DEF 14A 1 d329026ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT of 1934

(Amendment No.    )

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Preliminary Proxy Statement

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Definitive Proxy Statement

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Definitive Additional Materials

¨   

Soliciting Material Pursuant to § 240.14a-11(c) or § 240.14a-12

Amerigroup Corporation

 

(Name of Registrant as Specified In Its Charter)

 

 

(Name of Person(s) Filing Proxy Statement)

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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

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LOGO

4425 Corporation Lane

Virginia Beach, Virginia 23462

April 27, 2012

Dear Stockholder:

You are cordially invited to attend AMERIGROUP Corporation’s 2012 Annual Meeting of Stockholders, which will be held on Thursday, June 7, 2012 at 10:00 a.m., Eastern Time, in the Hargroves Conference Center located at the Amerigroup National Support Center II, 1330 Amerigroup Way, Virginia Beach, Virginia 23464. For your convenience, we are also pleased to offer a live webcast of our 2012 Annual Meeting on the Investor Relations section of our website at www.amerigroup.com. Details regarding admission to the meeting and the business to be conducted are described in the Notice of Internet Availability of Proxy Materials you received in the mail and in this proxy statement. We have also made available with this proxy statement a copy of our Annual Report on Form 10-K for the year ended December 31, 2011. We encourage you to read our Annual Report, as it includes our 2011 audited consolidated financial statements and provides information about our business.

Your vote is very important. Whether or not you plan to attend the 2012 Annual Meeting, we hope that you will vote as soon as possible. You may vote in person by ballot at the 2012 Annual Meeting, over the Internet, by telephone or, if you requested to receive printed proxy materials, by mailing a proxy or voting instruction card. Please review the instructions for each of your voting options described in this proxy statement as well as in the Notice of Internet Availability of Proxy Materials that you received in the mail.

Thank you for your interest in our Company.

 

Sincerely,
AMERIGROUP CORPORATION
LOGO
JAMES G. CARLSON
Chairman, Chief Executive Officer and President


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LOGO

4425 Corporation Lane

Virginia Beach, Virginia 23462

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held On Thursday, June 7, 2012

The Annual Meeting of Stockholders of AMERIGROUP Corporation (“Amerigroup” or the “Company”) will be held in the Hargroves Conference Center located at the Amerigroup National Support Center II, 1330 Amerigroup Way, Virginia Beach, Virginia 23464, on Thursday, June 7, 2012 at 10:00 a.m., Eastern Time. (the “2012 Annual Meeting”). Doors to the meeting will open at 9:30 a.m. The 2012 Annual Meeting will be held for the following purposes:

 

  1.

To elect three Directors to the Board of Directors, each for a three-year term ending at the 2015 Annual Meeting of Stockholders;

 

  2.

To ratify the appointment of KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2012;

 

  3.

To approve, in an advisory and non-binding vote, the compensation of the Company’s named executive officers as described in this proxy statement;

 

  4.

To approve the AMERIGROUP Corporation 2012 Cash Incentive Plan; and

 

  5.

To transact such other business that may properly be brought before the meeting or any postponement(s), adjournment(s) or delay(s) thereof.

This notice has been provided to holders of record of AMERIGROUP Corporation’s common stock, par value $0.01 per share, as of the close of business on April 9, 2012 (the “Record Date”). Stockholders as of the close of business on the Record Date will be entitled to attend and vote at the meeting.

We also make available free of charge through the Investor Relations section of our website at www.amerigroup.com our Annual Report for the year ended December 31, 2011 (“2011 Annual Report”). Information on our website is not incorporated into this proxy statement or our other securities law filings and is not a part of these filings. Any stockholder who desires an additional copy of our 2011 Annual Report may obtain one without charge by sending a request to the Company, c/o Investor Relations, AMERIGROUP Corporation, 4425 Corporation Lane, Virginia Beach, Virginia 23462.

 

By Order of the Board of Directors,
LOGO
NICHOLAS J. PACE
Executive Vice President,
General Counsel and Secretary

Virginia Beach, Virginia

April 27, 2012


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PROXY STATEMENT

TABLE OF CONTENTS

 

     Page  

Questions and Answers about the Proxy Materials and Our 2012 Annual Meeting of Stockholders

     1   

Security Ownership of Certain Beneficial Owners and Management

     8   

Section 16(a) Beneficial Ownership Reporting Compliance

     10   

Proposal 1: Election of Directors

     10   

Identifying and Evaluating Nominees for Director

     13   

Corporate Governance

     17   

Board Meetings

     17   

Board Independence

     17   

Communicating with the Board

     17   

Board Leadership Structure

     18   

The Board’s Role in Risk Oversight

     19   

Certain Relationships and Related Transactions

     20   

Committees of the Board

     20   

Audit Committee Report

     23   

Proposal 2: Ratification of the Selection of Independent Registered Public Accounting Firm

     24   

Compensation Committee Interlocks and Insider Participation

     25   

Compensation Committee Report

     25   

Compensation Discussion and Analysis

     25   

Executive Summary

     25   

Section I — Overview of Our Executive Compensation Program

     26   

Section II — Setting Compensation and Target Total Compensation

     29   

Section III — 2011 Performance Goals, Evaluation and Awards

     31   

Section IV — Additional Information Regarding Our Compensation Programs

     35   

Termination and Change in Control Payments

     35   

Other Executive Agreements and Arrangements

     37   

Executive Compensation Tables

     38   

Summary Compensation Table

     38   

Grants of Plan-Based Awards

     39   

Outstanding Equity Awards at Fiscal 2011 Year-End

     41   

Option Exercises and Stock Vested

     43   

Nonqualified Deferred Compensation

     44   

Potential Change in Control Awards

     45   

Potential Involuntary Termination Severance Payments

     46   

Compensation of Directors

     46   

Proposal 3: Advisory Vote on Executive Compensation

     47   

Proposal 4: Approval of the AMERIGROUP Corporation 2012 Cash Incentive Plan

     48   

 

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LOGO

 

4425 Corporation Lane

Virginia Beach, Virginia 23462

PROXY STATEMENT

This proxy statement is furnished to you in connection with the solicitation by the Board of Directors of AMERIGROUP Corporation of proxies for voting at the Annual Meeting of Stockholders to be held in the Hargroves Conference Center located at the Amerigroup National Support Center II, 1330 Amerigroup Way, Virginia Beach, Virginia 23464, on Thursday, June 7, 2012 at 10:00 a.m., Eastern Time, or any adjournment(s), postponement(s) or delays thereof (“2012 Annual Meeting”). This proxy statement, which contains information about the items upon which you will vote at the 2012 Annual Meeting, is first being mailed or distributed to holders of AMERIGROUP Corporation common stock, par value $0.01 per share, on or about April 27, 2012. A copy of our Annual Report for the year ended December 31, 2011 (“2011 Annual Report”) is being delivered to you with this proxy statement. References in this proxy statement to “the Company,” “we,” “us” and “our” refer to AMERIGROUP Corporation and its wholly-owned subsidiaries, unless the context requires otherwise.

QUESTIONS AND ANSWERS ABOUT THE PROXY MATERIALS AND

OUR 2012 ANNUAL MEETING OF STOCKHOLDERS

 

Q:

Why did I receive a notice in the mail regarding the Internet availability of proxy materials instead of a full set of proxy materials?

 

A:

We provide access to our proxy materials over the Internet. On or about April 27, 2012 we mailed to our stockholders a “Notice of Internet Availability of Proxy Materials” (the “Notice”) telling them how to access and review the information contained in the proxy materials and how to vote their proxies over the Internet. You will not receive a printed copy of the proxy materials in the mail unless you request the materials by following the instructions included in the Notice and on page 6 of this proxy statement. In addition, by following the instructions included in the Notice, stockholders may request to receive proxy materials in printed form by mail or electronically by e-mail on an ongoing basis. Your election to receive proxy materials in printed form by mail or by e-mail will remain in effect until you terminate it.

 

Q:

How can I get electronic access to the proxy materials?

 

A:

The Notice will provide you with instructions regarding how to view our proxy materials on the Internet. You can view the proxy materials for the 2012 Annual Meeting on the Internet at www.proxyvote.com. Please have your 12 digit control number available. Your 12 digit control number can be found on your Notice. If you received a paper copy of your proxy materials, your 12 digit control number can be found on your proxy card or voting instruction card. Our proxy materials are also available on the Investor Relations section of our website at www.amerigroup.com.

 

Q:

What is included in the proxy materials?

 

A:

The proxy materials include:

 

   

Our proxy statement for the 2012 Annual Meeting; and

 

   

Our 2011 Annual Report, which includes our 2011 audited consolidated financial statements.

 

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If you requested printed versions of these materials by mail, these materials also include the proxy card for the 2012 Annual Meeting.

 

Q:

Who is entitled to vote at the 2012 Annual Meeting?

 

A:

Stockholders of record as of the close of business on April 9, 2012 (the “Record Date”) are entitled to notice of, and to vote at, the 2012 Annual Meeting. At the close of business on the Record Date, 48,364,835 shares of our common stock, $0.01 par value per share, were outstanding and entitled to vote. We have no other class of stock outstanding.

 

Q:

What is the quorum requirement for the 2012 Annual Meeting?

 

A:

A majority of the outstanding shares of our common stock on the Record Date must be present at the 2012 Annual Meeting in order to hold the meeting and conduct business. This is called a quorum.

 

Q:

What if a quorum is not present at the 2012 Annual Meeting?

 

A:

If a quorum is not present at the scheduled time of the 2012 Annual Meeting, we may adjourn the meeting. If we propose to have the stockholders vote whether to adjourn the meeting, the proxyholders will exercise their discretion to vote all shares for which they have authority in favor of the adjournment.

 

Q:

What proposals will be voted on at the 2012 Annual Meeting?

 

A:

Stockholders will vote on four proposals at the 2012 Annual Meeting:

 

  1.

Election of three Directors to serve on our Board of Directors (Proposal 1);

 

  2.

Ratification of the appointment of KPMG LLP (“KPMG”) as our independent registered public accounting firm for the fiscal year ending December 31, 2012 (Proposal 2);

 

  3.

Approval, in an advisory and non-binding vote, of the compensation of the Company’s named executive officers (“NEOs”) as described in this proxy statement (Proposal 3); and

 

  4.

Approval of the AMERIGROUP Corporation 2012 Cash Incentive Plan (the “2012 Cash Incentive Plan”) (Proposal 4).

We will also consider any other business that comes properly before the 2012 Annual Meeting.

 

Q:

How does the Board of Directors recommend that I vote on these proposals?

 

A:

The Board of Directors recommends that you vote your shares:

 

  1.

“FOR” each of the Board’s nominees for Director (Proposal 1);

 

  2.

“FOR” the ratification of the appointment of KPMG as our independent registered public accounting firm for the fiscal year ending December 31, 2012 (Proposal 2);

 

  3.

“FOR” the advisory resolution approving executive compensation (Proposal 3); and

 

  4.

“FOR” the approval of the 2012 Cash Incentive Plan (Proposal 4).

 

Q:

What is the difference between holding shares as a stockholder of record and as a beneficial owner of shares held in street name?

 

A:

Stockholder of Record.    If your shares are registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, then you are considered the stockholder of record with respect to those shares, and the Notice was sent directly to you by the Company.

 

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Beneficial Owner of Shares Held in Street Name.    If your shares are held in an account at a brokerage firm, bank, broker-dealer, or other similar organization, then you are the beneficial owner of shares held in “street name,” and the Notice was forwarded to you by that organization. Most of our stockholders hold their shares in street name. The organization holding your account is considered the stockholder of record for purposes of voting at the 2012 Annual Meeting. As a beneficial owner, you have the right to direct that organization on how to vote the shares held in your account.

 

Q:

If I am a stockholder of record, how do I vote?

 

A:

If you are a stockholder of record, you may vote in person by ballot at the 2012 Annual Meeting. We will offer you a ballot when you arrive.

If you do not wish to vote in person or if you will not be attending the 2012 Annual Meeting, you may vote by proxy. You may vote by proxy over the Internet or by phone by following the instructions provided in the Notice, or if you request printed copies of the proxy materials by mail, you can also vote by mail or by telephone by following the instructions provided in the Notice.

 

Q:

If I am a beneficial owner of shares held in street name, how do I vote?

 

A:

If you are a beneficial owner of shares held in street name and you wish to vote in person at the 2012 Annual Meeting, you must obtain a valid legal proxy from the organization that holds your shares.

If you do not wish to vote in person or if you will not be attending the 2012 Annual Meeting, you may vote by proxy. You may vote by proxy over the Internet by following the instructions provided in the Notice, or if you request printed copies of the proxy materials by mail, you can also vote by mail or by telephone by following the instructions provided in the Notice.

New York Stock Exchange (“NYSE”) rules do not permit brokers, banks and other similar organizations to vote in the election of Directors, on the executive compensation matter in this proxy statement, or for the approval of the 2012 Cash Incentive Plan if such organization has not received instructions from the beneficial owner. Accordingly, it is particularly important that beneficial owners instruct their brokers how they wish to vote their shares.

 

Q:

What does it mean if I receive more than one proxy or voting instruction card?

 

A:

It means that your shares are registered differently or are in more than one account. Please provide voting instructions for all proxy and voting instruction cards you receive.

 

Q:

What happens if I do not give specific voting instructions in my proxy?

 

A:

Stockholders of Record.    If you are a stockholder of record and you:

 

   

Indicate when voting on the Internet or by telephone that you wish to vote as recommended by our Board of Directors; or

 

   

Sign, date and return a proxy card without giving specific voting instructions,

then the proxyholders will vote your shares in the manner recommended by our Board on all matters presented in this proxy statement and as the proxyholders may determine in their discretion with respect to any other matters properly presented for a vote at the meeting.

Beneficial Owners of Shares Held in Street Name.    If you are a beneficial owner of shares held in street name and do not provide the organization that holds your shares with specific voting instructions, the organization that holds your shares may generally vote on “routine” matters but cannot vote on “non-routine” matters. Proposal 2 (ratification of KPMG) is the only “routine” matter. Proposals 1 (election of Directors), 3 (approval of executive compensation) and 4 (approval of the 2012 Cash Incentive Plan) are all

 

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“non-routine.” If the organization that holds your shares does not receive instructions from you on how to vote your shares on a non-routine matter, the organization that holds your shares does not have the authority to vote on this matter with respect to your shares. This is generally referred to as a “broker non-vote.” When votes are tabulated for any particular matter, broker non-votes will be counted for purposes of determining whether a quorum is present but will not be considered votes cast. We encourage you to provide voting instructions to the organization that holds your shares by carefully following the instructions provided in the Notice.

 

Q:

What effect do abstentions and broker non-votes have on the proposals?

 

A:

In all matters other than the election of Directors, abstentions have the same effect as votes “AGAINST” a matter. A broker is entitled to vote shares held for a beneficial owner on the routine matter (Proposal 2). A broker may not vote shares held for a beneficial owner on the non-routine matters (Proposals 1, 3 and 4), absent instructions from the beneficial owners of such shares. Thus, if you do not give your broker specific instructions, your shares will not be voted on any matter other than the ratification of the appointment of KPMG. Broker non-votes, if any, will have no effect on the outcomes of any of the proposals other than Proposal 2, on which broker non-votes, if any, will have the same effect as a vote “AGAINST” the proposal.

 

Q:

What vote is required to approve each of the proposals?

 

A:

Election of Directors (Proposal 1).    Nominees for Director will be elected to the Board by a plurality of the votes cast. Therefore, the three nominees who receive the greatest number of votes cast for the election of Directors at the 2012 Annual Meeting will be elected.

Ratification of KPMG (Proposal 2).    The ratification of KPMG will be approved if a majority of the shares present in person or represented by proxy and entitled to vote on this matter vote “FOR” this item.

Approval of Executive Compensation Advisory Vote (Proposal 3).    The resolution on the compensation of our NEOs will be approved if a majority of the shares present in person or represented by proxy and entitled to vote on this matter vote “FOR” this item. Because your vote is advisory, it will not be binding on the Board or the Company. However, the Board and the Compensation and Organizational Management Committee (the “Compensation Committee”) will review the voting results and take them into consideration when making future decisions regarding the compensation of the named executive officers.

Approval of the 2012 Cash Incentive Plan (Proposal 4).    The 2012 Cash Incentive Plan will be approved if a majority of the shares present in person or represented by proxy and entitled to vote on this matter vote “FOR” this item.

 

Q:

How are votes counted?

 

A:

Election of Directors (Proposal 1).    In the election of Directors, votes may be cast in favor of, or withheld with respect to, any or all nominees. We will not count abstentions or withheld votes as either for or against a Director. Withheld votes and broker non-votes will have no effect on the election of Directors. There are no cumulative voting rights.

Ratification of KPMG (Proposal 2).    You may vote “FOR” or “AGAINST” or “ABSTAIN” from voting on this item. We will treat an abstention as a vote against this item and broker non-votes, if any, will have the same effect as a vote “AGAINST” the proposal.

Approval of Executive Compensation Advisory Vote (Proposal 3).    In the advisory vote to approve the compensation of our named executive officers, you may vote “FOR” or “AGAINST” or “ABSTAIN” from voting on this item. We will treat an abstention as a vote against this item and broker non-votes will have no effect on the outcome of the vote on this matter.

