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 19, 2011

 

 

To our Stockholders:

 

You are cordially invited to attend our 2011 Annual Meeting of Stockholders, which will be held on Thursday, May 19, 2011, at 8:00 a.m., Eastern Time, at The Ritz-Carlton Tysons Corner, 1700 Tysons Boulevard, McLean, Virginia 22102, Telephone (703) 506-4300. The meeting will be held for the following purposes:

 

 

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. As a result, we are mailing a notice of internet availability to many of our stockholders instead of paper copies of our proxy statement and our annual report. The notice contains instructions on how to access those documents over the internet. The notice also contains instructions on how stockholders can receive a paper copy of our proxy materials, including the proxy statement, our 2010 Annual Report and a form of proxy card.

 

All holders of record of the Company’s common stock at the close of business on Monday, March 21, 2011 are entitled to vote at the 2011 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 8, 2011

 

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 19, 2011

 

 

 

 

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 2011 Annual Meeting of Stockholders of the Company to be held on Thursday, May 19, 2011, at 8:00 a.m., Eastern Time, at The Ritz-Carlton Tysons Corner, 1700 Tysons Boulevard, McLean, Virginia 22102, Telephone (703) 506-4300 or at any adjournment of the meeting (the “2011 Annual Meeting”).

 

On April 8, 2011, we mailed to our stockholders a notice containing instructions on how to access this proxy statement, our 2010 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 or in the past have specifically elected to receive future proxy materials by mail.

 

What is the purpose of the 2011 Annual Meeting?

 

You will be asked to consider and vote upon five proposals: (i) to elect three individuals to serve as Class II Directors of the Company until the annual meeting of stockholders to be held in 2014; (ii) to ratify the selection of Ernst & Young LLP as the Company’s independent registered public accounting firm for 2011; (iii) a non-binding advisory vote to approve the compensation of the Company’s named executive officers; (iv) a non-binding advisory vote to determine whether the non-binding advisory vote on the compensation of the Company’s named executive officers should be held every year, every two years or every three years; and (v) a stockholder proposal set forth in this proxy statement, if properly presented at the meeting. The Board is not aware of any other matters to be presented for action at the 2011 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 8, 2011, 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 2010 Annual Report and other proxy materials are posted at www.proxyvote.com (simply enter your 12-digit control number listed on the Notice and click “Submit”). You may also request printed copies of this proxy statement, the 2010 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 21, 2011, the record date for the meeting (the “Record Date”), are entitled to receive notice of and to vote at the 2011 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 2011 Annual Meeting for an estimated fee of $7,500 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 21, 2011, the Record Date, there were 148,251,797 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 2011 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 properly executed proxy. Any stockholder of record present in person or by properly executed proxy at the 2011 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 2011 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.  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 2011 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 proxy at the 2011 Annual Meeting and entitled to vote is required (i) to ratify the selection of Ernst & Young LLP as the Company’s independent registered public accounting firm, (ii) to approve the non-binding advisory vote on the compensation of the Company’s named executive officers, (iii) to approve the stockholder proposal set forth in this proxy statement and (iv) to act upon all other business that may properly come before the 2011 Annual Meeting or any adjournment(s) thereof. To determine whether the non-binding advisory vote on compensation of the Company’s named executive officers should be held every year, every two years or every three years, the option receiving the most votes will be the option selected by the stockholders.

 

How do I vote?

 

You can vote either in person by attending the 2011 Annual Meeting or by proxy without attending the 2011 Annual Meeting. To vote by proxy, you must either:

 

 

Can I change or revoke my vote?

 

Yes. To change or revoke your vote, 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 2011 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 2011 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.

 

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. A broker non-vote occurs if your shares are not registered in your name and you do not provide your broker or other nominee with voting instructions on a non-routine matter. In accordance with the rules of the New York Stock Exchange, the election of directors is considered a non-routine matter, and if you fail to provide your broker or nominee with instructions, your broker or nominee may not vote on Proposal 1. Proposal 2, regarding the ratification of Ernst & Young LLP as our independent registered public accounting firm, is considered a routine matter and a broker may submit a proxy card voting shares at his or her discretion on this matter even if you fail to provide instructions. Proposals 3, 4 and 5, concerning the non-binding advisory vote on the compensation of our named executive officers, the non-binding advisory vote to determine whether the non-binding advisory vote on the compensation of our named executive officers should be held every year, every two years or every three years, and the stockholder proposal, are non-routine matters, and if you fail to provide your broker or nominee with instructions, your broker or nominee may not vote on them.

 

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.

 

Where can I find voting results for the 2011 Annual Meeting?

 

The preliminary voting results will be published on a Current Report on Form 8-K filed by the Company with the SEC within four business days of the 2011 Annual Meeting. The final voting results, if different than the preliminary voting results, will be published on an amended Current Report on Form 8-K within four business days of the date on which the final results are known.

