Slicing into an employment agreement from Coventry…

February 8, 2012

Employment agreements are like cooking – a combination of science and art that result in a dish that some may find tasty (executives) while others (perhaps investors) find a little harder to swallow.

Consider, for example, the new Amended Employment Agreement that Coventry Health Care, Inc. (CVH) just gave to its chief executive, Allen F. Wise; the agreement was filed with the SEC along with this 8-K on February 6. The agreement extends Wise’s job through December 31, 2013 and creates the possibility that he could be more than $15 million wealthier by the time the agreement ends.

Wise has a long history with Coventry. He joined the company’s board of directors in 1996 and served as president and CEO from October 1996 to December 2004, when he retired. Following that move, he was named Chairman of the Board in January, 2005. But within a few years, Coventry’s stock price fell by 75%, prompting the man who succeeded Wise as chief executive, Dale Wolf, to resign suddenly. Coventry’s directors asked Wise to come back and in January, 2009, he resumed his former role.

When Wise started his second stint as CEO, his 2009 employment agreement provided for some nice touches – a signing bonus worth $5.5 million, 300,000 Performance Share Units (PSUs), and 1 million stock options – in addition to a salary of $600,000 per year. The company explained in its April, 2011 proxy that it

“…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.”

Perhaps that sense of teamwork is firmly established, or maybe it’s just not so important anymore, because Wise’s new agreement raised his base salary to $900,000 a year. But, as before, he also got some forms of compensation that are worth far more than his paycheck.

Last month, Coventry gave Wise a batch of Restricted Stock Units (RSUs) and PSUs with a grant-date value of $7.6 million. Whether the RSUs will vest depends on Coventry meeting its earnings per share target in 2012; if it does so, they will vest, half at the end of 2012, and half at the end of 2013. The PSUs, meanwhile, will vest if certain EPS and revenue growth targets are met. Both types of equity awards will be settled in cash, and Wise will get his money in early 2014.

Wise’s new employment agreement also promises to make a second $7.6 million award in January, 2013. While the vesting criteria are similar (but tied to targets for 2013), Coventry once again promised to settle things at the end of that year and pay Wise in cash in mid-February, 2014.

Judging from this morning’s earnings report, Wise seems determined to charge ahead, making reference to Coventry’s “forecast of double digit revenue growth coupled with operating earnings and EPS growth.” But, of course, there is still much work to do. Coventry’s performance in the past year lagged behind both the S&P 500 and other companies in the health care plan industry. If the company’s performance improves dramatically, we suspect that investors may find Wise’s employment agreement more palatable than they currently do.

Image source: Chopping the vegetables via Shutterstock

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