On Sept. 21, 2001, rescuers dug through the smoldering remains of the World Trade Center. Across town, families buried two firefighters found a week earlier. At Fort Drum, on the edge of New York's Adirondacks, soldiers readied for deployment halfway across the world.
Boards of directors of scores of American companies were also busy that day. They handed out millions of bargain-priced stock options to their top executives.
The terrorist attack shut the U.S. stock market for days. When it reopened Sept. 17, stocks skidded more than 14% over five days, in the worst full week for the Dow Jones Industrial Average since Germany invaded France in May 1940. But for recipients of options, the lower their company's stock price when options are awarded the better, since the options grant a right to buy shares at that price for years to come. The grants set recipients up for millions of dollars in profit if the shares recovered.
Ninety-one companies that didn't regularly grant stock options in September did so in the first two weeks of trading after the terror attack. Their grants were concentrated around Sept. 21, when the market reached its post-attack low.
Stock options were originally designed to align executives' incentives with the goals of shareholders, encouraging recipients to work hard to improve their companies' stock price. When those options are granted at favorable prices, executives get some of their gain free -- that is, they get a chance to buy in an unusual dip below the price many investors have paid.
There's nothing illegal about granting options after the market plunges. But acting so quickly after a national tragedy drove down stocks shows the eagerness of some companies to increase their executives' potential wealth. These grants also offer important new fodder for an already fractious debate over what constitutes the proper use of options in executive compensation.
Some of the post-9/11 grants were extraordinarily well-timed, hitting the exact low for the period. At least six of the companies that granted options dated after the attack are under investigation in the wider options-timing probe. That raises the question of whether some grants that appear to have been granted in the post-attack period were actually made later, then backdated.
UnitedHealth, which granted stock options dated shortly after the terror attack, also faces investigations of its other options practices by the Securities and Exchange Commission and federal prosecutors. The former CEO of one UnitedHealth unit, R. Channing Wheeler, received option grants dated on quarterly lows for four straight years, 1999 through 2002. In September 2001, UnitedHealth gave Mr. Wheeler 96,000 options, adjusted for later stock splits, priced at the managed-care company's post-9/11 quarterly low. UnitedHealth declined to comment and Mr. Wheeler didn't return calls.
On UnitedHealth's compensation committee in September 2001 were New York investor William Spears, Columbia University nursing dean Mary Mundinger and former New Jersey Gov. Thomas Kean -- later head of the federal commission that investigated Sept. 11 intelligence failures. Mr. Kean and Ms. Mundinger didn't return calls, while Mr. Spears declined to comment.
At Stryker Corp., a Michigan maker of orthopedic products, onetime stock-option-committee member John Lillard said he didn't regret the decision to award options nine days after the attack. 'If you believe the company is going to do well, and here is an external event that is affecting the market and you've made a decision to reward executives, you go ahead with it,' Mr. Lillard said. 'Life goes on.'
At Stryker, in Kalamazoo, Mich., post-9/11 stock-option grants to several executives appear to have been initiated by the chairman and CEO at the time, John W. Brown. They were dated Sept. 20, 2001, at the bottom of a sharp 'V' pattern in the share price.
Mr. Brown would 'periodically tell us if he thought the stock was attractive,' and then the board would decide whether to award options, said Mr. Lillard, the former member of Stryker's stock-option committee. 'We didn't just sit down after Sept. 11th and say, 'Gee, how can we take advantage of this?' ' Mr. Lillard said. Besides, he added, no one could have known whether the stock would rebound immediately or continue to slide.
Mr. Brown said that for the past 10 to 12 years, the company, to compensate for a relatively small number of options given to executives, has tried to 'pick what we think would be the low point of the year. That's what we're gunning for.'
Stryker's option grant came on the lowest closing stock price for the second half of the calendar year. Mr. Brown said he believes that he called both members of the stock-option committee on Sept. 20 to recommend they choose that day to grant options. He added that he couldn't remember a time when the board didn't follow his advice.
Mr. Brown said that while he didn't remember the details of the 2001 grant, 'that was the year of 9/11. I'm sure that the market hammered us and that was the reason I was doing it at that time.'
Mr. Brown, still chairman but no longer CEO, said he could understand how it might strike some as unseemly to give executives stock options so soon after a catastrophe. 'That would be a legitimate point, I suppose,' he said.
He added that in retrospect, he probably wouldn't have advised that the grant be given. Today, Mr. Brown said, Stryker gives its grants during a relatively narrow period in the spring.
This seems yet another illustration about how focused the top leadership of large health care corporations are on the compensation they receive.
Furthermore, as we have commented before (here and here, and see links to earlier posts), there has been a marked contrast between the compensation received by UnitedHealth Group top executives, especially CEO Dr William McGuire, and the company's mission "to make health care more affordable."
And we wonder why health care is so expensive, and why health care costs rise faster than inflation?