UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

SCHEDULE 14A

(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO.     )

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o		Definitive Additional Materials

o		Soliciting Material Pursuant to Section 240.14a-12

Coventry Health Care, Inc.

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement if other than the Registrant)

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6705 Rockledge Drive, Suite 900
Bethesda, MD 20817-1850
301-581-0600

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held on May 21, 2009

 

 

 

 

To our Stockholders:

 

You are cordially invited to attend our 2009 Annual Meeting of Stockholders, which will be held on Thursday, May 21, 2009, at 8:30 a.m., Eastern Daylight Saving Time, at The Fairmont, Washington DC, 2401 M Street, N.W., Washington, District of Columbia 20037, Telephone (202) 429-2400. The meeting will be held for the following purposes:

 

 

2. To act upon a proposal to approve the Company’s 2004 Incentive Plan, as amended and restated;

 

 

We are pleased to take advantage of Securities and Exchange Commission rules that allow issuers to furnish proxy materials to their stockholders on the internet. These rules allow us to provide our stockholders with the information they need, while lowering the costs of delivery and reducing the environmental impact of our annual meeting.

 

A proxy statement, a proxy card and a copy of our 2008 Annual Report and other proxy materials describing the operations of the Company during the fiscal year ended December 31, 2008, accompany this notice. Information regarding the matters to be acted upon at the meeting is contained in the attached proxy statement.

 

All holders of record of the Company’s common stock at the close of business on Monday, March 23, 2009, are entitled to vote at the 2009 Annual Meeting of Stockholders or at any adjournment(s) of the meeting.

 

By Order of the Board of Directors,

 

 

ALLEN F. WISE

Chief Executive Officer

 

Bethesda, Maryland

April 10, 2009

 

YOUR VOTE IS IMPORTANT. IF YOU DO NOT PLAN TO ATTEND THE MEETING, PLEASE
VOTE. YOU MAY VOTE BY TOLL-FREE TELEPHONE OR BY THE INTERNET.
IF YOU RECEIVED A COPY OF THE PROXY CARD BY MAIL, YOU MAY VOTE BY COMPLETING,
DATING, SIGNING AND RETURNING THE PROXY CARD IN THE ACCOMPANYING
POSTAGE-PAID RETURN ENVELOPE. PLEASE SEE INSTRUCTIONS
ON THE PROXY CARD.

 

TABLE OF CONTENTS

 

 

6705 Rockledge Drive, Suite 900

Bethesda, MD 20817-1850

301-581-0600

 

 

 

 

PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
To Be Held on May 21, 2009

 

 

 

This proxy statement is furnished to stockholders of Coventry Health Care, Inc. (the “Company”) in connection with the solicitation of proxies by the Board of Directors of the Company (the “Board”) for the 2009 Annual Meeting of Stockholders of the Company to be held on Thursday, May 21, 2009, at 8:30 a.m., Eastern Daylight Saving Time, at The Fairmont, Washington DC, 2401 M Street, N.W., Washington, District of Columbia 20037, Telephone (202) 429-2400, or at any adjournment of the meeting (the “2009 Annual Meeting”).

 

On April 10, 2009, we mailed to our stockholders a notice containing instructions on how to access this proxy statement, our annual report and other proxy materials online, and how to vote online. If you prefer to receive the proxy materials in the mail and to vote by mail, the notice also contains instructions on how to request a printed copy of the proxy materials. You will not receive a printed copy of the proxy materials in the mail unless you specifically request them.

 

What is the purpose of the 2009 Annual Meeting?

 

You will be asked to consider and vote upon four proposals: (i) to elect three individuals to serve as Class III Directors of the Company until the annual meeting of stockholders to be held in 2012; (ii) to act upon a proposal to approve the Company’s 2004 Incentive Plan, as amended and restated; (iii) to approve the use of certain performance goals in the Company’s 2004 Incentive Plan; and (iv) to ratify the selection of Ernst & Young LLP as the Company’s independent auditors for 2009. The Board is not aware of any other matters to be presented for action at the 2009 Annual Meeting. However, if other matters are presented for a vote, the proxies will be voted for these matters in accordance with the judgment of the persons acting under the proxies.

 

Why did I receive a one-page notice in the mail regarding the internet availability of proxy materials instead of a full set of printed proxy materials?

 

Rules adopted by the Securities and Exchange Commission (the “SEC”) allow us to provide access to our proxy materials over the internet. Accordingly, we sent a Notice of Internet Availability of the Proxy Materials (the “Notice”) to our stockholders of record and beneficial owners. Instructions on how to access the proxy materials over the internet or to request a printed copy may be found in the Notice and in this proxy statement. In addition, stockholders may request receipt of proxy materials in printed form by mail or electronically by e-mail on an ongoing basis.

When will this proxy statement be sent to stockholders?

 

On April 10, 2009, we mailed to our stockholders of record and beneficial owners the Notice containing instructions on how to access this proxy statement and other proxy materials online. A copy of this proxy statement, the Company’s 2008 Annual Report and other proxy materials are posted at www.proxyvote.com (simply enter your 12- or 14-digit control number listed on the Notice and click “Submit”). You may also request printed copies of this proxy statement, the 2008 Annual Report and other proxy materials by following the instructions in the Notice.

 

Who is entitled to vote?

 

Only stockholders of record at the close of business on Monday, March 23, 2009, the record date for the meeting (the “Record Date”), are entitled to receive notice of and to vote at the 2009 Annual Meeting. If you were a stockholder of record on that date, you will be entitled to vote all of the shares that you owned on that date.

 

How many votes do I have?

 

You will have one vote for every share of the Company’s common stock that you owned on the Record Date.

 

Who is soliciting my vote?

 

Your vote is being solicited by and on behalf of the Board.

 

How will we solicit proxies and who is paying for this proxy solicitation?

 

The cost of soliciting proxies will be borne by us. These costs include the expense of preparing, assembling, printing and mailing the Notice to stockholders of record and beneficial owners, mailing the printed proxy materials to stockholders (who so request), and reimbursements paid to brokerage firms and others for their reasonable out-of-pocket expenses for forwarding proxy materials to stockholders and obtaining beneficial owners’ voting instructions. We have retained Morrow & Co., LLC, 470 West Avenue, Stamford, CT 06902, a proxy soliciting firm, to assist in the solicitation of proxies in conjunction with the 2009 Annual Meeting for an estimated fee of $10,000 plus reimbursement of disbursements made on the Company’s behalf. In addition to soliciting proxies by mail, our directors, officers and employees may solicit proxies on our behalf personally or by telephone, without additional compensation. We will also solicit proxies by e-mail from stockholders who are our employees or who previously requested to receive proxy materials electronically.

 

How many votes can be cast by all stockholders?

 

On March 23, 2009, the Record Date, there were 148,476,954 shares of the Company’s common stock outstanding and eligible to vote on each matter brought before the meeting. Each outstanding share of common stock is entitled to one vote on all matters.

 

How many votes must be present to hold the meeting?

 

A quorum must be present to hold the 2009 Annual Meeting. A “quorum” is a majority of the outstanding shares eligible to vote. Such shares may be present at the meeting or represented by proxy. Any stockholder of record present at the 2009 Annual Meeting, but who abstains from voting, will be counted for purposes of determining whether a quorum is present. If a quorum is not present, the 2009 Annual Meeting may be adjourned from time to time until a quorum is present or represented by proxy.

 

How many votes are required for each proposal?

