UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No. )

 

Filed by the Registrant þ

 Filed by a Party other than the Registrant  o

Check the appropriate box:

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §240.14a-12

 

AETNA INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 Aetna Inc.

Notice of Annual Meeting and

Proxy Statement

 

 

To Our Shareholders:

 

Aetna Inc.’s 2009 Annual Meeting of Shareholders will be held on Friday, May 29, 2009, at 9:30 a.m. Eastern time at the Omni Jacksonville Hotel in Jacksonville, Florida, and we hope you will attend.

 

 

This booklet includes the Notice of the Annual Meeting and Aetna’s 2009 Proxy Statement. The Proxy Statement provides information about Aetna and describes the business we will conduct at the meeting.

 

 

At the meeting, in addition to specific agenda items, we will discuss generally the operations of Aetna. We welcome any questions you have concerning Aetna and will provide time during the meeting for questions from shareholders.

 

 

If you are unable to attend the Annual Meeting, it is still important that your shares be represented. Please vote your shares promptly.

 

 

Ronald A. Williams

Chairman and Chief Executive Officer

April 20, 2009

 

Notice of Annual Meeting of Shareholders of Aetna Inc.

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of Aetna Inc. will be held at the Omni Jacksonville Hotel in Jacksonville, Florida, on Friday, May 29, 2009, at 9:30 a.m. Eastern time for the following purposes:

 

 

The Board of Directors has fixed the close of business on March 27, 2009 as the record date for determination of the shareholders entitled to vote at the Annual Meeting or any adjournment thereof.

 

The Annual Meeting is open to all shareholders as of the close of business on the March 27, 2009 record date or their authorized representatives. Parking is available at the Omni Jacksonville Hotel. See the reverse side of this page for directions to the Omni Jacksonville Hotel.

 

We ask that you signify your intention to attend the Annual Meeting by checking the appropriate box on your proxy card. In lieu of issuing an admission ticket, we will place your name on a shareholder attendee list, and you will be asked to register and present government issued photo identification (e.g., a driver’s license or passport) before being admitted to the Annual Meeting. If you hold your shares through a stockbroker, bank or other holder of record and plan to attend, you must send a written request to attend along with proof that you own the shares (such as a copy of your brokerage or bank account statement for the period including March 27, 2009) to Aetna’s Corporate Secretary at 151 Farmington Avenue, RW61, Hartford, CT 06156. The Annual Meeting will be audiocast live on the Internet at www.aetna.com/investor.

 

It is important that your shares be represented and voted at the Annual Meeting. You can vote your shares by one of the following methods: vote by Internet or by telephone using the instructions on the enclosed proxy card (if these options are available to you), or mark, sign, date and promptly return the enclosed proxy card in the postage-paid envelope furnished for that purpose. If you attend the Annual Meeting, you may vote in person if you wish, even if you have voted previously.

 

This Notice of Annual Meeting and Proxy Statement and the Company’s 2008 Annual Report, Financial Report to Shareholders are available on Aetna’s Internet website at www.aetna.com/proxymaterials.

 

By order of the Board of Directors,

 

 

Judith H. Jones

Vice President and Corporate Secretary

April 20, 2009

DIRECTIONS TO THE OMNI JACKSONVILLE HOTEL

 

FROM I-10 EAST

 

From I-10, take I-95 North. Take exit 352B (immediately after the bridge) to Forsyth Street. Go east (right) on Forsyth Street to Pearl Street and take a right onto Pearl Street. Take Pearl Street to Water Street and turn left. The hotel is 1/2 block down on the left.

 

FROM I-95 SOUTH AND JACKSONVILLE INTERNATIONAL AIRPORT — 18 MILES/20 MINUTES

 

From I-95 South follow signs to Union Street. Take exit 353B (left hand exit) and turn left on Union Street. Turn right on Jefferson. Turn left on Water Street. The hotel is 21/2 blocks on the left.

 

FROM I-95 NORTH — DAYTONA/ST. AUGUSTINE

 

From I-95 follow signs to Downtown/Riverside Avenue/Acosta Bridge. Take exit 350A, over Acosta Bridge. Stay in right lane and exit on Water Street, turning right. Follow Water Street 1/4 mile. The hotel is on the left.

