Author: Site Staff

The backdating of stock options at UnitedHealth Group has set off a widespread regulatory investigation into the practice and elicited outcry from shareholders and doctors, but barely a whimper has been heard from those employers for whom rising health care costs are among their biggest concerns.

In late May, for example, the New York Business Group on Health, an organization that counts IBM, Pitney Bowes, the Bank of New York and Verizon among its 175 members, met with a senior team from UnitedHealth Group as part of the group’s ongoing effort to measure the performance of health plans based on standardized metrics. The compensation issue, however, did not come up, says Laurel Pickering, the New York group’s executive director.

“Employers feel very far removed” from the creation of compensation standards at the health insurance giant, Pickering says. Plus, Pickering speculates, most executives at large companies are used to hefty compensation packages. “Among the pressing issues going on in health care, it’s not one of the main things employers are talking about or trying to fix.”

Instead, employers in her group are focused on the problems they believe they can fix, such as measuring and improving quality and reducing cost.

For its part, UnitedHealth Group has communicated via letter, e-mail and phone to employers and shareholders alike, reiterating some of the efforts the company has undertaken to reduce its executives’ compensation, UnitedHealth spokesman Tyler Mason says. The company has eliminated equity-based compensation for most senior management and eliminated post-retirement health insurance for CEO William McGuire and COO Stephen Helmsley. The board of directors also has reduced its own pay, Mason says.

Executive compensation and benefits, of course, are costs that are ultimately passed on to employers, says Carolyn Brancato, director of corporate governance at the Conference Board.

“With any corporation, executive pay is the cost of doing business,” says Brancato, who does not comment on specific companies but was speaking more generally on corporate governance. “Backdating stock options doesn’t seem like a very direct way of linking pay to performance.”

This was a point not lost on physician groups around the country. They are among the most vocal critics of insurance companies and view them as bent on underpaying doctors for their services.

Physician group administrators on an e-mail listserv facilitated by the Medical Group Management Association expressed dismay almost immediately after news broke in April that UnitedHealth Group’s CEO had received part of his $1.6 billion in unrealized gains on options he exercised at or near the stock’s quarterly low points.

Among the group’s 20,000 members, a handful of administrators were particularly incensed.

Christopher Francis, an administrator for Waco Surgical Group, a six-surgeon practice in Waco, Texas, read the news on his computer and thought about how difficult it was to get reimbursed by the health insurer.

“My immediate reaction was ‘Why is it so difficult to contract with UnitedHealth when they obviously have the resources to pay their executives?’ ” Francis says.

Francis’ criticisms are aimed not just at UnitedHealth, but at all insurers.

“A provider may fight for a small increase on a contract,” he says. “To have that be so difficult to achieve and then turn around to see what they are doing on the compensation for their own folks, it’s hard to reconcile.”

Though Francis says only a small portion of the physician practice’s revenue comes from UnitedHealth Group, most doctors are afraid to speak out against UnitedHealth. As the country’s second-largest health insurer, behind Wellpoint, it dominates most markets, says Elizabeth Johnson, a spokeswoman for the Medical Group Management Association.

“In any market there may only be a couple of insurers, so our members really don’t have a choice and they need to be careful about what they say,” she says.

The Securities and Exchange Commission has broadened its investigation into the backdating of stock options to include at least 26 companies. Health care companies included in the probe are Caremark Rx, a pharmacy benefit manager; Medarex, a Princeton, New Jersey, bio-pharmaceutical company; and Renal Care Group, a Nashville, Tennessee, company that offers dialysis services.

A low-key but potentially powerful constitutional issue is delaying movement in the House-Senate talks about immigration legislation.

The Senate bill, approved just before Congress departed for the Memorial Day recess, contains a provision that would require illegal immigrants to pay back taxes in order to start on a path toward naturalization.

Revenue measures are supposed to originate in the House, according to the Constitution. A House member in the conference committee could declare that the Senate bill is unconstitutional, squelching negotiations to reconcile House and Senate immigration legislation.