 

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 2010 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, the 2010 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.

 

The Board currently combines the roles of Chairman of the Board and Chief Executive Officer. Considering the Company’s strong performance over extended periods under Mr. Wise’s leadership, the Board believes that the Company benefits from Mr. Wise’s services in both roles. Mr. Wise had previously served as our Chief Executive Officer from 1996 through 2004, and the Board believed him to be the most qualified to serve again as our Chief Executive Officer in light of his successful previous tenure leading the Company, his continuous involvement in the Company’s business as a director and Chairman, and his overall experience in, knowledge of and reputation in the health care industry.

 

The Board also maintains an independent Lead Director. Elizabeth E. Tallett currently serves as our Lead Director. We believe it is important to have an independent Lead Director to establish a system of checks and balances between the independent directors of the Board and Mr. Wise. The Lead Director provides leadership to the Board to ensure it operates in an independent, cohesive manner. In addition to working in conjunction with the Chairman to establish the agenda for each meeting, the Lead Director presides over executive sessions attended by only independent directors; presides over meetings in the event of the Chairman’s unavailability; communicates to the Chairman the substance of discussions held during executive sessions; serves as a liaison between the Chairman and the Board’s independent directors on sensitive issues; approves materials sent to the Board; speaks on behalf of the Board and the Company as directed by the Board when the Chairman is unable to do so; remains available to receive direct communications from stockholders, employees, regulatory agencies, etc. through Board approved procedures; and performs such other responsibilities as the Board may periodically consider to be appropriate. Our Corporate Governance Guidelines set forth in greater detail the Lead Director’s responsibilities. Our Corporate Governance Guidelines are available under “Corporate Governance” accessible through the “Investor Relations” link on the Company’s website at www.coventryhealthcare.com.

 

The Company is exposed to a number of risks, including economic, environmental, operational and regulatory risks, among others. Management is responsible for the day-to-day management of the risks the Company faces, while the Board as a whole is responsible for the oversight of such risk. The Audit, Compensation, and Nominating/Corporate Governance Committees, however, each play a key role in assisting the Board in fulfilling its oversight responsibilities. The Audit Committee regularly meets with management, members of the Company’s internal audit department and the Company’s independent registered public accounting firm to discuss and remedy any significant financial risk exposure, including internal controls. Management, external auditors, and internal auditors also periodically provide reports to the Audit Committee. In addition, the Audit Committee provides regular reports regarding its activities to the Board. The Compensation Committee assists the Board with risk oversight by monitoring and structuring employee compensation practices to ensure they do not promote excessive risk-taking that might threaten the value of the Company and regularly reporting its activities to the Board. The Nominating/Corporate Governance Committee assists with risk oversight by managing Board structure and organization,

establishing the criteria for selecting new members to the Board, annually reviewing the corporate governance principles of the Company and recommending changes when appropriate. The Nominating/Corporate Governance Committee also regularly reports its activities to the Board.

 

In 2010, the Company engaged Ernst & Young LLP to conduct an enterprise risk assessment (“ERA”) in order to further develop the Company’s enterprise risk management framework. Ernst & Young LLP conducted interviews with members of senior management and the Board to identify the most significant risks faced by the Company. Based on the ERA, the Company has implemented processes to monitor and report on mitigating initiatives, including a quarterly review of significant business risks by key leaders of the Company. Ernst & Young LLP will perform periodic follow-up reviews of the Company’s ERA program.

 

At the direction of the Compensation Committee, management of the Company prepared an analysis and assessment of our compensation programs for all employees, including our executives, evaluating the potential risks associated with those programs. Our assessment consisted of an extensive review of our various plans and programs by a cross-functional team of representatives from different departments throughout our organization, including our legal, finance and human resources/compensation departments and Frederic W. Cook & Co., Inc. (“Frederic W. Cook”), the Compensation Committee’s independent compensation consultant. This team reviewed the structures of the compensation programs, the processes used with respect to those programs and the controls related to those programs. It also validated our compensation mix against the compensation mix in the market and among our peer group.

 

The Compensation Committee and representatives from Frederic W. Cook reviewed and discussed with management the results of the analysis and assessment of our compensation programs. We concluded that, although we maintain performance-based incentive plans, our compensation policies and practices have counterbalances that mitigate risks and do not create risks that are reasonably likely to have a material adverse effect on our Company. In reaching or concurring with the conclusions, the assessment team and the Compensation Committee considered the following features of our compensation programs:

 

 

 

The Board has determined that nine 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 the applicable rules and regulations and 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 those types of facts and circumstances set forth in 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 nine independent directors are: Joel Ackerman, L. Dale Crandall, Lawrence N. Kugelman, Daniel N. Mendelson, Rodman W. Moorhead, III, Michael A. Stocker, M.D., Joseph R. Swedish, 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. We discuss the specific experience, qualifications, skills and attributes of each of our directors and director nominees within the director biographies on pages 12 to 15 of this proxy statement. Any stockholder nominations proposed for consideration by the Nominating/Corporate Governance Committee should be submitted to the following address: 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 2012 annual meeting of stockholders 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 20, 2012 and not later than February 19, 2012).