 

FROM MAIN STREET HEADING SOUTH

 

Turn right off Main Street onto Bay Street. Continue on Bay Street to Pearl Street and turn left onto Pearl Street. Go one block to Water Street. The hotel driveway is 1/2 block on the left.

 

FROM ORLANDO

 

Take I-4 east to I-95 North. Follow signs to Downtown/Riverside Ave/Acosta Bridge. Take exit 350A, over the Acosta Bridge. Stay in right lane and exit on Water St. turning right. Follow Water St 1/4 mile. The hotel is on the left side.

 

Table of Contents

 

 

AETNA INC.
151 FARMINGTON AVENUE, HARTFORD, CONNECTICUT 06156
APRIL 20, 2009

 

PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON FRIDAY, MAY 29, 2009

 

This Proxy Statement and the related 2008 Annual Report, Financial Report to Shareholders are available at www.aetna.com/proxymaterials.

 

Among other things, the “Questions and Answers about the Proxy Materials and the Annual Meeting” section of this Proxy Statement contains information regarding:

 

 

Any control/identification number that a shareholder needs to access his or her form of proxy or voting instruction card is included with his or her proxy or voting instruction card.

 

 

A: The Board of Directors (the “Board”) of Aetna Inc. (“Aetna”) is providing these proxy materials to you in connection with the solicitation by the Board of proxies to be voted at Aetna’s Annual Meeting of Shareholders that will take place on May 29, 2009, and any adjournments or postponements of the Annual Meeting. You are invited to attend the Annual Meeting and are requested to vote on the proposals described in this Proxy Statement. These proxy materials and the enclosed proxy card are being mailed to shareholders on or about April 20, 2009.

 

 

A: This Proxy Statement provides you with information about Aetna’s governance structure, our Director nominating process, the proposals to be voted on at the Annual Meeting, the voting process, the compensation of our Directors and our most highly paid executive officers, and certain other required information.

 

 

A: There are four items scheduled to be voted on at the Annual Meeting:

 

 

 

 

A: The Board recommends that you vote your shares FOR each of Aetna’s nominees to the Board, FOR the approval of the appointment of KPMG LLP as the Company’s independent registered public accounting firm for 2009, and AGAINST each of the shareholder proposals.

 

 

A: You may vote all Aetna Common Shares, par value $.01 per share (“Common Stock”), you owned as of the close of business on March 27, 2009, the RECORD DATE. These shares include those (1) held directly in your name as the SHAREHOLDER OF RECORD, including shares purchased through Aetna’s DirectSERVICE Investment Program, and (2) held for you as the BENEFICIAL OWNER through a stockbroker, bank or other holder of record.

 

 

A: Many Aetna shareholders hold their shares through a stockbroker, bank or other holder of record rather than directly in their own names. As summarized below, there are some distinctions between shares held of record and those owned beneficially:

 

 

 

A: Whether you hold shares directly as the shareholder of record or beneficially in street name, you may vote before the Annual Meeting by granting a proxy to each of Barbara Hackman Franklin, Gerald Greenwald and Ellen M. Hancock or, for shares you beneficially own, by submitting voting instructions to your broker or other nominee. Most shareholders have a choice of voting by using the Internet, by calling a toll-free telephone number or by completing a proxy or voting instruction card and mailing it in the postage-paid envelope provided. Please refer to the summary instructions below and carefully follow the instructions included on your proxy card or, for shares you beneficially own, the voting instruction card provided by your broker or other nominee.

 

 

 

The Internet and telephone voting procedures are designed to authenticate shareholders and to allow shareholders to confirm that their instructions have been properly recorded. In order to provide shareholders of record with additional time to vote their shares while still permitting an orderly tabulation of votes, Internet and telephone voting for these shareholders will be available until 11:59 p.m. Eastern time on May 28, 2009.

 

 

A: Participants in the Aetna 401(k) Plan (the “401(k) Plan”) who receive this Proxy Statement in their capacity as participants in the 401(k) Plan will receive voting instruction cards in lieu of proxy cards. The voting instruction card directs the trustee of the 401(k) Plan how to vote the shares. Shares held in the 401(k) Plan may be voted by using the Internet, by calling a toll-free telephone number or by marking, signing and dating the voting instruction card and mailing it in the postage-paid envelope provided. Shares held in the 401(k) Plan for which no instructions are received are voted by the trustee of the 401(k) Plan in the same percentage as the shares held in the 401(k) Plan for which instructions are received.