 

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Approval of the 2012 Cash Incentive Plan (Proposal 4).    You may vote “FOR” or “AGAINST” or “ABSTAIN” from voting on this item. We will treat an abstention as a vote against this item and broker non-votes will have no effect on the outcome of the vote on this matter.

 

Q:

What do I need for admission to the 2012 Annual Meeting?

 

A:

You are entitled to attend the 2012 Annual Meeting only if you are a stockholder of record or a beneficial owner as of the Record Date or you hold a valid proxy for the 2012 Annual Meeting. If you are the stockholder of record, your name will be verified against the list of stockholders of record prior to your being admitted to the 2012 Annual Meeting. You should be prepared to present photo identification for admission. If you hold your shares in street name, you should provide proof of beneficial ownership on the Record Date, such as a brokerage account statement showing that you owned shares of Company stock as of the Record Date, a copy of the voting instruction card provided by your broker, bank or other nominee, or other similar evidence of ownership as of the Record Date, as well as your photo identification for admission. If you do not provide photo identification or comply with the other procedures outlined above upon request, you will not be admitted to the 2012 Annual Meeting. You may contact our Corporate Secretary at (757) 490-6900 for directions to the 2012 Annual Meeting.

 

Q:

Can I change my vote or revoke my proxy?

 

A:

You may change your vote or revoke your proxy at any time before your proxy is voted at the 2012 Annual Meeting. If you are a stockholder of record, you may change your vote or revoke your proxy by:

 

  1.

delivering to the Company (Attention: Corporate Secretary) at 4425 Corporation Lane, Virginia Beach, Virginia 23462, a written notice of revocation of your proxy;

 

  2.

delivering to the Company an executed proxy bearing a later date (which shall include a proxy given by telephone or over the Internet); or

 

  3.

attending the 2012 Annual Meeting and voting in person by ballot.

Attendance at the meeting in and of itself will not cause your previously granted proxy to be revoked.

For shares you hold in street name, you may change your vote by submitting new voting instructions to your broker, bank or other nominee or, if you have obtained a legal proxy from your broker, bank or other nominee giving you the right to vote your shares at the 2012 Annual Meeting, by attending the meeting and voting in person by ballot.

 

Q:

What happens if additional matters are presented at the 2012 Annual Meeting?

 

A:

If you grant a proxy, the persons named as proxyholders, James W. Truess, the Company’s Executive Vice President and Chief Financial Officer (“CFO”) and Nicholas J. Pace, the Company’s Executive Vice President, General Counsel and Secretary, will have the discretion to vote your shares on any additional matters properly presented for a vote at the meeting.

 

Q:

Who will count the votes?

 

A:

Margaret M. Roomsburg, the Company’s Chief Accounting Officer, and Dennis R. Kinzig, the Company’s General Auditor, will tabulate the votes and act as the inspectors of election.

 

Q:

Where can I find the voting results of the 2012 Annual Meeting?

 

A:

We expect to announce preliminary voting results at the 2012 Annual Meeting and publish final results in a Current Report on Form 8-K filed within the applicable time period following the 2012 Annual Meeting.

 

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Q:

Is my vote confidential?

 

A:

Yes, it is our policy that documents identifying your vote are confidential. The vote of any stockholder will not be disclosed to any third party before the final vote count at the 2012 Annual Meeting except:

 

   

to meet legal requirements;

 

   

to assert claims for or defend claims against the Company;

 

   

to allow authorized individuals to count and certify the results of the stockholder vote;

 

   

if a proxy solicitation in opposition to the Board of Directors takes place; or

 

   

to respond to stockholders who have written comments on proxy cards or who have requested disclosure.

 

Q:

Who will bear the cost of soliciting votes for the 2012 Annual Meeting?

 

A:

The Company will solicit proxies and will bear the costs of its solicitation. These costs include the expense of preparing and mailing proxy solicitation materials for the 2012 Annual Meeting and reimbursements paid to brokerage firms and others for their expenses incurred in forwarding solicitation materials regarding the 2012 Annual Meeting to beneficial owners of our common stock. We may conduct further solicitation personally, telephonically, through the Internet, by e-mail or by facsimile through our officers, Directors and employees, none of whom will receive additional compensation for assisting with the solicitation. The Company has retained Morrow & Co., LLC to assist in the solicitation of proxies for a fee estimated to be approximately $6,500 plus out of pocket expenses. The Company may generate other expenses in connection with the solicitation of proxies for the 2012 Annual Meeting.

 

Q:

Where can I get a paper copy of these materials?

 

A:

The Company will deliver promptly and without charge, upon written or oral request, a separate copy of the proxy statement and 2011 Annual Report to a stockholder at a shared address to which a single copy of the documents was delivered. A stockholder who wishes to receive a separate copy of the proxy statement and Annual Report, now or in the future, should notify the Company by calling (757) 490-6900 or by submitting a request to the attention of the Corporate Secretary, AMERIGROUP Corporation, 4425 Corporation Lane, Virginia Beach, Virginia 23462. Beneficial owners sharing an address who are receiving multiple copies of proxy materials and Annual Reports and wish to receive a single copy of such materials in the future should contact their broker, bank or other nominee to request that only a single copy of each document be mailed to all stockholders at the shared address in the future.

 

Q:

May I propose actions for consideration at the 2013 Annual Meeting of Stockholders (“2013 Annual Meeting”) or nominate individuals to serve as Directors?

 

A:

You may submit proposals, including Director nominations, for consideration at future annual meetings of stockholders as follows:

Stockholder Proposals.    For a stockholder proposal to be considered for inclusion in our proxy statement for our 2013 Annual Meeting of Stockholders, the written proposal must be received by our Secretary, c/o AMERIGROUP Corporation, 4425 Corporation Lane, Virginia Beach, Virginia 23462 no later than December 28, 2012. The proposal will need to comply with Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which lists the requirements for the inclusion of stockholder proposals in company-sponsored proxy materials. If you intend to present a proposal at our 2013 Annual Meeting, but you do not intend to have it included in our 2013 proxy statement, your proposal together with any information required by our Amended and Restated By-Laws (“By-Laws”) must be delivered to the Company’s Secretary no earlier than March 9, 2013 and no later than April 8, 2013. If the date of our 2013 Annual Meeting is called for a date that is more than 30 calendar days before or after the one-year

 

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anniversary of the date of our 2012 Annual Meeting, your proposal must be delivered by the close of business on the tenth day following the day we publicly announce the date of the 2013 Annual Meeting. In order for proposals of stockholders made outside of Rule 14a-8 under the Exchange Act to be considered “timely” within the meaning of Rule 14a-4(c) under the Exchange Act, such proposals must be received by our Secretary by April 8, 2013. If such proposals are not “timely” within the meaning of Rule 14a-4(c), then proxies solicited by us for the 2013 Annual Meeting may confer discretionary authority to us to vote on such proposals.

Nomination of Director Candidates.    Stockholders may propose Director candidates for consideration by the Board’s Nominating and Corporate Governance Committee (the “Nominating Committee”). Any such recommendations should include the candidate’s name, home and business contact information, detailed biographical data, relevant qualifications for Board membership, information regarding any relationships between the candidate and the Company within the last three years and a written indication by the recommended candidate of his or her willingness to serve. Any such recommendation should be directed to the Secretary of the Company at the address of our principal executive offices. In addition, our By-Laws permit stockholders to nominate Directors for election at an annual meeting of stockholders. If a stockholder wishes to nominate an individual for election to our Board at the 2013 Annual Meeting of Stockholders, such stockholder must deliver a written notice together with any information required by our By-Laws to the Secretary of the Company by no earlier than March 9, 2013 and no later than April 8, 2013. If the date of our 2013 Annual Meeting of Stockholders is called for a date that is more than 30 calendar days before or after the one-year anniversary of the 2012 Annual Meeting, the notice must be delivered by the close of business on the tenth day following the day we publicly announce the date of the 2013 Annual Meeting.

By-Law Provisions.    The relevant provisions of our By-Laws regarding the requirements for making stockholder proposals and nominating Director candidates are available on the Investor Relations section of our website at www.amerigroup.com. You may also contact the Corporate Secretary of the Company at AMERIGROUP Corporation, 4425 Corporation Lane, Virginia Beach, Virginia 23462 to request a copy of our By-Laws.

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders to be held on June 7, 2012.

The proxy statement and 2011 Annual Report are available at www.proxyvote.com.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of our common stock as of March 26, 2012, by (i) each NEO listed in the Summary Compensation Table on page 38 of this proxy statement, (ii) each Director, (iii) all Directors and executive officers as a group, and (iv) stockholders holding five percent or more of our outstanding common stock based on information previously provided to the Company by such beneficial owners as of the dates indicated in the footnotes that follow the table.

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (“SEC”), which generally attribute beneficial ownership of securities to persons who possess sole or shared voting or investment power with respect to those securities, including shares of common stock issuable upon the exercise of vested stock options or warrants that are immediately exercisable or exercisable within 60 days. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws. Percentage ownership calculations are based on 48,290,835 shares outstanding as of March 26, 2012.

 

Name

   Number of
Shares
     Percent  

FMR LLC(1)

     4,850,590         10.0

T. Rowe Price Associates, Inc.(2)

     4,110,964         8.5

BlackRock, Inc.(3)

     3,959,175         8.2

Baron Capital Group, Inc.(4)

     3,271,385         6.8

Capital World Investors(5)

     3,147,661         6.5

Artisan Partners Holdings LP(6)

     2,829,600         5.9

The Vanguard Group, Inc.(7)

     2,421,137         5.0

James G. Carlson(8)(9)

     898,671         1.8

James W. Truess(8)(10)

     197,363         *   

Richard C. Zoretic(8)(11)

     141,939         *   

John E. Littel(8)(12)

     86,545         *   

Uwe E. Reinhardt, Ph.D.(13)(14)

     72,540         *   

Jeffrey B. Child(8)(15)

     67,463         *   

William J. McBride(8)(16)

     60,477         *   

Mary T. McCluskey, M.D.(8)(17)

     60,288         *   

Richard D. Shirk(8)(18)

     55,540         *   

Emerson U. Fullwood(8)(19)

     24,517         *   

Thomas E. Capps(20)(21)

     18,121         *   

Hala Moddelmog(8)(22)

     15,200         *   

John W. Snow(8)(23)

     14,901         *   

Kay Coles James(8)(24)

     10,073         *   

Joseph W. Prueher(8)(25)

     9,901         *   

All Directors and executive officers as a group (19 persons)

     1,918,065         3.9

 

 *

Represents amounts of less than 1%

 

(1)

Represents shares of our common stock owned by FMR LLC (“FMR”) as of December 31, 2011, as derived solely from information reported in a Schedule 13G/A under the Exchange Act, filed with the SEC on February 14, 2012. The principal business address for FMR is 82 Devonshire Street, Boston, MA 02109. FMR reported sole voting power with respect to 590 shares of common stock and sole dispositive power with respect to all 4,850,590 shares of common stock.

 

(2)

These shares of our common stock are owned by various individual and institutional investors for which T. Rowe Price Associates, Inc. (“T. Rowe”) serves as investment adviser with power to direct investments and/or sole power to vote. Information concerning T. Rowe’s ownership is as of December 31, 2011 and is

 

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derived from information reported in a Schedule 13G/A under the Exchange Act, filed with the SEC on February 13, 2012. The principal business address for T. Rowe is 100 East Pratt Street, Baltimore, MD 21202. T. Rowe reported sole voting power with respect to 691,010 shares of common stock and sole dispositive power with respect to all 4,110,964 shares of common stock. For purposes of the reporting requirements of the Exchange Act, T. Rowe is deemed to be a beneficial owner of such securities; however, T. Rowe expressly disclaims that it is, in fact, the beneficial owner of such securities.

 

(3)

Represents shares of our common stock owned by BlackRock, Inc. (“BlackRock”) as of December 31, 2011, as derived solely from information reported in a Schedule 13G/A under the Exchange Act, filed with the SEC on February 10, 2012. The principal address for BlackRock is 40 East 52nd Street, New York, NY 10022.

 

(4)

Represents shares of our common stock owned by Baron Capital Group, Inc. (“Baron”) as of December 31, 2011, as derived solely from information reported in a Schedule 13G/A under the Exchange Act, filed with the SEC on February 14, 2012. The principal business address for Baron is 767 Fifth Avenue, 49th Floor, New York, NY 10153. Baron reported shared voting power with respect to 2,907,385 shares of common stock and shared dispositive power with respect to all 3,271,385 shares of common stock.

 

(5)

Represents shares of our common stock owned by Capital World Investors (“Capital”) as of December 31, 2011, as derived solely from information reported in a Schedule 13G under the Exchange Act, filed with the SEC on February 10, 2012. The principal address for Capital is 333 South Hope Street, Los Angeles, CA 90071.

 

(6)

Represents shares of our common stock owned by Artisan Partners Holdings LP (“Artisan”) as of December 31, 2011, as derived solely from information reported in a Schedule 13G under the Exchange Act, filed with the SEC on February 7, 2012. The principal business address for Artisan is 875 East Wisconsin Avenue, Suite 800, Milwaukee, WI 53202. Artisan reported shared voting power with respect to 2,682,300 shares of common stock and shared dispositive power with respect to all 2,829,600 shares of common stock.

 

(7)

Represents shares of our common stock owned by The Vanguard Group, Inc. (“Vanguard”) as of December 31, 2011, as derived solely from information reported in a Schedule 13G/A under the Exchange Act, filed with the SEC on February 7, 2012. The principal business address for Vanguard is 100 Vanguard Boulevard, Malvern, PA 19355. Vanguard reported sole voting power with respect to 33,038 shares of common stock, sole dispositive power with respect to 2,388,099 shares of common stock and shared dispositive power with respect to 33,038 shares of common stock.

 

(8)

The address for this person is c/o AMERIGROUP Corporation, 4425 Corporation Lane, Virginia Beach, VA 23462.

 

(9)

Includes options to purchase 657,953 shares of our common stock and 181,796 shares of restricted stock.

 

(10)

Includes options to purchase 62,571 shares of our common stock and 115,450 shares of restricted stock.

 

(11)

Includes options to purchase 6,833 shares of our common stock and 115,297 shares of restricted stock.

 

(12)

Includes options to purchase 25,694 shares of our common stock and 35,836 shares of restricted stock.

 

(13)

Dr. Reinhardt’s address is 351 Wallace Hall, Princeton University, Princeton, NJ 08554.

 

(14)

Includes options to purchase 52,983 shares of our common stock and 2,509 shares of restricted stock.

 

(15)

Includes options to purchase 17,427 shares of our common stock and 2,509 shares of restricted stock.

 

(16)

Includes options to purchase 20,542 shares of our common stock and 2,509 shares of restricted stock.

 

(17)

Includes options to purchase 22,229 shares of our common stock and 32,309 shares of restricted stock.

 

(18)

Includes options to purchase 26,983 shares of our common stock and 2,509 shares of restricted stock.

 

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(19)

Includes options to purchase 10,317 shares of our common stock and 2,509 shares of restricted stock.

 

(20)

Mr. Capps’ address is c/o Dominion Resources, Inc., 100 Tredegar Street, Richmond, VA 23219.

 

(21)

Includes 2,509 shares of restricted stock.

 

(22)

Includes options to purchase 7,729 shares of our common stock and 2,509 shares of restricted stock.

 

(23)

Includes options to purchase 5,180 shares of our common stock and 2,509 shares of restricted stock.

 

(24)

Includes 2,509 shares of restricted stock.

 

(25)

Includes options to purchase 5,180 shares of our common stock and 2,509  shares of restricted stock.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our Directors, executive officers and persons who beneficially own more than ten percent of our outstanding common stock to file reports of ownership and changes in ownership with the SEC and the NYSE. Directors, executive officers and stockholders holding ten percent or more of our outstanding common stock are required by SEC regulation to furnish to us copies of all Section 16(a) forms they file. Based solely on a review of the copies of Section 16(a) forms furnished to us and written representations from certain reporting persons that no other filings were required for those persons, we believe that all the Section 16(a) filing requirements applicable to our Directors, executive officers and greater than ten percent stockholders were complied with for the year ended December 31, 2011.

PROPOSAL 1:

ELECTION OF DIRECTORS

The Company’s Board of Directors currently has eleven members all of whom, except Mr. Carlson, our Chairman, Chief Executive Officer and President, are independent within the meaning of the NYSE director independence standards.

The Company’s Amended and Restated Certificate of Incorporation provides for a Board of Directors divided into three classes, as nearly equal in number as the then total number of Directors constituting the entire Board of Directors permits, with the term of office of one class expiring at each year’s Annual Meeting of Stockholders. Each class of Directors is elected for a term of three years, except in the case of elections to fill vacancies or newly appointed Directorships.

Three Directors will be elected at the 2012 Annual Meeting to serve until the 2015 Annual Meeting or until the election and qualification of their successors, or their earlier death, resignation or removal. Unless otherwise indicated on any proxy, the shares that are represented by such proxy will be voted “FOR” each of the nominees whose biographical information appears in the section below. Each nominee serves currently as a Director of the Company has consented to being named in this proxy statement and to serve if elected. However, if at the time of the 2012 Annual Meeting any nominee is unable or unwilling to serve, the proxies will be voted for such other person as the Board of Directors may designate.

