This excerpt taken from the UNH DEF 14A filed Apr 23, 2009.
Determination of Total Compensation
The Compensation Committees Use of an Independent Compensation Consultant
The Compensation Committees practice has been to retain independent compensation consultants to advise the Compensation Committee on executive and director compensation matters, assess total compensation program levels and program elements for executive officers and evaluate
competitive compensation trends. From mid-2006 through 2008, the Compensation Committee retained Semler Brossy Consulting Group, LLC (Semler Brossy) as its compensation consultant. Semler Brossy took directions from, and reported directly to, the Compensation Committee and did not perform any work for management except at the direction of the Compensation Committee. In February 2009, the Compensation Committee retained Towers Perrin to act as its compensation consultant. Prior to retaining Towers Perrin, the Compensation Committee considered prior relationships that Towers Perrin had with the Company and the health benefits consulting services that Towers Perrin provides to certain customers of the Company. The Compensation Committee concluded that Towers Perrin is an independent compensation consultant under the Board of Directors recently enacted policy regarding the use of an independent compensation consultant.
In 2009, the Board of Directors adopted a policy formalizing the Compensation Committees practice of using an independent compensation consultant. The policy provides that if the Compensation Committee does not use an independent consultant, the Company will disclose the consultants lack of independence in its proxy statement and disclose by appropriate category the aggregate payments made to the consultant. The consultant will not be considered independent if it or any member of its affiliated group is paid by the Company or its affiliates for any services or products not provided at the direction and under the supervision of the Compensation Committee in an amount that exceeds 2% of the affiliated groups consolidated gross revenues. In addition, the consultant will not be deemed independent if the individuals providing services to the Compensation Committee provide any services or products to the Company, its affiliates or management that are not provided at the direction and under the supervision of the Compensation Committee.
The Compensation Committee determines the overall compensation for the named executive officers based on its own evaluation, including internal pay equity considerations, tenure and performance of various executive officers, input from its independent consultant and benchmark data. The Compensation Committee believes that total compensation for named executive officers should be heavily weighted toward long-term performance-based compensation, but it does not target a specific mix of compensation between annual and long-term compensation or between equity and cash compensation. In 2008, long-term (cash and equity) compensation represented approximately 70% of the total mix of base salary, annual and long-term compensation granted to named executive officers other than the CEO because our CEO did not receive any equity awards in 2008.
In general, the Compensation Committees goal is to achieve total compensation for each named executive officer, as well as all executive officers as a group, that falls within a range of 50-75% of benchmark data if paid at target. In 2008, the Compensation Committee discontinued its previous practice of reviewing individual components of compensation against benchmark data because it felt this approach placed undue emphasis on the individual elements of compensation instead of its desired focus on the competitive positioning of total compensation.
In 2007, the Compensation Committee, with the advice of its independent compensation consultant, established the peer group below. In addition to reviewing data from peer group companies when considering annual cash incentive awards for 2008, long-term cash incentive awards for the 2006-2008 performance period and equity awards made in February 2009, the Compensation Committee also considered general industry data maintained by Towers Perrin, which includes approximately 800 companies, as well as a subset of the companies included in the general industry data, with revenues in excess of $50 billion.
The Compensation Committee reviewed the general industry data because it contains more companies and is more robust than the peer group and allows for adjustments to ensure comparability based on size or scope. For example, the Compensation Committee believes that the data derived from the peer group companies does not contain comparable roles for two of the Companys executive officers. In 2009, the Compensation Committee intends to conduct a best practices review of our peer group. The peer group companies are:
Companies highlighted in italics are the five largest publicly traded managed care companies with which we compete. The Company does not feel, however, that it is appropriate to benchmark its compensation practices only against other managed care companies because we are larger, more complex and more diverse than those companies, and we compete for talent and capital with other successful large companies without regard to industry. Companies marked with an asterisk were acquired during 2008.
Role of Management and CEO in Determining Executive Compensation
While the Compensation Committee has the responsibility to approve and monitor all compensation for our named executive officers, management plays an important role in determining executive compensation. At the Compensation Committees request, management recommends appropriate enterprise-wide financial and non-financial performance goals. Management works with the Compensation Committee to establish the agenda and prepare meeting information for each Compensation Committee meeting. Our CEO assists the Compensation Committee by providing his evaluation of the performance of the named executive officers who report directly to him and recommends compensation levels for such named executive officers. Our CEO does not, however, make recommendations regarding or participate in the determination of his own compensation.
Use of Tally Sheets and Wealth Accumulation Analysis
When making compensation decisions, the Compensation Committee reviews tally sheet information for each of our named executive officers. These tally sheets are prepared by management and quantify the elements of each named executive officers total compensation, including base salary, annual cash incentive awards and long-term cash incentive awards, stock ownership levels, value of benefits provided, 401(k) and deferred compensation balances and three-year reported compensation
on Form W-2. The tally sheets also include a summary of all equity awards previously granted to each named executive officer, the gain realized from past vesting or exercise of equity awards and the projected value of accumulated equity awards based upon various stock appreciation scenarios. This is done to more effectively analyze not only the amount of compensation each named executive officer has accumulated to date, but also to better understand the amount the named executive officer could accumulate in the future.
At the request of the Compensation Committee, in September 2008, Semler Brossy performed a review to determine how targeted compensation awards for named executive officers compared to realized compensation during the period from 2005 through 2008. This analysis showed that the then current intrinsic value of those awards were well below their original targeted value, demonstrating alignment with shareholders given the performance of the Companys stock during this period.