PacifiCare’s $68.8-Million ‘Carrot’

PacifiCare Health Systems Inc. gave its top executive an options package last year that could be worth as much as $68.8 million, depending on the managed-care health insurer’s performance during the next decade.

On top of the options to buy 445,000 shares, Chief Executive Alan Hoops received salary and other pay of $983,038 in 1997, according to the company’s proxy filing with the Securities and Exchange Commission.

The options, many of which vest only if the company’s Class B shares close above certain prices by specific dates, are designed to keep management “focused on increasing shareholder value,” PacifiCare spokesman David Erickson said. Other executives, including Chief Operating Officer Jeffrey Folick, received options packages with similar requirements.

“It’s designed to really dangle a pretty big carrot out in front of management,” Erickson said. “After the disappointments of 1997, the board of directors wanted to put in place an incentive program that would help get PacifiCare back on track.”

Hoops’ pay package last year compares with one worth $1.3 million, plus options to buy 30,000 shares, that he got in the company’s fiscal year ended Sept. 30, 1996. Santa Ana-based PacifiCare, one of the nation’s largest managed care companies, changed its fiscal year to match the calendar year in February 1997.

PacifiCare acquired FHP International Inc. early in 1997 for about $2.1 billion. Losses from FHP’s Utah unit, combined with rising medical costs, contributed to lower profits at PacifiCare last year.

PacifiCare has said it intends to sell the Utah operations, and Erickson said a transaction will take place later this year.

The company reported 1997 profit of $107 million, excluding one-time charges, down about 22% from $138 million in 1996. Revenue for the year rose 87% to $8.98 billion from $4.81 billion in 1996.

The HMO had 3.8 million members as of Dec. 31, the end of what Hoops called a “very challenging year” in a recent company release.

Looking ahead, the options PacifiCare gave Hoops last year ensure his potential profit will be closely tied to the performance of the company’s Class B shares.

Those shares, which hold no voting power, fell 19 cents Wednesday to close at $70.94 on the Nasdaq market. The shares have risen 35% so far this year, after falling almost 39% in 1997.

Hoops will be able to exercise options to buy 172,500 Class B shares if the shares close above $92.50 for 20 days by Oct. 6, 2000. He can exercise options to buy another 172,500 shares if the shares close above $114 for 20 days before Oct. 6, 2002.

These so-called premium-priced options expire if the shares don’t reach those levels, the SEC filing said.

To estimate the value of the options, PacifiCare didn’t calculate how much they were worth on the day they awarded, a method used by some companies. Instead, it disclosed estimates of the potential profits executives might make on the options.

The SEC lets companies choose which method to use in proxy statements. For that reason, compensation figures aren’t entirely comparable from one company to another, even in the same industry.

Hoops’ options could be worth as much as $68.8 million, if all the goals are met and the shares rise 10% annually through the year 2007.