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 (the “Exchange Act”) (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 Company’s Corporate Governance Guidelines do not explicitly define “diversity.” It is the Nominating/Corporate Governance Committee’s practice to seek director candidates who will contribute to a diversity of perspectives. The Nominating/Corporate Governance Committee considers diversity in the context of the Board as a whole and takes into account a candidate’s personal characteristics (such as gender and ethnicity) and experience (such as with respect to industry education and public service), with the aim of maintaining a Board that considers a broad range of viewpoints. Board members should also 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, and in no event may any director serve on the board of directors of more than six public companies. Our Corporate Governance Guidelines are available under “Corporate Governance” accessible through the “Investor Relations” link on the Company’s website at www.coventryhealthcare.com.

 

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 seeks to achieve a balance of knowledge, experience, diversity of perspective 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. Prior to 2009, Allen F. Wise, our Chairman of the Board, chaired the executive sessions. Since returning to the Company in 2009 as our Chief Executive Officer, executive sessions have been chaired by the Company’s Lead Director, Elizabeth E. Tallett. Ms. Tallett is an independent director elected to such position by her fellow 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 2010 annual meeting of stockholders. For 2011, the Board scheduled its regular meeting in the second quarter to coincide with the 2011 Annual Meeting. The Company anticipates that all directors will attend its 2011 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 to the following address: 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 2010 fiscal year, the Board held four regular meetings, three special telephonic meetings and one meeting by unanimous written consent. All incumbent 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 independent directors. The members of the Audit Committee are Lawrence N. Kugelman (Chair), L. Dale Crandall and Elizabeth E. Tallett. Mr. Crandall and Ms. Tallett serve on the audit committees of four and three public companies, respectively. 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.  The charter provides a detailed description of the Audit Committee’s responsibilities. During the 2010 fiscal year, the Audit Committee held four regular meetings, four pre-earnings release telephonic meetings, four special telephonic meetings and two special 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 four independent directors. The members of the Nominating/Corporate Governance Committee are Joel Ackerman (Chair), Daniel N. Mendelson, Michael A. Stocker, M.D. 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” on page 7 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. During fiscal year 2010, the Nominating/Corporate Governance Committee held four regular meetings and three special telephonic meetings.

 

Compensation Committee. The Compensation Committee is comprised of four independent directors. The members of the Compensation Committee are L. Dale Crandall (Chair), Rodman W. Moorhead, III, Joseph R. Swedish and Timothy T. Weglicki. The Compensation 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. During fiscal year 2010, the Compensation Committee held four regular meetings, five special telephonic meetings and one special meeting.

 

During the year ended December 31, 2010, the Compensation Committee was comprised of L. Dale Crandall (Chair), Rodman W. Moorhead, III, Joseph R. Swedish 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 2010, 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.

 

Our Code of Business Conduct and Ethics, Corporate Governance Guidelines, Related Person Transactions Policy and current committee charters are available under “Corporate Governance” accessible through the “Investor Relations” link on the Company’s website at www.coventryhealthcare.com.

 

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 and Bylaws provide 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: four in Class I, three in Class II and three 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 II Directors’ terms of office expire in 2011. The nominees designated for election as Class II Directors at the 2011 Annual Meeting will, if elected, each serve three-year terms expiring at the annual meeting of stockholders in 2014. All of the Class II nominees consented to being nominated and to serve if so elected.

 

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 persons named on 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 2011 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 II Directors as well as the persons serving as Class I and Class III Directors whose terms continue until the 2013 or 2012 annual meeting of stockholders, respectively:

 

Nominees for Class II Directors

 

 

Continuing Class I Directors with Three-Year Terms Expiring in 2013

 

 

Continuing Class III Directors with Three-Year Terms Expiring in 2012

 

CLASS II DIRECTOR NOMINEES
(TO BE ELECTED; CURRENT TERMS EXPIRE IN 2011)

 

Joel Ackerman has been a director of the Company since November 1999. From October 2010 to the present, Mr. Ackerman has been a director and the Chief Executive Officer of Champions Oncology, Inc. (formerly Champions Biotechnology, Inc.), a public company engaged in the development of predictive technology used to improve the development and use of oncology drugs. From September 2008 to October 2010, Mr. Ackerman was 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 also a director of Kindred Healthcare, Inc., a company operating long-term acute care hospitals, skilled nursing centers and contract rehabilitation services.

 

Mr. Ackerman’s specific skills and experience include his past positions at Warburg Pincus & Co., a leading investment firm that has provided funding to a variety of public and private health care services companies at all stages of development. We believe his experience as a health care industry investor provides a unique perspective to the Board in assessing merger and acquisition opportunities, financing options and strategic planning.

