Health Net 2015 Annual Report Download - page 120

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Under the framework, the 2015 MIP was to be funded if the Company met or exceeded a pre-established level of
2015 PTI, which was $511 million. If the pre-established funding threshold was met, the Compensation Committee was
to have the discretion to fund the 2015 MIP within one of three funding ranges, depending on the amount of 2015 PTI
achieved. PTI as a financial funding measure emphasizes operational performance, which supports the Company’s long-
term financial growth and development and rewards the creation of value for our stockholders. Once the Compensation
Committee determined the funding range based on PTI, then the Compensation Committee was to consider the
Company’s performance with regard to, among other things, the Strategic Initiatives to determine the funding level of the
2015 MIP within the applicable range, which was to also be the company performance score.
In connection with the pending Merger, in February 2016, the Compensation Committee determined, in lieu of
using 2015 PTI to determine the funding level under the 2015 MIP, to fund such bonuses at $35 million, in accordance
with the terms of the Merger Agreement and as permitted by the terms of the MIP. Under the previously approved 2015
MIP framework, the Company’s actual 2015 PTI of $572.8 million would have supported a funding level in the highest
of the three possible ranges, which was between 101% - 150% of the target funding level. The Compensation Committee
made such determination based upon the negotiated terms of the Merger Agreement, the Company’s performance in
2015, the inapplicability of certain elements of the Strategic Initiatives in light of the pending Merger and its
determination that the Company performed successfully with regard to the remaining Strategic Initiatives. The
Compensation Committee and the Board, as applicable, then approved specific awards of these cash bonuses based upon
each named executive officer’s performance with regard to, among other things, a number of performance factors in
determining actual award amounts paid to each named executive officer. A description of the material terms of the MIP
can be found below under “—How do we determine the amount for each element of executive officer compensation?—
Analysis of Compensation During Fiscal 2015—Annual Performance-Based Incentive Cash Awards.”
Long-Term Equity Incentive Compensation
Annual grants of equity awards are intended to align the interests of our executive officers with those of our
stockholders and link our named executive officers’ compensation to stockholder value.
Equity Grant Guidelines-General. Each year, the Compensation Committee approves grant guidelines that
provide a range of shares available for grant to all employees who are eligible to participate in our equity program,
including our named executive officers. When developing grant guidelines for our named executive officers, several
factors are typically considered, including but not limited to market median grant values and market trends in equity
grant guidelines based on competitive market data provided by Semler, our targeted rate of share usage, or burn rate,
participants’ salary grade levels in the organization, participation guidelines, remaining shares available for issuance
under our equity plans and longer-term stock price trends. The grant guidelines are designed to deliver competitive
equity value to the eligible recipient population and ensure that we maintain our targeted burn rate. The Compensation
Committee, in its discretion, may approve grant guidelines and equity awards that are below the market median in order
to maintain our targeted burn rate.
Our targeted burn rate attempts to control the rate of dilution for stockholders and provide a reasonable amount of
value sharing with our executives. We measure burn rate in stock option equivalents assuming a conversion factor for
every full value share granted. Our historical number of diluted weighted average shares outstanding and rate of share
usage over the past five years, is shown in the table below.
Stockholder Dilution From Stock Grants: Historic Rates of Usage at Health Net
FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
Diluted Weighted Average Shares 89,970,000 83,112,000 80,404,000 80,777,000 78,358,000
Option-Equivalent Shares Granted 2,055,412 1,907,556 2,001,792 1,540,592 1,226,871
Rate of Share Usage (%) 2.28 2.3 2.49 1.91 1.57
In connection with the pending Merger, the Compensation Committee approved the continuing use in 2016 of the
equity grant guidelines established for 2015, adjusting only for changes in the trading price of the Company’s common
stock without changing the value of the applicable ranges of shares available for grant, consistent with the terms of the
Merger Agreement.
2015 Equity Grant Guidelines. In December 2014, the Compensation Committee made initial determinations
with regard to our targeted burn rate for 2015 and the grant guidelines for equity awards to participants in our 2015
equity award program, including our named executive officers. When determining the grant guidelines, the