Vote Required

Directors will be elected by a plurality of the votes cast. In tabulating the vote, withheld votes and broker non-votes will be disregarded and have no effect on the outcome of the vote.

The Board of Directors unanimously recommends that you vote “FOR” the election to the Board of Directors of each of the three nominees identified below.

 

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Nominees for Director

(Terms to expire at the 2015 Annual Meeting of Stockholders)

LOGO

 

Thomas E. Capps

  

Mr. Capps, age 76, has been one of our Directors since 2004. In 2007, Mr. Capps retired as Chairman of the Board of Directors of Dominion Resources, Inc., a national producer and transporter of energy, a position he had held since 2005. Prior to that, Mr. Capps served as the Chairman and Chief Executive Officer of Dominion Resources, Inc. Mr. Capps also serves on the Boards of Directors of Associated Electric and Gas Insurance Service and The Shaw Group Inc. and the Executive Committee of the Medical Foundation of North Carolina (University of North Carolina).

LOGO

 

Emerson U. Fullwood

  

Mr. Fullwood, age 64, has been one of our Directors since 2009. Mr. Fullwood retired from Xerox Corporation, a business process and document management company, in June 2008 after serving as Corporate Vice President, Executive Chief of Staff and Marketing Officer for Xerox North America since 2004. Prior to that, Mr. Fullwood was President of the Xerox Channels Group and held several executive and general management leadership positions with Xerox. Mr. Fullwood currently serves as a Director of Vanguard Group, Vanguard Funds and SPX Corporation and previously served on the Board of Directors of General Signal Corporation. He also serves on the Boards of Directors of North Carolina A&T State University, United Way of Rochester, University of Rochester Medical Center, Rochester Boy Scouts of America, Monroe Community College Foundation, the Urban League and Colgate Rochester Crozier Divinity School.

LOGO

 

William J. McBride

  

Mr. McBride, age 67, has been one of our Directors since 1995. Mr. McBride has been retired since 1995. Prior to that, Mr. McBride was President, Chief Operating Officer and a Director of Value Health, Inc. and President and Chief Executive Officer of Cigna Healthplans, Inc. Mr. McBride also serves on the Board of Directors of Magellan Health Services, Inc., a specialty health care management organization, and a number of privately held companies.

Directors Continuing in Office

(Terms to expire at the 2014 Annual Meeting of Stockholders)

LOGO

 

James G. Carlson

  

Mr. Carlson, age 59, has been one of our Directors since 2007. Mr. Carlson has been our Chief Executive Officer and President since September 1, 2007, and Chairman of the Board since May 8, 2008. Prior to that, he served as our President and Chief Operating Officer beginning in 2003. Previously, he served as an Executive Vice President of UnitedHealth Group and President of its UnitedHealthcare business unit, which served more than 10 million members in HMO and PPO plans nationwide. Mr. Carlson serves on the Boards of Directors of the National Kidney Foundation, Morningside College, America’s Health Insurance Plans and the Health Sector Advisory Council of Duke University’s Fuqua School of Business, in addition to numerous community charitable organizations.

 

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LOGO

 

Jeffrey B. Child

  

Mr. Child, age 52, has been one of our Directors since 2003. Since July 2004, Mr. Child has served as the Chief Financial Officer of a family office of an unaffiliated third party. From February 1999 through June 2003, Mr. Child served as a Managing Director, U.S. equity capital markets at Banc of America Securities LLC, where he was responsible for its public equity underwriting business in the United States. Prior to that, he served as Managing Director of Banc of America Securities’ health care group. Mr. Child previously served on the Boards of Directors of Fox Hollow Technologies, Inc. and ev3 Inc. and serves as a Trustee of the Menlo Park City School District Board of Education.

LOGO

 

Richard D. Shirk

  

Mr. Shirk, age 66, has been one of our Directors since 2002. Mr. Shirk has been retired since 2002. Prior to that, Mr. Shirk served as Chairman and Chief Executive Officer of Cerulean Companies and as President and Chief Executive Officer of its wholly-owned subsidiary, Blue Cross and Blue Shield of Georgia. He has also held senior executive positions with Cigna HealthCare, EQUICOR — Equitable HCA Corporation and The Equitable. Mr. Shirk also serves on the Board of Directors of the SSgA funds and a number of privately held companies.

LOGO

 

John W. Snow

  

Dr. Snow, age 72, has been one of our Directors since August 2010. Dr. Snow is the President of JWS Associates, LLC, a strategic consulting firm. Prior to that, Dr. Snow served as the 73rd United States Secretary of the Treasury from February 2003 to June 2006. Prior to his appointment as Secretary of the Treasury, he served as the Chairman, President and CEO of CSX Corporation. Dr. Snow has also previously served in several senior roles at the United States Department of Transportation and has served as Chair of the Business Roundtable. Dr. Snow currently serves on the Board of Directors of Cerberus Capital Management LP as non-executive chair, and on the Boards of Directors of International Consolidated Airlines Group, Marathon Petroleum Corporation and Verizon Communications, Inc.

Directors Continuing in Office

(Terms to expire at the 2013 Annual Meeting of Stockholders)

LOGO

 

Kay Coles James

  

Ms. James, age 62, has been one of our Directors since 2005. She is the President of The Gloucester Institute, a non-profit organization focused on developing future leaders. From June 2001 to January 2005, Ms. James served as Director, U.S. Office of Personnel Management, where she was principal human resources advisor to President George W. Bush. She has also served as Secretary of Health and Human Resources for the Commonwealth of Virginia; Senior Fellow at The Heritage Foundation; and Assistant Secretary of the U.S. Department of Health and Human Services. She currently serves on the Board of The Heritage Foundation, the National Board of The Salvation Army, the Board of Trustees of Virginia Commonwealth University and the Board of Directors of The PNC Financial Services Group, Inc.

 

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LOGO

 

Hala Moddelmog

  

Ms. Moddelmog, age 56, has been one of our Directors since 2009. She is the President of Arby’s Restaurant Group, Inc., an international quick service restaurant company. From 2009 to 2010, she served as Chief Executive Officer of Catalytic Ventures, LLC, a company she founded to consult and invest in the food service industry. From 2006 to 2009, Ms. Moddelmog served as the President and Chief Executive Officer of the Susan G. Komen for the Cure Foundation. From 1995 to 2004, she was the President of Church’s Chicken, a division of AFC Enterprises, Inc. Ms. Moddelmog previously served on the Boards of Directors of Fiesta Brands, Inc., HyperActive Technologies and AMN Healthcare Services, Inc.

LOGO

 

Admiral Joseph W. Prueher, USN (Ret.)

  

Admiral Prueher, age 69, has been one of our Directors since August 2010. He has served as the first James R. Schlesinger Distinguished Professor at the University of Virginia’s Miller Center of Public Affairs since 2009 and as a Consulting Professor and Senior Advisor at Stanford University since 2001. Admiral Prueher served as the United States Ambassador to China from 1999 to 2001. Admiral Prueher was the commander-in-chief of the U.S. Pacific Command and the senior military commander of the Army, Navy, Marine Corps and Air Force troops in the Pacific and Indian Oceans during his 35 year career in the United States Navy. He serves on the Boards of Directors of New York Life Insurance Company, Emerson Electric Co., Fluor Corporation and Long Shadows Vintners, LLC. Admiral Prueher formerly served on the Boards of Directors of Merrill Lynch & Co., Inc., Bank of America Corporation and The Wornick Company a wholly-owned subsidiary of TWC Holding LLC.

LOGO

 

Uwe E. Reinhardt, Ph.D.

  

Dr. Reinhardt, age 74, has been one of our Directors since 2002. He is the James Madison Professor of Political Economy and Public Affairs of Princeton University where he has taught since 1968. He is a Trustee of the H&Q Healthcare Investors and H&Q Life Sciences Investors investment funds, and a member of the Editorial Board of the Journal of the American Medical Association, Health Affairs and several other journals. Dr. Reinhardt serves on the Board of Boston Scientific Corporation. He is a Commissioner on the Henry J. Kaiser Family Foundation’s Commission on Medicaid and the Uninsured.

Identifying and Evaluating Nominees for Director

The Nominating Committee will consider Director candidates recommended by stockholders. In considering candidates submitted by stockholders, the Nominating Committee will take into consideration the needs of the Board of Directors and the qualifications of the candidate. The Nominating Committee’s evaluation process does not vary based on whether a candidate is recommended by a stockholder. However, the Board of Directors may consider the number of shares held by the nominating stockholder and the length of time that such shares have been held. The process to recommend a Director candidate and the information required to be submitted by a stockholder in connection with such recommendation is set forth in the Question and Answer section of this proxy on page 6 under the question “May I propose actions for consideration at the 2013 Annual Meeting of Stockholders or nominate individuals to serve as Directors?”

The Board of Directors is responsible for selecting the nominees for election to the Board of Directors. It is the responsibility of the Nominating Committee to develop selection criteria for Board of Directors membership and to review and consider prospective Director candidates, as more fully discussed below.

 

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When the Board of Directors determines that an additional Director should be added to the Board or a vacancy needs to be filled, the Nominating Committee, working closely with the full Board of Directors and management, develops criteria for open Board positions, taking into account such factors as it deems appropriate, which may include:

 

   

the current composition of the Board;

 

   

the range of talents, experiences and skills that would best complement those already represented on the Board;

 

   

the balance of management and independent Directors; and

 

   

the need for financial or other specialized expertise.

Diversity is among the many factors that the Board and Nominating Committee considers in evaluating prospective Director nominees. Diversity, as considered by the Board and the Nominating Committee, can encompass many attributes, including business experience, substantive experience, life experiences, age, gender and race. Applying these criteria, the Nominating Committee considers Director candidates suggested by its members, other Board members, management and stockholders. The Nominating Committee may from time-to-time retain third-party executive search firms that specialize in identifying potential Directors.

Once a person has been identified by the Nominating Committee as a potential candidate, the Nominating Committee collects and reviews available information regarding the person to assess whether the person should be considered further. If the Nominating Committee determines that the candidate warrants further consideration, the Chairman or another member of the Nominating Committee, or a retained third-party search firm, contacts the person. Generally, if the person expresses a willingness to be considered and to serve on the Board of Directors, the Nominating Committee requests information from the candidate, reviews the candidate’s accomplishments and qualifications, and conducts one or more interviews with the candidate. After completing this evaluation, the Nominating Committee makes a recommendation to the Board as to the persons who should be elected to the Board, and the Board makes its decision after considering the recommendation and report of the Nominating Committee.

The Nominating Committee believes that the minimum qualifications for serving as a Director of the Company are that a nominee demonstrates, by significant accomplishment in his or her field, an ability to make a meaningful contribution to the Board of Directors’ oversight of the business and affairs of the Company and has an impeccable record and reputation for honest and ethical conduct in both his or her professional and personal activities. In addition, the Nominating Committee examines a candidate’s specific experiences and skills, time availability in light of other commitments, potential conflicts of interest and independence from management and the Company.

We believe that all current Directors have high standards of integrity, commitment and independence of thought and judgment and possess an impeccable record and reputation for honest and ethical conduct. We also consider our Directors to have a diverse set of business and personal experiences, backgrounds and expertise, and to be diverse in terms of age, gender and race. When analyzing whether our Directors and nominees for election at the 2012 Annual Meeting have the experience, qualifications, attributes and skills to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Nominating Committee and the Board focused on the information summarized in each Director’s individual biography set forth on pages 11 through 13. The Nominating Committee and the Board also found the following attributes and qualifications of our Directors to be particularly meaningful in considering their nomination to, and continued service on, our Board:

Thomas E. Capps — Mr. Capps had a long tenure as the Chief Executive Officer of Dominion Resources, Inc., a national producer and transporter of energy. As a result, he is able to provide our Board with valuable business, leadership and management insights related to strategic direction and operational excellence for a

 

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complex business. Mr. Capps’ experience leading Dominion through the growth of its business by, among other things, market expansion and acquisitions, provides background and insights as we implement our growth strategies. Further, as a result of his service as Chairman and Chief Executive Officer of a publicly traded company, he is able to provide unique insight to our Chairman and Chief Executive Officer on critical strategic issues.

James G. Carlson — Mr. Carlson has over 30 years of experience in the health care industry. He has held positions of increasing responsibility with large, complex managed care organizations. He served as our Chief Operating Officer from 2003 to 2007 and as our Chief Executive Officer from 2007 to the present. Through these experiences, he has developed in-depth knowledge of the managed care industry generally and our Company in particular. He is able to provide the Board with valuable business, leadership and management experience and insights into the Company and its industry.

Jeffrey B. Child — Mr. Child previously served as a senior investment banker for Banc of America Securities LLC, where a significant portion of his focus was on health care companies and transactions. As a result, Mr. Child is able to provide our Board with critical insights on corporate finance and strategic transactions. This experience qualifies Mr. Child to serve on our Audit and Finance Committee (“Audit Committee”), where he also meets the requirements of an “Audit Committee financial expert” as described on page 21. In addition, Mr. Child’s knowledge of health care developed through his health care investment banking experience, seven years of service on our Board and his prior service on the board of directors of a publicly traded medical device company provides Mr. Child with additional expertise with respect to the health care industry. Additionally, Mr. Child brings substantial financial expertise to the Board, providing an understanding of financial statements, corporate finance and capital markets.

Emerson U. Fullwood — Mr. Fullwood has extensive executive management experience in positions of increasing responsibility with Xerox Corporation. Mr. Fullwood has substantial experience of profit and loss management responsibility for significant lines of business. These experiences provide him with valuable insights as a Director of the Company, particularly with respect to operations and finance matters.

Kay Coles James — Ms. James is well-versed in health care policy as a result of her service as the Director of the U.S. Office of Personnel Management, which, among other responsibilities, designs and administers the health insurance program for federal employees and retirees and manages policies and programs for the recruitment, training, promotion and compensation of the federal workforce. Ms. James was appointed by the U.S. Secretary of Health and Human Services to the Medicaid Advisory Commission and previously served as the Assistant Secretary of the U.S. Department of Health and Human Services as well as the Secretary of Health and Human Resources for the Commonwealth of Virginia. As a result, Ms. James brings to the Board substantial insights on federal and state government health care policy. Ms. James also serves on the board of directors of a large publicly traded financial institution so she is able to provide additional input on developing best practices for public companies in areas such as risk oversight.

Hala Moddelmog — Ms. Moddelmog has extensive executive management and marketing experience in positions of increasing responsibility with large, complex businesses. These experiences provide her with valuable insights, particularly with respect to operations and marketing matters. Ms. Moddelmog previously served as a director of a publicly traded health care staffing company and recently served as President and Chief Executive Officer of a large not-for-profit breast cancer advocacy and awareness company. As a result, Ms. Moddelmog is able to bring to the Board experience and knowledge of health care from alternate perspectives.

William J. McBride — Mr. McBride has significant experience as an executive and director of large managed care organizations. As a result, he is able to provide our Board with valuable business, leadership and management experience and insights into nearly all aspects of our business and industry. Mr. McBride also previously served as President, Chief Operating Officer and a Director of Value Health, Vice President and

 

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Controller of INA Corporation’s Life and Healthcare Group and Vice President of Finance for Cigna’s Affiliated Business Group. As a result, Mr. McBride also brings to the Board substantial financial expertise, providing an understanding of financial statements and accounting issues. Finally, Mr. McBride has served on our Board for over 15 years, making him our longest-serving Director, which provides him with deep institutional knowledge of our Company.

Admiral Joseph W. Prueher, USN (Ret.) — Admiral Prueher has extensive leadership experience through his military and governmental service positions. Admiral Prueher’s extensive public sector experience will be valuable at a time of change in the health care industry, when the coordination between the private and public sectors is particularly important. Additionally, Admiral Prueher serves on the board of directors of large publicly traded companies that operate in highly regulated, complex environments, so he is able to provide our Board with additional input on developing best practices for public companies in areas such as risk oversight, strategic planning and corporate governance matters.

Uwe E. Reinhardt, Ph.D. — Dr. Reinhardt is recognized as one of the nation’s leading authorities on health care economics and is a frequent lecturer and writer on the subject. Dr. Reinhardt has served on a number of government commissions and advisory boards, among them the congressional Physician Payment Review Commission, the National Council on Health Care Technology of the U.S. Department of Health and Human Services, the Special National Advisory Board of the U.S. Department of Veterans Affairs, the National Advisory Board of the Agency for Healthcare Research and Quality, the Kaiser Commission on Medicaid and the Uninsured and the World Bank External Advisory Panel for Health, Nutrition and Population. He is the President of the International Health Economics Association, is on the Board of the National Institute of Health Care Management, and is Chairman of the Coordinating Committee of the Commonwealth Fund’s International Program in Health Policy. Dr. Reinhardt also serves or has served as a member of numerous editorial boards, including the Journal of Health Economics, the Milbank Memorial Quarterly, Health Affairs, the New England Journal of Medicine, and the Journal of the American Medical Association. Dr. Reinhardt’s experience allows him to provide the Board with a deep understanding of the financing and economics of our federal and state health care systems, as well as substantial insight on health care policy.

