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SCHEDULE 14A INFORMATION
Revised Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. 1)
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FOUNDATION HEALTH SYSTEMS, INC.
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(Name of Registrant as Specified In Its Charter)
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The following is a revised Report of the Compensation and Stock Option
Committee on Executive Compensation for Fiscal Year 1996 (the "Revised
Compensation Report") that was contained in the definitive PROXY STATEMENT
for Foundation Health Systems, Inc. on pages 14 through 16 dated as of July
10, 1997. The Revised Compensation Report reflects certain clarifications of
the actions taken by the Compensation and Stock Option Committee for the 1996
fiscal year.
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE ON
EXECUTIVE COMPENSATION FOR FISCAL YEAR 1996
INTRODUCTION AND BACKGROUND
The following report is provided in accordance with the rules of the
Securities and Exchange Commission and covers compensation policies applicable
to the executive officers of HSI during 1996. The report has been approved by
the members of the Compensation Committee, which functions in substantially the
same capacity as the Compensation and Stock Option Committee of HSI (the
"Predecessor Committee").
In 1996, until February 23, 1996 the Predecessor Committee was comprised of
the following four non-employee directors of HSI: Dr. Austin and Messrs.
Bouchard (Chairman), Mancino and Montgomery. On February 23, 1996, the
Predecessor Committee's size was reduced to three members, each of whom was an
"outside director" within the meaning of Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"). The members of the Predecessor Committee
following this change were Messrs. Bouchard (Chairman), Farley and Murphy.
Following the FHS Combination the Compensation Committee's membership was
increased to four "outside directors" (within the meaning of Section 162(m) of
the Code). On the date of this report, the members of the Compensation Committee
are Messrs. Bouchard (Chairman), Hanselman, Farley and Troubh.
Under the By-Laws of HSI, the Predecessor Committee was responsible for
setting the compensation levels of the Chief Executive Officer and the most
highly compensated officer other than the Chief Executive Officer (in each case
subject to Board ratification) and certain other senior executives, including
the "Named Executive Officers" listed below in the Summary Compensation Table.
The Predecessor Committee was also responsible for the administration of HSI's
stock option and other stock-based and equity-based plans.
COMPENSATION PHILOSOPHY
The Predecessor Committee designed the compensation system to include three
components: base salary, short-term incentive pay in the form of an annual cash
bonus opportunity and long-term equity based incentive compensation.
Compensation decisions were based upon competitive market pay practices,
corporate or unit performance and individual contributions. The Predecessor
Committee, with the assistance of independent consultants, developed base line
and target compensation levels based on pay practices of a group of eight
healthcare organizations with annual revenues ranging from $2.4 billion to $4.0
billion. All of these companies whose stock is currently publicly traded are
included in the "Selected Peer Group" in the stock performance graph set forth
later in this Proxy Statement.
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The Predecessor Committee desired over time to establish base salaries at or
below the median for the peer group, but to provide an opportunity for total
cash compensation (base salary plus annual cash bonus) to reach the top quartile
based on corporate performance. In this way, the Predecessor Committee sought to
have a significant portion of annual compensation at risk. In addition, the
Predecessor Committee awarded a meaningful number of stock options in 1996 with
a view to directly aligning each executive's long-term financial interests with
the shareholders and to retaining talented senior executives. The options
granted in 1996 provided for termination and a "clawback" of realized gains if
the executive resigned and joined a competitor.
The Compensation Committee intends to continue the philosophy of the
Predecessor Committee by placing a significant portion of each year's
compensation at risk and by using equity appreciation as the primary element of
long-term incentive compensation. Like the Predecessor Committee, the
Compensation Committee will make adjustments during the first several
compensation periods to balance the pay practices of the constituent companies
in the merger in accordance with competitive benchmarking.
BASE SALARY
During 1996 the base salary levels of Dr. Hasan (the Chief Executive
Officer) and Dr. Berkbigler were governed by their respective employment
agreements that became effective as part of the merger involving Health Net and
QualMed, Inc. that formed HSI, which employment agreements provided for salary
increases of 7% per year. The base salaries of the other Named Executive
Officers were not changed in 1996. The base salaries of the Named Executive
Officers in 1996, on average, slightly exceeded the median level of the peer
group of healthcare companies. Dr. Southam's base salary was negotiated when he
was hired during 1996 and was within the range established by the Predecessor
Committee's guidelines.
