This excerpt taken from the UNH DEF 14A filed Apr 28, 2008.
Shareholders are asked to consider and vote upon a proposal to approve the material terms for the payment of incentive compensation to the Companys most highly compensated executive officers under the Companys annual and long-term incentive plans. If the shareholders approve this proposal, the compensation paid pursuant to these material terms is expected to be fully deductible by the Company under Section 162(m). This summary of the material terms for payment of executive incentive compensation is qualified in its entirety by the detailed provisions of the Summary of Material Terms for Payment of Executive Incentive Compensation, a copy of which is attached as Appendix A to this proxy statement.
Section 162(m) generally provides that no federal income tax business expense deduction is allowed for annual compensation in excess of $1 million paid by a publicly traded corporation to its chief executive officer and three other most highly compensated officers, excluding the chief financial officer (the covered executive officers), as determined in accordance with the applicable rules under the Exchange Act. However, under the Internal Revenue Code, there is no limitation on the deductibility of qualified performance-based compensation. Qualified performance-based compensation by the Company must be paid solely on account of the attainment of one or more objective performance goals established in writing by the Compensation Committee while the attainment of the goals is substantially uncertain. Performance goals may be based on one or more business criteria that apply to an individual, a business unit or the Company as a whole, and may be measured on an absolute basis or on a relative basis and on a GAAP or non-GAAP basis. Stock options and SARs always satisfy the performance goal requirement because their performance goal is an increase in the fair market value of the Companys common stock. The Compensation Committee is prohibited from increasing the amount of compensation payable if a performance goal is met, but may reduce or eliminate compensation even if the performance goal is attained. Shareholders must approve the types of performance goals and the maximum amount that may be paid to covered executive officers or the formula used to calculate the amount.
The Company will use a formula to determine the maximum amount of the annual cash incentive awards and long-term cash incentive awards for performance periods that are longer than one year. The formula that will fund the annual incentive award bonus pool for eligible participants is 2% of Company net income. The formula that will fund the long-term incentive award bonus pool for eligible participants is 2% of the Companys average net income during the performance period. The maximum cash incentive compensation amount that may be earned in any performance period by any one participant is 25% of the bonus pool for annual incentive awards and 25% of the bonus pool for long-term incentive awards.
The Compensation Committee may set the percentage share of each participant in each respective bonus pool at the start of the performance period, and the aggregate total of the individual percentage limits for the performance period shall not exceed 100% of the bonus pool. If the
Compensation Committee does not set the individual percentage limits by the 90th day of the performance period, the percentage limit shall be determined based on the percentage each participants base salary on the 90th day of the performance period is to the base salary of all participants on that day and will be further adjusted if a new participant is added after the 90th day.
Vesting in equity awards and awards payable in shares of our common stock, other than stock options and SARs, to a covered executive officer intended to satisfy the requirements for qualified performance-based compensation will be contingent upon the attainment of one or more performance goals (which may be stated as alternative goals) established in writing by the Compensation Committee for a covered executive officer for each performance period. Performance goals for awards payable in shares will be based on one or more of the following business criteria:
Performance-based equity awards will be granted under the 2002 Stock Incentive Plan, as amended, or its successors. The maximum number of shares of common stock that may be earned as a performance award in respect of a performance period by any one covered executive officer shall be 500,000 shares. Payment of an award may be paid in the form of shares of common stock of the Company, restricted stock, restricted stock units, other stock-based awards or any combination thereof.
The annual incentive cash bonus for 2008 will be paid from a formula bonus pool that is 2% of Company net income for the fiscal year ending December 31, 2008 and each participants share of the pool will be based on the percentage of the participants base salary is to the base salary of all participants with a maximum award for 2008 of 150% to 250% of a participants base salary. Payment of the 2008 annual incentive cash awards to one or more covered executive officers is subject to funding based on the 2% of net income formula, to achievement of additional conditions to receipt of bonuses described in the Compensation Discussion and Analysis above and to shareholder approval of the material terms for payment of executive incentive compensation.
The long-term incentive cash bonus for the 2008-2010 performance period will be paid from a formula bonus pool that is 2% of the Companys average net income during the performance period
and each participants share of the pool will be based on the percentage of the participants base salary is to the base salary of all participants with a maximum award of 100% of the participants average base salary during the performance period. Payment of long-term incentive cash awards to one or more covered executive officers will be subject to funding based on the 2% of net income formula, to achievement of additional conditions to receipt of bonuses described in the Compensation Discussion and Analysis above and to shareholder approval of the material terms for payment of executive incentive compensation.
It is the Compensation Committees practice to seek to qualify executive compensation for deductibility to the extent that the policy is consistent with the Companys overall objectives in attracting, motivating and retaining its executives. The Compensation Committee from time to time may approve payment of discretionary incentive compensation based on business criteria other than the foregoing performance goals. Any discretionary compensation would not qualify for the exclusion from the $1 million limitation of deductible compensation under Section 162(m).