Richard D. Shirk — Mr. Shirk has significant experience as an executive and director of large managed care organizations. As a result, he is able to provide our Board with valuable business, leadership and management experience and insights into all aspects of our business and industry. As a former Chief Executive Officer of a managed care organization, Mr. Shirk is also able to provide our Board and senior management team with significant expertise on the operations of a business in our industry.

John W. Snow — Dr. Snow had a long tenure as the Chief Executive Officer of CSX Corporation, a large public corporation in an industry subject to significant governmental and regulatory oversight. As a result, he is able to provide our Board with valuable insights related to the operational, financial and strategic leadership of a complex business with significant governmental interaction. In addition, as a result of his service as the Secretary of the Treasury, he is able to provide insight to our executives and directors on governmental and financial issues, including the budget considerations and financing of the Medicare and Medicaid programs. Additionally, Dr. Snow serves on the board of directors of large, complex publicly traded companies, so he is able to provide our Board with additional input on developing best practices for public companies in areas such as risk oversight, strategic planning and corporate governance matters.

 

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CORPORATE GOVERNANCE

The Company’s policies and practices reflect corporate governance initiatives that comply with the listing requirements of the NYSE and the corporate governance requirements of the Sarbanes-Oxley Act of 2002. The Company maintains a corporate governance page on the Investor Relations section of its website at www.amerigroup.com that includes information about its corporate governance practices, including its Company’s Corporate Governance Principles, its Code of Business Conduct and Ethics, and the charters for each of the three standing committees of the Board of Directors and the position of Lead Independent Director. Printed copies of these documents are available to any stockholder without charge upon written request to our Corporate Secretary at 4425 Corporation Lane, Virginia Beach, Virginia 23462.

The Company has a Code of Business Conduct and Ethics that applies to members of the Board and the Company’s officers and employees, which is posted on our internal and corporate websites. The Company has adopted an additional separate code of ethics that applies to its executive officers and finance executives. Moreover, the Company has an anonymous hotline administered by a third party available to all employees by telephone or e-mail, and the Company’s Audit Committee has procedures in place for the anonymous submission of employee complaints on accounting, internal controls or auditing matters.

Board Meetings

The Board met seven times in 2011, all of which were regularly scheduled meetings. Each Director attended at least 75% of all Board and applicable committee meetings in 2011. Directors are encouraged to attend the Annual Meeting. In 2011, all of the then current Directors attended the 2011 Annual Meeting.

Board Independence

None of the current Directors, except Mr. Carlson, our Chairman, Chief Executive Officer and President, has any material relationship with the Company (directly or as a partner, stockholder or officer of an organization that has a material relationship with the Company) other than as a Director or stockholder of the Company. On this basis, the Board has affirmatively determined that each of the current Directors, except for Mr. Carlson, is independent within the meaning of the NYSE’s director independence standards.

The independent Directors meet periodically in executive sessions without the participation of management. Executive sessions are currently scheduled to be held either on the day prior to or the day of each regularly scheduled in-person meeting of the Board of Directors. Richard D. Shirk served as our Lead Independent Director until March 31, 2012 and Jeffrey B. Child became our Lead Independent Director effective April 1, 2012. The Lead Independent Director presides at executive sessions and also performs other duties as described below under “Board Leadership Structure” below.

Communicating with the Board

The Board has established a process to receive communications from stockholders and other interested parties. Stockholders and other interested parties may contact any member or all members of the Board of Directors, the Lead Independent Director, the members of any Board committee or the chair of any Board committee by mail or electronically. To communicate with any of the foregoing, correspondence should be addressed to the Board or any such individual Director or group of Directors or Board committee or chair of such committee by either name or title. All such correspondence should be sent “c/o Corporate Secretary” at AMERIGROUP Corporation, 4425 Corporation Lane, Virginia Beach, Virginia 23462. All communications received will be opened by the office of the Corporate Secretary for the sole purpose of determining whether the contents represent a message to our Directors. Any contents that are not in the nature of advertising, promotions of a product or service, or patently offensive material will be forwarded promptly to the addressee. In the case of communications to the Board or any group or committee of Directors, the Corporate Secretary’s office will make

 

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sufficient copies of the contents to send to each Director who is a member of the group or committee to which the envelope or e-mail is addressed. Members of the Board may be contacted electronically by sending an e-mail to corpbod@amerigroup.com. The e-mail should indicate whether it is directed to the Board as a whole, the Lead Independent Director, or to specific Director(s) or committee chair.

Board Leadership Structure

One of the Board’s key responsibilities is to evaluate and determine its appropriate leadership structure in order to provide independent oversight of management and to discharge its responsibility to oversee the business and affairs of the Company. The Board believes that the appropriate Board leadership structure varies from company to company as circumstances warrant. Our Board evaluates and considers changes to its leadership structure on at least an annual basis. The Nominating Committee also evaluates the leadership structure of our Board on at least an annual basis and stays informed with respect to the corporate governance dialogue regarding an independent Chairman versus a combined Chairman/Chief Executive Officer (“CEO”) leadership model.

Since the Company’s incorporation, the CEO has also served as the Chairman of the Board. Based on the Board’s most recent review, the Board continues to believe that this leadership structure is optimal for the Company for the following reasons:

 

   

the current structure results in the most effective leadership to help the Board discharge its oversight duties;

 

   

the CEO, as the individual with primary responsibility for managing the Company’s day-to-day operations, is also best positioned to provide Board leadership that is aligned with our stockholders’ interests as well as the Company’s needs;

 

   

the CEO is well situated to identify the key risks facing our organization and ensure that these risks are brought to the attention of the Board (see discussion below under “The Board’s Role in Risk Oversight”); and

 

   

having one leader serving as both the Chairman and CEO provides decisive leadership while reducing the likelihood of confusion about leadership roles and duplication of efforts, and allows the Company to speak with one voice.

After reviewing the qualifications of each Director, the Board believes that Mr. Carlson is the Board member best suited to lead the Board in its oversight responsibilities. Mr. Carlson has served as the Company’s Chairman and CEO since May 2008. In making this determination, the Board considered Mr. Carlson’s over 30 years of experience in health care, including service with managed care organizations that require similar breadth, expertise and knowledge as required by the Company. The Board also considered Mr. Carlson’s service as COO and President of the Company from 2003 until his promotion to CEO. His knowledge, expertise and leadership regarding the issues and risks affecting our business are important to the Board in overseeing the business and affairs of the Company.

In considering its current leadership structure of a combined Chairman/CEO, the Board has taken into account a number of structural safeguards that serve to preserve the Board’s independent oversight of management. First, the Board is comprised entirely of independent Directors (other than Mr. Carlson) who are highly qualified and experienced, and who exercise a strong, independent oversight function. Second, as specified in our Corporate Governance Principles, the Board has designated one of its independent members as Lead Independent Director and equipped him with significant authority and responsibilities (described below). Third, a number of Board and committee processes and procedures, including regular executive sessions of independent Directors and annual evaluations of our CEO’s performance against pre-determined goals, provide independent oversight of our CEO’s performance. The Board believes that these safeguards provide the appropriate balance between the authority of those who oversee the Company and those who manage it on a day-to-day basis, as well as preserve the Board’s independent oversight of management.

 

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The position of Lead Independent Director, which is currently held by Jeffrey B. Child, has significant authority and responsibilities. The authority and responsibilities of the Lead Independent Director are detailed in a Board-approved Charter under which the Lead Independent Director has the following specific responsibilities, among others:

 

   

if the Chairman is unable to attend a Board meeting, to act as Chairman of such Board meeting;

 

   

serve as principal liaison between the independent Directors and the Chairman;

 

   

approve the quality, quantity and timeliness of the information sent to the Board as well as approving Board meeting agenda items;

 

   

approve Board meeting schedules to assure that there is sufficient time for discussion of all agenda items;

 

   

have the authority to call meetings of the independent Directors and to set the agendas for and chair the meetings of the independent Directors;

 

   

if requested by stockholders, ensure that he or she is available, when appropriate, for consultation and direct communication;

 

   

perform such other duties as the Board shall from time-to-time delegate; and

 

   

preside at executive sessions of the independent Directors.

The Charter of the Lead Independent Director can be found on the Investor Relations section of our website at www.amerigroup.com.

The Board’s Role in Risk Oversight

The Board executes its oversight responsibility for risk management directly and primarily through its three standing Committees, as follows:

 

   

In connection with every regularly scheduled quarterly Board meeting, the Board receives a detailed report of the most significant risks affecting the Company from members of the Company’s executive management team, including the Company’s CEO, CFO, COO and General Counsel. The Board and management discuss these risks, which may be operational, financial, macroeconomic, legal, compliance-related, regulatory, political or others. Further, the Board is routinely informed of developments affecting the Company’s risk profile or other aspects of its business.

 

   

The Audit Committee has responsibility for overseeing the Company’s processes for risk assessment and risk management. The Company’s General Auditor, who reports independently to the Audit Committee, facilitates the risk management program. The Audit Committee’s meeting agendas include discussions of individual risk areas throughout the year, as well as an annual summary of the risk management process. In addition, the Audit Committee has oversight of the Company’s investment policy and receives a quarterly report of the Company’s portfolio holdings which details, among other things, the portfolio’s investment return and credit and liquidity risks.

 

   

The Compensation Committee oversees risks associated with our compensation policies and practices. As described on page 28, the Compensation Committee considers and attempts to mitigate excessive risk taking through the structure of our compensation programs.

 

   

The Nominating Committee has primary responsibility for overseeing the Company’s compliance program and compliance risks. The Company’s Chief Compliance Officer (“CCO”), who reports independently to the Nominating Committee, facilitates the compliance program. The Nominating Committee regularly receives a detailed report from the CCO regarding the Company’s compliance program activities.

 

   

The Board is informed of its standing committees’ risk oversight and other activities via regular reports of the committee chairpersons to the full Board.

 

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The Chairman and CEO keeps the Board informed of specific risk topics affecting our business to the extent needed between regularly scheduled Board meetings through special meetings, ad hoc conference calls and postings to a secure Board-only web portal.

Certain Relationships and Related Transactions

Review and Approval of Related Person Transactions

We review all relationships and transactions in which the Company and our Directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. The Company’s legal staff is primarily responsible for the development and implementation of processes and controls to obtain information from the Directors and executive officers with respect to related person transactions and for then determining, based on the facts and circumstances, whether the Company or a related person has a direct or indirect material interest in the transaction. As required under SEC rules, transactions that are determined to be directly or indirectly material to the Company or a related person are disclosed in the Company’s proxy statement. In addition, the Audit Committee reviews and approves or ratifies any related person transaction that is required to be disclosed.

Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote respecting approval or ratification of the transaction, provided, however, that such Director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction.

In the course of the Board’s determination regarding the independence of each of the non-employee Directors, the Board considered certain commercial transactions between the Company and third parties where one of our Directors serves on the board of that third party. The Board determined that the amount of sales to, or purchases from the respective third party was below the greater of $1 million or two percent of the annual revenue of that third party and the Company, and that the transactions otherwise were not directly influenced by and did not significantly benefit the Directors. The Board also considered the fact that certain of our Directors serve on the boards of institutional investors that own shares of our common stock. The Board determined that none of these transactions presented an actual or apparent conflict of interest or adversely affected the Directors’ independence. No member of our Board or management was aware of any relevant transactions other than those described in this section.

Indemnification Agreements

The Company has entered into an indemnification agreement with each of its Directors and executive officers. The indemnification agreement provides that the Director or executive officer will be indemnified to the fullest extent permitted by law for claims arising in such person’s capacity as a Director or executive officer. The agreement further provides that in the event of a change of control of the Company, the Company would seek legal advice from an approved special independent counsel selected by the Director or executive officer, who has not performed services for either party for five years, to determine the extent to which the Director or executive officer would be entitled to an indemnity under applicable law. Also, in the event of a change of control or a potential change of control, the Company would, at the Director’s or executive officer’s request, establish a trust in an amount equal to all reasonable expenses anticipated in connection with investigating, preparing for and defending any claim. The Company believes that these agreements are necessary to attract and retain skilled management and Directors with experience relevant to our industry.

Committees of the Board

The Board has three standing committees: the Nominating Committee, Audit Committee and Compensation Committee. Each committee is governed by a charter, a current copy of which is available on the Investor

 

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Relations section of our website at www.amerigroup.com. A copy of each charter is also available in print without charge to stockholders upon request, addressed to the Corporate Secretary at AMERIGROUP Corporation, 4425 Corporation Lane, Virginia Beach, Virginia 23462.

The Nominating Committee

The members of the Nominating Committee are Admiral Prueher (Chairman), Jeffrey B. Child, Kay Coles James, Hala Moddelmog, and Uwe E. Reinhardt, Ph.D., each of whom, the Board has determined in its business judgment, is an independent Director within the meaning of the NYSE director independence standards. The Nominating Committee met seven times during 2011. The functions of the Nominating Committee include the following:

 

   

identifying and recommending to the Board individuals qualified to serve as Directors of the Company;

 

   

recommending to the Board the Directors to serve on committees of the Board;

 

   

advising the Board with respect to matters of Board composition, procedures and committees;

 

   

developing and recommending to the Board a set of corporate governance principles applicable to the Company and overseeing corporate governance matters generally;

 

   

developing and recommending to the Board a Code of Business Conduct and Ethics and overseeing such matters generally;

 

   

overseeing the Company’s compliance program; and

 

   

overseeing the annual evaluation of the Board of Directors.

As discussed above under “Identifying and Evaluating Nominees for Director,” the Nominating Committee has a significant role in identifying, recruiting, vetting and recommending Director nominees.

The Compensation Committee

The members of the Compensation Committee are Kay Coles James (Chair), Thomas E. Capps, William J. McBride, Richard D. Shirk and John W. Snow, each of whom the Board of Directors has determined in its business judgment, is an independent Director within the meaning of the NYSE director independence standards. The Compensation Committee met seven times in 2011.

The Compensation Committee, among other things, sets the overall compensation philosophy of the Company, considers management proposals relating to compensation, reviews and makes recommendations to the Board of Directors with respect to compensation and benefit issues, administers the terms of performance-based compensation programs with respect to the executive officers of the Company and reviews and recommends Director compensation to the Board for approval.

The Audit Committee

The members of the Audit Committee are Jeffrey B. Child (Chairman), Emerson U. Fullwood, William J. McBride and Richard D. Shirk, each of whom, the Board has determined in its business judgment, is an independent Director within the meaning of the NYSE director independence standards and satisfies the financial literacy requirements of the NYSE listing standards. Based on his business experience described previously in this proxy statement, as well as his experience as a chief financial officer, the Board has determined that Mr. Child is an “Audit Committee financial expert” as defined in Item 407(d)(5) of Regulation S-K under the Securities Act of 1933. The Audit Committee met 13 times in 2011.

Management is responsible for the preparation of the Company’s consolidated financial statements and for maintaining an adequate system of disclosure controls and procedures and internal control over financial

 

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reporting for that purpose. KPMG, as the independent registered public accounting firm for the Company, is responsible for performing an independent audit of our consolidated financial statements and of the Company’s internal control over financial reporting and issuing reports thereon, in accordance with standards established by the Public Company Accounting Oversight Board (the “PCAOB”). The Audit Committee is responsible for reviewing the financial information which will be provided to stockholders and others, the systems of internal controls, which management and the Board have established, the performance and selection of an independent registered public accounting firm, and the Company’s audit and financial reporting processes.

Further, the Audit Committee:

 

   

approves the scope of audits and other services to be performed by the Company’s independent registered public accounting firm and internal auditors;

 

   

considers whether the performance of any professional service by the independent registered public accounting firm, other than services provided in connection with the audit function, could impair the independence of the outside independent registered public accounting firm;

 

   

reviews the results of internal and external audits, the accounting principles applied in financial reporting, and financial and operational controls; reviews the Company’s financial performance quarterly prior to the release of earnings;

 

   

reviews management’s discussion and analysis in the interim unaudited consolidated financial statements each quarter before the Company files its quarterly report on Form 10-Q with the SEC; and

 

   

reviews management’s discussion and analysis in the Annual Report on Form 10-K before the Company files it with the SEC.

It is the Company’s policy that all fees paid to the independent registered public accounting firm that performs the independent audit of the Company’s financial statements be pre-approved by the Audit Committee. All requests for fee pre-approval must first be presented to the Company’s General Auditor and the Chief Financial Officer along with information about the nature of the proposed engagement including the amount of the fee and its timing. If the General Auditor deems the engagement appropriate, he will arrange to have the engagement presented to the Audit Committee for pre-approval. All engagements must be pre-approved by the Audit Committee prior to entering into an agreement for or commencing services.

 

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AUDIT COMMITTEE REPORT

The Audit Committee has reviewed Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”) and discussed with management the Company’s audited consolidated financial statements as of and for the year ended December 31, 2011.

The Audit Committee has discussed with KPMG the matters required to be discussed by the Statement on Auditing Standards No. 61 (AICPA, Professional Standards, Vol. 1 AU Section 380), as adopted by the PCAOB.