Traditionally, the chairman of the House Ways and Means Committee, currently Rep. William Thomas, R-California, would point out the problem and “blue slip,” or kill, the Senate bill. Thomas has not commented publicly on whether he intends to do so.

In order to remedy the constitutional technicality, Senate Majority Leader Bill Frist, R-Tennessee, has proposed that the Senate take a tax bill previously approved by the House and add the Senate language on immigrant back taxes.

That measure would be approved by unanimous consent in the Senate and go to the House, where the House immigration bill would be attached. Then the House would vote to proceed to conference.

A Frist aide asserts that Senate Minority Leader Harry Reid, D-Nevada, is insisting that the Senate and House go directly to the conference committee with the bills as each chamber has approved them.

But a spokeswoman for Frist says that taking that route would mean “the bill is dead” because a House member would declare it unconstitutional.

“We’re at a standstill,” says Carolyn Weyforth, Frist’s press secretary. For Democrats, “this is a campaign issue. They don’t want to address (immigration) until after the election.”

On June 6, Reid indicated that he fears that attaching the Senate immigration bill to a House tax measure would open the flood gates for tax policy changes in conference. He said that he would drop his objections if Republicans assure him that they won’t use the immigration bill as a vehicle for non-immigration tax reform, according to published reports. He also said that it is up to Bush to prevent House Republicans from “blue-slipping” the Senate immigration bill.

In December, the House approved an immigration bill that focuses on border security and workplace enforcement. The Senate passed a comprehensive bill that contains enforcement provisions as well as a guest worker program and a path to naturalization for most of the country’s approximately 11 million illegal immigrants. The bills must be combined into a final measure that would be voted on again in each house.

“If we can get to conference, differences can be worked out,” Weyforth says.

—Mark Schoeff Jr.

Regulators may not yet be finished with the string of rules affecting how companies determine and disclose executive compensation, thanks to the recent scandal involving companies that have allegedly backdated their stock option grants to executives.

This year, the Securities and Exchange Commission released a proposal requiring companies to disclose more clearly every aspect of executive compensation. The backdating of options wasn’t addressed then, but it surely will be now, compensation experts say.

Employers give stock options to top executives as part of their incentive pay. Usually, the exercise price of these options, or the price at which the executives can purchase the options, is determined by the fair market value of the company stock on the date the options are granted.

According to the allegations, grants at several firms, including UnitedHealth Group, occurred right before drastic jumps in the stock price. That pattern led the SEC and the U.S. Justice Department, as well as the U.S. attorney for the Southern District of New York, to investigate whether these companies set the date of the exercise price back to a date when the options were priced at their lowest. By backdating the options to a day before a stock run-up, companies could give their executives higher returns from the options.

If firms didn’t disclose that the options were backdated, and thus granted the options at a discount, they will have to pay huge accounting and tax charges. The companies also may have violated securities laws if they did not disclose the practice to shareholders.

The incidents highlight a need for more governance in this area, says Patrick McGurn, executive vice president at Institutional Shareholder Services, a Rockville, Maryland, company that advises institutional investors on how to vote on proxies.

Some analysts predict that the SEC might mandate that the exercise price of stock option grants be equal to the fair market value of the company’s stock on the day they are granted. Whether the agency takes this action or not, companies should be doing this as a best practice, says compensation consultant Jack Dolmat-Connell. Very few employers backdate options, but several choose dates in the future, he says.

“This is usually because if a company is dealing with a large grant, they have a lot of administrative (work) and communications to do before they actually make the grant,” he says. Dolmat-Connell says that the options-award contracts for executives shouldn’t be sent to the board “until you are ready to grant the options.”

But Russell Miller, a senior client partner in the New York office of Korn/ Ferry, doesn’t think the SEC will go as far as mandating grant dates. “The SEC has generally stated that it doesn’t want to get involved in managing companies,” he says.

At a minimum, the investigations into backdating will affect how the SEC’s final rule on executive compensation disclosure turns out, analysts say.

One of the controversial provisions in the proposal, which is expected to become a rule by year’s end, would require companies to add a new “Compensation Discussion and Analysis” section to their filings with the SEC.