 

 

A: You hold the Common Stock you acquired through Aetna’s Employee Stock Purchase Plan (the “ESPP”) as the beneficial owner of shares held in street name. You can vote these shares as described beginning on page 2 under “HOW CAN I VOTE MY SHARES BEFORE THE ANNUAL MEETING?”

 

 

A: Yes. For shares you hold directly in your name, you may change your vote by (1) signing another proxy card with a later date and delivering it to us before the date of the Annual Meeting (or submitting revised votes over the Internet or by telephone before 11:59 p.m. Eastern time on May 28, 2009), or (2) attending the Annual Meeting in person and voting your shares at the Annual Meeting. The last-dated proxy card will be the only one that counts. Attendance at the Annual Meeting will not cause your previously granted proxy to be revoked unless you specifically so request. For shares you hold beneficially, you may change your vote by submitting new voting instructions to your broker or other nominee in a manner that allows your broker or other nominee sufficient time to vote your shares.

 

 

A: You may vote your shares at the Annual Meeting if you attend in person. You may vote the shares you hold directly in your name by completing a ballot at the Annual Meeting. You may only vote the shares you hold in street name at the Annual Meeting if you bring to the Annual Meeting a proxy, executed in your favor, from the shareholder of record. You may not vote shares you hold through the 401(k) Plan at the Annual Meeting.

 

A: In the election of Directors, you may vote FOR, AGAINST or ABSTAIN with respect to each of the Director nominees. In an uncontested election, if more AGAINST than FOR votes are cast for a Director nominee, he or she will be required to submit his or her resignation for consideration by the Nominating and Corporate Governance Committee and the Board. Please see “Director Elections — Majority Voting Standard” on page 9. An ABSTAIN vote on the election of Directors will not have the effect of a vote AGAINST. For all other proposals, you may vote FOR, AGAINST or ABSTAIN. An ABSTAIN vote on these other proposals will not have the effect of a vote AGAINST.

 

 

A: If you sign and date your proxy card with no further instructions, your shares will be voted (1) FOR the election as Directors of each of the nominees named on pages 17 through 24 of this Proxy Statement, (2) FOR the approval of KPMG LLP as the Company’s independent registered public accounting firm for 2009, and (3) AGAINST each of the shareholder proposals.

 

If you sign and date your broker voting instruction card with no further instructions, your shares will be voted as described on your broker voting instruction card.

 

If you sign and date your 401(k) Plan voting instruction card with no further instructions, all shares you hold in the 401(k) Plan will be voted by the trustee of the 401(k) Plan in the same percentage as the shares held in the 401(k) Plan for which the trustee receives voting instructions.

 

 

A: Shares that you hold directly in your name will not be voted at the Annual Meeting. Shares that you beneficially own that are held in the name of a brokerage firm or other nominee may be voted in certain circumstances even if you do not provide the brokerage firm with voting instructions. Under New York Stock Exchange (“NYSE”) rules, brokerage firms have the authority to vote shares for which their customers do not provide voting instructions on certain routine matters. The election of Directors and the approval of KPMG LLP as the Company’s independent registered public accounting firm for 2009 are considered routine matters for which brokerage firms may vote uninstructed shares. Each of the shareholder proposals to be voted on at the Annual Meeting is not considered routine under the applicable rules, and therefore brokerage firms may not vote uninstructed shares on any of those proposals. Any uninstructed shares you hold through the 401(k) Plan will be voted by the trustee of the 401(k) Plan in the same percentage as the shares held in the 401(k) Plan for which instructions are received.

 

 

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

 

 

A: The Annual Meeting will be held at the Omni Jacksonville Hotel in Jacksonville, Florida. Directions to the Omni Jacksonville Hotel are on the reverse side of the attached Notice of Annual Meeting of Shareholders of Aetna Inc. The Annual Meeting is open to all shareholders as of the close of business on the March 27, 2009 RECORD DATE or their authorized representatives. We ask that you signify your intention to attend by checking the appropriate box on your proxy card or voting instruction card. In lieu of issuing an admission ticket, we will place your name on a shareholder attendee list, and you will be asked to register and present government issued photo identification (for example, a driver’s license or passport) before being admitted to the Annual Meeting. If your shares are held in street name and you plan to attend, you must send a written request to attend along with proof that you owned the shares as of the close of business on the RECORD DATE

(such as a copy of your brokerage or bank account statement for the period including March 27, 2009) to Aetna’s Corporate Secretary at 151 Farmington Avenue, RW61, Hartford, CT 06156.