The Audit Committee received and reviewed the written disclosures from KPMG required by applicable requirements of the PCAOB regarding KPMG’s communications with the Audit Committee concerning independence, and has discussed with KPMG their independence. The Audit Committee considered whether the provision of non-audit services was compatible with KPMG’s independence in performing audit services.

Based upon the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements referred to above be included in the Company’s 2011 Form 10-K.

Members of the Audit and Finance Committee:

Jeffrey B. Child (Chair)

Emerson U. Fullwood

William J. McBride

Richard D. Shirk

 

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PROPOSAL 2:

RATIFICATION OF THE SELECTION OF

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

General

Upon the recommendation of our Audit Committee, the Board of Directors has appointed KPMG to serve as our independent registered public accounting firm for the fiscal year ending December 31, 2012. KPMG has served in this capacity since 1994. We are asking our stockholders to ratify the Board’s appointment of KPMG as our independent registered public accounting firm for the fiscal year ending December 31, 2012. No Director or executive officer of the Company has any substantial interest in the appointment of KPMG as the Company’s independent registered public accounting firm. Although ratification is not required under our By-Laws or otherwise, the Board is submitting the selection of KPMG to our stockholders as a matter of good corporate practice. Even if the selection is ratified, the Audit Committee in its discretion may, subject to the approval of the Board of Directors, select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interest of the Company and our stockholders.

Representatives of KPMG are expected to be present at the 2012 Annual Meeting. They will have an opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions.

Vote Required

The affirmative vote of a majority of the shares present in person or by proxy at the 2012 Annual Meeting and entitled to vote on this proposal is required for ratification of the Board’s appointment of KPMG as our independent registered public accounting firm. In tabulating the vote, we will count abstentions and broker non-votes, if any, as having the same effect as voting against the proposal.

The Board unanimously recommends a vote “FOR” such ratification.

Independent Registered Public Accounting Firm’s Fees

The following is a summary of the fees billed to the Company by KPMG for professional services rendered for the audit of the Company’s annual financial statements for 2011 and 2010 and for fees billed for other services rendered by KPMG:

 

Fee Category

   Fiscal 2011 Fees      Fiscal 2010 Fees  

Audit Fees

   $ 1,537,000       $ 1,447,000   

Audit-Related Fees

     152,000         180,077   

All Other Fees

     202,591         1,000   
  

 

 

    

 

 

 

Total Fees

   $ 1,891,591       $ 1,628,077   
  

 

 

    

 

 

 

Audit Fees

Audit Fees consisted of fees billed for professional services rendered for the audits of the Company’s consolidated financial statements, the audits of the Company’s internal control over financial reporting, review of the interim consolidated financial statements included in quarterly reports, and services that are normally provided by KPMG in connection with statutory and regulatory filings or engagements. The aggregate Audit Fees billed for each of the last two fiscal years are set forth in the above table.

Audit-Related Fees

Audit-Related Fees consisted of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported

 

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under “Audit Fees.” These services include employee benefit plan audits and attestation services that are required by statute or regulation. The aggregate Audit-Related Fees billed for each of the last two fiscal years are set forth in the above table.

All Other Fees

All Other Fees consisted of assistance and consultations related to services in connection with registration statement and debt offering during 2011 and state examiner reviews and regulatory compliance advisory services in both periods presented. The aggregate All Other Fees billed for each of the last two fiscal years are set forth in the above table.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During 2011, our Compensation Committee consisted of Ms. James (Chair) and Messrs. Capps, McBride and Shirk, none of whom was at any time during fiscal 2011 or at any other time, an officer or employee of the Company. None of our executive officers serve as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving as a member of our Board or our Compensation Committee.

COMPENSATION COMMITTEE REPORT

Management of the Company has prepared the Compensation Discussion and Analysis (the “CD&A”) below, and the Compensation Committee has reviewed and discussed the CD&A with management. Based on its review and discussion, the Compensation Committee recommended to the Board that the CD&A be included in this proxy statement and incorporated by reference into the Company’s 2011 Form 10-K.

Members of the Compensation and Organizational Management Committee:

Kay Coles James (Chair)

Thomas E. Capps

William J. McBride

Richard D. Shirk

John W. Snow

COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

This CD&A reviews the compensation policies and decisions of our Compensation Committee with respect to the 2011 performance of the NEOs listed in the Summary Compensation Table on page 38.

In 2011, our Company produced solid financial and operational results, which were driven by the leadership and performance of our NEOs, who exceeded their business development goals and met their financial and operational goals related to earnings per share and clinical and service quality. Our results for 2011 included:

 

   

Net income of $195.6 million, or $3.82 earnings per diluted share (“EPS”);

 

   

Total revenues of $6.3 billion, an 8.8% increase over the prior year;

 

   

2,024,000 members at the end of 2011, representing an increase of 4.8% over the prior year;

 

   

Health benefits ratio of 83.7% of premium revenues for the year ended December 31, 2011;

 

   

Selling, general and administrative expense ratio of 8.1% of total revenues in 2011;

 

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Successful bids to expand our business in Texas and enter the Louisiana market, entry into an agreement to make an acquisition that will allow us to service additional members in New York and expanded service offerings in many of our other existing markets; and

 

   

Clinical and service quality improvements and successful accreditation of three of our Company’s health plans.

Additional information about our financial and operational results for 2011 can be found in our 2011 Form 10-K under the section titled Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overall, we believe the objectives of our 2011 compensation program were met because our NEOs were motivated to focus on specific areas of our business that are critical not only to our short-term and long-term financial and operational success, but also to the quality of care of our members and satisfaction of our state customers. In addition, we maintained continuity among our executive leadership group, which we view as essential given the growth opportunities for our industry in the next few years.

The remainder of this CD&A discusses our overall program in greater detail and is organized into the following four sections:

 

   

Section I — Overview of Our Executive Compensation Program, which discusses our executive compensation program objectives and the administration and governance of our executive compensation program.

 

   

Section II — Setting Target Compensation and Target Total Compensation, which discusses how target total compensation is set, including the use of industry peer company information, and the components of our compensation program.

 

   

Section III — 2011 Performance Goals, Performance Evaluation and Compensation Awards, which discusses the 2011 performance goals for our Company and NEOs, actual performance against those goals and the Compensation Committee’s 2011 compensation decisions regarding our NEOs.

 

   

Section IV — Additional Information Regarding Our Compensation Programs, which provides other important information regarding our executive compensation program, including employee benefits and perquisites, our change in control benefit and severance policies and the employment agreement with our CEO.

Section I — Overview of Our Executive Compensation Program

Executive Compensation Program Objectives

Our executive compensation program seeks to provide incentives for executives to enhance Company performance, create stockholder value and attract and retain superior executive talent. Our program is based upon the following core principles:

 

   

Pay-for-Performance:    We emphasize pay-for-performance and believe that actual compensation should be closely aligned with Company and individual performance. We measure Company performance against financial and non-financial performance goals, such as customer service and quality of care for our members, as well as against the performance of our Industry Peer Group (described below) and the Standard & Poor’s (“S&P”) Healthcare Index. We measure an individual’s performance against major job objectives (“MJOs”) applicable to that individual’s position and responsibilities. MJOs are generally related to the attainment of specific financial, operational or business initiatives and goals. We believe that tying executive compensation to performance is the best way to encourage financial performance in a responsible manner while taking into consideration operational performance goals.

 

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Compensation Aligned with Stockholder Interests:    We believe that compensation should be directly linked to, and provide incentives for, the creation of stockholder value and delivery of stockholder return. Accordingly, certain components of our NEOs’ compensation are directly linked to the Company’s achievement of EPS targets and total stockholder return.

 

   

Attract and Retain Superior Executive Talent:    We operate in a highly competitive industry where there is a great demand for talented executives. Therefore, we structure our compensation programs to be competitive with other organizations in our industry and with organizations with whom we compete for executive talent.

Executive Compensation Program Administration

The Compensation Committee oversees our executive compensation program on behalf of the Board. When setting executive compensation, the Compensation Committee is advised by Meridian Compensation Partners, LLC (“Meridian Partners”), a nationally recognized compensation consultant that performs no other services for the Company. The Compensation Committee also receives input from management, which consults with Towers Watson & Co. (“Towers Watson”), a nationally recognized compensation consultant. The following table describes the roles performed by the Compensation Committee, our independent Directors, certain of our executive officers and the compensation consultants in the administration of our executive compensation program.

 

Compensation Committee   

• sets the overall compensation philosophy of the Company;

• considers management proposals relating to compensation;

• reviews and makes recommendations to the Board of Directors with respect to compensation and benefit issues; and

• approves all compensation decisions for each executive officer, including base salaries and any bonuses, long-term incentive compensation, equity awards or severance benefits.

 

Independent Directors   

• participate in the performance evaluation of our CEO;

• participate in determination of the CEO’s salary and incentive compensation awards; and

• attend, as desired, Compensation Committee meetings and provide input on compensation decisions.

 

Executive Officers   

• assist the Compensation Committee in developing financial performance goals for the Company and the NEOs under our incentive compensation programs;

• CEO provides input when setting the incentive compensation target awards for other NEOs; and

• CEO reviews and presents to the Compensation Committee the performance assessment and compensation recommendations for other NEOs.

 

Compensation Consultant (Management)   

• attends meetings of the Compensation Committee at the request of management;

• works with management to design compensation programs for presentation to the Compensation Committee;

• compiles, on an annual basis, the financial and stock performance information for our Industry Peer Group;

• assists the Company with benchmarking its compensation practices against the Industry Peer Group; and

• provides a broad market perspective relative to compensation practices of comparable companies.

 

 

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Compensation Consultant (Committee)   

•  reports directly to, and participates in meetings of, the Compensation Committee;

•  advises the Compensation Committee on compensation proposals presented by management and executive and director compensation trends and program design;

•  reviews the Company’s compensation awards for alignment with the Company’s program objectives and to determine reasonableness;

•  reviews market data and advises the Compensation Committee on setting the compensation of the CEO and other executive officers;

•  evaluates and makes recommendations to the Compensation Committee regarding the size and composition of the Company’s Industry Peer Group; and

•  annually prepares and reviews with the Compensation Committee tally sheets for the NEOs to ensure that target Total Compensation (defined below) is reasonable and to provide a comprehensive view of the realizable value of outstanding unvested and vested equity awards and potential payments in the event of termination of employment or a change in control.

 

Governance of our Executive Compensation Program

We have adopted practices that govern and support the objectives of our executive compensation program, including paying for performance, aligning the interest of our executives with our stockholders and attracting and retaining executive talent. These governance practices include: clawback provisions for equity awards, prohibitions on hedging in Company securities, mitigation of excessive risk taking, guidelines that require stock ownership by our executives and directors and consideration of stockholder support for our executive compensation program.

 

   

Clawbacks:    Our 2009 Equity Incentive Plan provides for the recoupment or “clawback” of equity awards and, if approved by stockholders at the 2012 Annual Meeting, our 2012 Cash Incentive Plan will also provide for the clawback of cash awards under certain circumstances. If a grantee breaches any restrictive covenant applicable to the grantee, or if the Company restates its financial results as a result of fraud or misconduct and the Compensation Committee determines, among other things, that the grantee personally and knowingly engaged in practices that contributed to the restatement, grantee will forfeit the right to receive any future awards under the plans. In addition, the Company may demand repayment of any awards already received by the grantee under either plan.

 

   

No Hedging:    Directors, officers and employees are prohibited from entering into hedging transactions with respect to the Company’s securities. Specifically, Directors, officers and employees may not purchase or sell puts, calls, options or other securities based on the Company’s securities and may not enter into other hedging or monetization transactions, such as forward sale contracts, in which the stockholder continues to own the security without all the risks or rewards of ownership. The policy also prohibits purchasing Company securities on margin or borrowing against an account in which Company securities are held.

 

   

Risk Mitigation:    The Compensation Committee considers and attempts to mitigate excessive risk-taking by our executives through the structure of our compensation programs. The Company’s compensation program is intended to mitigate risk by emphasizing long-term compensation and performance measures correlated with growing stockholder value and increasing operational performance rather than solely rewarding short-term financial performance and providing for short-term payouts. In addition, the retention and holding periods in equity awards received by our executives help to align the executives’

 

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interests with those of stockholders, further reducing any incentive to focus on short-term objectives at the expense of increasing long-term value. The Compensation Committee believes that the balance of the Company’s short-term and long-term compensation components is effective in that it does not encourage excessive risk-taking by our executives.

 

   

Officer and Director Equity Ownership Requirements:    Our Executive Stock Ownership Guidelines generally provide that our CEO and all Executive Vice Presidents must hold all time-based vesting restricted stock awards for five years following the date of grant (less any shares sold or withheld by the Company to satisfy tax obligations upon vesting). Our Director Stock Ownership Guidelines require our independent Directors to hold shares of our common stock equal in value to $250,000 (measured annually as of the date of the Annual Meeting). Directors who join the Board after May 2010 have five years following their commencement of service as a Director, and all other independent Directors have until the 2013 Annual Meeting of Stockholders, to attain the requisite ownership level. Currently, all of our executive officers and independent Directors are in compliance with the applicable equity ownership guidelines.

 

   

2011 “Say-on-Pay” Advisory Vote on Executive Compensation:    At our 2011 Annual Meeting of Stockholders, under recently adopted Section 14A of the Securities Exchange Act of 1934, we provided stockholders with a “Say-on-Pay” advisory vote on our executive compensation and also gave stockholders the opportunity to vote on how often the “Say-on-Pay” advisory vote should occur. Our stockholders expressed substantial support for the compensation of our NEOs, with approximately 87% of the votes cast in favor of approving the compensation for our NEOs, and decided that a “Say-on-Pay” advisory vote should occur annually. The Compensation Committee evaluated the results of the 2011 advisory votes and, in light of the substantial support for our executive compensation program, did not make any specific changes to our executive compensation program and policies as a result of the 2011 “Say-on-Pay” advisory vote, but decided to hold a “Say-on-Pay” advisory vote annually consistent with the recommendation of our stockholders.

Section II — Setting Compensation and Target Total Compensation

Compensation for our NEOs is established annually consistent with the objectives of our executive compensation program. In an effort to ensure that our executive compensation is competitive, which allows us to attract and retain executive talent, and to assess the extent to which our executive compensation program pays for performance, the Compensation Committee considers the relevant pay practices of certain peer companies. Moreover, the Compensation Committee sets compensation using components that are designed to meet the objectives of our executive compensation program.

Our Industry Peer Group

The Compensation Committee considers, at least annually, the relevant pay practices of a group of peer companies (the “Industry Peer Group”) in structuring our executive compensation program. Our Industry Peer Group is limited to other publicly traded companies in the managed care industry, as these companies are our primary competitors for executive talent. Moreover, the executive officer positions of the companies in our Industry Peer Group are most comparable to our executive officer positions in terms of breadth, complexity and scope of responsibilities. The Compensation Committee also validates our Industry Peer Group by comparing it to companies followed by sell-side analysts and identified as comparable investment opportunities by investors in a periodic investor perception survey conducted by the Company. For 2011, our Industry Peer Group was comprised of the following companies:

 

Aetna, Inc.

   Magellan Health Services Inc.

Centene Corp.

   Molina Healthcare, Inc.

Cigna Corp.

   UnitedHealth Group Incorporated

Coventry Health Care, Inc.

   Universal American Corp.
Health Net, Inc.    Wellcare Health Plans, Inc.
HealthSpring, Inc.    WellPoint, Inc.
Humana, Inc.   

 

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Although Metropolitan Health Networks, Inc. (“Metropolitan”) was included in the Industry Peer Group for 2010, it was excluded for 2011 after the Committee and the Company determined that Metropolitan was not a competitor, did not engage in competition with the Company and was not of sufficient size or scale to be in the Industry Peer Group. In 2012, HealthSpring, Inc. will not be included in the Industry Peer Group as a result of its acquisition by Cigna Corp.

Components of Total Compensation

In order to meet the objectives of our executive compensation program, we compensate our NEOs with base salaries, an annual performance-based cash bonus and long-term incentives, which we refer to collectively as “Total Compensation.” As outlined below, each component serves a different purpose and has certain key characteristics.

 

Component

  

Purpose

  

Key Characteristics

Base Salary

  

• reflects job responsibilities

• reflects anticipated future value to the Company

• provides a stable source of income to executives

 

  

• evaluated annually by Compensation Committee

• generally targeted at market median

Performance-Based Annual

Cash Bonus (“MJO Bonus”)

  

• provides short-term cash incentive compensation tied to individual and Company annual performance

  

• paid pursuant to 2007 Cash Incentive Plan

• determined based on goals established annually by Compensation Committee

• generally targeted at market median

 

Performance-Based

Long-Term Incentives

  

• encourages key employees, including NEOs, to own our common stock

• provides long-term cash and equity incentive compensation aligned with the creation of stockholder value to executives whose contributions are essential to the growth and success of our business

• encourages retention

 

  

• paid pursuant to 2007 Cash Incentive Plan and 2009 Equity Incentive Plan

• determined based on goals established annually by Compensation Committee and performance over a multi-year period

• generally targeted at market median

We consider the value and relative weighting of each component of Total Compensation in order to provide market-competitive compensation and to motivate and reward executives for performance. This consideration is subjective and not formulaic. The Compensation Committee sets compensation targets at levels to ensure that the Company can attract and retain key executive talent. While target Total Compensation is set at approximately the median level of our Industry Peer Group, our programs are designed so that our NEOs have the opportunity to earn above median compensation from certain components of Total Compensation that are tied to performance, such as MJO Bonuses and long-term incentive compensation, or tied to stockholder return, such as outperform equity grants.

