Who Needs Powerball?

Too bad that California's PacifiCare didn't get a better buyer.

PacifiCare Health Systems Inc. was purchased last December by UnitedHealth Group Inc. in what was touted as the second-biggest merger ever in the hospital managed-care industry. But it turns out that UnitedHealth's chief executive may go down as the poster boy for biggest-ever corporate payout of a questionable nature.

The chief executive, William McGuire, at the end of the year had amassed $1.6 billion--yes, that's billion, with a B--in unrealized gains from stock options. Curiously, McGuire's options were granted on dates that the stock was at the very bottom or near bottom of its price for that year. Of course, that means McGuire maximizes his profit because he can buy the option stock at unusually low prices before selling at current and much higher prices.

Is it incredible luck that his options happened to be granted on the date that the company's stock was at or near the low point for the year for at least four separate years? The Wall Street Journal, which has done good reporting on this matter, figured that the odds of such a favorable pattern occurring by chance would be one in 200 million or greater. In other words, McGuire had much better odds of hitting the Powerball jackpot. On the other hand, with an options deal like he had, he needn't bother with a paltry Powerball.

The curious timing raises the question of whether the options were backdated in some way. After the options issue came to light, UnitedHealth reported that it got a call from the Securities and Exchange Commission, and the company began an internal investigation.

McGuire last Monday morning delivered a speech to a conference of business writers and editors at a meeting I attended in Minneapolis. To his credit, he didn't duck out of the scheduled appearance, but he did duck a question about whether he would resign if his company were found to have backdated options. He begged off any other comments on the issue, saying he didn't want to prejudice the in-house investigation.

Later that day, UnitedHealth's board adopted a range of compensation and governance changes. Among the changes, McGuire would no longer get stock options. Did someone say, "Too line. Too late."?

You can defend lavish perks and pay, to a degree. But it's hard to imagine a sound defense for this stock-option decision. Did directors talk among themselves and decide that it was embarrassing that their boy didn't even have a billion dollars in gains from stock options, so they decided to rig the system to help him out a little?

The real problem with eye-popping pay, especially if it is done with creative rule fudging, is that it is corrosive. It sends a signal to employees that they are fools to work hard and to work honestly, especially if it appears to them that their bosses are looting the company. It sends a signal to vendors and physicians that, hey, they may as well take whatever they can from the company. The guys at the top are.

Directors, who are supposed to guard their companies, often defend the use of options by saying they align the interest of top executives with shareholders. But it is not in shareholders' interests when the guards of a company put down their weapons and help their buddies cart out the cash.

Charles Crumpley is editor of the Business Journal. He can be reached at [e-mail]