 

 

A: Yes. You can listen to the live audio webcast of the Annual Meeting by going to Aetna’s Internet website at www.aetna.com/investor and then clicking on the link to the webcast.

 

 

A: We will publish the voting results of the Annual Meeting in a press release promptly after the votes are finalized and in our Quarterly Report on Form 10-Q for the period ended June 30, 2009.

 

 

A: Each share of Aetna’s Common Stock outstanding as of the close of business on March 27, 2009, the RECORD DATE, is entitled to one vote at the Annual Meeting. At the close of business on March 27, 2009, 447,849,434 shares of the Common Stock were outstanding.

 

 

A: A majority of the shares of Common Stock outstanding as of the close of business on March 27, 2009 must be present in person or by proxy for us to hold the Annual Meeting and transact business. This is referred to as a quorum. Broker nonvotes are counted as present for the purpose of determining the presence of a quorum. Generally, broker nonvotes occur when shares held by a broker for a beneficial owner are not voted with respect to a particular proposal because the proposal is not a routine matter, and the broker has not received voting instructions from the beneficial owner of the shares. If you vote to abstain on one or more proposals, your shares will be counted as present for purposes of determining the presence of a quorum unless you vote to abstain on all proposals.

 

 

A: Under Pennsylvania corporation law and Aetna’s Articles of Incorporation and By-Laws, the approval of any corporate action taken at the Annual Meeting is based on votes cast. “Votes cast” means votes actually cast “for” or “against” a particular proposal, whether by proxy or in person. Abstentions and broker nonvotes are not considered “votes cast.” In uncontested elections, Directors are elected by a majority of votes cast. As described in more detail on page 9 under “Director Elections — Majority Voting Standard,” Aetna’s Corporate Governance Guidelines require any incumbent Director nominee who receives more “against” than “for” votes to submit his or her resignation for consideration by the Nominating and Corporate Governance Committee and the Board. Shareholder approval of each of the other proposals to be considered at the Annual Meeting also occurs if the votes cast in favor of the proposal exceed the votes cast against the proposal. If you are a beneficial owner and do not provide the shareholder of record with voting instructions, your shares may constitute broker nonvotes, as described under “HOW MANY SHARES MUST BE PRESENT TO HOLD THE ANNUAL MEETING?” above.

 

 

A: Aetna will pay the entire cost of preparing, assembling, printing, mailing, and distributing these proxy materials, except that you will pay for Internet access if you choose to access these proxy materials over the Internet. In addition to the mailing of these proxy materials, the solicitation of proxies or votes may be made in person, by telephone, or by electronic communication by our Directors, officers and employees, none of whom will receive any additional compensation for such solicitation activities. We also have hired Georgeson Inc. to assist us in the distribution of proxy materials and the solicitation of votes for a fee

of $18,500 plus reasonable out-of-pocket expenses for these services. We also will reimburse brokerage houses and other custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses for forwarding proxy and solicitation materials to beneficial owners of the Common Stock and obtaining their voting instructions.

 

 

A: Yes. Aetna offers shareholders of record the option of viewing future annual reports to shareholders and proxy statements via the Internet instead of receiving paper copies of these documents in the mail. The 2009 Aetna Inc. Notice of Annual Meeting and Proxy Statement and 2008 Aetna Annual Report, Financial Report to Shareholders are available on Aetna’s Internet website at www.aetna.com/proxymaterials. Under Pennsylvania law, Aetna may provide shareholders who give the Company their e-mail addresses with electronic notice of its shareholder meetings as described below.

 

If you are a shareholder of record, you can choose to receive annual reports to shareholders and proxy statements via the Internet and save Aetna the cost of producing and mailing these documents in the future by following the instructions under “HOW DO I ELECT THIS OPTION?” below. If you hold your shares through a stockbroker, bank or other holder of record, check the information provided by that entity for instructions on how to elect to view future notices of shareholder meetings, proxy statements and annual reports over the Internet.