ANNUAL INCENTIVES
Pursuant to HSI's Performance-Based Annual Bonus Plan adopted by its
stockholders, annual incentives for the Named Executive Officers, including the
Chief Executive Officer, were based on consolidated income from operations
before taxes, as determined in accordance with generally accepted accounting
principles. Under the plan, the annual bonuses are based on a maximum cash bonus
pool equal to 2.5% of consolidated income from operations before taxes provided
that an annual performance goal of $62.5 million of such consolidated income is
met.
Subject to review and certification by the Predecessor Committee, each
participant was eligible to receive a pro rata share of the bonus pool based on
the relationship of his salary determined at the beginning of the relevant year
to the combined salaries of all participants at the beginning of the relevant
year. Under the terms of the Performance-Based Annual Bonus Plan, the
Predecessor Committee retained the discretion to reduce or eliminate awards to
any participant based on its consideration of any extraordinary changes which
may have occurred during the year as well as business performance criteria such
as net income, cash flow, earnings per share and other relevant strategic
considerations.
As shown in the table, no cash bonuses were paid (through the exercise of
the Predecessor Committee's negative discretion under the plan) to the Chief
Executive Officer or the other Named Executive Officers (other than Dr.
Southam) for the 1996 plan year. In exercising such negative discretion, the
Predecessor Committee acknowledged the voluntary waiver by Dr. Hasan and
certain other senior executives of any expectation of a bonus payout for
1996 notwithstanding the fact that such executives achieved the threshold
performance targets considered by the Predecessor Committee in connection
with potential bonus awards for 1996. As set forth elsewhere in this Proxy
Statement, the current Compensation Committee also intends to exercise
appropriate negative discretion in administering the Performance-Based Annual
Bonus Plan (and the new Performance-Based Annual Bonus Plan proposed for
stockholder approval).
Dr. Southam's bonus was a predetermined amount negotiated as part of his
employment contract. In addition, Dr. Hasan (as shown in the "All Other
Compensation" column of the table) was credited with an employer contribution
under the prior HSI SERP in the amount of $818,918 to reflect amounts that would
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have accrued under such SERP had his employment with QualMed been taken into
account, as required under his employment contract.
STOCK COMPENSATION
During early 1996, HSI granted a significant number of stock options to the
Chief Executive Officer and other Named Executive Officers. The size of the
option grants reflected the fact that no options had been granted during 1995
because of a pending merger that was not consummated and the fact that
previously granted options had vested in connection with the proposed merger. In
determining the number of options to be granted, the Predecessor Committee
considered the advice of outside consultants, which was based upon the
competitive practices at the group of peer companies, as well as each individual
executive's position and potential for helping the Company to achieve its
long-term objectives. This review of competitive practices was the primary
consideration in establishing the number of options to be granted to Dr. Southam
as part of his employment contract and to Dr. Berkbigler following his promotion
and assumption of greater responsibilities.
During 1996, the Predecessor Committee awarded 300,000 options to Dr. Hasan.
The size of this grant was established in part by reference to the peer group
survey and with a view toward incentivizing Dr. Hasan in his key role in
establishing the future direction of HSI and implementing its goals. The grant
was structured to maximize the incentive for Dr. Hasan to increase shareholder
value by setting the strike price of one-third of the options at 115% of the
market price of HSI's stock on the date of grant and another one-third of the
options at 125% of such market price.
Stock options are also considered effective long-term incentives by the
Compensation Committee because an executive receives a gain only if the
Company's stock value increases and its stockholders also receive a gain. The
Compensation Committee intends to continue to use options and other equity-based
incentives as the primary element of long-term compensation for the Company's
executive officers.
COMPENSATION DEDUCTIBILITY POLICY
The Compensation Committee's policy with respect to the tax deductibility of
compensation in excess of $1 million payable to each of the Named Executive
Officers is to comply with the requirements of Section 162(m) of the Code
applicable to qualified performance-based compensation to the extent such
compliance is practicable and in the best interest of the Company and its
stockholders.
J. Thomas Bouchard, Chairman
Richard W. Hanselman
Thomas T. Farley
Raymond S. Troubh
Dated: August 1, 1997