 

Election of Directors.  On March 5, 2009 the Board amended and restated the Company’s Bylaws (the “Bylaws”) to establish a standard of majority voting in uncontested director elections. Under this standard, the affirmative vote of a majority of votes cast for each director nominee represented in person or by properly executed proxy at the meeting is required to approve the election of each such nominee. A majority of votes cast means that the number of shares voted “for” a nominee exceeds the shares voted “against” with respect to the nominee. Abstentions and broker non-votes will be counted for purposes of determining whether a quorum is

present at the 2009 Annual Meeting, but will not be deemed to be votes cast for the purpose of tabulating the vote in the election of directors.

 

Other matters.  The affirmative vote of a majority of the shares of the Company’s common stock present or represented by properly executed proxy at the 2009 Annual Meeting and entitled to vote is required (i) to approve the Company’s 2004 Incentive Plan, as amended and restated, (ii) to approve the use of certain performance goals in the Company’s 2004 Incentive Plan, (iii) to ratify the selection of Ernst & Young LLP as the Company’s independent auditor and (iv) to act upon all other business that may properly come before the 2009 Annual Meeting or any adjournment(s) thereof.

 

Why are approval of the Company’s 2004 Incentive Plan, as amended and restated, and the approval of the performance goals under such plan being presented as two separate proposals?

 

Although both the amendment and restatement of the 2004 Incentive Plan (to, among other things, increase the amount of shares authorized for issuance thereunder by 5,500,000) and approval of the performance goals thereunder are, in the Company’s view, in the best interest of its stockholders, we believe that they should be considered separately — the latter is simply a re-approval of previously approved performance goals that is required for tax deductibility, while the former will enhance the Company’s ability to continue to motivate and retain its personnel with equity incentives. Even if a stockholder opposes the 2004 Incentive Plan, as amended and restated, we nevertheless want that stockholder to be able to vote in favor of the performance goals to allow the Company to continue to take advantage of certain tax deductions with respect to its performance-based executive compensation.

 

How do I vote?

 

You can vote either in person by attending the 2009 Annual Meeting or by proxy without attending the 2009 Annual Meeting. To vote by proxy, you must either:

 

 

Can I change or revoke my vote?

 

Yes. Just send in a new proxy card with a later date, cast a new vote by telephone or internet (only your last proxy submitted prior to the 2009 Annual Meeting will be counted), or send a written notice of revocation to the Company’s Corporate Secretary at 6705 Rockledge Drive, Suite 900, Bethesda, MD 20817-1850. If you attend the 2009 Annual Meeting and want to vote in person, you can request that your previously submitted proxy not be used. If your shares are held through a broker, bank or other institution in “street name,” you will need to obtain a proxy form from the institution that holds your shares.

 

How are the votes counted?

 

The votes are counted by an automated system administered by Broadridge Investor Communications Solutions, Inc. Abstentions and broker non-votes are each included in the determination of the number of shares present and voting for purposes of determining the existence of a quorum. Abstentions are counted in tabulations of the votes cast on proposals presented to stockholders and will have the effect of a vote against proposals, other than the election of directors. Broker non-votes will not be counted for purposes of determining whether a proposal has been approved and will not be counted as votes cast for or against such proposal.

 

What is a “broker non-vote”?

 

Under current New York Stock Exchange rules, brokers and nominees may exercise their voting discretion without receiving instructions from the beneficial owner of the shares on proposals that are deemed to be routine

matters. If a proposal is not a routine matter, the broker or nominee may not vote the shares with respect to the proposal without receiving instructions from the beneficial owner of the shares. If a broker submits a proxy card expressly stating that the broker is not voting on a non-routine matter, such action is referred to as a “broker non-vote.” Since the election of directors, the approval of certain performance goals in the Company’s 2004 Incentive Plan and the ratification of Ernst & Young LLP as our independent auditors are routine matters, a broker may submit a proxy card voting shares at his or her discretion on these matters. Because the approval of the 2004 Incentive Plan, as amended and restated, is not a routine matter, your broker or nominee may not vote your shares on these matters without receiving instructions from you.

 

Where can I find voting results for the 2009 Annual Meeting?

 

The voting results will be published in the Company’s Form 10-Q for the period ending June 30, 2009. The Form 10-Q will be filed with the SEC on or before August 10, 2009.

 

Can I access the Company’s proxy materials and annual report electronically?

 

The Notice mailed to you contains instructions on how to access our proxy materials and vote over the internet. This proxy statement, our 2008 Annual Report and other proxy materials are also available on our internet website at www.coventryhealthcare.com (accessible through the “Investor Relations” link). Opting to access your proxy materials online saves us the cost of producing and mailing the proxy materials to your home or office and gives you an automatic link to the proxy voting site.

 

Additionally, you may choose to receive future proxy materials (including the Notice) by e-mail, which will save us the cost of printing and mailing documents to you and will reduce the impact of our annual stockholders’ meetings on the environment. If you choose to receive future proxy materials (including the Notice) by e-mail, you will receive an e-mail next year with instructions containing a link to those materials and a link to the proxy voting site. Your election to receive proxy materials by e-mail will remain in effect until you terminate it.

 

What is “householding” and how does it affect me?

 

The SEC has adopted a rule concerning the delivery of annual reports and proxy statements. It permits us, with your permission, to send a single Notice and, to the extent requested, a single set of these proxy materials to any household at which two or more stockholders reside if we believe they are members of the same family. This rule is called “householding” and its purpose is to help reduce printing and mailing costs of proxy materials. To date, the Company has not instituted this procedure, but may do so in the future.

 

A number of brokerage firms have instituted householding. If you and members of your household have multiple accounts holding shares of the Company’s common stock, you may have received a householding notification from your broker. Please contact your broker directly if you have questions, require additional copies of this proxy statement, 2008 Annual Report or other proxy materials, or wish to revoke your decision to household. These options are available to you at any time.

 

The Company is dedicated to conducting its business in accordance with the highest standards of ethical conduct, uncompromising integrity and compliance with all federal, state and local laws governing its business. Accordingly, the Company has established a Code of Business Conduct and Ethics (the “Code of Ethics”) to assure uniformity in standards of conduct, which applies to all of the Company’s directors, officers, employees (including our Chief Executive Officer, Chief Financial Officer and Controller) and representatives and to relationships with stockholders, customers, vendors, competitors, auditors and all public and governmental bodies. In support of the Code of Ethics, the Company appointed a Chief Compliance Officer and all employees are required to participate in annual compliance training. Violations may be reported as provided in the Code of Ethics, including by an anonymous telephone hotline. The Audit Committee monitors the implementation and enforcement of the Code of Ethics. The Code of Ethics, as amended, is available under “Corporate Governance” accessible through the “Investor Relations” link on the Company’s website at www.coventryhealthcare.com. In addition, a copy of the Code of Ethics is available in print at the request of any stockholder. Requests should be sent to the following address: Corporate Secretary, Coventry Health Care, Inc., 6705 Rockledge Drive, Suite 900, Bethesda, MD 20817-1850.

 

The Board has determined that seven of its ten directors, including all members of the Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee, are “independent” as defined by the listing standards of the New York Stock Exchange, by the SEC and all of its applicable rules and regulations, as well as for purposes of Rule 162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). In determining director independence, the Board broadly considers all relevant facts and circumstances, including the rules of the New York Stock Exchange. The Board considers the issue not merely from the standpoint of a director, but also from that of persons or organizations with which the director has an affiliation. An independent director must be free of any relationship with the Company or its management that may impair the director’s ability to make independent judgments. Particular attention is paid to whether a director is independent from management and to any contractual relationships that may exist with a director or a related party or interest. The seven independent directors are: Joel Ackerman, L. Dale Crandall, Lawrence N. Kugelman, Daniel N. Mendelson, Rodman W. Moorhead, III, Elizabeth E. Tallett and Timothy T. Weglicki.

