Mensch tracht, und Gott lacht

Monday, May 01, 2006

How Dr. McGuire earned $1.6 Billion

When William McGuire became CEO of United Health in 1989, the company had annual revenue of $400 million and the stock sold for about a dollar a share. Annual revenues increased to $45.4 billion in 2005 and the stock topped $98 before being split. Because Mr. McGuire did not exercise (cash-in) options accumulated over many years when the stock was much cheaper, he had unrealized (and therefore uncertain) capital gains of $1.6 billion by early 2006.

An AP wire story quotes McGuire saying, "This isn't a giveaway of money that occurs out of the premiums of health care recipients. These are shareholder dollars.”

That is absolutely right. Gains from exercised stock options are entirely at the expense of stockholders -- not customers or other employees. Exercised options are a cost to other shareholders because the difference between the grant price and the exercise price has to be financed by issuing more shares (which dilutes earnings per share) or by using cash that could otherwise have been invested. Grants of restricted stock to executives are also entirely at the expense of other shareholders, because they dilute the value of other shares.

There is no sense it which stock-based compensation of executives – which accounts for nearly all of the periodic windfalls that make the headlines -- could be said to be at the expense of the company’s customers, the company's workers or workers in general.

McGuire called the current criticism of stock options "overheated," and said, "The real scrutiny should address those situations where . . . executives are handsomely paid even when the shareholders are not." That too is quite right.

Politicians and pundits take note:
If you don't own shares in United Health, what that company's executives earned because the stock price went up is literally none of your business.

1 comment:

Devang said...

Except companies do usually use cash that could otherwise be invested to pay for the massive amounts of stockoptions some of them hand out. Tech companies come to mind, offcourse, but I'm not familiar with United Health's case.

It's really shareholders vs. shareholders, the employees/consumers/pundits/politicans wouldn't even be in the picture, except for the fact that this happens to be healthcare company.