UnitedHealth Group (UNH)

Components of Compensation

Total compensation for executive officers is comprised of base salary, an annual cash incentive bonus, long-term cash incentive awards, equity awards, and other benefits.

Base salaries are established at levels competitive with those offered by other companies of similar size and operating complexity. Executive officers’ base salaries are reviewed annually and increases are based on an executive’s personal contributions to corporate performance and increases in responsibilities.

A potentially more significant component of cash compensation for our executive officers consists of annual incentive awards earned and paid under our Executive Incentive Plan, which was approved by our shareholders in May 2002. Under this plan, at the beginning of the year, the Committee assigns each eligible executive a target annual incentive award, expressed as a percentage of base salary. The annual incentive target is set at a higher percentage of salary for our more senior executive officers so that the percentage of potential total cash compensation subject to the Company’s results and to individual performance increases with seniority. The established targets are achievable only through strong performance from each of our executive officers and the Company. The maximum annual incentive awards payable under the Executive Incentive Plan, which are greater than the target awards, depend upon the Company’s performance against objective performance goals established by the Committee at the beginning of each year. The Committee may reduce, but not increase, the maximum annual incentive award payable to any plan participant based on a discretionary assessment of such financial and individual performance factors it deems appropriate. These factors may include performance against financial and non-financial objectives, such as revenue growth, operating income, quality, compliance, corporate integrity, strategic initiatives, and other factors. Formal weightings are not assigned to these performance factors. Minimum corporate performance thresholds must be attained before any annual incentive awards are paid under the Executive Incentive Plan. The annual incentive award amounts payable for 2005 performance of the named executive officers that the Committee approved in January 2006 are listed in the Summary Compensation Table.

Some of our executive officers, including all of the executive officers named in the Summary Compensation Table, are also eligible to receive long-term performance awards under the Executive Incentive Plan. These awards are intended to link our senior executives’ compensation with the long-term performance of the Company over a three-year period and provide incentives for our most senior executives to sustain superior levels of overall performance. The Committee identifies participants and establishes objective performance goals and target and maximum performance awards at the beginning of each performance period. Minimum corporate performance thresholds must be attained before any performance awards are paid under the Executive Incentive Plan. The Committee will determine whether or not the performance objectives have been achieved at the end of each performance period. The Committee may reduce, but not increase, the performance award otherwise payable to any plan participant based on a discretionary assessment of such financial and individual performance factors as it determines to be appropriate. In January 2006, the Committee reviewed and discussed the performance of the Company over the three-year performance period from 2003 through 2005 in relation to the performance thresholds previously adopted by the Committee for performance

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awards to be granted under the Executive Incentive Plan. The Committee noted that the performance thresholds had been met and that the Company had demonstrated strong performance over the performance period. The performance award payments approved by the Committee for the named executive officers are listed in the Summary Compensation Table.

The Committee believes that stock ownership programs, including stock option, stock appreciation rights, restricted stock grants, stock purchases and other similar programs are other valuable tools to provide executive officers with long-term interest in the Company’s performance. The Committee believes that these programs contribute to employee productivity and loyalty. We have continuously encouraged the alignment of employee and shareholder interests through equity-based incentive programs. In the past, we did not have a policy of making awards at regular period times. In 2005, all of our equity awards, other than certain awards made in connection with promotions or new hires, were made in connection with regularly scheduled Committee meetings. Our current policy is to grant equity awards, other than certain awards made in connection with promotions or new hires, only in connection with regularly scheduled quarterly Committee meetings.

Equity-based awards are granted to our executive officers under the UnitedHealth Group 2002 Stock Incentive Plan. Historically, the Committee has utilized executive stock options because a holder of an option benefits only if the Company’s stock price increases after the date of grant, although we occasionally grant shares of restricted stock to new executives if we determine that a restricted stock grant would provide a better initial incentive than a stock option award or similar award. Options generally become exercisable in 25% increments on each of the first four anniversaries of the date of grant, subject to certain conditions. In determining the number of option shares to be granted to each executive officer, the Committee considers various factors, including the executive’s responsibilities and potential for directly contributing to the Company’s performance, the executive’s base salary amount, and the total number of option shares previously granted to the executive. The option grants awarded to the named executive officers in 2005 are listed in the Summary Compensation Table.

In addition to cash and stock compensation, we make available to our executive officers a broad range of benefit programs, which also are available to employees generally, including an employee stock purchase program, life and disability insurance, a 401(k) savings plan, and other benefit programs. Our executive officers may also receive benefits not generally available to other employees, such as limited reimbursement for financial planning expenses. Dr. McGuire and Mr. Hemsley receive additional benefits under their employment agreements and under the authorization of the Committee, including Company-paid life and disability insurance premiums, a limited expense allowance, reimbursement for financial planning services, payment of security expenses, and personal use of Company-provided transportation. The Board of Directors has required Dr. McGuire and Mr. Hemsley to use Company-provided transportation whenever practical for security purposes. In January 2006, the Committee reviewed the benefits granted to Dr. McGuire and Mr. Hemsley, and in the context of their total compensation did not believe that changes should be made to their benefits. Amounts paid to the named executive officers pursuant to the Company’s benefit programs in 2005 are listed in the Summary Compensation Table except to the extent disclosure is not required by the proxy rules.