 

The Board recognizes that transactions or relationships with the Company and its directors, executive officers, significant stockholders and their immediate family members may involve potential conflicts of interest. As a result, the Board adopted a written Related Person Transactions Policy (the “Policy”) requiring the prior approval of the Nominating/Corporate Governance Committee before a related person may enter into a transaction or relationship in which the Company is a participant and the related person would have a direct or indirect material interest, unless such transaction is available to all employees or involves less than $25,000. Under the Policy, any proposed related person transactions are reviewed at the regularly scheduled meetings of the Nominating/Corporate Governance Committee. Additionally, ongoing relationships are periodically reviewed and assessed to ensure compliance and fairness to the Company and there is a general presumption that a related person transaction will not be approved. A related person transaction may be approved if, after a full review, the disinterested members of the Nominating/Corporate Governance Committee determine that the transaction is being made at arm’s length and is fair to the Company. The Policy is available under “Corporate Governance” accessible through the “Investor Relations” link on the Company’s website at www.coventryhealthcare.com.

 

The policy of the Nominating/Corporate Governance Committee is to consider properly submitted stockholder nominations for director candidates as described below under “Identifying and Evaluating Nominees for Directors.” In evaluating such nominations, the Nominating/Corporate Governance Committee seeks to achieve a balance of

knowledge, experience and capability on the Company’s Board and to address the membership criteria set forth under “Director Qualifications” below. Any stockholder nominations proposed for consideration by the Nominating/Corporate Governance Committee should be addressed to: Corporate Secretary, Coventry Health Care, Inc., 6705 Rockledge Drive, Suite 900, Bethesda, MD 20817-1850.

 

To be timely considered by the Nominating/Corporate Governance Committee, director nominations submitted by stockholders for the 2010 Annual Meeting must be delivered to or mailed and received by the Corporate Secretary at the Company’s address (above) not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting of stockholders (i.e. not earlier than January 21, 2010 and not later than February 20, 2010); provided, however, that if the date of the annual meeting is advanced more than 30 days prior to such anniversary date or delayed more than 60 days after such anniversary date, then to be timely such notice must be received no later than the close of business on the later of 70 days prior to the date of the meeting or 10 days following the day on which public announcement of the meeting was made.

 

A stockholder’s notice must include (a) the proposed nominee’s name, qualifications and all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) certain other information regarding the stockholder proponents, its associated persons, its financial interests in the Company and other matters, as required by the Company’s Bylaws as to the stockholder giving such notice.

 

No person is eligible for election as a director of the Company unless nominated in accordance with the procedures required by the Company’s Bylaws. The Chair of the Board may, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed by the Company’s Bylaws, and if he should so determine, the defective nomination will be disregarded.

 

The procedures described above do not supersede the requirements or conditions established by the SEC for stockholder proposals to be included in the Company’s proxy statement for future stockholder meetings. See “Stockholder Proposals” on page 49 of this proxy statement.

 

The Company’s Corporate Governance Guidelines contain Board membership criteria that apply to nominees recommended by the Nominating/Corporate Governance Committee for positions on the Company’s Board. Under these criteria, not less than a majority of the members of the Board must be independent and the Board members must have the highest professional and personal ethics and values consistent with the Company’s values and standards. Other criteria that will be considered are prior experience as a director, knowledge of the Company’s business and industry and broad experience at the operational, financial, regulatory or policy making level(s) in business. Diversity, age and skills in the context of the needs of the Board are also considerations. The members should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to perform all director duties responsibly. The Corporate Governance Guidelines are available under “Corporate Governance” accessible through the “Investor Relations” link on the Company’s website at www.coventryhealthcare.com. In addition, a copy of the Corporate Governance Guidelines is available in print to any stockholder that requests one by writing to the following address: Corporate Secretary, Coventry Health Care, Inc., 6705 Rockledge Drive, Suite 900, Bethesda, MD 20817-1850.

 

The Nominating/Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director. The Nominating/Corporate Governance Committee regularly assesses the appropriate size of the Board, and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Nominating/Corporate Governance Committee considers various potential candidates for director that may come to the attention of the Nominating/Corporate Governance Committee through current Board members, professional search firms, stockholders or other persons. These

candidates are evaluated at regular or special meetings of the Nominating/Corporate Governance Committee and may be considered at any point during the year.

 

As described above, the Nominating/Corporate Governance Committee considers properly submitted stockholder nominations for candidates for the Board. Following verification of stockholder status of persons proposing candidates, recommendations are collected and considered by the Nominating/Corporate Governance Committee at a regularly scheduled meeting prior to the issuance of the proxy statement for the Company’s annual meeting of stockholders. If any materials are provided by a stockholder in connection with the nomination of a director candidate, such materials are forwarded to the Nominating/Corporate Governance Committee. The Nominating/Corporate Governance Committee may also review materials provided by professional search firms or other parties in connection with a nominee who is not proposed by a stockholder. In evaluating the nominations, the Nominating/Corporate Governance Committee uses the same criteria for all nominees and the Nominating/Corporate Governance Committee seeks to achieve a balance of knowledge, experience and capability on the Board.

 

Executive sessions of non-management directors of the Board and its committees are held on a regular basis at quarterly and special meetings. In 2008, Allen F. Wise, as Chairman of the Board, chaired the executive sessions. On January 30, 2009, Dale B. Wolf resigned as president and chief executive officer of the Company, and Allen F. Wise became chief executive officer. Executive sessions in 2009 will be chaired by the Company’s lead director, Elizabeth E. Tallett, who is an independent director elected by the non-management directors. Any independent director can request that an additional executive session be scheduled. See “Communications With The Board” below for the process by which stockholders may communicate with non-management directors of the Board.

 

Although directors are invited and are always welcome to attend the annual stockholder meetings, the Company does not require their attendance. All directors attended the 2008 annual meeting of stockholders. For 2009, the Board scheduled its regular meeting in the second quarter to coincide with the 2009 Annual Meeting. The Company anticipates that all directors will attend the 2009 Annual Meeting.

 

Stockholders and interested parties may communicate with the Board, the Chair, or any other director or group of directors by submitting a letter in writing to such director(s), c/o Coventry Health Care, Inc., 6705 Rockledge Drive, Suite 900, Bethesda, MD 20817-1850. If the communication relates to the Company’s ethics or business conduct, financial statements, accounting practices or internal controls, the communication should be submitted in writing addressed to: Audit Committee Chair, Coventry Health Care, Inc., 6705 Rockledge Drive, Suite 900, Bethesda, MD 20817-1850. If the communication relates to other matters that are within the scope of the responsibilities of the Board and/or its committees, the communication will be forwarded to the appropriate director. Stockholder communications may be submitted confidentially or anonymously. Solicitations, advertisements and obviously inappropriate communications will not be forwarded, but will be made available to any director who wishes to view them.

 

During the 2008 fiscal year, the Board held four regular meetings, one special in-person meeting, and four special telephonic meetings. All members of the Board attended at least 75% of the meetings held by the Board and by the committees of which they were members.

 

Audit Committee.  The Audit Committee is comprised of three directors who are independent of the management of the Company and independent of any relationship that, in the opinion of the Board, would interfere with the exercise of their independent judgment as members of the Audit Committee. The members of the

Audit Committee are Lawrence N. Kugelman (Chair), L. Dale Crandall and Elizabeth E. Tallett. Mr. Crandall and Ms. Tallett each serve on the audit committees of more than three public companies. The Board has considered their commitments to serve on the other audit committees and has affirmatively determined that such simultaneous service does not impair the ability of Mr. Crandall or Ms. Tallett to serve effectively on the Audit Committee of the Company’s Board.

