Beating the Odds?

How much is enough? When will Bill Gates have enough money? When will William McGuire, CEO of UnitedHealth Group, feel he has fleeced the American public and shareholders enough, often during their most dire times of need and vulnerability? The escalation of health care costs is a travesty, matched only by the exorbitant compensation that some CEOs have structured for themselves. But what goes into that compensation? Perhaps this needs a closer examination.

The Wall Street Journal has reported on some very strange coincidences. How about convenient stock option dates that defy the odds? The stock price on the day that stock options are granted greatly effects how valuable those options will be. What if options are granted on the lowest stock price day of the year? That would be great timing. How many times could our CEO Mr. McGuire hit that lottery? Apparently, he can hit it over and over, as can many other CEOs. Perhaps some CEOs are retroactively setting the option date at the end of the year, after they already know the low price for the year. But they wouldn't do that, because it's illegal. Even before Mr. McGuire's most recent exorbitant compensation story, there were questions:

“The Journal's analysis raises questions about one of the most lucrative stock-option grants ever. On Oct. 13, 1999, William W. McGuire, CEO of giant insurer UnitedHealth Group Inc., got an enormous grant in three parts that -- after adjustment for later stock splits -- came to 14.6 million options. So far, he has exercised about 5% of them, for a profit of about $39 million. As of late February he had 13.87 million unexercised options left from the October 1999 tranche. His profit on those, if he exercised them today, would be about $717 million more.

The 1999 grant was dated the very day UnitedHealth stock hit its low for the year. Grants to Dr. McGuire in 1997 and 2000 were also dated on the day with those years' single lowest closing price. A grant in 2001 came near the bottom of a sharp stock dip. In all, the odds of such a favorable pattern occurring by chance would be one in 200 million or greater. Odds such as those are "astronomical," said David Yermack, an associate professor of finance at New York University, who reviewed the Journal's methodology and has studied options-timing issues.”

Mr. McQuire is not alone in his spectacular market timing. It seems that many other executives have been able to “predict” the low point of their respective stocks. It’s uncanny. As they say, "Odds such as those are "astronomical". For more examples, see the chart at the end of this Wall Street Journal story.

Wall Street Journal Story in PDF.