 

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. Mr. Kugelman has been a private investor and business consultant since October 1996. From October 2002 to September 2010, he was a director 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.

 

Mr. Kugelman has more than 26 years of executive experience in managed care. His skills and specific expertise in the managed care and pharmaceutical industries enable him to contribute to our Board’s understanding of the competitive challenges our Company faces.

 

Michael A. Stocker, M.D. has been a director of the Company since November 2009. Dr. Stocker served as Chief Executive Officer of Empire Blue Cross Blue Shield (“Empire”) from 1994 until its acquisition by Wellpoint, Inc. in December 2005. Dr. Stocker was employed by Wellpoint through April 2007. Dr. Stocker is a past Chairman of America’s Health Insurance Plans. Prior to joining Empire, Dr. Stocker had served as President of Cigna Healthplans and as General Manager of U.S. Healthcare for its New York market. Earlier he had been Medical Director, Anchor HMO/Rush Presbyterian St. Luke’s Medical Center in Chicago, and Associate Chairman of the Department of Family Practice at Cook County Hospital. He is currently on the boards of the HMS Holdings Corp., a cost management company for government-sponsored health and human services programs that is a publicly traded company on the NASDAQ Global Select Market, the Arthur Ashe Institute for Urban Health, the United Hospital Fund, a non-profit health services research and philanthropic organization, and SeeChange Health, a start-up private equity company, which is part of the Psilos Group. He is also Chairman of NYC Health and Hospitals Corporation and a member of the Empire State Stem Cell Funding Committee.

 

Mr. Stocker has over 30 years of leadership experience in the health care industry, beginning as a family physician and including executive experience in the managed care industry. This broad experience in the overall health care industry enhances our Board’s analysis of Company performance.

 

CONTINUING CLASS I DIRECTORS
(TERMS EXPIRE IN 2013)

 

L. Dale Crandall has been a director of the Company since January 1, 2004. Mr. Crandall is President of Piedmont Corporate Advisors, Inc., a financial management consulting firm. He 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 Ansell Limited, a global provider of health care barrier protection products and Bridgepoint Education, Inc., a provider of post-secondary education. He is also a trustee of five funds in the Dodge and Cox family of mutual funds.

Mr. Crandall’s skills and qualifications applicable to the Company includes his extensive experience in the managed care industry. In particular, as noted above, Mr. Crandall served as an executive with Kaiser Permanente on both the provider and payor sides of that company’s business. His background includes executive experience in day-to-day operations, finance and accounting. We believe that because of these specific skills and experience, Mr. Crandall enhances the Board’s knowledge of the health care industry and its complicated reimbursement system, as well as the related operational, financial and accounting complexities.

 

Joseph R. Swedish has been a director of the Company since February 2010. Since December 2004, Mr. Swedish has served as President and Chief Executive Officer of Trinity Health, a not-for-profit multi-state health care system serving eight states and 47 hospitals supporting an integrated delivery system. Previously, Mr. Swedish was President and Chief Executive Officer of Centura Health from 1999 to 2004. From 1994 to 1998, Mr. Swedish served as President and Chief Executive Officer of the Central Florida and East Florida Divisions of Hospital Corporation of America.

 

Mr. Swedish brings significant governance and management health care experience to the Board. He serves as a board member for the National Quality Forum, engages in numerous initiatives through national associations for the improvement of health care delivery and has served on public company boards in the health care industry. His current position as a health care system executive combined with a career engaged in many sectors of the industry enables the Board to better understand the perspectives and strategies of providers, such as hospitals and physicians.

 

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, and Principal Financial Group, Inc., a global financial institution.

 

Ms. Tallett has extensive experience in the biotechnology, pharmaceutical and life sciences industries. The Board believes that her knowledge of these industries helps it better understand health care costs, research and treatments. Previously, Ms. Tallett served as President and Chief Executive Officer of TransCell Technologies, Inc.; as President of Centocor Pharmaceuticals; as a member of the Parke-Davis Executive Committee; as a Director of Varian, Inc.; and as Director of Worldwide Strategic Planning for Warner-Lambert Co.. Her executive experience enables her to provide depth of knowledge on issues of marketing, operations and acquisitions.

 

Allen F. Wise became our Chief Executive Officer on January 26, 2009. He has been a director of our Company since October 1996 and has been Chair of the Board since January 2005. He was President and Chief Executive Officer of our Company from October 1996 to December 2004, when he retired.

 

Mr. Wise has extensive operational and management experience in health care and has served as both an executive officer and director with numerous other companies in the health care sector during the past 36 years. We believe that Mr. Wise brings extensive historical knowledge of the Company — and the managed care industry generally — to the Board. We believe that his deep knowledge of the Company and the industry, the judgment he has developed during many years as a chief executive and his ability to assemble and motivate a talented executive team is reflected in the Company’s long-term performance during his association with it.