 

If you are a shareholder of record and choose to receive future notices of shareholder meetings by e-mail and view future proxy statements and annual reports over the Internet, you must supply an e-mail address, and you will receive your notice of the meeting by e-mail when those materials are posted. The notice you receive will include instructions and contain the Internet address for those materials.

 

Many shareholders who hold their shares through a stockbroker, bank or other holder of record and elect electronic access will receive an e-mail containing the Internet address to access Aetna’s notices of shareholder meetings, proxy statements and annual reports when those materials are posted.

 

 

A: If you are a shareholder of record and are interested in receiving future notices of shareholder meetings by e-mail and viewing future annual reports and proxy statements on the Internet instead of receiving paper copies of these documents, you may elect this option when voting by using the Internet at www.investorvote.com and following the instructions. You will need to have your proxy card in hand when you access the website.

 

 

A: The 2008 Aetna Annual Report, Financial Report to Shareholders is being mailed to shareholders in advance of or together with this Proxy Statement. If you hold Aetna shares in your own name and received more than one copy of the 2008 Aetna Annual Report, Financial Report to Shareholders at your address and wish to reduce the number of reports you receive and save Aetna the cost of producing and mailing these reports, you should contact Aetna’s Transfer Agent at 1-800-446-2617 to discontinue the mailing of reports on the accounts you select. At least one account at your address must continue to receive an annual report, unless you elect to review future annual reports over the Internet. Mailing of dividend checks, dividend reinvestment statements, proxy materials and special notices will not be affected by your election to discontinue duplicate mailings of annual reports. Registered shareholders may resume the mailing of an annual report to an account by calling Aetna’s Transfer Agent at 1-800-446-2617. If you own shares through a stockbroker, bank or other holder of record and received more than one 2008 Aetna Annual Report, Financial Report to Shareholders, please contact the holder of record to eliminate duplicate mailings.

 

“Householding” occurs when a single copy of our annual report and proxy statement is sent to any household at which two or more shareholders reside if they appear to be members of the same family.

Although we do not “household” for registered shareholders, a number of brokerage firms have instituted householding for shares held in street name. This procedure reduces our printing and mailing costs and fees. Shareholders who participate in householding will continue to receive separate proxy cards, and householding will not affect the mailing of account statements or special notices in any way.

 

 

A: If for any unforeseen reason any of Aetna’s nominees is not available to be a candidate for Director, the persons named as proxy holders on your proxy card may vote your shares for such other candidate or candidates as may be nominated by the Board, or the Board may reduce the number of Directors to be elected.

 

 

A: Other than the election of Directors and the other proposals described in this Proxy Statement, Aetna has not received proper notice of, and is not aware of, any matters to be presented for a vote at the Annual Meeting. If you grant a proxy using the enclosed proxy card, the persons named as proxies on the enclosed proxy card, or any of them, will have discretion to, and intend to, vote your shares according to their best judgment on any additional proposals or other matters properly presented for a vote at the Annual Meeting, including, among other things, consideration of a motion to adjourn the Annual Meeting to another time or place.

 

 

A: Yes. You can submit proposals for consideration at future annual meetings, including Director nominations.

 

 

 

 

A: Yes. You can ask questions regarding each of the items to be voted on when those items are discussed at the Annual Meeting. Shareholders also will have an opportunity to ask questions of general interest at the end of the Annual Meeting.

 

 

A: Votes are counted by employees of Aetna’s Transfer Agent and certified by the judge of election for the Annual Meeting who is an employee of the Transfer Agent. The judge will determine the number of shares outstanding and the voting power of each share, determine the shares represented at the Annual Meeting, determine the existence of a quorum, determine the validity of proxies and ballots, count all votes and determine the results of the actions taken at the Annual Meeting.

 

 

A: Yes. The vote of each shareholder is held in confidence from Aetna’s Directors, officers and employees except (a) as necessary to meet applicable legal requirements (including stock exchange listing requirements) and to assert or defend claims for or against Aetna and/or one or more of its consolidated subsidiaries, (b) as necessary to assist in resolving any dispute about the authenticity or accuracy of a proxy card, consent, ballot, authorization or vote, (c) if there is a contested proxy solicitation, (d) if a shareholder makes a written comment on a proxy card or other means of voting or otherwise communicates the shareholder’s vote to management, or (e) as necessary to obtain a quorum.