 

The Audit Committee’s responsibilities include:

 

 

The current charter of the Audit Committee, as amended, is available under “Corporate Governance” accessible through the “Investor Relations” link on the Company’s website at www.coventryhealthcare.com, and provides a detailed description of its responsibilities. In addition, a copy of the current charter is available in print to any stockholder upon request by writing to the following address: Corporate Secretary, Coventry Health Care, Inc., 6705 Rockledge Drive, Suite 900, Bethesda, MD 20817-1850. During the 2008 fiscal year, the Audit Committee held four regular meetings, three pre-earnings release telephonic meetings, and two special telephonic meetings.

 

The Board has determined that all audit committee members are financially literate under the current listing standards of the New York Stock Exchange. The Board also determined that L. Dale Crandall qualifies as an “audit committee financial expert” as defined by rules and regulations adopted by the SEC pursuant to the Sarbanes-Oxley Act of 2002.

 

Nominating/Corporate Governance Committee.  The Nominating/Corporate Governance Committee is currently comprised of three directors who are independent of the management of the Company. The members of the Nominating/Corporate Governance Committee are Joel Ackerman (Chair), Daniel N. Mendelson and Timothy T. Weglicki.

 

The Nominating/Corporate Governance Committee’s responsibilities include:

 

 

Nominations for election to the Board may be made by or at the direction of the Nominating/Corporate Governance Committee or by any eligible stockholder entitled to vote for the election of directors. See “Corporate Governance — Stockholder Nominees” at page 5 of this proxy statement. The current charter of the Nominating/Corporate Governance Committee, which is available under “Corporate Governance” accessible through the “Investor Relations”’ link on the Company’s website at www.coventryhealthcare.com, provides a detailed description of its responsibilities. In addition, a copy of the current charter is available in print to any stockholder who requests one by writing to the following address: Corporate Secretary, Coventry Health Care, Inc., 6705

Rockledge Drive, Suite 900, Bethesda, MD 20817-1850. During fiscal year 2008, the Nominating/Corporate Governance Committee held four regular meetings.

 

Compensation Committee.  The Compensation Committee is comprised of three directors who are independent of the management of the Company. The Committee’s general responsibilities include:

 

 

The current charter of the Compensation Committee, which is available under “Corporate Governance” accessible through the “Investor Relations” link on the Company’s website at www.coventryhealthcare.com, provides a detailed description of its responsibilities. In addition, a copy of the current charter is available in print to any stockholder that requests one by writing to the following address: Corporate Secretary, Coventry Health Care, Inc., 6705 Rockledge Drive, Suite 900, Bethesda, MD 20817-1850. During fiscal year 2008, the Compensation Committee held four regular meetings and three special telephonic meetings. The members of the Compensation Committee are L. Dale Crandall (Chair), Rodman W. Moorhead, III and Timothy T. Weglicki.

 

During the year ended December 31, 2008, the Compensation Committee was comprised of L. Dale Crandall (Chair), Rodman W. Moorhead, III, and Timothy T. Weglicki, none of whom had at any time been an officer or employee of the Company or any of its subsidiaries. During 2008, no interlocking relationship existed between any officer, member of the Board or the Compensation Committee and any officer, member of the board of directors or compensation committee of any other company.

 

The Code of Business Conduct and Ethics, Corporate Governance Guidelines and current committee charters are available under “Corporate Governance” accessible through the “Investor Relations” link on the Company’s website at www.coventryhealthcare.com. In addition, a copy of one or more of these documents is available in print to any stockholder who submits a request in writing to the following address: Corporate Secretary, Coventry Health Care, Inc., 6705 Rockledge Drive, Suite 900, Bethesda, Maryland, 20817.

 

The Company’s Bylaws provide that the Company’s Board shall consist of not less than three directors and may increase to such other number of directors as shall be determined by the Board from time to time. The Company’s Certificate of Incorporation provides that the directors shall be divided into three classes as nearly equal in number as possible. There are currently ten persons serving on the Board: three in Class I, three in Class II and four in Class III. At each annual meeting, directors of the class whose term of office expires in that year are elected for a three-year term. The Class III Directors’ terms of office expire in 2009.

 

The Board believes that eight (8) to twelve (12) directors is currently the optimal range to permit diversity of experience without hindering effective discussion of issues or diminishing individual accountability. Pursuant to the Company’s Certificate of Incorporation and the Company’s Bylaws, the number of directors is set by the affirmative vote of a majority of the full Board.

 

The nominees designated for election as Class III Directors at the 2009 Annual Meeting will, if elected, each serve three-year terms expiring at the annual meeting of stockholders in 2012. All of the nominees consented to being nominated and to serve if so elected. John H. Austin, M.D., a Class III director, will retire from the Board effective as of the adjournment of the Board meeting to be held the day before the 2009 Annual Meeting. Upon Dr. Austin’s retirement, the Board intends to reduce the size of the Board from ten to nine directors. However, the Nominating and Corporate Governance Committee is undertaking a search for a replacement director and the Board intends to increase the size back to ten directors when a replacement director is identified.

 

The persons named in the proxy card that accompanies this proxy statement intend to vote the shares represented by such proxy “for” the election of the nominees named herein, unless contrary instructions are received. If any of the nominees named below should be unable to accept nomination or election as a director at the 2009 Annual Meeting, an event which the Board does not anticipate, the persons named in the proxy may vote for such other person or persons as may be designated by the Board.

 

The following table provides information about the persons nominated to serve as Class III Directors, as well as the persons serving as Class I and Class II Directors whose terms continue until the 2010 or 2011 annual meeting of stockholders, respectively:

 

Nominees for Class III Directors with Three-Year Terms Expiring in 2012

 

 

Continuing Class I Directors with Three-Year Terms Expiring in 2010

 

Continuing Class II Directors with Three-Year Terms Expiring in 2011

 

 

CLASS III DIRECTOR NOMINEES
(TO BE ELECTED; TERMS EXPIRE IN 2012)

 

Daniel N. Mendelson has been a director of the Company since May 2005. Mr. Mendelson is President and Chief Executive Officer of Avalere Health, a strategic advisory company that provides guidance and syndicated research for clients in the healthcare industry, government and the not-for-profit sector. Prior to founding Avalere Health in 2000, he served as Associate Director for Health at the White House Office of Management and Budget in Washington, D.C. Mr. Mendelson is a director of PharMerica Corporation, a pharmaceutical services company serving patients in hospital and long-term care settings.

 

Rodman W. Moorhead, III has been a director of the Company since May 1997. Mr. Moorhead is a private investor. In December 2006, he retired from Warburg Pincus LLC, a private equity and venture capital firm in New York, where he was a Managing Director and Senior Advisor and had been employed since 1973. From June 1998 to present he has served as a director of Scientific Learning Corporation, a computer-based special education training company.

 

Timothy T. Weglicki has been a director of the Company since August 2001. Mr. Weglicki is a Founding Partner of ABS Capital Partners, a private equity fund located in Baltimore, Maryland. Mr. Weglicki has been with ABS since December 1993. Mr. Weglicki is a director of American Public Education, Inc., a leading provider of online post-secondary education focused primarily on serving the military and public service communities.

 

CLASS I DIRECTORS
(TERMS EXPIRE IN 2010)

 

L. Dale Crandall has been a director of the Company since January 1, 2004. Mr. Crandall previously served in various management positions with Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals, including President and Chief Operating Officer from March 2000 until his retirement in June 2002, and Senior Vice President, Finance and Administration, from June 1998 until March 2000. He is also a member of the boards of directors of UnionBanCal Corporation, a wholly-owned subsidiary of MUFG, whose primary subsidiary is Union Bank, N.A., Ansell Limited, a global provider of healthcare barrier protection products, Metavante Technologies, Inc., a provider of banking and payment technologies, Serena Software, Inc., an enterprise software company, Bridgepoint Education Inc., a provider of post-secondary education, and a Trustee of five funds in the Dodge and Cox family of mutual funds.