The Company also recognizes the need to balance the components of Total Compensation appropriately depending on an individual’s position within the Company and his or her ability to impact our results. Accordingly, we structure our compensation programs so that a significant portion of our NEOs’ target Total Compensation is performance-based (in the form of MJO Bonuses and long-term incentive compensation) and heavily dependent upon our financial and operational results compared to our compensation programs for our broad-based employee

 

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population, who are generally not eligible for MJO Bonuses or long-term incentive compensation. The programs for those other employees are designed to provide more income stability and accordingly, a smaller portion of their compensation is performance-based. We believe that the design of our compensation program is effective in achieving our pay-for-performance philosophy by aligning compensation for those executives whose responsibilities and decisions most directly impact our results with the interests of our stockholders by basing a significant proportion of their compensation on performance-based compensation awards.

Section III — 2011 Performance Goals, Evaluation and Awards

Compensation for our NEOs for 2011 consisted of base salaries, MJO Bonuses, long-term incentive plan compensation and performance-based equity awards. In this section we describe the programs pursuant to which compensation was paid to our NEOs for 2011 performance, including the goals that were established, the evaluation of the NEOs’ performance against these goals and the awards that were made as a result of these evaluations.

2011 Performance Goals, Evaluation and Awards — MJO Bonus

On an annual basis, the Compensation Committee approves performance goals and establishes an MJO Bonus formula that provides a guideline for the determination of individual MJO Bonuses. For 2011, the total bonus pool for all bonus-eligible employees was determined based on the degree to which performance goals were attained. Subject to limitations in our 2007 Cash Incentive Plan, the Compensation Committee may exercise its judgment to increase or decrease the actual amount of the MJO Bonus to a particular NEO to reflect performance. The formula components for 2011 were as follows:

 

Annual MJO Target

($)

   x   

Percentage of MJOs

Attained

(%)

   x   

Percentage of Company Goals Attained

(%)

   =   

MJO Bonus

($)

The “Percentage of MJOs Attained” is the result of the Compensation Committee’s evaluation of the NEOs following completion of the performance year against previously determined MJOs. The Compensation Committee evaluates the performance of our CEO and the performance of our other NEOs is evaluated by the Compensation Committee with significant input from our CEO.

The “Percentage of Company Goals Attained” is the result of the Compensation Committee’s evaluation of Company performance following completion of the performance year against previously determined performance goals approved by the Compensation Committee. Payment of MJO Bonuses is contingent on the Company achieving its performance goal.

In March 2011, the Compensation Committee approved performance goals, or MJOs, applicable to the 2011 performance year, which were the same for all NEOs. The Compensation Committee also established 2011 MJO Bonus targets at 175% of base salary for Mr. Carlson, 100% of base salary for Messrs. Truess and Zoretic and 75% of base salary for Mr. Littel and Dr. McCluskey. The MJOs are set forth in the table below, as are the relative weights assigned to each MJO, the Compensation Committee’s rationale in selecting the MJOs, the means by which performance of the MJO is measured and the NEOs’ actual performance against the MJOs. The Compensation Committee set points below and above each performance goal that, if attained, would equate to various levels of funding of the Company’s annual cash bonus pool for the 2011 performance year from 0% to 180% of target. The pool is the aggregate amount that may be paid to all Company employees who are eligible to receive MJO bonuses and is adjusted based upon the attainment of the performance goals between the minimum and maximum levels of funding (0% and 180%). Individual executives may be awarded in excess of 180% of their individual Annual MJO Target with Compensation Committee approval.

In February 2012, the Compensation Committee evaluated the Company’s and NEOs’ performance against the goals established to determine the appropriate funding of the Company’s bonus pool and the cash bonus

 

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amount to be paid to each executive. Based on the Company’s 2011 audited consolidated financial statements, projected premium revenue for the Texas business, an assessment of the Company’s performance on clinical and service quality measurements and successful accreditation of certain of the Company’s health plans, the Compensation Committee determined that the Company and NEOs had met the level of performance necessary to fund the bonus pool, resulting in a total bonus pool of 110% of the target set for fiscal year 2011. The Compensation Committee determined that the NEOs had successfully achieved the MJOs as set forth under the column in the table below labeled “Performance Result.” As a result, the Compensation Committee authorized and approved payment of MJO bonuses to the NEOs at 110% of target consistent with the formula approved by the Committee in March 2011 for determining MJO bonus awards.

 

MJO

  

Relative
Weight

  

Rationale

  

Measurement

  

Performance Result

Earnings per share of $3.45 - $4.25    70%   

EPS is an important measure of the Company’s current financial performance and a critical factor supporting cash flow, as well as a significant driver of stockholder return.

 

   Determined using the Company’s audited consolidated financial statements.    This MJO was met. The Company achieved 2011 EPS of $3.82.

Business Development

Expand business in Texas by bidding successfully to retain existing business and to expand the products offered to Texas residents and the overall number of Texas residents served.

 

   10%    This goal was selected due to the significance of the Texas business to the Company’s overall financial results.    Determined based upon incremental revenues for Texas as a result of the successful bid.    This MJO was exceeded. The Company won its bid to retain the majority of its existing business and expand its Texas business into new service areas.

Clinical quality improvements

Continue broad based strategy to demonstrate the Company’s favorable impact on the quality of care received by its members and performance relative to peers, including achievement of National Committee for Quality Assurance accreditation or re-accreditation for certain health plans and certain targeted Health Effectiveness Data and Information Set improvements.

 

   10%    Facilitating the provision of high quality health care to our members is a critical success factor for the Company. Quality health care is important for the well-being of the Company’s members and is an important component of the value proposition offered by the managed care industry.    Determined in the Compensation Committee’s judgment based on its review of the NEOs’ overall performance against specific criteria.    This MJO was met. Certain of the Company’s health plans were accredited or re-accredited and the Compensation Committee determined, in its discretion, that the NEOs had successfully accomplished their clinical quality improvement performance goals.

Service quality improvements

Demonstrate the Company’s commitment to service excellence through the accomplishment of initiatives related to claims processing, payment accuracy and call handling.

   10%    Delivering high service quality, particularly in the areas of accurate claims processing and call center customer service satisfaction, is critical to the Company’s performance. The level of service quality impacts the satisfaction of our members, our network providers and state government partners.    Determined in the Compensation Committee’s judgment based on its review of the NEOs’ overall performance against specific criteria.    This MJO was met. The Compensation Committee determined, in its discretion, that the NEOs had successfully accomplished their service quality improvement performance goals.

2011 Performance Goals, Evaluation and Awards — Long-Term Incentive Program

The Company implemented a new structure for its long-term incentive program for the period from January 1, 2011 to December 31, 2013 (the “2014 LTIP”) and subsequent three-year performance periods. Under

 

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the 2014 LTIP, the Compensation Committee established an aggregate long-term incentive target award for each NEO (expressed as a dollar value). For our NEOs, this aggregate target amount was allocated equally (25%) across four award types: stock options, time-based restricted stock, performance-based cash awards and performance-based equity awards, with the following key characteristics:

 

Award Type

  

Key Characteristics

    

Stock Options

  

• issued pursuant to 2009 Equity Incentive Plan

• represent 25% of long-term incentive target

• vests ratably over approximately 4 years

 

  

Restricted Stock

  

• issued pursuant to 2009 Equity Incentive Plan

• represents 25% of long-term incentive target

• vests ratably over approximately 4 years

 

  

Performance Share Units

  

• issued pursuant to 2009 Equity Incentive Plan

• represent 25% of long-term incentive target

• cliff vest in accordance with performance metrics in March 2014, the year following the three-year performance period

 

  

Performance Cash

  

• paid pursuant to the 2007 Cash Incentive Plan

• represents 25% of long-term incentive target

• paid in accordance with performance metrics in March 2014, the year following the three-year performance period

  

In March of 2011, the Compensation Committee established 2014 LTIP target awards at 342% of base salary for Mr. Carlson, 200% of base salary for Messrs. Truess and Zoretic and 100% of base salary for Mr. Littel and Dr. McCluskey. As a result, each NEO was awarded 25% of these targeted amounts in stock options and 25% in time-based restricted stock, subject to the vesting and other conditions noted in the table above. Performance share units and performance cash awards, each representing 25% of the 2014 LTIP target award, will be determined based on the degree to which the Company meets financial metrics related to return on equity, net income margin and revenue growth.

The performance goal for each of the financial metrics established for the 2014 LTIP is stated as a range that generally results in awards of 100% of target if actual performance falls within the range. However, performance below the range or above the range can result in actual awards as low as 0% and as high as 200% of target depending on the extent to which actual performance deviates from the range established.

In an effort to ensure that our 2014 LTIP is consistent with the objectives of our executive compensation program, a total stockholder return (“TSR”) governor is utilized for aggregate performance award percentages that fall below 50% of target or above 150% of target. If the above financial metrics generate an award that is greater than 150% of target then the Company must also demonstrate a TSR that is greater than the median of its peer group. Otherwise, the award is capped at 150%. Conversely, if the above financial metrics generate an award that is less than 50% of target and the Company outperformed its peer group in TSR over the same time period, the minimum award is fixed at 50% of target.

Awards under Predecessor Long-Term Incentive Plans for 2011 Performance

In previous years, the Compensation Committee established long-term cash incentive awards for the three-year cycle beginning January 1, 2009 and ending December 31, 2011 (the “2012 LTIP”) and the three-year cycle beginning January 1, 2010 and ending December 31, 2012 (the “2013 LTIP”). In March 2011, the Compensation Committee authorized the funding of 100% of the third installment of the 2012 LTIP Award and 100% of the

 

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second installment of the 2013 LTIP Award as a result of the Company’s solid financial and operational performance in 2011. These awards differ from our new long-term incentive compensation program described above. A detailed description of the plans pursuant to which these long-term cash incentive awards were made can be found in the Company’s Proxy Statement for the 2011 Annual Meeting of Stockholders.

Outperform Equity Awards

In previous years, the Company has also maintained an “outperform” equity program that has been replaced by our new long-term incentive compensation program described beginning on page 32. As a result, the outperform equity program will terminate in fiscal year 2013 upon grant of any awards related to performance for fiscal year 2012 under the program. In the event that the Company exceeds the median performance of our peers with respect to certain financial performance metrics discussed below, the Compensation Committee may make additional equity awards with a value designed to increase the total compensation level of the NEOs in accordance with the percentile equivalent of the Company’s level of performance.

These performance-based equity awards are determined as follows:

 

   

Results are measured relative to two peer groups, our Industry Peer Group and the S&P Healthcare Index (collectively, our “Equity Comparison Group”). We have chosen to compare our performance versus the companies in the S&P Healthcare Index, in addition to our Industry Peer Group, because our Industry Peer Group contains relatively few companies and trends in our industry generally affect our performance and the performance of our peers in a relatively similar manner. As a result, a comparison versus our Industry Peer Group alone may not give a true indication of our performance or our creation of stockholder value versus the broader market. To the extent we outperform the S&P Healthcare Index resulting in a positive return for our stockholders on a relative basis, we believe that our NEOs should be eligible to receive compensation above the median level.

 

   

Performance metrics applicable to outperform equity awards include total stockholder return, revenue growth and EPS growth.

 

   

Results for each company in each peer group are measured for the one-year and three-year periods ending with the immediately preceding fiscal year, and weighted equally.

 

   

Overall results are weighted two-thirds to our Industry Peer Group and one-third to the companies in the S&P Healthcare Index.

For purposes of determining the outperform equity award, if any, the Compensation Committee generally analyzes the Company’s performance when peer information becomes available, which may occur after the time the Compensation Committee generally evaluates performance for the purposes of determining MJO Bonuses and long-term incentive compensation. As a result, outperform equity awards may not be reported in the same proxy statement as the MJO Bonuses and long-term incentive compensation for the applicable performance year, as was the case for the 2010 performance year, which is discussed below.

In May 2011, the Compensation Committee evaluated the Company’s 2010 performance for the purposes of determining whether an outperform grant should be made to our NEOs in connection with the 2010 performance year. The Compensation Committee determined that our Company and our NEOs performed above the median level in 2010 relative to the Equity Comparison Group for the one- and three-year measurements. As a result, our NEOs received outperform equity grants in May 2011 for 2010 performance in the form of restricted stock that vests in four equal annual installments beginning April 30, 2012 and on each April 30th thereafter such that the award will be fully vested on April 30, 2015.

At the end of March 2012, the Compensation Committee evaluated the Company’s 2011 performance for the purposes of determining whether an outperform grant should be made to our NEOs in connection with the 2011 performance year. The Compensation Committee determined that our Company and our NEOs performed

 

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above the median level in 2011 relative to the Equity Comparison Group for the one- and three-year measurements. As a result, our NEOs received outperform equity grants in March 2012 for 2011 performance in the form of restricted stock that vests in four equal annual installments beginning April 30, 2013 and on each April 30th thereafter such that the award will be fully vested on April 30, 2016. These awards will be reported in the Executive Compensation Tables in the proxy statement for the 2012 Annual Meeting.

Section IV — Additional Information Regarding Our Compensation Programs

Employee Benefits and Limited Perquisites

Our NEOs receive benefits that are available generally to other employees, including: medical, dental and vision plans, a 401(k) plan with a Company match, an Employee Stock Purchase Plan, flexible spending accounts, life insurance and voluntary supplemental life insurance, short- and long-term disability insurance, paid accumulated leave, and a nonqualified deferred compensation plan, which is described below.

We provide limited perquisites to our NEOs, including an annual medical exam, term life insurance and limited personal use of an aircraft, subject to full reimbursement for such use, which the Company utilizes under a fractional share ownership program. We provide Mr. Carlson with term life insurance with a death benefit equal to the amount of his base salary. The value of this term life insurance benefit is imputed as income to Mr. Carlson and he is taxed on the imputed value. In 2011, no NEO used the aircraft for solely personal use. On occasion, spouses or other guests of NEOs may accompany the NEO on business trips when space is available. Generally, the cost of that travel is imputed as income to the NEO. In 2011, imputed income did not exceed $5,000 for any NEO and any such amounts are included in the “All Other Compensation” column in the Summary Compensation Table on page 38. 

Equity Award Granting Practices

We generally make annual equity grants in March with respect to restricted stock, performance share units and one-half of the options to be awarded to our NEOs under our long-term incentive program. The remaining options to be awarded are granted in September. The option grant is bifurcated to provide diversification with respect to the exercise price of the option.

The exercise price of stock option awards is no less than the fair market value of our common stock as determined under our 2009 Equity Incentive Plan. We use the closing market price of our common stock on the date of grant as the fair market value. From time-to-time, we also make off-cycle equity awards in connection with the recruiting and hiring of new key employees or to current employees for retention or incentive purposes.

Delegation of Authority

The Compensation Committee has delegated limited authority to the Company’s CEO to grant equity awards to new employees below the Executive Vice President-level. The Compensation Committee believes that this delegation of authority allows the Company to meet its ongoing business needs in an efficient manner.

Termination and Change in Control Payments

Change in Control Benefit Policy

We adopted a Change in Control Benefit Policy (the “CIC Policy”) in 2007 that is applicable to certain executives, including our NEOs. Our CIC Policy generally provides for a lump-sum severance payment (“CIC Severance Payments”) to our NEOs if a qualifying change in control of the Company occurs and, within two years following such change in control, involuntary termination of the executive’s employment or voluntary termination of the executive’s employment occurs following certain material or adverse changes in the executive’s employment.

 

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The CIC Severance Payment is equal to the product of:

 

   

the sum of the executive’s annual base salary and the executive’s target annual bonus for the year in which the change in control occurs, multiplied by

 

   

a multiple, selected by our Compensation Committee and ranging from 1 to 3. For the purposes of calculating such payment, the Compensation and Organizational Management Committee has set a 3x multiple for our CEO and a 2x multiple for the other NEOs.

Our CIC Policy also provides that, upon a change of control, eligible executives will receive:

 

   

a lump sum payment equal to the participant’s cash target for any long-term incentive compensation award that has been established for such executive as of the date of the change in control; and

 

   

any unpaid but earned annual MJO Bonus plus any pro-rated annual MJO Bonus for the year in which the change in control occurs.

Under our CIC Policy, if an executive’s payment upon a change in control is an excess parachute payment within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), and the payment exceeds the threshold that would make such payment an excess parachute payment by at least 20%, then the Company will pay the executive an additional cash payment (the “Gross-Up Payment”) in an amount such that after payment by the executive of all taxes, the executive will retain an amount equal to the taxes imposed upon both the change in control payment and the Gross-Up Payment. In the event that the change in control payment exceeds the threshold by less than 20%, then the change in control payment will be reduced so that such payment will not be considered an excess parachute payment.

