UnitedHealth Group CEO Stephen Hemsley realized a potential gain of more than $45 million from exercising stock options last year, as the share price of the nation's largest health insurer topped $100 on the way to setting all-time highs.
The 62-year-old executive exercised options to buy 850,000 shares of stock at the end of 2014 at discounts of as much as 56% to UnitedHealth's share price of $102.24 when he exercised the options. Hemsley paid between $45.28 and $57.42 per share, according to a proxy statement filed recently with the Securities and Exchange Commission.
The difference between his exercise price and the market price led to a realized value of $45.6 million for the executive.
The CEO didn't sell any of these shares, so that amounts to a paper gain. He will only pocket it if the shares have at least maintained their value when he sells them.
UnitedHealth spokesman Don Nathan noted that the options were granted to Hemsley in 2005 when he was the company's president and chief operating officer and don't reflect compensation decisions the company's board made for last year.
That kind of gain from options granted a decade ago is an example of how the system is supposed to work, said Charles Elson, who studies executive pay as director of the Weinberg Center for Corporate Governance at the University of Delaware. He noted that options are supposed to provide a benefit to the shareholder if the company's value rises.
"The fact that he's keeping the stock means he has faith in the company," Elson said.
He also said he expects to see similar gains from other companies as executives exercise options granted when the market was down a few years ago.
Hemsley realized such a large potential gain partly because his company's shares climbed 34% last year, or about triple the advance of the Standard & Poor's 500 index. That follows a year in which the Minneapolis-based insurer's stock advanced 39%. That growth has continued into 2015, with UnitedHealth reaching its latest all-time high price of $123.76 last month.
Investors have been drawn to UnitedHealth by a quarterly dividend that has climbed to nearly 38 cents per share, the fact that the company usually tops Wall Street expectations and by its diverse businesses. Health insurance is UnitedHealth's largest business, but it also provides information technology services and runs a rapidly growing pharmacy benefits management business.
Shares of UnitedHealth Group rivals like Anthem and Aetna also have climbed as the federal healthcare overhaul has unfolded and investor uncertainty about the law's affect on the industry has dissipated.
Hemsley, who became CEO in 2006, received total compensation valued at about $14.9 million last year, a 23% increase from the year before. That counts salary, bonuses, perks, and the estimated value of new stock options awarded during the year.