 

Elizabeth E. Tallett has been a director of the Company since March 1998. Ms. Tallett has been a Principal of Hunter Partners, LLC, which provides management services to developing life sciences companies, since July 2002. Ms. Tallett is also a director of IntegraMed America, Inc., a health services management company specializing in fertility and assisted reproductive technology, Meredith Corporation, a media and marketing company, Principal Financial Group, Inc., a global financial institution, and Varian, Inc., an analytical scientific instruments company.

 

Allen F. Wise became our Chief Executive Officer in January 2009. He has been a director of our Company since October 1996 and has been Chair of the Board since January 2005 and Executive Chair of the Board since December 2008. He was President and Chief Executive Officer of our Company from October 1996 to December 2004.

CLASS II DIRECTORS
(TERMS EXPIRE IN 2011)

 

Joel Ackerman has been a director of the Company since November 1999. Mr. Ackerman is a private investor. From January 1998 to September 2008, he served as a general partner of Warburg Pincus & Co. and a Managing Director of Warburg Pincus LLC. He is a director of Medical Staffing Network Holdings, Inc., a leading medical staffing company and provider of per diem nurse staffing services and Kindred Healthcare, Inc. a company operating long-term acute care hospitals, skilled nursing centers and contract rehabilitation services.

 

Lawrence N. Kugelman has been a director of the Company since August 1992. He has been a director of Arcadian Management Services, Inc., a company that owns and manages rural health care provider networks and Medicare health maintenance organizations, since July 2001, and a director since October 2002 of Valeant Pharmaceuticals International (formerly Valeant Pharmaceuticals, Inc.), a global, research-based pharmaceutical company that develops, manufactures, distributes and sells pharmaceutical, research and diagnostic products. Since 2003, he has been a Director of AccentCare, Inc., a company which provides in-home health care and support services. Mr. Kugelman has been a private investor and business consultant since October 1996.

 

Dale B. Wolf has been a director since January 2005.  He was the Chief Executive Officer of our Company from January 2005 to January 2009 and President of our Company from July 2008 to January 2009. Prior to that he served as Executive Vice President, Chief Financial Officer and Treasurer of our Company from December 1996 to December 2004. He is a director and a member of the audit committee and chair of the compensation committee of Catalyst Health Solutions, Inc., a provider of pharmacy benefit management services and supplemental benefits. Mr. Wolf is a Fellow of the Society of Actuaries.

 

Vote Required

 

On March 5, 2009 the Board amended and restated the Company’s Bylaws to establish a standard of majority voting in uncontested director elections. Under this standard, the affirmative vote of a majority of the votes cast for the director nominee represented in person or by proxy is required to approve the election of each of the company’s nominees. Abstentions and broker non-votes will be counted for purposes of determining whether a quorum is present at the 2009 Annual Meeting but will not be deemed to be votes cast for purposes of tabulating the vote. Your proxy cannot be voted for a greater number of persons than the number of nominees named.

 

THE BOARD RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF THE NOMINEES FOR CLASS III DIRECTORS.

 

The following table sets forth information, as of Monday, March 23, 2009, the Record Date, regarding the beneficial ownership of the Company’s common stock by (i) each person or group known by the Company to be the beneficial owner of more than five percent of the common stock, (ii) each director and nominee for director of the Company, (iii) each executive officer named in the Summary Compensation Table and (iv) all directors and executive officers of the Company as a group. The number of shares beneficially owned is determined under the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. On the Record Date, 148,476,954 shares of the Company’s common stock were outstanding.

 

For purposes of the table, a person or group of persons is deemed to beneficially own shares of common stock issuable upon the exercise of stock options that are currently exercisable or that become exercisable within 60 days from the date set forth above. For purposes of computing the percentage of outstanding common stock held by each person or group of persons named above, any shares that such person or group has the right to acquire within 60 days after the date set forth above are deemed outstanding, but are not deemed to be outstanding for purposes of computing the percentage ownership of any other person or group. The Company believes that the beneficial owners of the common stock listed in the table below, based on information furnished by such owners, have sole voting and dispositive power (or shares such powers with his or her spouse) with respect to such shares, except as explained in the footnotes to the table.

 

 

 

With respect to the fiscal year ended December 31, 2008, the Compensation Committee hereby reports as follows:

 

1. The Compensation Committee has reviewed and discussed with management the following Compensation Discussion and Analysis, set forth on pages 15 through 24 of this proxy statement, as required by Item 402(b) of Regulation S-K; and

 

2. Based on the review and discussions referred to in paragraph 1, above, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Company’s proxy statement on Schedule 14A filed with the SEC.

 

COVENTRY HEALTH CARE
COMPENSATION COMMITTEE
L. Dale Crandall (Chair)
Rodman W. Moorhead, III
Timothy T. Weglicki

 

COMPENSATION DISCUSSION & ANALYSIS

 

The following is a discussion of the objectives and elements of our compensation program for our named executive officers and the application of such program in 2008. This information should be read in conjunction with the Summary Compensation Table and other tables and narratives contained in this proxy statement. For 2008, the following individuals were our named executive officers.

 

 

Compensation Philosophy

 

The Company’s compensation program is designed to meet three primary objectives:

 

1. To provide incentives for delivery of stockholder value;

 

2. To establish a direct relationship between compensation and performance by the individual and the Company; and

 

3. To create short-term and long-term incentives that motivate executives and are competitive with our peer group so the Company can attract and retain talent.

 

The guiding principles supporting the Company’s compensation philosophy and program include:

 

1. Aligning executive compensation with achievement of Company goals and objectives that reinforces “pay for performance”;

2. Creating an ownership culture by linking compensation to the achievement of performance goals that enhance stockholder value and by adopting stock ownership guidelines that promote a long-term perspective; and

 

3. Monitoring and benchmarking peer group best practices to ensure that the Company’s compensation program is consistent with its philosophy. The Company has assembled a peer group of healthcare insurance competitors based on an analysis of:

 

a. Market capitalization;

 

b. Revenue; and

 

c. Similar broad-based product and service offerings.

 

The Company’s peer group for 2008 was comprised of the following nine public healthcare insurance companies:

 

Aetna Inc.

 

AMERIGROUP Corp.

 

Assurant, Inc.

 

CIGNA Corporation

 

Health Net, Inc.

 

Humana Inc.

 

UnitedHealth Group Incorporated

 

WellCare Health Plans, Inc.

 

WellPoint Health Networks, Inc.

 

Consistent with its pay-for-performance philosophy, the Company believes that the guaranteed components of compensation, in particular, base salaries and related benefits, or “fixed compensation costs”, should constitute a relatively low percentage of overall compensation. By contrast, the Company believes that components of compensation that vary based on performance goals or the value of the Company’s common stock, such as incentive bonuses and performance-based equity grants, should comprise a significant portion of total compensation. The Company seeks to set executive base salaries and related benefits at the median of its peer group, while performance-based pay is designed such that total compensation will exceed the 75th percentile of its peer group if pre-established performance goals are achieved.

 

Because the Company did not fully achieve its performance goals in 2008, the named executive officers did not receive any cash incentive bonuses under our Executive Management Incentive Plan (“EMIP”). They also forfeited allocations under our Mid-Term Executive Retention Program (“Mid-Term Plan”) and forfeited certain performance-based restricted stock awards. The table below shows the amounts of compensation that each of the Company’s named executive officers forfeited or otherwise did not earn with respect to 2008.