Potential payments under our CIC Policy applicable to our NEOs are set forth in the Potential Change in Control Awards table on page 45.

Severance Plan

We adopted a severance plan (the “Severance Plan”) in 2008. The Severance Plan provides for severance payments in the event of involuntary termination of employment without cause (exclusive of circumstances entitling the employee to benefits under the CIC Policy) as determined by the Company in its discretion. All of our current NEOs except Mr. Carlson may be eligible for severance payments under the Severance Plan. The terms of Mr. Carlson’s Employment Agreement with the Company, which is described below under “Other Executive Agreements and Arrangements,” apply with respect to severance benefits in the event of a termination of employment without cause.

Under the terms of the Severance Plan, in the event of termination of employment without cause and eligibility under the Severance Plan as determined by the Company in its discretion, our current NEOs (other than Mr. Carlson) may be entitled to severance payments, less applicable taxes, equal to the sum of:

 

   

annual base salary in effect at the time of termination of employment; plus

 

   

(i) if the termination of employment occurs on or before March 15 of a particular year, an amount equal to the annual MJO Bonus for the immediately preceding fiscal year that the NEO would have received (not to exceed target), taking into account the Company’s accrual for annual cash bonuses, or (ii) if the termination of employment occurs after March 15 of a particular year, one-half of the NEO’s target MJO Bonus for the fiscal year prior to the fiscal year in which the termination occurs; plus

 

   

for cash long-term incentive plan awards that are payable in fiscal year 2012 or 2013, any unpaid installments for which the Compensation Committee has approved funding, if any; plus

 

   

for cash long-term incentive plan awards granted in or after 2011, the amount of any prorated (based on completed months) cash awards, to the extent the Company has met the performance criteria under the applicable terms of the award as of the date of termination.

 

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Our NEOs may also be eligible for COBRA payment assistance and outplacement assistance under the Severance Plan. Receipt of any payments or other benefits under the Severance Plan are conditioned upon, among other things, the NEO’s execution and delivery of a general release of all claims in the form requested by the Company. Potential payments under our Severance Plan applicable to our NEOs are set forth in the Potential Involuntary Termination Severance Payments table on page 46.

Other Executive Agreements and Arrangements

Employment Agreement

The Company maintains an employment agreement with Mr. Carlson that commenced on January 16, 2008, but does not maintain employment agreements with any of the other NEOs. Mr. Carlson earns an annual base salary that is reviewed for adjustment on an annual basis by the Board. Mr. Carlson is also eligible to participate in the Company’s cash and equity incentive plans in accordance with the terms and conditions of the plans, including such opportunities and limitations as may be applicable to his position. He is also eligible to participate in the Company’s other compensation and benefits plans on the same basis as other executive officers of the Company. Payments to Mr. Carlson under the Employment Agreement in the event of termination of his employment are described below under Change in Control and Termination Payments on page 35.

Tax and Accounting Considerations

We take into account certain tax effects when setting compensation, specifically Section 162(m) of the Code, which generally provides that compensation paid by a publicly held corporation to its chief executive officer and certain other highly compensated executive officers in excess of $1 million per year per executive will be deductible only if paid pursuant to qualifying performance-based compensation plans approved by our stockholders.

It is our policy to maximize the effectiveness of our compensation programs while also taking into consideration the requirements of Section 162(m) of the Code and other limitations on the deductibility of executive compensation. In that regard, we intend to maintain the flexibility to take actions which we deem to be in the best interests of the Company and its stockholders. Accordingly, although we intend to preserve the deductibility of compensation to the extent consistent with our overall compensation policy, we reserve the authority to award non-deductible compensation as we deem appropriate.

The Patient Protection and Affordable Care Act amended Section 162(m) for health insurance companies to provide that, in general, for compensation which is paid or would otherwise become deductible after 2012, no deduction will be allowed to the extent total compensation for an individual exceeds $500,000 for the year. This limitation will apply to certain individuals compensated by the Company, including our NEOs, and when effective will replace the limitation described above. This new rule includes compensation earned for services after 2009 but which is paid or would otherwise become deductible after 2012.

We also take into account certain accounting implications when setting compensation. Specifically, in setting the amount of, and allocating between, different types of equity awards, we consider the effect of Financial Accounting Standards Board Accounting Standards Codification 718 Compensation — Stock Compensation (“FASB ASC 718”) on our earnings. We seek to strike a balance among the purposes of the awards, motivation and retention, and the effect of expensing such grants as required by FASB ASC 718.

 

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EXECUTIVE COMPENSATION TABLES

Summary Compensation Table

 

Name and Principal Position

  Year     Salary
$
    Bonus
$
    Stock
Awards(1)
$
    Option
Awards(3)
$
    Non-Equity
Incentive Plan
Compensation
$
    All Other
Compensation
$
    Total
$
 

James G. Carlson

    2011        805,962               2,675,747 (2)      623,574        2,043,334 (4)      21,700 (5)      6,170,317   

(Chairman, Chief Executive Officer and President)

    2010        789,615        468,645        5,373,771        483,907        3,340,939        34,665        10,491,542   
    2009        775,000        798,958        1,123,760        2,178,295        341,667        14,569        5,232,249   

James W. Truess

    2011        551,692               1,122,770 (2)      250,135        815,000 (4)      9,807        2,749,404   

(Executive Vice President and Chief Financial Officer)

    2010        535,962        185,000        2,799,987        197,004        1,320,000        10,360        5,048,313   
    2009        525,000        312,500        300,000        723,603        166,667        7,703        2,035,473   

Richard C. Zoretic

    2011        551,692               1,122,770 (2)      250,135        815,000 (4)      10,138        2,749,735   

(Executive Vice President and Chief Operating Officer)

    2010        535,962        185,000        2,799,987        197,004        1,320,000        9,673        5,047,626   
    2009        525,000        312,500        300,000        723,603        166,667        12,461        2,040,231   

John E. Littel

    2011        343,269               499,696 (2)      78,731        356,666 (4)      13,524        1,291,886   

(Executive Vice President, External Relations)

    2010        322,308        16,667        912,504        38,414        431,249        15,901        1,737,043   
    2009        315,000        104,167        91,333        172,052        66,667        4,967        754,186   

Mary T. McCluskey, M.D.

    2011        342,308               495,738 (2)      77,598        351,666 (4)      6,750        1,274,060   

(Executive Vice President and Chief Medical Officer)

    2010        332,308        17,667        912,504        36,939        431,249        6,715        1,737,382   
    2009        325,000        104,167        137,487        219,887        66,666        150,490        1,003,697   

 

(1)

Amounts reflected under Stock Awards represent the grant date fair value of restricted stock awards at the closing market price of our common stock on the date of grant. Fair Value of 2014 LTIP performance-based awards were calculated using a Monte Carlo valuation model to include the impact of the market condition related to the Company’s TSR relative to its peer group as detailed in Footnote 12 to the audited consolidated financial statements in our 2011 Form 10-K.

 

(2)

2011 Stock Awards sets forth the sum of the following: (i) 2011 equity outperform awarded in the form of time-based restricted stock; (ii) time-based restricted stock awards; (iii) performance-based restricted stock and; (iv) performance-based cash. Performance-based awards include a market condition related to the Company’s TSR relative to its peer group. Amounts reflected for performance-based restricted stock and performance-based cash represent the most probable grant value as of the grant date, which was at 100% of the target value. The maximum potential value awarded based on the performance conditions is 200% of the target value as detailed in the Grants of Plan-Based Awards Table on page 39. Each of the components is detailed below at 100% of the target value as applicable:

 

    2011 Equity
Outperform

$
    2014 LTIP Award     Total Stock
Award
$
 

Name

    Time-Based
Restricted Stock
$
    Performance-
Based Restricted
Stock
$
    Performance-
Based Cash
$
   

James G. Carlson

    499,995        741,376        741,376        693,000        2,675,747   

James W. Truess

    249,998        297,386        297,386        278,000        1,122,770   

Richard C. Zoretic

    249,998        297,386        297,386        278,000        1,122,770   

John E. Littel

    224,998        93,599        93,599        87,500        499,696   

Mary T. McCluskey, M.D.

    224,998        92,245        92,245        86,250        495,738   

 

(3)

Amounts reflected under Option Awards represent the grant date fair value of stock option awards using a Black-Scholes-Merton option-pricing model. The assumptions used in this model are detailed in Footnote 11 to the audited consolidated financial statements in our 2011 Form 10-K.

 

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(4)

Non-Equity Incentive Plan Compensation sets forth the MJO Bonus earned for the year ended December 31, 2011, the second one-third installment of the 2013 LTIP Awards and the final one-third installment of the 2012 LTIP Awards. Each of the components is detailed below:

 

Name

   2011 MJO
Bonus
$
     2013
LTIP
$
     2012
LTIP
$
     Total Non-Equity
Incentive Plan
Compensation
$
 

James G. Carlson

     1,560,000         241,667         241,667         2,043,334   

James W. Truess

     615,000         100,000         100,000         815,000   

Richard C. Zoretic

     615,000         100,000         100,000         815,000   

John E. Littel

     290,000         33,333         33,333         356,666   

Mary T. McCluskey, M.D.

     285,000         33,333         33,333         351,666   

 

(5)

Amounts reflect other compensation for Mr. Carlson related to Company match to 401(k) contributions, group term life benefits, Company paid spousal travel and executive health benefits.

Grants of Plan Based Awards

 

          Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
    Estimated Future Payouts
Under Equity Incentive Plan
Awards
    All Other
Stock
Awards:
Number of
Shares of
Stock or

Units
#
    All Other
Option
Awards:
Number of
Securities
Underlying

Options
#
    Exercise
or Base
Price of
Option

Awards(5)
$
    Grant
Date Fair
Value of
Stock and
Option

Awards
$
 

Name

  Grant
Date
    Threshold
$
    Target
$
    Maximum
$
    Threshold
$
    Target
$
    Maximum
$
         

James G. Carlson

    3/3/2011 (1)                                                       14,312        58.83        352,218   
    9/2/2011 (1)                                                       14,312        47.30        271,356   
    3/3/2011 (2)                                  741,376        1,482,751        12,602                      741,376   
    3/3/2011 (2)                                  693,000        1,386,000                               
    3/3/2011 (1)                                                12,602                      741,376   
    3/3/2011 (3)             1,418,000        2,836,000                                                    
    5/12/2011 (4)                                                7,380                      499,995   

James W. Truess

    3/3/2011 (1)                                                       5,741        58.83        141,286   
    9/2/2011 (1)                                                       5,741        47.30        108,849   
    3/3/2011 (2)                                  297,386        594,771        5,055                      297,386   
    3/3/2011 (2)                           .—        278,000        556,000                               
    3/3/2011 (1)                                                5,055                      297,386   
    3/3/2011 (3)             556,000        1,112,000        .—                                             
    5/12/2011 (4)                                                3,690                      249,998   

Richard C. Zoretic

    3/3/2011 (1)                                                       5,741        58.83        141,286   
    9/2/2011 (1)                                                       5,741        47.30        108,849   
    3/3/2011 (2)                                  297,386        594,771        5,055                      297,386   
    3/3/2011 (2)                                  278,000        556,000                               
    3/3/2011 (1)                                                5,055                      297,386   
    3/3/2011 (3)             556,000        1,112,000                                                    
    5/12/2011 (4)                                                3,690                      249,998   

John E. Littel

    3/3/2011 (1)                                                       1,807        58.83        44,470   
    9/2/2011 (1)                                                       1,807        47.30        34,261   
    3/3/2011 (2)                                  93,599        187,197        1,591                      93,599   
    3/3/2011 (2)                                  87,500        175,000                               
    3/3/2011 (1)                                                1,591                      93,599   
    3/3/2011 (3)             263,000        526,000                                                    
    5/12/2011 (4)                                                3,321                      224,998   

Mary T. McCluskey, M.D.

    3/3/2011 (1)                                                       1,781        58.83        43,830   
    9/2/2011 (1)                                                       1,781        47.30        33,768   
    3/3/2011 (2)                                  92,245        184,491        1,568                      92,245   
    3/3/2011 (2)                                  86,250        172,500                               
    3/3/2011 (1)                                                1,568                      92,245   
    3/3/2011 (3)             259,000        518,000                                                    
    5/12/2011 (4)                                                3,321                      224,998   

 

39


Table of Contents

 

(1)

As more fully described above, as part of the 2014 LTIP Award, each eligible participant was assigned a long-term incentive target award with multiple components. These components include stock option and time-based restricted stock awards and appear in their respective categories in the Summary Compensation Table on page 38.

 

(2)

As more fully described above, as part of the 2014 LTIP Award, each eligible participant was assigned a long-term incentive target award with multiple components. These components include performance-based cash and equity awards which are based upon achievement of the certain metrics at the conclusion of the three-year performance period. At the conclusion of the performance period 0-200% of target may be awarded. Accordingly, the threshold for these awards is $0. Under certain performance conditions the market condition may ultimately impact the total cash and number of performance share units awarded. These awards are included in the Stock Award section of the Summary Compensation Table on page 38 as the plans include a performance measure based upon the price of the Company’s stock.

 

(3)

Amounts represent awards for MJO Bonuses. The threshold represents the amount payable if the NEO does not achieve his or her MJOs and the Company does not meet its performance goals such that the MJO Bonuses are not funded. The target represents the MJO Annual Target set by the Committee for the NEO and is payable if the NEO attains 100% of his or her MJOs and the Company meets its performance goals. The maximum is payable if the NEO attains 100% of his MJOs and the Company exceeds its performance goals by a specified level.

 

(4)

Amount represents an outperform award related to the 2010 performance year as more fully described above.

 

(5)

The closing price of our common stock on the date of the grant.

 

40


Table of Contents

Outstanding Equity Awards at Fiscal 2011 Year-End

 

     Option Awards      Stock Awards  

Name

   Number of
Securities
Underlying
Unexercised
Options
(Exercisable)
#
     Number of
Securities
Underlying
Unexercised
Options
(Unexercisable)
#
     Equity
Incentive
Plan
Awards:
Number
of  Securities
Underlying
Unexercised
Unearned
Options
#
     Option
Exercise
Price
$
    Option
Expiration
Date
     Number
of Shares or
Units of
Stock that
Have Not
Vested
#
    Market
Value of
Shares or
Units of
Stock that
Have Not
Vested
$
     Equity
Incentive
Plan
Awards:
Number
of Unearned
Shares,
Units or  Other
Rights
That Have
Not Vested
#
    Equity
Incentive
Plan
Awards:
Market
or Payout
Value  of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested
$
 

James G. Carlson

     94,606                         18.54        2/11/2014             
     50,824                         32.74        3/13/2014                                 
     140,000                         41.60        2/9/2015                                 
     87,211                         30.63        3/12/2015                                 
     12,396                         36.01        3/13/2014                                 
     43,606                         33.69        3/12/2015                                 
     60,000         20,000                 30.63 (1)      3/12/2015                                 
     88,782         29,594                 31.44 (2)      5/7/2016                                 
     27,005         9,002                 34.58 (3)      5/7/2016                                 
     14,862         14,862                 36.62 (4)      5/13/2017                                 
     3,578         10,734                 58.83 (5)      3/3/2018                                 
     3,578         10,734                 47.30 (6)      9/2/2018                                 
                                    n/a         2,725 (7)      160,993                  
                                    n/a         17,872 (8)      1,055,878                  
                                    n/a         111,032 (9)      6,559,771                  
                                    n/a         10,062 (10)      594,463                  
                                    n/a         12,602 (11)      744,526                  
                                    n/a         7,380 (12)      436,010                  
                                    n/a                        20,123 (13)      1,188,867   
                                    n/a                        12,602 (14)      744,526   

James W. Truess

     14,671                         30.63        3/12/2015                                 
     7,336                         33.69        3/12/2015                                 
             212,627                 24.48 (16)      11/7/2015                                 
     27,486         9,163                 31.44 (2)      5/7/2016                                 
     10,995         3,665                 34.58 (3)      5/7/2016                                 
     6,050         6,051                 36.62 (4)      5/13/2017                                 
     1,435         4,306                 58.83 (5)      3/3/2018                                 
     1,435         4,306                 47.30 (6)      9/2/2018                                 
                                    n/a                                 
                                    n/a         1,480 (7)      87,438                  
                                    n/a         4,771 (8)      281,871                  
                                    n/a         62,634 (9)      3,700,417                  
                                    n/a         4,096 (10)      241,992                  
                                    n/a         5,055 (11)      298,649                  
                                    n/a         3,690 (12)      218,005                  
                                    n/a         25,531 (15)      1,508,371                  
                                    n/a                        8,193 (13)      484,042   
                                    n/a                        5,055 (14)      298,649   

 

41


Table of Contents
    Option Awards     Stock Awards  

Name

  Number of
Securities
Underlying
Unexercised
Options
(Exercisable)
#
    Number of
Securities
Underlying
Unexercised
Options
(Unexercisable)
#
    Equity
Incentive
Plan
Awards:
Number
of  Securities
Underlying
Unexercised
Unearned
Options
#
    Option
Exercise
Price
$
    Option
Expiration
Date
    Number
of Shares or
Units of
Stock that
Have Not
Vested
#
    Market
Value of
Shares or
Units of
Stock that
Have Not
Vested
$
    Equity
Incentive
Plan
Awards:
Number
of Unearned
Shares,
Units or  Other
Rights
That Have
Not Vested
#
    Equity
Incentive
Plan
Awards:
Market
or Payout
Value  of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
$
 

Richard C. Zoretic

    3,258                      30.63        3/12/2015                               
    1,629                      33.69        3/12/2015                               
           212,627               24.48 (16)      11/7/2015                               
    27,486        9,163               31.44 (2)      5/7/2016                               
    10,995        3,665               34.58 (3)      5/7/2016                               
    6,050        6,051               36.62 (4)      5/13/2017                               
    1,435        4,306               58.83 (5)      3/3/2018                               
    1,435        4,306               47.30 (6)      9/2/2018                               
                                n/a        1,327 (7)      78,399                 
                                n/a        4,771 (8)      281,871                 
                                n/a        62,634 (9)      3,700,417                 
                                n/a        4,096 (10)      241,992                 
                                n/a        5,055 (11)      298,649                 
                                n/a        3,690 (12)      218,005                 
                                n/a        25,531 (15)      1,508,371                 
                                n/a                      8,193 (13)      484,042   
                                n/a                      5,055 (14)      298,649   

John E. Littel

    10,426                      13.39        2/10/2013                               
    3,126                      18.54        2/11/2014                               
    60,000                      41.60        2/9/2015                               
    6,015                      30.63        3/12/2015                               
    3,007                      33.69        3/12/2015                               
    1,462                      36.01        3/13/2014                               
           34,020               24.48 (16)      11/7/2015                               
    7,083        2,361               31.44 (2)      5/7/2016                               
    2,061        688               34.58 (3)      5/7/2016                               
    1,134        1,135               36.62 (4)      5/13/2017                               
    451        1,356               58.83 (5)      3/3/2018                               
    451        1,356               47.30 (6)      9/2/2018                               
                                       768        45,373                 
                                       306        18,078                 
                                       22,776        1,345,606                 
                                       1,453        85,843                 
                                       4,085        241,342                 
                                       1,591 (11)      93,996                 
                                       3,321 (12)      196,205                 
                                                     1,536 (13)      90,747   
                                                     1,591 (14)      93,996   

Mary T. McCluskey, M.D.

