compensation of $9.5 million in 2008, which included $6.2 million in exercised options. He made $5.0 million in 2007, a year in which he exercised no options.

Hemsley’s stock options were originally granted in October 1999 and were set to expire last year. He exercised 4,875,000 shares at $28.94 per share; they had an exercise price of $8.7188 per share.

That was after those options were repriced upwards as a result of a backdating investigation in 2006 that lead to the eventual resignation of McGuire, who ended up paying large fines and settlements.

Hemsley retained 1,955,265  shares, after payment of the exercise price and related taxes.

Between October 1999, when Hemsley was awarded the options, to Feb. 6, 2009, when he exercised them, UnitedHealth’s stock has split 8:1. The annualized total return to shareholders was 19 percent, while the S&P 500 was down 3 to 4 percent in the same period.

Under the spotlight

Health insurers have been under the gun this year with regulators demanding explanations for rate increases and legislators taking aim at insurance company profits through health care reform legislation.

In March, the nation’s top health insurance executives, including Stephen Hemsley, were called to Washington by Health and Human Services Secretary Kathleen Sebelius for an explanation of rate increases. President Obama also stopped by to urge health care companies to be more transparent on their costs including compensation. UnitedHealth as a public company is already required to disclose compensation.

Financially UnitedHealth continues to perform well.

“Despite a challenging economy, we achieved solid results that exceeded our initial outlook on almost every key measure this past year,” Hemsley said when releasing the company’s year-end results.

UnitedHealth’s 2009 revenue was $87.1 billion, up 7 percent from a year earlier. Net earnings were $3.8 billion, or $3.24 per share, up 28 percent and 35 percent respectively. The company’s guidance for 2010 was revenue above $90 billion with earnings of $2.90 to $3.10 per share.

At the time, the company said changes from healthcare reform legislation would be minimal in 2010 but that it will factor those changes into its forecast for 2011 and beyond.

According to the proxy, an external pay analysis and comparison to UnitedHealth’s peer group showed that Hemsley’s total direct compensation for 2009 -–not including the exercise of stock options – was below the median level for CEOs in UnitedHealth’s peer group.

Salary unchanged

Hemsley’s annual salary in 2009 was $1.3 million, the same since 2006.

UnitedHealth’s financial performance in 2009 exceeded targeted goals for revenue, operating income and cash flow. That earned Hemsley an annual bonus of $1,950,000. His bonus was 7 percent more than in 2008 but below the $3.6 million earned in 2007.

Though Hemsley earned an annual bonus, he earned nothing under a long-term incentive plan that looks at the company’s performance from 2007 to 2009. Cumulative EPS results for the period fell short of the three-year performance goal of 9 percent compound annual growth as a result of a significant decline in EPS in 2008.

Hemsley’s $86,916 in other compensation includes company matching contributions to a 401 (k) plan and an executive savings plan. It does not include perks such as private use of company aircraft, company car or financial planning services.

Hemsley’s equity awards for 2009 include a mix of stock appreciation rights (SARs), which have a similar accounting treatment to stock options, restricted stock units (RSUs) and performance shares. Those had a combined grant date fair value of $5.6 million that is not part of the $101,959,866 total.