2008 FORFEITED COMPENSATION
NAMED EXECUTIVE OFFICERS

 

 

 

 

Compensation Approval Process

 

The Compensation Committee adopts executive compensation programs that provide a mix of cash- and equity-based awards for the achievement of business plan results and other strategic objectives, the creation of stockholder value and superior individual performance. Incentive compensation awards vary with the level of performance achieved. The compensation programs include what the Company believes are high performance goals that are challenging to achieve and that take into account both Company and individual performance. This approach to compensation is designed to align the short-term and long-term interests of the Company’s executives with those of its stockholders.

 

Executive officers provide input regarding selection of the Company’s peer group, the development of compensation programs that attract and retain talented executives, and the selection of performance measures that recognize individual performance while maximizing stockholder value. The chief executive officer provides recommendations to the Compensation Committee regarding the compensation of our named executive officers (other than his own compensation). The Compensation Committee, working in conjunction with its independent, retained executive compensation consultant, Frederic W. Cook & Co., Inc., supplements and evaluates this executive input.

 

The Compensation Committee reviews a tally sheet for members of executive management that describes each element of compensation, including base salary, annual cash incentive awards, equity awards, deferred compensation and perquisites. Tally sheets are updated throughout the year and reviewed when compensation issues are considered. A tally sheet review, with respect to proposed 2008 total compensation, was undertaken by the Compensation Committee and was then presented to the entire board of directors for evaluation and discussion. The Compensation Committee also reviewed the tally sheets in connection with its review and approval of various elements of 2008 compensation, including base pay decisions, establishment of potential awards under the EMIP and allocations under the Mid-Term Plan.

 

The Compensation Committee determines the chief executive officer’s compensation and also evaluates and approves senior executive compensation levels recommended by the chief executive officer. The Compensation Committee also reviews, evaluates, and recommends non-management director compensation to the Board. In addition, each year, the Compensation Committee evaluates its own performance and reviews its Committee

Charter. Any proposed changes to the Committee Charter are reported to the board of directors with recommendation for approval.

 

The Compensation Committee believes that the current allocation of compensation among the components of total compensation for senior executives does not encourage such executives to take excessive or unnecessary risks that may threaten the value of the Company. The Compensation Committee will continue to monitor its executive compensation practices as they relate to such risk issues in 2009.

 

The Company considers the impact of Internal Revenue Code Section 162(m) in the design of its compensation strategies. Under Section 162(m) of the Internal Revenue Code, compensation paid to executive officers in excess of $1,000,000 cannot be taken by the Company as a tax deduction unless the compensation qualifies as performance-based compensation. The Company expects that performance awards paid to executives under its 2004 Incentive Plan, as amended, will qualify as performance-based compensation. However, the Company has determined that it will not necessarily seek to limit executive compensation to amounts deductible under Section 162(m) of the Internal Revenue Code if such limitation is not in the best interests of the Company and its stockholders. The Compensation Committee will monitor business and legal developments and assess alternatives for preserving the deductibility of compensation payments and benefits to the extent reasonably practicable, consistent with its compensation policies and as determined to be in the best interests of the Company and its stockholders.

 

Elements of Total Compensation

 

The Company seeks to achieve its compensation philosophy through a combination of components, referred to in the aggregate as total compensation. These components include:

 

Fixed Compensation Costs:  base salary and benefits;

 

Short-term Incentives:  annual bonus;

 

Long-term Incentives:  stock option grants and restricted stock awards.

 

Base Salary.  The Company views base salaries primarily as an attraction and retention device and a fixed compensation cost. The Company establishes base salaries at levels that are competitive with the median base salaries of executives at peer group companies. Base salaries for our named executive officers are considered annually by the Compensation Committee and increases are based on each individual’s level of performance during the past year and current position and responsibilities within the Company, as well as an analysis of peer group competitiveness. Benefits (such as life insurance, accidental death and dismemberment, and short- and long-term disability) are linked to base salary and are also fixed compensation costs that are generally targeted at market median competitiveness.

 

The Compensation Committee approved the following base salaries during 2008:

 

 

For 2008, the Compensation Committee determined that Messrs. McDonough and McGarry already earned base salaries within the median range of our peer group and as a result neither received an increase to base pay. Mr. Guertin was found to be below the median range for our peer group and was given an appropriate increase in base pay. The raises for our other officers reflected increases that the Compensation Committee determined to be appropriate in light of peer company compensation practices. The differences in base salaries among our named executive officers and, more generally, the differences among the amounts of their overall compensation and various elements of compensation, reflect the Company’s belief that its senior executives should be compensated in

accordance with their relative levels of responsibility within the Company and the relative demands the Company places on them.

 

For 2009, the Compensation Committee has established base salaries of $600,000 each for Mr. Guertin and Mr. Zielinski. The $30,000 increase over 2008 base salary for Mr. Guertin is intended to bring him to the median for comparable executives in the Company’s peer group. Mr. Zielinski’s $125,000 increase over 2008 reflects his recently expanded duties and responsibilities within the Company, which now involve increased oversight of Company operating results, that occurred as part of changes in the executive management team. Mr. McGarry received no increase in base pay over 2008. The Company will report any material compensatory agreement that it enters into with Allen F. Wise with respect to his role as chief executive officer in accordance with SEC rules on Form 8-K.

 

Short-Term Incentives.  The purpose of the Company’s annual performance-based incentive plan is to recognize and reward executives for taking actions that build the value of the Company and generate competitive total returns to stockholders. In keeping with its pay-for-performance philosophy, at the beginning of 2008 the Company established the 2008 EMIP for certain senior executives, including the named executive officers.

 

The Compensation Committee established target performance goals under the 2008 EMIP of Company-wide fully diluted earnings per share (“EPS”) of $4.42, reflective of the Company’s 2008 budget and representing a year-over-year EPS growth of 11%. The Compensation Committee considered this to be a challenging goal in light of the operating results achieved by our peers and the overall competitiveness in the healthcare insurance market. The overall EPS target also served as the performance measure that had to be met as a condition to payment of Mid-Term Plan awards and the release of restrictions on awards of performance-based restricted stock, as discussed below. In establishing the EPS target, the Compensation Committee worked in conjunction with its independent compensation consultant and senior management and considered their suggestions as to appropriate EPS targets. As further described below, the Company’s performance goals also included certain stretch EPS levels, which were designed to reward performance and pay incentive compensation equal to or better than the 75th percentile of the Company’s peer group if the Company surpassed target EPS for the year.

 

Under the 2008 EMIP, the Compensation Committee established target awards, reflecting a percentage of base salary for each eligible executive, as follows:

 

 

The Compensation Committee worked with its independent compensation consultant to set the Chief Executive Officer’s target bonus level and to review and approve the target bonus levels of other eligible executives listed above. These EMIP payment targets were established to be competitive with incentives awarded to executives at our peer companies in comparable management positions, to fulfill the role of annual incentives in our total compensation strategy, and to reflect the responsibilities of the individual executives.

 

Under the 2008 EMIP, no bonuses would be earned if actual EPS did not meet a minimum threshold of 90% of its target EPS. If the 90% EPS threshold had been achieved, each named executive officer would have been eligible for an award. Since the EPS threshold of 90% was not met, the named executive officers earned no bonuses for 2008. If the target EPS performance goal had been exceeded, the Compensation Committee was permitted to grant awards greater than target levels. Under the plan, no participating executive could receive an award in excess of the lesser of $5 million or 1% of operating earnings. The plan permits the Company to make the annual incentive payments in cash, equity, or a mix of both, although historically the Company has made EMIP payments entirely in cash.