    6,563                      34.48        10/1/2014                               
    564                      30.63        3/12/2015                               
    282                      33.69        3/12/2015                               
    9,620        3,207               31.44 (2)      5/7/2016                               
    2,061        688               34.58 (3)      5/7/2016                               
    1,134        1,135               36.62 (4)      5/13/2017                               
    445        1,336               58.83 (5)      3/3/2018                               
    445        1,336               47.30 (6)      9/2/2018                               
                                n/a        153 (7)      9,039                 
                                n/a        2,187 (8)      129,208                 
                                n/a        22,776 (9)      1,345,606                 
                                n/a        768 (10)      45,373                 
                                n/a        1,568 (11)      92,637                 
                                n/a        3,321 (12)      196,205                 
                                n/a                      1,536 (13)      90,747   
                                n/a                      1,568 (14)      92,637   

 

42


Table of Contents

 

(1) 

Options granted March 12, 2008 and expiring March 12, 2015 with an option price of $30.63 vest at a rate of 50% on March 12, 2010 and 25% on each of the following grant date anniversaries. They will be fully vested on March 12, 2012.

 

(2)

Options granted May 7, 2009 and expiring May 7, 2016 with an option price of $31.44 vest at a rate of 12.5% on June 30, 2009 and 6.25% quarterly thereafter. They will be fully vested on December 31, 2012.

 

(3)

Options granted May 7, 2009 and expiring May 7, 2016 with an option price of $34.58 vest at a rate of 12.5% on June 30, 2009 and 6.25% quarterly thereafter. They will be fully vested on December 31, 2012.

 

(4)

Options granted May 13, 2010 and expiring May 13, 2017 with an option price of $36.62, vest at a rate of 12.5% on June 30, 2010 and 6.25% quarterly thereafter. They will be fully vested on December 31, 2013.

 

(5)

Options granted March 3, 2011 and expiring March 3, 2018 with an option price of $58.83, vest annually at a rate of 25% on December 31 and will be fully vested on December 31, 2014.

 

(6)

Options granted September 2, 2011 and expiring September 2, 2018 with an option price of $47.30, vest annually at a rate of 25% on December 31 and will be fully vested on December 31, 2014.

 

(7)

Restricted stock awards granted March 12, 2008 vest annually at a rate of 25% and will be fully vested on March 12, 2012.

 

(8)

Restricted stock awards granted May 7, 2009 vest annually at a rate of 25% and will be fully vested on April 30, 2013.

 

(9)

Special Equity Retention Awards granted on March 9, 2010 will vest 20% on December 1, 2011 and 2012, vest 25% on December 1, 2013, and fully vested on December 1, 2014.

 

(10)

Restricted stock awards granted May 13, 2010 vest annually at a rate of 25% and will be fully vested on April 30, 2014.

 

(11)

Restricted stock awards granted March 3, 2011 vest annually at a rate of 25% and will be fully vested on January 7, 2015.

 

(12)

Restricted stock awards granted May 12, 2011 vest annually at a rate of 25% and will be fully vested on April 30, 2015.

 

(13)

Restricted stock awards granted May 14, 2010 vest annually at a rate of 25% per year based on the attainment of certain performance parameters as detailed in Footnote 11 to the audited consolidated financial statements in our 2011 Form 10-K.

 

(14)

Performance share units granted March 3, 2011 are presented at target level and cliff vest on March 1, 2014 based on attainment of certain performance parameters as described on page 32.

 

(15)

Restricted stock awards granted November 7, 2008 vest in full on November 7, 2012.

 

(16)

Options granted November 7, 2008 and expiring November 7, 2015 with an option price of $24.48 and will be fully vested on November 7, 2012.

Option Exercises and Stock Vested

 

     Option Awards      Stock Awards  

Name

   Number of Shares
Acquired on
Exercise
#
     Value Realized
on Exercise
$
     Number of Shares
Acquired on
Vesting
#
     Value Realized
on Vesting
$
 

James G. Carlson

     274,099         11,813,964         51,955         3,185,277   

James W. Truess

     215,224         5,812,839         25,589         1,538,013   

Richard C. Zoretic

     214,366         6,896,491         25,059         1,506,754   

John E. Littel

     17,235         761,177         7,953         471,490   

Mary T. McCluskey, M.D.

     32,102         1,024,908         7,708         460,460   

 

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Deferred Compensation

We do not maintain a defined benefit pension plan. We do maintain a nonqualified deferred compensation plan that allows executives, including our NEOs, to defer, on a tax-deferred basis, salary and bonus payments. We currently maintain two deferred compensation plans, a plan adopted in 2002 (the “2002 Deferred Compensation Plan”) and a plan adopted in 2005 (the “2005 Deferred Compensation Plan”). We adopted the 2005 Deferred Compensation Plan in order to comply with Section 409A of the Code and applicable regulations. As of January 1, 2005, contributions to the 2002 Deferred Compensation Plan were frozen and any contributions subsequent to that date by executives are to be made to the 2005 Deferred Compensation Plan. In the past, Mr. Carlson has elected to defer compensation under both plans and as of December 31, 2010 had balances under both plans. The terms of the 2005 Deferred Compensation Plan and 2002 Deferred Compensation Plan are materially similar.

The 2005 Deferred Compensation Plan allows executives to defer a percentage of both their base salary and their MJO Bonus. An executive may not defer any portion of his or her LTIP Award. Salary deferral elections must be made at least a month before the beginning of the applicable deferral period and bonus deferral elections must be made at least six months prior to the end of the applicable performance period. The amount deferred is indexed to certain approved investment funds. The Company does not match any portion of the executive’s deferral contribution.

Under the terms of the 2005 Deferred Compensation Plan, an executive elects the deferred compensation distribution terms at the time the executive makes the initial election to make a deferral contribution. The minimum deferred distribution period is five years. The executive may elect that distributions be made upon retirement in a lump sum or ratably over a five, ten or fifteen year period. In the event that the executive’s employment terminates prior to retirement, the executive’s balance in the plan is distributed in accordance with the terms of the plan, but in no event earlier than six months following the date of termination.

Nonqualified Deferred Compensation

 

Name

   Executive
Contributions
in Last Fiscal
Year
$
     Registrant
Contributions
in Last Fiscal
Year
$
     Aggregate
Earnings
in Last Fiscal
Year
$
    Aggregate
Withdrawals/
Distributions
$
     Aggregate Balance
at Last Fiscal
Year End(1)
$
 

James G. Carlson

                     (104,658             1,621,791   

James W. Truess

                                      

Richard C. Zoretic

                                      

John E. Littel

                                      

Mary T. McCluskey, M.D.

                                      

 

(1) 

Amounts are reflected in the appropriate column in the Summary Compensation Table, or previous Summary Compensation Tables, as applicable.

Change in Control and Termination Payments

Change in Control

Under our CIC Policy (described on page 35), our NEOs would have been entitled to the amounts set forth in the following table had a change in control and a qualifying termination of employment occurred on December 31, 2011.

 

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Table of Contents

Potential Change in Control Awards

 

Name

  Base
Salary
times
CIC
Multiple(1)

$
    Target
Bonus
times
CIC
Multiple(1)

$
    Interrupted
Performance
Cycle
Bonus(2)

$
    Outstanding
LTIP
Awards for
2012, 2013
& 2014

$
    Accelerated
Vesting of
Options(3)

$
    Accelerated
Vesting of
Restricted
Stock(4)

$
    280(g)
Gross-Up/
Reductions(5)

$
    Total
Change in
Control
Award

$
 

James G. Carlson

    2,430,000        4,254,000        1,418,000        2,324,250        2,070,458        11,485,034        (1,866,299     22,115,443   

James W. Truess

    1,112,000        1,112,000        556,000        953,000        7,887,659        7,119,435        2,126,563        20,866,657   

Richard C. Zoretic

    1,112,000        1,112,000        556,000        953,000        7,887,659        7,110,396        (725,283     18,005,772   

John E. Littel

    700,000        526,000        263,000        312,500        1,301,011        2,211,187        (188,064     5,125,634   

Mary T. McCluskey, M.D.

    690,000        518,000        259,000        311,250        147,062        2,001,453        760,277        4,687,042   

 

(1) 

The following multiples applied as of December 31, 2011: 3x for Mr. Carlson and 2x for Messrs. Truess, Zoretic and Littel and for Dr. McCluskey.

 

(2) 

Earned but unpaid MJO Bonus target for the 2011 performance year as of December 31, 2011.

 

(3) 

Number of unvested options multiplied by the difference between the closing market price of the Company’s stock on December 30, 2011 of $59.08 and the applicable strike price of the option. No value is assigned to option grants whose strike price is in excess of the closing market price of our common stock at December 30, 2011, if applicable. The value of the vested but unexercised portion of each option has not been included in these amounts because their receipt is not affected or accelerated by the change in control.

 

(4) 

Number of unvested restricted stock awards multiplied by the closing market price of our common stock on December 30, 2011 of $59.08.

 

(5) 

The potential change in control award payments for Messrs. Carlson, Zoretic and Littel exceeded the threshold that would make such payment an excess parachute payment (within the meaning of Section 280G of the Code) by less than 20%. As a result, pursuant to our CIC Policy, the value of the bonus element of the change in control payment has been reduced by $1,866,299, $725,283 and $188,064 for Messrs. Carlson, Zoretic and Littel, respectively to bring the resulting total change in control payment to an amount such that it would not have been considered an excess parachute payment under our CIC Policy. The potential change in control payments for Mr. Truess and Dr. McCluskey exceeded the threshold that would make such payment an excess parachute payment by more than 20%. Therefore, under the CIC Policy, additional cash payments or gross-up payments of $2,126,563 and $760,277 have been added to the payments for Mr. Truess and Dr. McCluskey, respectively.

Termination of Employment

Payments in the case of involuntary termination of Mr. Carlson’s employment are determined under his Employment Agreement, which is described on page 37 under “Other Executive Agreements and Arrangements.” Under the terms of the Employment Agreement, in the event that the Company terminates Mr. Carlson’s employment without cause (as defined in his employment agreement), including as a result of his death or following his permanent disability (as defined in his employment agreement), or in the event Mr. Carlson terminates his employment for changed circumstances (as defined in his employment agreement), the Company will provide him with certain termination and severance benefits, including payments totaling two times the sum of his then current annual base salary and Annual MJO Target. With respect to Mr. Carlson’s outstanding equity awards, all vested and unvested awards (options and restricted stock) would be forfeited upon termination of employment for cause and all unvested awards would be forfeited upon voluntary termination or termination without cause. Termination of Mr. Carlson’s employment following a change in control is controlled by our CIC Policy, as discussed on page 36.

Payments in the case of termination of employment of our NEOs (other than Mr. Carlson) are determined under our Severance Plan, which is described beginning on page 36.

 

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Table of Contents

The table below shows the potential payments payable to our NEOs if the NEO’s employment with the Company had terminated on December 31, 2011 (other than a termination of employment in connection with a change in control).

Potential Involuntary Termination Severance Payments

 

Name

   Base
Salary
$
     MJO
Bonus
$
     2012
LTIP
Award
(Year 1 & 2)
$
     2013
LTIP
Award
(Year 1)
$
     COBRA
Subsidy
$
     Total
Severance
Payment
$
 

James G. Carlson(1)

     1,620,000         2,836,000         483,333         422,917         9,491         5,371,741   

James W. Truess(2)

     556,000         556,000         200,000         175,000         13,112         1,500,112   

Richard C. Zoretic(2)

     556,000         556,000         200,000         175,000         12,147         1,499,147   

John E. Littel(2)

     350,000         263,000         91,667         58,333         12,147         775,147   

Mary T. McCluskey, M.D.(2)

     345,000         259,000         91,667         58,333         4,718         758,718   

 

(1) 

Amounts payable under the terms of Mr. Carlson’s employment agreement in the case of termination without cause are equal to: (i) 2x each for Base Salary and MJO Bonus; (ii) unpaid installments under long-term incentive compensation awards that have been approved and funded; and (iii) COBRA payment assistance. These amounts are also payable in case of termination as a result of death; however, excluding amounts payable under long-term incentive compensation awards, these amounts will be reduced by all amounts payable to Mr. Carlson’s beneficiaries pursuant to any life insurance policies on his life maintained by the Company. These amounts are also payable in case of termination as a result of disability; however, excluding amounts payable under long-term incentive compensation awards, these amounts will be reduced by all amounts payable to Mr. Carlson during the first twenty-four months of disability under any disability insurance coverage provided to him by the Company.

 

(2) 

Amounts are payable to Messrs. Truess, Zoretic, and Littel and Dr. McCluskey under the terms of the Company’s Severance Plan in the case of termination without cause.

COMPENSATION OF DIRECTORS

Directors who are officers or employees of the Company receive no compensation for service as a member of the Board of Directors. Independent Directors receive the compensation described below.

Cash Compensation.    Independent Directors receive a quarterly retainer of $8,750, payable in arrears, and an attendance fee of $2,500 for each Board meeting attended in person and $1,000 for participating by conference call. The chairpersons of the Compensation Committee and the Nominating Committee receive an additional retainer of $15,000, payable $3,750 per quarter, in arrears. The Chairman of the Audit Committee receives an additional retainer of $20,000, payable $5,000 per quarter, in arrears. Our Lead Independent Director receives an additional retainer of $15,000, payable $3,750 per quarter in arrears. Independent Directors receive an attendance fee of $1,500 for each committee meeting attended in person and $1,000 for participating by conference call. Independent Directors are also reimbursed for their reasonable expenses incurred in connection with their service. We also maintain a nonqualified deferred compensation plan that allows our independent Directors to defer, on a tax-deferred basis, receipt of Board and Committee retainer and meeting fees. The Company does not match any portion of the Director’s deferral contribution.

Equity Compensation.    Independent Directors receive an annual equity grant with a value of approximately $170,000, comprised of nonqualified stock options and/or shares of restricted stock, as elected by the director. The date of grant of the award is the day of the Annual Meeting of Stockholders and the grant vests in full on April 30th of the following year.

 

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Table of Contents

Independent Director compensation for 2011 is set forth in the following table:

Compensation of Directors

 

Name

  Fees Earned
or Paid Cash
$
    Stock
Awards
(1)(2)
$
    Option
Awards
$
    Non-Equity
Incentive
Plan
Compensation
$
    Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
$
    All Other
Compensation
$
    Total
$
 

Thomas E. Capps

    55,000        169,985                                    224,985   

Jeffrey B. Child

    82,247        169,985                                    252,232   

Emerson U. Fullwood

    64,000        169,985                                    233,985   

Kay Coles James

    83,437        169,985                                    253,422   

William J. McBride

    83,190        169,985                                    253,175   

Hala Moddelmog

    59,500        169,985                                    229,485   

Joseph W. Prueher

    54,310        169,985                                    224,295   

Uwe E. Reinhardt, Ph.D.

    58,500        169,985                                    228,485   

Richard D. Shirk

    92,063        169,985                                    262,048   

John W. Snow

    48,500        169,985