 

CONTINUING CLASS III DIRECTORS
(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 health care 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.

 

As a leading national expert in Medicare, Medicaid and other public health care programs, Mr. Mendelson has a deep understanding of the Company’s strategic imperatives in each of these lines of business. As Chief Executive

Officer of Avalere Health, Mr. Mendelson actively advises Fortune 500 companies on policy issues of immediate relevance to managed care operations, such as clinical quality, evidence-based medicine, health economics and outcomes research and health information technology. Mr. Mendelson’s prior experience as a White House policy official also lends perspective on how federal health care policies are developed and how they impact companies across the spectrum of health care businesses.

 

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.

 

Mr. Moorhead has been a director of our Company for over 14 years. His experience in private equity and venture capital allow him to articulate the perspective of an institutional investor.

 

Timothy T. Weglicki has served on our Board since August 2001. Mr. Weglicki is a Founding Partner of ABS Capital Partners, a private equity firm founded in 1993. Prior to joining ABS Capital in 1993, Mr. Weglicki spent 15 years with Alex. Brown & Sons Incorporated, where he was an investment banker in the firm’s health care practice, headed the corporate finance and equity divisions and founded and headed the firm’s capital markets group. He is a director of American Public Education and of several of ABS Capital Partners’ portfolio companies.

 

We believe that Mr. Weglicki’s qualifications to serve on our Board of Directors include his significant leadership experience in investment banking, capital markets and private equity, his understanding of successful health care and technology-based business models and his experience as a director of other public companies. Mr. Weglicki has depth of knowledge and experience in numerous areas relevant to our business, including with respect to recruiting executive talent, reorganizing compensation structures and focusing businesses on core profit units.

 

Vote Required

 

The Company’s Bylaws 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. A majority of votes cast means that the number of shares voted “for” a nominee exceeds the number of 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 2011 Annual Meeting but will not be deemed to be votes cast for purposes of tabulating the vote.

 

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

 

The following table sets forth information, as of Monday, March 21, 2011, 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, 148,251,797 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, 2010, 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 18 to 31 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
Joseph R. Swedish
Timothy T. Weglicki

 

 

This Compensation Discussion and Analysis is a discussion of how we use different elements of compensation to achieve the objectives of our executive compensation program and how we determined the amounts of each component of compensation paid to our named executive officers for 2010. This information should be read in conjunction with the data and associated narrative provided in the Summary Compensation Table and other tables on pages 31 through 37 of this proxy statement. For 2010, the following individuals were our named executive officers:

 

 

Our compensation program is designed to achieve the following objectives:

 

 

 

Selected performance measures are tied to the achievement of business plan results, strategic objectives and the creation of stockholder value. Fixed compensation (i.e., base salary) represents a very small portion of overall compensation.

 

 

 

Our compensation program incorporates the following best practices:

 

 

Our compensation program is designed to motivate and reward the achievement of our business performance targets, goals and objectives, which in turn enhance stockholder value over the long-term. Following the divestiture of a non-core business in 2009, in 2010 we focused on our seven core lines of business and on improving our cost structure to better position our Company for future success.

 

Specifically, under the leadership of our management team in 2010, we contributed to long-term stockholder value in the following ways:

 

 

The following chart sets forth a comparison between the performance of our common stock and the Standard & Poor’s (“S&P”) 500 from January 26, 2009 (the date Mr. Wise became our Chief Executive Officer) through December 31, 2010:

 

 

Our executive compensation policies and plans are evaluated and approved by the Compensation Committee with the objective of providing incentive-based compensation that aligns with the business goals of the Company and the interests of its stockholders. The Compensation Committee also determines the compensation of the Chief Executive Officer and evaluates and approves the compensation of the other senior executives of the Company, including our named executive officers.

 

As part of the annual compensation approval process, the Compensation Committee considers the advice of Frederic W. Cook, its independent compensation consultant.

 

Our Chief Executive Officer provides recommendations to the Compensation Committee regarding compensation of our named executive officers and other executive officers during the annual compensation approval process and throughout the year. He does not provide recommendations regarding his own compensation but does provide input regarding his accomplishments and the attainment of business and individual goals set for him by the Compensation Committee each year. Additionally, the Compensation Committee considers the recommendations and feedback of our Chief Executive Officer when designing compensation plans and selecting performance metrics and targets for our annual and long-term incentive compensation programs.

 

The Compensation Committee has engaged Frederic W. Cook because of the firm’s expertise in executive compensation. Frederic W. Cook provides the Compensation Committee with insight as to compensation programs and incentives used by the Company’s peers and other public companies, trends in executive compensation, pending and current legislation and the evolving policies and procedures adopted by proxy advisory services firms.