For 2009, the Company has established an EMIP consistent with the format and approach used in prior years. Provided that the Company meets its threshold earnings per share goal for 2009, the Company’s senior executives will be eligible for bonuses constituting a percentage of base salary, the amount of which may vary based upon business results and individual performance.

 

Long-Term Incentives.  Unlike its “fixed compensation cost” approach to base salary and related benefits, the Company utilizes a performance-based approach for long-term incentives. Generally, it is the Company’s philosophy to place greater emphasis on long-term incentive compensation than on its fixed compensation costs and annual performance incentives.

 

Long-term performance-based incentives are designed to align executive compensation with the delivery of value to stockholders. The Company uses a variety of equity grants, including stock option grants and performance-based restricted stock awards, to encourage executives to manage the Company toward both annual performance goals and sustained long-term growth in stockholder value. In 2008, as in previous years, the Company used both time-based stock option awards and performance-based restricted stock awards. The Company believes that long-term incentives in the form of stock options instill an ownership culture, delivering value only when the marketplace recognizes that value has been created through increased share price and rewarding executives for long-term value creation. Performance-based restricted stock awards reward executives for achievement of annual EPS goals while also allowing executives to be rewarded for increasing shareholder value over time.

 

Long-term incentives are awarded under the 2004 Incentive Plan, which is an omnibus plan integral to the Company’s total compensation program as it relates to long-term incentives. It was designed to provide the flexibility and incentives required to attract highly qualified individuals in a competitive marketplace, to motivate and retain key employees, and to meet the requirements of Section 162(m) of the Internal Revenue Code for “performance-based” compensation. The Compensation Committee has the authority to approve all awards made under this plan. The 2004 Incentive Plan provides the Company with the flexibility to adapt to changing market influences that may prompt varying the mix of performance-based cash awards, nonqualified stock option grants and restricted stock awards.

 

The Compensation Committee uses an analysis of total compensation paid to peer company executives when establishing potential long-term incentive payments to its named executive officers. Allocation of long-term incentives is based on an assessment of that executive’s individual contributions to the Company, as well as an analysis of peer group compensation practices.

 

The number of nonqualified stock options awarded to named executive officers is determined within the context of the Compensation Committee’s review of total target compensation for executive officers and in light of the Company’s philosophy of weighting overall compensation toward performance-related components. Black-Scholes values are used to convert the number of shares of stock underlying each stock option granted into a dollar value that can then be compared with peer group practices and the Company’s total compensation objective. In addition to being competitive to the peer group, the number of grants and shares of stock underlying each stock option grant for the named executive officers reflect a number of considerations, including the Company’s year-over-year growth in both revenue and EPS, expansion into profitable markets, and strategic acquisitions that have positioned the Company as a full-service healthcare organization. See the Grants of Plan-Based Awards During Fiscal Year 2008 table on page 26 for a summary of the grants awarded in 2008.

 

The Black-Scholes assumptions for the nonqualified stock option grants included in this proxy are as follows:

 

 

As in previous years, in 2008 the Company also awarded to its named executive officers shares of performance based restricted-stock. These awards were designed so that vesting of the awards would occur over four years in equal annual installments, provided that the Company achieved the EPS and EPS growth goals for 2008 attached to

such awards. Because these EPS threshold goals were not fully achieved, all of these performance-based restricted stock awards made to our named executive officers in 2008 were forfeited.

 

In late summer of 2008, the Compensation Committee met to consider ways to motivate and retain key employees in light of the Company’s own performance and external market conditions. The Compensation Committee decided that it would be appropriate to make a one-time grant of time-based restricted stock to a broad group of management personnel, including the named executive officers, in order to retain and motivate such employees. These grants were made on September 26, 2008. The awards vest in four equal annual installments beginning on the first anniversary of the grant date. In connection with receiving such awards, the Company required members of senior management, including named executive officers, to enter into restrictive covenants agreements. These agreements contain terms requiring the award recipient (i) to comply with covenants regarding nondisclosure of the Company’s confidential information; (ii) to refrain from competition with the Company and from soliciting the employment of the Company’s employees and customers for a period of one year following termination of employment; and (iii) pursuant to a “claw-back” provision, in the event of breach of the noncompetition covenants by the award recipient, to pay to the Company the fair market value of any shares granted pursuant to the restricted stock award agreement with respect to which the restrictions have lapsed within the last 12 months of employment, less any taxes paid with respect to such shares (with fair market value based on the Company’s stock price on the date the restrictions lapsed).

 

The Company does not time the issuing of grants and awards around material, non-published information. Grant and award dates are determined either as of a specific future event (such as date of hire) or on the date of the Compensation Committee’s approval. The Compensation Committee generally considers new hire awards at its regularly scheduled meetings. Awards approved for executives that are newly hired are priced at the closing market price on the date of grant. The date of grant is either:

 

(i) the date of hire if that date is after the Compensation Committee’s meeting date; or

 

(ii) the date of the Compensation Committee’s meeting if the date of hire is before the Compensation Committee’s meeting date.

 

The annual equity grants for key management are generally considered and approved at a Compensation Committee meeting held mid-year during an open window period. The annual grant date is four (4) business days after the date of the Compensation Committee’s approval to allow time to communicate the awards and to timely file Form 4 disclosures with the Securities and Exchange Commission. The exercise price of option awards is the closing market price of the Company’s stock on the grant date.

 

The Company is currently considering the amount and terms of the equity grants that it will make to its senior executives for 2009. Decisions with respect to these grants will occur as part of the Company’s overall process for determining total compensation and will take into account the fact that the Company, as discussed below, intends to replace its Mid-Term Plan with another form of incentive compensation.

 

Performance-based executive retention program.  In a highly competitive environment such as ours, retention of key senior executives, including the named executive officers, is of critical importance to the Company’s success. In May 2004, the Company began utilizing a program intended to promote the retention of such executives, the Mid-Term Plan. This program was administered under the terms of the 2004 Incentive Plan. The plan design included an annual EPS target and service requirements applied over a rolling three-year period, with payments contingent both on the EPS target being achieved and the executive’s continued employment with the Company through the three-year term. Allocations for a particular year were forfeited if EPS targets for that year were not met or if the executive left the Company before the end of the applicable three-year term. Earlier payment was permitted to occur in the event of a change-of-control, in which case all participants’ accounts would vest in full, or in the event of a participant’s death or involuntary discharge without cause, in which case such participant’s accounts would vest on the date of death or discharge.

 

The Mid-Term Plan consisted of two types of cash allocations: a fixed dollar allocation and a stock equivalent allocation credit. Investment returns for the fixed dollar allocation account were based on a model portfolio as selected by the Company. The credits in the stock equivalent allocation account increase or decrease in accordance

with the price of the Company’s common stock, although payments on the stock equivalent allocation are ultimately paid in cash.

 

For 2008, the fixed dollar allocation opportunity for our named executive officers was a percentage of cash compensation (base salary plus the actual EMIP incentive payment paid with respect to 2007) as follows:

 

 

For 2008, all Mid-Term Plan participants were eligible to receive a stock equivalent allocation credit equal to 35% of each participant’s fixed dollar cash allocation, conditioned on the Company meeting its EPS target and individual performance. Under the 2008 Mid-Term Plan, contributions to the fixed dollar allocation and stock equivalent allocation accounts were made subject to forfeiture if the executive were to resign, were terminated for cause prior to June 30, 2011, or if the EPS goals for 2008 were not met. Since the Company did not fully achieve its performance criteria for 2008, executives forfeited all awards for 2008.