These documents would explain the metrics companies use to determine compensation. As part of that, firms will have to explain how they determine the exercise price of their stock option grants to executives.

Many executives have written letters to the SEC complaining about putting that kind of analysis into a filed document. They feel that including such details in their SEC filings makes them liable for every minute piece of informa- tion, some of which they might not normally oversee.

“That argument is going to look pretty weak now,” McGurn says. “The SEC will want to put everyone on the hook.”

Democrats are objecting to language in the House pension reform bill that they say would allow insurance companies to take a cut of lawsuit awards before the injured victim receives money.

Although the pension reform conference committee commenced its work in early March, Democrats says they’ve just learned of the insurance facet. The disagreement could complicate the already protracted wrangling over the pension reform bill.

“This provision is a special interest fix that was slipped into the House bill at the last minute without public hearing or debate,” says Sen. Edward Kennedy, D-Massachusetts and ranking member of the Senate Health, Education, Labor and Pensions Committee. “This is an indication of greed that is not entirely unexpected in this conference but should not be tolerated.”

Rep. Rob Andrews, D-New Jersey, says the measure would override laws in many states that require the weakest claimant to be paid first. He says changing such rules would deny victims the money they need to cover medical bills.

Andrews, a conferee, asserts that the measure is not germane to a pension bill. “This is a question of insurance law and health care law,” he says. “It should never have been in there in the first place.”

Proponents of the House language argue that the intent is to clarify existing law that allows a plan sponsor to be reimbursed for payment of medical expenses after a victim recovers damages from a negligent third party.

Recently, the Supreme Court ruled that a company has a right to such recovery as long as the funds are in the possession of the victim.

If a sponsor can’t get its money back, the participant would receive double payment, potentially leading to an increase in health insurance premiums, according to advocates of reimbursement. If the money is returned to the insurer, it can be restored to the plan and lower premiums.

On June 8, both House Majority Leader John Boehner and Senate Majority Leader Bill Frist called for the pension conference to conclude by the July 4 congressional recess.

—Mark Schoeff Jr.

Event: World Business Forum Chicago 2006, June 6-7, 2006 at Navy Pier, Chicago, Illinois

About the WBF: The World Business Forum combines high-level speakers with opportunities for networking with top executives, thinkers, and business decision makers from all sectors of industry. Over 77 percent of attendees are senior executives defined as CEOs, presidents, business owners and general managers. Workforce Management is one of the media sponsors of the forum.

Conference Info: For more information about the World Business Forum go to www.hsm-us.com.

Day 2: Wednesday June 7, 2006

Second-day Speaker Lineup: Author and journalist Malcolm Gladwell (speaking on marketing & innovation), Travelocity CEO Michelle Peluso (women in leadership), management guru, author, and business consultant Kenichi Ohmae (Asia), Neusoft Group founder Dr. Jiren Liu (Asia), former New York Mayor Rudy Giuliani (crisis management), and former U.S. President William Jefferson Clinton (that’s how he bills himself at these events) speaking on peace and global prosperity.

Best Speaker, Day 2: Malcolm Gladwell. A regular on the business speaker circuit, I’ve heard Gladwell speak three times in the past year and he had a different speech each time. This is highly unusual for a business speaker (for instance, Marcus Buckingham gave essentially the same talk in Chicago that I heard him give in April at the Human Resource Planning Society conference). This time, Gladwell’s talk focused on lessons from his first book (The Tipping Point) rather than his most recent book (Blink). Not only did he sneak up on the audience (many were unsure of what to expect from Gladwell and found themselves pleasantly surprised), but he was also the only speaker at the conference that stayed long after his speech and interacted with attendees.

Most Disappointing Speaker, Day 2: Travelocity’s Michelle Peluso. I felt bad for Peluso because she was the only woman on the program and this seemed to be the first time she had ever given a speech to a crowd of this size (around 1,500 business executives). She spoke from the podium (unlike other speakers who walked around the stage as they spoke); had no PowerPoint, slides, or other props, and generally gave a flat and dull speech. I couldn’t help but think: if WBF wants to get more women on the program, why not someone like Carly Fiorina, Meg Whitman, or Madeline Albright? Or better yet, why not all three? Getting better women speakers is something the organizers of the WBF clearly need to work on.

Most Thought Provoking Speaker: Whether you agree with him politically or not, Bill Clinton is a very-thoughtful man with some very interesting things to say. His talk centered on the interdependence between people, nations, and economies in our 21st Century World. And, he made a case for all Americans working and focusing on the shared opportunities, responsibilities, and values that exist among us and among all people of the world. It’s hard to imagine anyone leaving after listening to Bill Clinton and not having a slightly different view of what we need to do to make the world of the future a better place for our children and grandchildren.

–John Hollon

Day 1: Tuesday June 6, 2006

Big Name Speakers: If you want to hear big name speakers talking on a wide array of business and global topics, then a World Business Forum event is for you. Generally held in places like Chicago or New York, the WBF lines up the biggest names in business and politics and gets them to speak on the key issues of the day. It is a tried-and-true formula, but dependent completely on the quality of the speakers.

First day Speaker Lineup: Author and business consultant Marcus Buckingham (speaking on personal development), PricewaterhouseCoopers Chairman Dennis Nally (corporate values and behavior), former Secretary of State Colin Powell (global security), Adobe Systems CEO Bruce Chizen (growth & innovation) and Harvard Business School professor Michael Porter (strategy).

Best Speaker, Day 1: Business professor Michael Porter. Famous for developing the five-forces model of competition, Porter is probably the leading expert in the U.S., if not the world, on business strategy. He talks to a business audience the way he teaches in his classroom at Harvard and his presentation was not only lively and informative, but also tremendously entertaining and thought provoking. Porter throws out a challenge–Does your company have a business strategy? –and then spends 90 minutes demonstrating how many companies don’t.

Most Disappointing Speaker, Day 1: Colin Powell. It’s not that Gen. Powell didn’t have some interesting things to say, but that he spent a lot of time talking about his retirement and other such mundane matters. I heard a number of attendees talking after his talk, and most everyone expected a lot more. As one executive put it, “He’s had such an interesting life. I wish he would have spent more time sharing some of the key experiences from his career and less talking about what he’s done since he left the State Department.”

One Man’s Observation: This is my third WBF conference, and if there is one thing I’ve gleaned from them it is that the best speaker is generally not one of the biggest names on the program. More times than not, the most enlightening and engaging speaker is someone you feel you need to sit through to get to the big-name speaker that was the draw that got you to the event in the first place. You may show up to hear Bill Clinton or Colin Powell, but it is going to be Michael Porter or Malcom Gladwell that really engages you and offers some insight you can take back to the office.

–John Hollon

Call it revenge in the electronic age—you lose my data, I take away your iPod.

In a strange twist to the data breach at the U.S. Department of Veterans Affairs, the theft of personal data for millions of veterans could mean the confiscation of many government workers’ personal music players.

A lawsuit filed by veterans groups Tuesday (June 6) asks a federal court to prevent the VA and its employees from removing “any device capable of storing, containing, or transferring any record or system of records, including … ‘iPods’ and similar devices, from property under VA’s supervision and control until and unless VA demonstrates that adequate information security has been established to the Court’s satisfaction.”

The lawsuit, which accuses the VA of violating laws including the Privacy Act of 1974, also asks for damages of $1,000 for each individual “adversely affected” by the VA’s alleged Privacy Act violations.

The VA did not immediately return a call seeking comment.

The legal tussle, with its iPod overtones, stems from the VA’s admission last month that personal data for as many as 26.5 million veterans, as the agency first said, had been stolen from an employee’s home. The agency said the data included names, Social Security numbers and dates of birth for veterans and some spouses. On June 6, however, the VA revised its previous descriptions of the records involved, and said that the data potentially included information on as many as 2.2 million current military service personnel, including up to 80 percent of the active-duty force.

Identity theft and data privacy have become hot topics recently, with most of the attention focused on consumers. But observers have warned that employee data lapses could explode in employers’ faces, resulting in possible legal violations and damage to company reputations.