 

As part of our executive compensation process, we periodically review executive compensation data from similar companies in order to ensure that our practices are fair and reasonable. In 2010, at the request of the Compensation Committee, Frederic W. Cook provided an analysis based upon market data from public SEC filings for eight publicly traded health insurance companies. This peer group is consistent with the companies used for the

2009 analysis. The peer group was selected based on industry focus and includes companies with which we compete for talent. In addition, to ensure the size appropriateness of the companies, we considered an analysis of market capitalization, revenue and similarity of broad-based product and service offerings. The peer group consists of:

 

 

We do not directly tie individual components of compensation to particular benchmarks. Rather, this market-check analysis is just one factor considered in our annual compensation approval process. Other important considerations include individual performance, scope of responsibilities, retention concerns and the need to recruit new executive officers.

 

Generally, we seek to provide base salaries that approximate our peer group median and to design our performance-based programs so that our senior executives will be paid above the median of our peer group if we achieve company-wide and individual performance goals. Our compensation structure is heavily weighted to variable, incentive-based compensation, which is earned only upon the achievement of challenging performance metrics aligned with our business plan, strategic objectives and the delivery of stockholder value. In fact, approximately 80% of the target compensation for our named executive officers is variable, except for Mr. Wise for whom 96% of target compensation is variable. Therefore, if company or individual performance does not meet expectations, actual compensation realized by the executives will be dramatically reduced and would be well below the 25th percentile of the competitive marketplace based on 2010 peer group compensation data.

 

In addition to an examination of pay levels and overall pay mix, Frederic W. Cook also analyzed the program designs of our peer companies, including pay vehicles and performance metrics, as well as dilution levels.

 

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

 

 

 

Our compensation program is designed so that short-term and long-term incentives comprise the majority of our executives’ targeted total compensation and fixed elements represent a relatively small portion of the overall package.

 

Chief Executive Officer

 

 

Other Named Executive Officers

 

 

Base salary provides a competitive rate of fixed pay and reflects different levels of responsibility within the Company, the skills and experience required for the job, individual performance and labor market conditions.

 

In 2009, when Mr. Wise returned as Chief Executive Officer, we equalized base salaries for certain named executive officers to $600,000 to foster a sense of teamwork. Our management team is highly collaborative, and each member of the team is expected to be fully engaged in all aspects of our business.

 

For 2010, base salaries for Messrs. Wise, DeMovick and Zielinski were $600,000. Mr. Bahr’s base salary was increased from $450,000 to $600,000 in connection with his promotion in 2010. Mr. Stelben, our Interim Chief Financial Officer, received a base salary of $325,000 for 2010. In addition to his base salary for 2010, Mr. Stelben also received a monthly stipend of $8,300 while serving as Interim Chief Financial Officer to compensate him for his increased responsibilities.

 

For 2011, Mr. Stelben’s base salary has been increased to $450,000, effective January 29, 2011, and Mr. Stelben will no longer receive the additional monthly stipend previously paid in recognition of his services as Interim Chief Financial Officer. Except as previously stated, the Committee did not make any adjustments to the base salaries of other named executive officers for 2011.

 

Our short-term incentive program is designed to reward the annual achievement of financial, strategic and individual objectives. The annual incentive pool is funded based upon the achievement of corporate performance metrics, but individual payouts are also determined based upon individual performance and accomplishments.

 

Corporate Performance Metric and Target for 2010

 

The corporate performance metric for the 2010 annual incentive program was EPS.

 

 

 

 

The Compensation Committee selected EPS as the corporate performance metric only after careful consideration. Over the course of the last several years, the Company has been committed to focusing our business to better compete in the evolving macroeconomic and health care insurance environments. In 2010, we concentrated on the execution of previously developed strategic business plans.

In selecting EPS as the corporate performance metric, the Compensation Committee emphasized the achievement of a single performance metric which was viewed as critical to our success and is impacted by, and reflective of, a number of other important factors that can serve as performance triggers in their own right, including revenue, net income, selling, general and administrative expense initiatives, profit margins and dilution. Furthermore, we believe EPS serves as the single most important performance measure tracked by our investors as a critical driver of stockholder value.

 

The EPS target of $2.20 is consistent with our 2010 business plan. Our annual business plan is based on an aggregate of targeted levels of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and margin contributions for each of our constituent businesses, which are in turn linked to revenue and/or membership growth targets. This business plan is thoroughly reviewed, discussed, analyzed and approved by our Board of Directors and is believed to reflect challenging goals, particularly in light of the current macroeconomic environment and uncertain regulatory environment. Consistent with our pay for performance philosophy, no annual incentive awards would have been paid if we had not achieved threshold EPS performance of $1.98, which is 80% of target.

 

In 2010, actual EPS achievement was $2.97, which represents 135% of our EPS target of $2.20.