 

The following Mid-Term Plan account balances, earned from previous years, remained in place as of December 31, 2008:

 

 

 

 

For 2009, the Company has discontinued the Mid-Term Plan. The Company is in the process of evaluating substitute incentives that will promote both executive retention and achievement of performance goals.

 

Non-Qualified Deferred Compensation Plan and Long-term Disability Coverage.  The Company’s 401(k) Restoration and Deferred Compensation Plan (“Restore Plan”) maintains the relative value of the Company-provided retirement benefit to all employees otherwise curtailed by Internal Revenue Code Section 415. This benefit is paid to equalize benefits (on the basis of percent of base pay allocated to retirement funding) for all similarly situated executives. The Restore Plan is discussed in more detail in the narrative to the Nonqualified Deferred Compensation Table on page 29 of this proxy statement.

 

The long-term disability benefit is likewise structured to remove Internal Revenue Code and ERISA limitations to equalize benefits on the basis of percent of compensation eligible for long-term disability payment consideration. Under the terms of the employment agreements executed with most named executive officers, long-term disability payments will be provided at full salary continuation until the executive qualifies for benefits under the standard employee long-term disability program (see “Employment Agreement Summary” on page 31 of this proxy statement for more information). Once the standard employee long-term disability benefit payments begin, a named executive officer will receive 60% of his pre-disability earnings, supplemented by the Company to the extent not covered under its standard long-term disability program.

Perquisites.  The Company provides a limited number of perquisites to the named executive officers. The Company believes that these limited perquisites are necessary to attract and retain talented executives, to promote greater efficiency and productivity of executives’ time, and in some cases, to provide physical security for the executives. The Company-provided perquisites include a company car (lease or allowance) and private aircraft services for business use for all named executive officers and limited personal use for Mr. Wolf, Mr. Guertin, Mr. McDonough, and Mr. Soistman.

 

All executives have the right to participate in Company employee benefit programs (including medical, dental, vision, life, accidental death and dismemberment, dependent life, short-term disability, 401(k) plan, vacation/holidays, group legal, and flexible spending accounts). Benefit plan participation is on the same basis as all other eligible employees, except that highly compensated employees ($200,000 base salary plus bonus) pay a higher medical plan contribution rate than other covered employees.

 

Allen Wise’s Employment Agreement

 

On April 8, 2009, the Company and Mr. Wise agreed to the basic terms and conditions of his employment as Chief Executive Officer of the Company, which will be set forth in an employment agreement to be executed by Mr. Wise and the Company. The employment agreement will be deemed to be effective as of January 26, 2009 and have an initial term ending on December 31, 2010 with provisions for automatic one-year renewals unless either party gives notice of non-renewal at least 90 days prior to the end of the term. Pursuant to the agreement, Mr. Wise’s initial annual base salary will be $600,000, with any future increases subject to the discretion of the Compensation Committee. Mr. Wise will have an annual bonus target under the Company’s EMIP equal to 300% of his base salary, subject to performance criteria and with a maximum payout of two times target.

 

In addition, Mr. Wise was granted 1.0 million stock options each with an exercise price equal to the fair market value on the date of grant (April 8, 2009), and 300,000 performance share units which will be earned over the performance period April 1, 2009 thru December 31, 2009 based upon the achievement of pre-established earnings per share targets. The stock options will vest 50% as of December 31, 2009 and 50% as of December 31, 2010. Performance share units will be settled in cash upon vesting. In January 2010, Mr. Wise will be granted 300,000 performance share units which will be subject to vesting based upon achievement of earnings per share targets established by the Compensation Committee for calendar year 2010.

 

Mr. Wise will also receive a $4 million sign-on bonus to compensate him for his dislocation from his current business endeavors and his loss of income from such sources. This amount will be paid one-half upon execution of his employment agreement and one-half on January 1, 2010, so long as Mr. Wise is still serving as Chief Executive Officer.

 

Mr. Wise will be eligible to participate in all executive level benefit arrangements but no perquisites or tax gross-up arrangements will be provided. In addition, under certain circumstances, Mr. Wise will be eligible for limited severance up to a maximum of one times his base salary and target bonus or compensation for the balance of the contract term, again without any tax gross-up.

 

Executive Stock Ownership Guidelines

 

The Company has adopted stock ownership guidelines for certain executive officers. These guidelines promote an ownership culture and long-term perspective and further align executive officers’ interests with stockholders’ interests. These guidelines also support the Company’s long-standing commitment to sound corporate governance. The guidelines recommend that the Chief Executive Officer, President, Executive Vice Presidents, Senior Vice Presidents and other designated executives own shares of the Company’s common stock having a continuing value equal to a multiple of their base salary.

 

As a result of an analysis completed by the Compensation Committee’s independent consultant, the Company revised its executive stock ownership guidelines in 2008. Based on the analysis of the top 250 largest publicly traded

companies, coupled with the current economic environment facing similar Fortune 500 companies and generally depressed stock prices, the Company revised its recommended multiples as follows:

 

 

Additionally, for the same reasons mentioned above, the Company has revised the time period in which executives must meet or exceed this threshold ownership from three years to five years. Executives are now expected to achieve their stock ownership goals within five years of the date such executive becomes subject to the guidelines. Hedging or any form of margin arrangement, short sales, and/or dealing in puts and calls of the Company’s stock by executives is prohibited. Executives who do not meet the guidelines within the prescribed time frame may not be eligible for future stock grants.

 

The percent of stock ownership guideline achieved by each named executive officer under these new guidelines as of December 31, 2008 is displayed in the following table:

 

 

 

 

Post-Termination Arrangements.  The Company provides severance and change-in-control post-termination benefits to its named executive officers. These arrangements are provided to maintain executive continuity and leadership during potentially disruptive negotiations relating to potential mergers, acquisitions, or other business combinations. These arrangements also serve to protect the stockholders’ interest in maintaining executive leadership so that goals and objectives in the best interest of the stockholders are pursued.

 

Severance and related excise tax provisions are established at the median of peer group levels. Should an executive’s change-in-control payment result in the imposition of Section 4999 excise taxes, the executive will receive gross-up protection, except that a ten-percent (10%) cutback provision applies, to the extent such cutback would eliminate the excise tax. The cutback is capped at $100,000 for the chief executive officer and $50,000 for the other named executive officers. Had a change-in-control occurred on December 31, 2008, no excise tax would have been assessed and the cutback provision would not have been applied for any named executive officer. See the Post-Termination Compensation — Fiscal Year 2008 table and the Employment Agreement Summary table on pages 30 through 32 of this proxy statement for a summary of the post-termination, severance, death, and disability payments available to the named executive officers.

Set forth below is information concerning the compensation of the named executive officers for our most recent year.

 

Summary Compensation Table

 

 

 

 

 

 

 

The following table sets out grants of our plan-based awards to our named executive officers in 2008. Although required to be listed in the table below, the listed cash bonuses were not earned and the performance-based shares were forfeited in 2008 due to the Company not meeting its EPS target.

 

Grants of Plan-Based Awards During Fiscal Year 2008

 

 

 

 

 

The following table provides information with respect to outstanding stock options and restricted stock held by the listed officers as of December 31, 2008. Unless specified, equity awards vest at a rate of 25% per year over four years from the grant date. The table below includes shares of performance-based restricted stock awarded on May 19, 2008 that were subsequently forfeited.

 

Outstanding Equity Awards at Fiscal Year-End — Fiscal Year 2008

 

 

 

The following table provides information concerning exercises of stock options and vesting of restricted shares during 2008 for the named executive officers:

 

Option Exercises and Stock Vested — Fiscal Year 2008