UnitedHealth Group (UNH)

Long-Term Cash Incentive Awards

The long-term cash incentive awards program creates a strong financial incentive for achieving or exceeding three-year financial goals for the enterprise. These awards are considered qualified performance-based compensation under Section 162(m) of the Internal Revenue Code. Long-term cash incentive awards for the 2006-2008 performance period are paid under the Company’s 2002 Executive Incentive Plan, the material terms of which were approved by the Company’s shareholders in 2002. The maximum potential long-term cash incentive award for any participant is equal to 1% of the Company’s earnings for the performance period. The actual long-term cash incentive award for each named executive officer for the 2006-2008 performance period was less than such percentage of the Company’s earnings for the performance period and was determined based on the long-term incentive plan metrics described below. This approach was designed to establish each named executive officer’s long-term cash incentive award in a manner that complied with the performance-based compensation requirements of Section 162(m), while preserving the Compensation Committee’s flexibility to determine the actual long-term cash incentive award for each named executive officer up to the maximum amount under the Company’s 2002 Executive Incentive Plan.

Historically, the Compensation Committee used EPS as the sole long-term incentive plan metric for awards under the long-term incentive program, as sustained earnings growth over a longer period should contribute to our market valuation and have a favorable impact on the future appreciation of our stock. Beginning in 2007, the Compensation Committee added average ROE as a second long-term cash incentive plan metric for awards for the three-year performance period beginning that year. The Compensation Committee believes the combination of these two metrics correlates closely to the creation of shareholder value over the long-term and measures management’s effectiveness at reinvesting capital. Each performance metric is based on achievement of the Company’s long-term strategic business plan and is not targeted to performance by the Company’s peer group companies.

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The Company did not readjust performance measures for open performance periods to include an ROE component (including the 2006-2008 performance period) due to implications related to treatment as qualified performance-based compensation under Section 162(m).

The long-term cash incentive award for the 2006-2008 performance period was granted under the Company’s 2002 Executive Incentive Plan. The following table shows the performance measure and targets for the 2006-2008 long-term cash incentive award, approved by the Compensation Committee in January 2006, as well as the actual performance achieved:

The first-year component of the cumulative three-year EPS required for maximum performance was based on the Company’s business plan and external outlook for 2006. The annual targets used to build up to the cumulative three-year EPS required for maximum performance corresponded to a compound annual growth rate of 15.7% over the three-year period. This growth rate was consistent with the Company’s then stated goal of achieving 15% long-term earnings growth. In approving the target, the Company was of the view that achieving performance at those levels would require significant revenue growth, effective medical and operating cost management and efficient use of capital. A threshold cumulative EPS requirement was approved at 85% of the three-year $10.08 target (which equaled $8.57).

Consistent with the terms of the 2002 Executive Incentive Plan, the Compensation Committee approved the following adjustments to the Company’s reported EPS for the impact of changes in accounting principles, extraordinary items and unusual or non-recurring losses:

Actual results for the 2006-2008 performance period were above the EPS threshold, but below the maximum cumulative EPS requirement. The Company had strong EPS growth in 2006 and 2007, with a compound annual growth rate of 23%, as adjusted. However, EPS declined in 2008 due to a number of factors, including the factors discussed under “Annual Cash Incentive Awards” above and the challenging economic environment, resulting in a three-year average compound annual growth rate of 8.5%, as adjusted.

Long-Term Cash Incentive Awards

The Compensation Committee makes long-term cash incentive awards to a select group of senior executives, including the named executive officers. These awards are also made under the Executive Incentive Plan. Only those senior executives designated by the Compensation Committee whose positions and responsibilities enable them to have the greatest impact on the long-term performance of our Company are eligible for these long-term cash incentive awards. We include a long-term cash incentive component in the executive compensation program because it directly links the compensation of the senior leadership of our Company with long-term Company financial performance, motivates the most senior executives to sustain superior levels of performance, and constitutes additional at-risk compensation payable only if the specified goals are achieved.

The Executive Incentive Plan specifies that the performance goal or goals to be satisfied during any multi-year performance period shall be expressed in terms of one or more financial measures such as revenue growth, return on equity, operating cash flows, EPS and operating margin, each of which may be expressed either as an absolute standard or a comparative measure with respect to other companies, and applied at enterprise-wide or business unit levels. For these purposes, the Compensation Committee has elected to use a three-year performance period and a financial measure of total Company EPS over each three-year period.

This plan provides that the Compensation Committee shall adjust the Company’s reported EPS for the impact of changes in accounting principles, extraordinary items and unusual or non-recurring losses.

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Since the adoption of the plan in 2002, such an adjustment has only occurred once, in connection with the Company’s adoption in 2006 of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (FAS 123R), to provide comparability over the periods.

At the beginning of each year, upon recommendation by management, the Compensation Committee approves the participants for the upcoming performance period and an EPS goal that must be achieved before any long-term cash incentive amount is paid. For the 2004-2006 performance period (incentives paid in 2007), in addition to approving an initial EPS goal that had to be achieved before any long-term cash incentive amount could be paid, the Compensation Committee also approved a second EPS goal that had to be achieved for the maximum long-term cash incentive amount to be payable. For EPS performance between the two EPS goals, an award of up to the target long-term cash incentive amount could be paid. For EPS performance above the second EPS goal, an award of generally up to 200% of the executive’s long-term cash incentive target amount could be paid.

The Compensation Committee’s practice has been to set the long-term cash incentive target for each participating executive at 50% of that individual’s average base compensation over the three-year performance period. Although the Executive Incentive Plan permits a maximum individual long-term cash incentive payout in any given year equal to the lesser of 300% of a participant’s average base compensation or $10,000,000, the Compensation Committee’s practice generally has been to limit the maximum long-term individual incentive amount payable to 200% of the long-term cash incentive target amount payable. The Compensation Committee may also exercise discretion to reduce, but not increase, the amount of any long-term cash incentive amount otherwise payable under the terms of the Executive Incentive Plan. The Compensation Committee typically exercises this discretion in the same manner as described above under “Annual Cash Incentive Awards.”