 

New Corporate Performance Metrics for 2011

 

In 2010, at the request of the Compensation Committee, Frederic W. Cook completed a study of performance metrics used by the Company’s peer group. The Compensation Committee, after careful consideration and consultation with Frederic W. Cook, changed our 2011 annual incentive compensation program’s performance criteria from one metric to three weighted metrics. Funding the 2011 annual incentive pool will now be predicated on the attainment of targeted EPS (60%), revenue (20%) and selling, general and administrative costs (20%). Incentive payouts are also based on a variety of individual performance factors as described below.

 

The change to multiple metrics was based upon several factors. Although the Compensation Committee has never taken an EPS-only approach in determining incentive payouts, the use of multiple financial metrics is viewed as an emerging best practice and highlights areas of focus in which outstanding performance will be rewarded. Also, the use of multiple metrics is an added counterbalance in the design of our annual incentive compensation program intended to discourage excessive risk taking that might threaten the value of our Company.

 

Individual Performance Metrics for 2010

 

In determining individual payouts under the annual incentive plan, we take into account a qualitative assessment of individual performance and accomplishments. We evaluate the totality of each executive’s contributions and increase or reduce annual incentive compensation accordingly. Considerations include demonstration of leadership, effectiveness of mentoring, contributions to succession planning and contributions to our integration of newly-acquired businesses. Additional considerations include the achievements of the business unit or department for which the executive is responsible and the relative importance of these achievements to the overall success of the organization. Weight is also given to whether or not an executive assumed any additional assignments or responsibilities outside the normal scope of his position during the year.

 

While all of our named executive officers share responsibility for our corporate performance, each of them has specific areas of responsibility and oversight as well as related operational and strategic objectives that are considered by the Compensation Committee in its annual assessment of their performance. These objectives do not have a specific relative weighting but rather are part of a more holistic assessment of performance.

 

In addition to their overall corporate responsibilities and the successful execution of our strategic plan as approved by the Board, in 2010, our executives had the following additional individual objectives:

 

 

 

Individual Annual Incentive Targets for 2010

 

The Compensation Committee has established target annual incentive awards for each eligible executive, defined as a percentage of base salary. Actual annual incentive payouts are based on the achievement of corporate and individual performance objectives.

 

 

 

 

Annual Incentive Payouts for 2010

 

 

 

 

We believe that most of an executive’s compensation should come from long-term incentive components that are tied to pre-determined performance measures or an increase in the Company’s market value. These awards are intended to reward performance over a multi-year period, align the interests of executives with those of stockholders, instill an ownership culture, enhance the personal stake of executive officers in the growth and success of the Company and provide an incentive for the executive officers’ continued service at the Company. Long-term incentive awards are made under our stockholder approved Amended and Restated 2004 Incentive Plan.

 

2010 Long-Term Incentive Vehicles

 

In 2010, we awarded executives a mix of PSUs and stock options.

 

 

Stock options and PSUs are used to balance and support the objectives of motivating and rewarding the achievement of annual Company and long-term stock price performance, to retain key employees and to create an alignment with the interests of stockholders (as discussed on pages 22 and 23 of this proxy statement). Compensation from stock options depends solely on appreciation in our stock price; as a result, stock options strongly support the objective of ensuring that pay is aligned with changes in stockholder value. PSUs ensure that payouts are tied directly to changes in stockholder value and the achievement of critically important performance objectives, and also minimize dilution of other stockholders.

 

We do not use a pre-defined formula for determining the relative allocation of the different long-term incentive vehicles granted to the named executive officers. Instead, a variety of factors are considered at the time of grant, including the successful achievement of goals set for the named executive officers, an analysis of their entire compensation package, the mix of long-term and short-term incentives previously granted and under contemplation, and current equity holdings, both vested and unvested.

 

2010 Long-Term Incentive Awards

 

Individual grants of PSUs, restricted stock and stock options are determined on a discretionary basis based on individual responsibilities and performance, 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 towards long-term performance-based elements.

In 2010, the Compensation Committee also took into consideration awards previously made to Messrs. Wise and DeMovick in connection with their re-hire in 2009, which in certain instances were intended to serve as incentive compensation for 2010 in addition to 2009. Additionally, awards made to Mr. Wise were made pursuant to his employment agreement.

 

Below is a table reflecting our annual long-term incentive grants made to our named executive officers in 2010:

 

 

 

 

2010 PSU Awards

 

Target awards of PSUs were made to all named executive officers except Messrs. Wise and DeMovick on May 26, 2010. The stock price on the date of grant was $20.46. Pursuant to his employment agreement, the PSU award to Mr. Wise was made on January 4, 2010 and vested upon achievement of 2010 performance goals. The performance metrics associated with this award were established by the Compensation Committee on January 29, 2010, and the stock price on January 29, 2010 was $22.88.

 

The number of PSUs earned varies based upon the achievement of EPS performance targets. EPS was selected as the performance metric for 2010 because it is impacted by, and reflective of, a number of other important factors that can serve as performance triggers in their own right, including revenue, net income, selling, general and administrative expense initiatives, profit margins and dilution.