Components of Compensation

Total compensation for executive officers is comprised of base salary, an annual cash incentive bonus, long-term cash incentive awards, equity awards, and other benefits.

Base salaries are established at levels competitive with those offered by other companies of similar size and operating complexity. Except for Dr. McGuire, whose salary is set by his employment agreement, executive officers’ base salaries are reviewed annually and increases are based on an executive’s personal contributions to corporate performance and increases in responsibilities.

A potentially more significant component of cash compensation for our executive officers consists of annual incentive awards earned and paid under our Executive Incentive Plan. The Executive Incentive Plan was approved by our shareholders in May 2002. Minimum corporate performance thresholds must be attained before any annual incentive awards are paid under the Executive Incentive Plan. The maximum annual incentive awards payable under the Executive Incentive Plan depend on the Company’s performance against objective performance goals established by the Committee at the beginning of each year. Under this plan, at the beginning of the year, the Committee assigns each eligible executive a target annual incentive award, expressed as a percentage of base salary. The annual incentive target is set at a higher percentage of salary for our more senior executive officers so that the percentage of potential total cash compensation subject to the Company’s results and to individual performance increases with seniority. The established targets are achievable only through strong performance from each of our executive officers and the Company. The Committee may reduce, but not increase, the annual incentive award payable to any plan participant based on a discretionary assessment of such financial and individual performance factors it deems appropriate. These factors may include performance against financial and non-financial objectives, such as revenue growth, operating income, quality, compliance, corporate integrity, strategic initiatives, and other factors. Formal weightings are not assigned to these performance factors. Although a number of annual incentive targets were met, and the Company had a very strong performance in 2004, the Committee determined that not all goals were exceeded by all business units. Accordingly, bonus compensation for many executives did not increase, and in some instances decreased, over levels received in 2003. The annual incentive award amounts payable for 2004 performance of the named executive officers that the Committee approved in February 2005 are listed in the Summary Compensation Table.

Some of our executive officers, including all of the executive officers named in the Summary Compensation Table, are also eligible to receive long-term performance awards under the Executive Incentive Plan. These awards are intended to link our senior executives’ compensation with the long-term performance of the Company over a three-year period and provide incentives for our most senior executives to sustain superior levels of overall performance. The Committee identifies participants and establishes objective performance goals and target and maximum performance awards at the

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beginning of each performance period. Minimum corporate performance thresholds must be attained before any performance awards are paid under the Executive Incentive Plan. The Committee will determine whether or not the performance objectives have been achieved at the end of each performance period. The Committee may reduce, but not increase, the performance award otherwise payable to any plan participant based on a discretionary assessment of such financial and individual performance factors as it determines to be appropriate. In February 2005, the Committee reviewed and discussed the performance of the Company over the three-year performance period from 2002 through 2004 in relation to the performance thresholds previously adopted by the Committee for performance awards to be granted under the Executive Incentive Plan. The Committee noted that the performance thresholds had been met and that the Company had demonstrated strong performance over the performance period. The performance award payments approved by the Committee for the named executive officers are listed in the Summary Compensation Table.

The Committee believes that stock ownership programs, including stock option, restricted stock grant, stock purchase and other similar programs are other valuable tools to provide executive officers with long-term interest in the Company’s performance. The Committee believes that these programs contribute to employee productivity and loyalty. We have continuously encouraged the alignment of employee and shareholder interests through equity-based incentive programs.

Equity-based awards are granted to our executive officers under the UnitedHealth Group 2002 Stock Incentive Plan. Historically, the Committee has utilized executive stock options because a holder of an option benefits only if the Company’s stock price increases after the date of grant. Options generally become exercisable in 25% increments on each of the first four anniversaries of the date of grant, subject to certain conditions. In determining the number of option shares to be granted to each executive officer, the Committee considers various factors, including the executive’s responsibilities and potential for directly contributing to the Company’s performance, the executive’s base salary amount, and the total number of option shares previously granted to the executive, as well as, with respect to Dr. McGuire and Mr. Hemsley, the terms of the executive’s employment agreement. The option grants awarded to the named executive officers in 2004 are listed in the Summary Compensation Table.

In addition to cash and stock compensation, we make available to our executive officers a broad range of benefit programs, which also are available to employees generally, including an employee stock purchase program, life and disability insurance, a 401(k) savings plan, and other benefit programs. Our executive officers may also receive benefits not generally available to other employees, such as limited reimbursement for financial planning expenses. Dr. McGuire and Mr. Hemsley receive additional benefits under their employment agreements and under the authorization of the Committee, including Company-paid life and disability insurance premiums, a limited expense allowance, reimbursement for financial planning services, payment of security expenses, and personal use of Company-provided transportation. The Board of Directors has required Dr. McGuire and Mr. Hemsley to use Company-provided transportation whenever practical for security purposes. In March 2005, the Committee reviewed the benefits granted to Dr. McGuire and Mr. Hemsley, and in the context of their total compensation did not believe that changes should be made to their benefits. Amounts paid to the named executive officers pursuant to the Company’s benefit programs in 2004 are listed in the Summary Compensation Table except to the extent disclosure is not required by the proxy rules.

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