Will UnitedHealth Group’s new CEO get the hefty pay package the board wants to give him?
That eight-figure question rises amid UHG’s unprecedented loss of value in the past several weeks. UHG is America’s largest healthcare company, No. 3 on the Fortune 500, but in April it reported surprisingly terrible first-quarter performance. The stock price plunged, then kept plunging for weeks. CEO Andrew Witty resigned abruptly for unspecified personal reasons, and the board chairman, Stephen Hemsley, took over as CEO.
Hemsley, who turns 73 in June, will be trying to rescue the colossus he helped build as CEO from 2006 to 2017. While investors might have expected he would hold the job only until the board of directors finds a new CEO, Hemsley and the board have other ideas. The highly unusual pay package they created for Hemsley shows how.
He will get a base salary of $1 million a year—big money but actually below the usual salary for CEOs of such large companies. More important, he would get a one-time $60 million grant of stock options, with a twist: He would get the payoff only if he remains CEO for three years. He would get no other stock-based awards in that period.
Shareholders will get to vote on that unconventional pay plan at UHG’s June 2 annual meeting. Institutional Shareholder Services, the largest firm that advises major shareholders on how to vote, advises they vote No.
UHG struck back, sending shareholders an explanation of what ISS allegedly missed and why they should vote for Hemsley’s pay package. The company’s central point: “the award only has value if and to the extent shareholder value is created.” As for ISS’s “windfall” argument, UHG stated that “in reality all [underlined and bold in the UHG document] shareholders would gain from increases in the company’s stock price relative to current levels.”
Who’s likely to win this vote? Bottom line, Hemsley and UHG will probably get the pay package they negotiated. ISS’s recommendations are taken seriously, but shareholders usually vote in favor of management. Even if UHG loses the shareholder vote on pay, which companies must hold by law, the result is non-binding and advisory only; the board of directors could simply ignore the shareholders’ wishes. In addition, UHG notes that ISS’s main competitor, Glass Lewis, is recommending shareholders vote in favor of Hemsley’s pay package. “Upon a cursory glance,” it tells its clients, “[Hemsley’s] annualized compensation is not excessive.”
Regardless of the outcome, the contested vote will be significant. It will raise the already high stakes for UHG, its directors, and Hemsley. Three years from now, success in the face of opposition would look all the more heroic—and failure would be all the more bitter.