 

 

 

 

Based on 2010 EPS performance of $2.97, 100% of these PSUs were subsequently earned on December 31, 2010. For all executives other than Mr. Wise, the PSUs will vest on December 31, 2011, but will not be paid out until

early 2012. Therefore, the ultimate value realized by each executive for the PSU awards remains “at risk” and will continue to vary based on future stock price performance.

 

2010 Option Awards

 

Options were awarded on May 26, 2010 to Messrs. Stelben, Bahr and Zielinski and have an exercise price of $20.46.

 

2010 Promotional Award for Mr. Bahr

 

In addition to the annual long-term awards detailed above, on October 8, 2010, we made an award of 50,298 shares of restricted stock to Mr. Bahr in connection with his promotion to Executive Vice President of our Company. This award was divided into two equal tranches of 25,149 shares of restricted stock. The first tranche is subject to the achievement of certain 2011 performance criteria. If these performance criteria are achieved, the restrictions will lapse in equal increments over a four-year period, with the first increment vesting on February 8, 2012 and the remaining three increments vesting annually thereafter on the anniversary of the grant date. The second tranche is time-vested and will vest in four equal annual increments on the anniversary of the date of grant.

 

2011 Long-Term Incentive Awards

 

On January 3, 2011, pursuant to the extension of his original employment contract, Mr. Wise was awarded 356,083 PSUs which will be earned upon the achievement of 2011 performance EPS targets and, if earned, will vest as of December 31, 2011.

 

We anticipate that 2011 long-term incentive awards for our other named executive officers will be made in May 2011.

 

Timing of Long-Term Incentive Awards

 

The Company does not time the issuance of grants and awards around material, non-public 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 members of management are reviewed and approved at a Compensation Committee meeting held mid-year, historically during an open window period. The grant date for such annual awards is five 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 SEC. The exercise price of option awards is the closing market price of the Company’s stock on the grant date.

 

In 2009, in keeping with best compensation practices, the Company prospectively eliminated all executive perquisites and tax gross-up payments.

 

In 2010, two of our named executive officers received de minimus perquisites totaling $29,008, which we were contractually obligated to honor. These benefits were agreed to prior to 2009, the year in which we prospectively eliminated all perquisites (see footnote 4 of the Summary Compensation Table on page 32 of this proxy statement).

 

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 and long-term disability, 401(k) plan, vacation/holidays, group legal and flexible spending accounts). Executives participate in the benefit plans on the

same basis as all other eligible employees, except that as highly compensated employees, they pay a higher medical plan contribution rate than other covered employees.

 

The Company’s 401(k) Restoration and Deferred Compensation Plan (“Restore Plan”) maintains the relative value of the Company’s 401(k) retirement plan benefit offered to all employees, but is otherwise curtailed by Internal Revenue Code Section 415. This benefit is paid to equalize benefits (on the basis of the percent of base pay allocated to retirement funding) for all similarly situated executives. See the Non-qualified Deferred Compensation Table on page 34 of this proxy statement.

 

The Company has adopted stock ownership guidelines for non-employee directors (see page 41 of this proxy statement for a discussion of our non-employee directors’ stock ownership guidelines) and certain executive officers. These guidelines promote an ownership culture and long-term perspective, act as a form of risk mitigation and are intended to align executive officers’ interests with stockholders’ interests.

 

 

Executives are expected to achieve their stock ownership goals within five years of the date such executive becomes subject to the guidelines. Executives who do not meet the guidelines within the prescribed time frame may not be eligible for future stock grants. Ownership that counts towards satisfaction of the guidelines includes common stock held directly, common stock held in the Company’s 401(k) plan and the Restore Plan and unvested restricted stock (stock options are not counted).

 

The following table reflects, as of December 31, 2010, holdings of the Company’s stock by our named executive officers:

 

 

 

 

Hedging or any form of margin arrangement, short sales and/or dealing in puts and calls of the Company’s stock by executives are prohibited.

 

The Company provides severance and change-in-control post-termination benefits to its named executive officers. In the case of a change-in-control, post-termination benefits would not be payable unless the executive is terminated within two years of the change-in-control. 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 stockholders are pursued. For more detail regarding post-termination benefits, see pages 35 through 37 of this proxy statement.

 

The Company also considers the impact of Internal Revenue Code Section 162(m) in its compensation strategies. Under Section 162(m) of the Internal Revenue Code, compensation paid in 2010 to any covered employee 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 Amended and Restated 2004 Incentive Plan (also referred to herein as the “2004 Incentive Plan”) 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 reviews business and legal developments and assesses alternatives for preserving the deductibility of compensation payments and benefits to the extent reasonably practicable, consistent with its compensation philosophy and as determined to be in the best interests of the Company and its stockholders.

 

 

 

 

 

For 2010, “Stock Awards” consists of the following: