UnitedHealth grew rapidly, regularly beating its lofty earnings targets. (The company, whose health plans cover 70 million Americans, ranks 21st this year on the Fortune 500.) To Wall Street, McGuire was a star; he became a forceful pitchman for his company's stock. Citing UnitedHealth's move into areas like medical technology and finance, McGuire urged analysts to value its shares more highly, as a health-services conglomerate - "the GE of health care," he called it. Although much of UnitedHealth's business remained insurance, McGuire bristled at being lumped with that cyclical industry, with its humble earnings multiple.
Wall Street awarded UnitedHealth stock a big premium, but McGuire never thought it was enough. He tracked the slightest movements of UnitedHealth shares, popping into the office of his IR chief to ask about even a quarter-point drop in the stock. "It wasn't day-to-day, but half-hour to half-hour," says McDonagh. "He took it personally." Adds former analyst Goodman: "He felt for most of the time I covered the company that UnitedHealth was not being given sufficient credit for what it was accomplishing, even when the stock was doing very well."
Indeed, in a 2003 interview with a Fortune writer, McGuire, asked about his compensation, mused about that very issue. "If you go to Silicon Valley, we're paupers," McGuire declared. "...Just imagine if we had a multiple equating to our growth rate. Now we'd be talking about serious money.... You can add another 50% to our stock price. It would be hellacious!"
Indeed. By the end of 2005, McGuire held so many options that a $1 move in UnitedHealth Group's price generated a $30 million impact on his net worth.
It seems beyond question that the amount of money McGuire made multiplied outrage at his part in the options scandal. As McGuire and his defenders see it, he has been unfairly roasted for his own success. Although he's recently gotten more than $10 million a year in cash and perks, almost all his fortune came from the soaring value of UnitedHealth shares. Wasn't this what "pay for performance" was all about? Before he left, the company calculated that if UnitedHealth stock had merely performed as well as the S&P 500 during his tenure, McGuire's unexercised options would have been worth just $23 million at the end of 2005, instead of $1.6 billion.
By the beginning of 1999, McGuire was already rich. He'd netted almost $49 million from stock sales and was sitting on options worth another $22 million. But he wasn't satisfied. As he began negotiations for a new contract with his board at the height of the tech bubble, McGuire fumed about all the dot-com twentysomethings who were billionaires from their stakes in companies that hadn't made a dime. "He was being recognized as one of the most successful CEOs in the country, and asking to be paid accordingly," says Doug Leatherdale, a longtime UnitedHealth director.
These negotiations put McGuire on the road toward billionaire status. In addition to big guaranteed annual options awards, he wanted a "mega-grant": a signing bonus of two million options. He settled for a million. (Hemsley got a new contract too, with a bonus of 500,000 options.)
Even as McGuire unloaded big blocks every year or two (he's made $469 million from stock sales to date), the board gave him millions of new options. Fund manager Tom Marsico, whose Marsico Capital Management is one of UnitedHealth's biggest shareholders, thought McGuire had plenty. In a meeting with McGuire, Marsico recalls, "I told Bill he should be looked at as a founder of the company, that he had been compensated with 2% to 2 1/ 2% of the stock, and frankly that was enough." But McGuire recounted how hard he'd worked, how much money he'd made for investors. The stock grants kept coming.
'We sleep with good conscience'
On March 18, 2006, the Wall Street Journal published its "Perfect Payday" story, spotlighting UnitedHealth as one of several companies where CEOs received options on "unusually propitious dates." McGuire, the story reported, in three separate years received big grants on the very day UnitedHealth's stock hit its lowest closing price. Examining 12 grants McGuire had received, the Journal concluded: "In all, the odds of such a favorable pattern occurring by chance would be one in 200 million or greater."
Strike prices for exercising options are supposed to be set at the market price on the day they're officially granted. McGuire essentially stood accused of backdating his options - setting a low exercise price with hindsight, to give himself instant paper profits.
By early April, UnitedHealth's board had formed a special committee and retained Washington attorney William McLucas, a respected former SEC enforcement chief with WilmerHale, to investigate. McLucas and his team found that UnitedHealth's procedures for awarding options were a disaster. The HR department routinely backdated grants for new hires to the lowest price in a quarter. McGuire, described as "central" to the process, personally selected the dates for most employee grants, especially for ones to top executives. McLucas concluded that most of the 29 grants the investigators reviewed were "likely backdated."
McGuire denied doing anything improper. While acknowledging poor procedures, he told McLucas that he chose dates when he thought the stock was unusually low and got approval on each of those days from a member of the board's compensation committee, usually chairman Bill Spears. He didn't just pick a low date later.
"Certain facts run contrary to this assertion," McLucas's report dryly concludes. Documents and e-mails written after the grant dates spoke in "tentative and prospective terms" about the awards; McGuire had no proof he'd gotten approval on those dates from directors; and Spears, according to McLucas, didn't believe he had the power to authorize the grants, which required compensation-committee approval. Finally, there was the "propitious" pattern: Eight of the grants the investigators studied were pegged to the very day UnitedHealth shares hit their lowest price of the quarter; eight more corresponded to the second- or third-lowest price. These grants represented about 80% of all the option shares UnitedHealth issued between January 1994 and August 2002.