Companies that create and back privacy rules can boost morale, says Judith Collins, author of Preventing Identity Theft in Your Business: How to Protect Your Business, Customers, and Employees. “Employees feel a good deal of relief,” she says.

In the case of the VA, it seems possible that some employees will be relieved of their iPods.

—Ed Frauenheim

Vincent K. Snowbarger’s appointment as acting executive director of the Pension Benefit Guaranty Corp. by Labor Secretary Elaine Chao might not hold for long. Pending legislation co-authored by Senate Finance Committee Chairman Charles Grassley, R-Iowa, and Sen. Max Baucus, D-Montana, would make the PBGC executive director a presidential appointee requiring Senate approval.

“Even if Mr. Snowbarger’s appointment were made permanent today, if this legislation gets enacted he would go back to interim status and the president would choose the new executive director, and that choice would be voted upon by the Senate,” says a staffer at Baucus’ office who did not wish to be identified.

Snowbarger was appointed Thursday, June 1, to replace Brad Belt, who resigned March 23 and officially left the agency Wednesday. His appointment was first reported Thursday afternoon on Pensions & Investments’ Web site, pionline.com. Snowbarger had been the PBGC’s deputy executive director since November 2004 and served as interim executive director of the agency in February 2004 after Steven Kandarian resigned. Snowbarger was a Republican U.S. representative from Kansas from 1997 to 1999, and was a state representative before that.

David James, a Labor Department spokesman, did not return calls for comment by deadline.

This article first appeared on pionline.com, the Web site of Pensions & Investments, a sister publication of Workforce Management.

Capitol Hill Democrats are trying to block a decision by the Energy Department to reimburse only defined-contribution pension and medical benefits for newly hired contract workers, but it’s unclear whether the agency’s move will have an impact on House-Senate negotiations over pension reform legislation.

Sen. Edward Kennedy, D-Massachusetts, Senate Minority Leader Harry Reid of Nevada and four other senators introduced a bill May 11 to overturn the policy. In late April, the Energy Department said it was trying to “improve the predictability of contractor benefit costs and mitigate the growth of the department’s liabilities for these costs” in a way that is “consistent with market trends.”

In a letter, 10 House Democrats called on President Bush to withdraw the new rule. They also filed their own bill.

“These changes penalize responsible employers who provide their employees with guaranteed retirement benefits and real, affordable health insurance,” wrote Rep. George Miller, D-California, ranking member of the House Education and the Workforce Committee. “The federal government should not be leading a race to the bottom on health and retirement benefits for workers.”

The Energy Department’s policy change comes at a delicate time in House-Senate talks on a final pension bill.

House Majority Leader John Boehner, R-Ohio, hasn’t reviewed the Energy Department policy, but he says it may affect Capitol Hill negotiations. “It is going to be another issue on the table we are going to have to discuss,” he says.

The department’s pension declaration stunned policy experts. “This is a shocking attack on the defined-benefit pension system by the administration,” says Ethan Kra, chief actuary for retirement at Mercer Human Resource Consulting. “This came out of left field with no opportunity for comment. This was just an edict.”

The decision, according to one expert, reflects a bias by President Bush against traditional benefit programs and in favor of personal accounts, such as those he has proposed for Social Security.

“The Bush administration has been quite clear and candid that they don’t care whether employers have defined-benefit plans and that in their view individual plans are better for workers,” says Dallas Salisbury, president and CEO of the Employee Benefit Research Institute. “The question is, is the Defense Department next?”

Even if the agency is acting alone, it is overstepping its bounds, says an expert, who argues that contractors should be free to choose a benefits program as long as it holds down costs.

“I was stunned because it seems to me that there is no justification whatsoever for DOE to dictate to a provider what type of benefits they should be offering,” says Martha Priddy Patterson, a director of Deloitte Consulting in Washington. “Where does this end? Will they not reimburse your medical plan if it covers contraceptives or cosmetic surgery?”

The decision also could have influence outside the Beltway.

“This just further underlines for the private sector, at least while this administration is in power, that they can’t expect to be criticized for getting rid of their defined-benefit plans,” Salisbury says.

—Mark Schoeff Jr.