 

At Aetna, we believe sound corporate governance principles are good for our business, the industry, the competitive marketplace and for all of those who place their trust in us. We have embraced the principles behind the Sarbanes-Oxley Act of 2002, as well as the governance rules for companies listed on the NYSE. These principles are reflected in the structure and composition of our Board and in the charters of our Board Committees, and are reinforced through Aetna’s Code of Conduct, which applies to every employee and to our Directors.

 

Aetna’s Corporate Governance Guidelines (the “Guidelines”) provide the framework for the governance of Aetna. The governance rules for companies listed on the NYSE and those contained in the Sarbanes-Oxley Act of 2002 are reflected in the Guidelines. The Guidelines address the role of the Board (including advising on key strategic, financial and business objectives); the composition and selection of Directors; the functioning of the Board (including its annual self-evaluation); the Committees of the Board; the compensation of Directors; and the conduct and ethics standards for Directors, including a prohibition against any nonmanagement Director having a direct or indirect material relationship with the Company except as authorized by the Board or our Nominating Committee, and a prohibition against Company loans to, or guarantees of obligations of, Directors and their family members. The Guidelines are available at www.aetna.com/governance and in print to shareholders free of charge by calling 1-800-237-4273.

 

The Board reviews the Company’s corporate governance practices annually. These reviews include a comparison of our current practices to those suggested by various groups or authorities active in corporate governance and to those of other public companies. Based on this review, in 2009, the Board determined, among other matters, to limit the number of other public company directorships that a Director can hold to four.

 

The Company’s Articles of Incorporation provide for majority voting in uncontested elections of Directors. Under the Articles of Incorporation, a Director nominee will be elected if the number of votes cast “for” the nominee exceeds the number of votes cast “against” the nominee. An “abstain” vote will not have the effect of a vote “against.” In contested elections, those in which a shareholder has nominated a person for election to the Board, the voting standard will be a plurality of votes cast. Under Pennsylvania law and the Articles of Incorporation, if an incumbent Director nominee does not receive a majority of the votes cast in an uncontested election, the incumbent Director will continue to serve on the Board until his or her successor is elected and qualified. To address this situation, the Guidelines require any incumbent nominee for Director in an uncontested election who receives more “against” votes than “for” votes to promptly submit his or her resignation for consideration by the Nominating Committee. The Nominating Committee is then required to recommend to the Board the action to be taken with respect to the resignation, and the Board is required to act on the resignation, in each case within a reasonable period of time. Aetna will disclose promptly to the public each such resignation and decision by the Board. New nominees not already serving on the Board who fail to receive a majority of votes cast in uncontested elections will not be elected to the Board in the first instance.

 

The Nominating Committee regularly assesses the appropriate size and composition of the Board and, among other matters, whether any vacancies on the Board are expected due to retirement or otherwise. The Director retirement age is 75. Each year, the Nominating Committee assesses the characteristics and performance of each individual Director candidate as part of its nomination process, regardless of the candidate’s age.

 

Aetna’s nonmanagement Directors meet in regularly scheduled executive sessions at Aetna’s Board meetings, without management present. During 2008, the nonmanagement Directors, each of whom is independent, met ten times to discuss certain Board policies, processes and practices, the performance and proposed performance-based compensation of the Chief Executive Officer, management succession and other matters relating to the Company and the functioning of the Board.

 

Gerald Greenwald, an independent Director, has been the Presiding Director since April of 2007. Generally, the Presiding Director is responsible for coordinating the activities of the independent Directors. Among other things, the Presiding Director sets the agenda for and leads the nonmanagement and independent Director sessions that the Board regularly holds, and briefs the Chairman and Chief Executive Officer on any issues arising from those sessions. The Presiding Director also acts as the principal liaison to the Chairman and Chief Executive Officer for the views of, and any concerns or issues raised by, the independent Directors, though all Directors continue to interact one-on-one with the Chairman and Chief Executive Officer as needed and as appropriate. The Chairman and Chief Executive Officer consults with the Presiding Director for recommendations in setting the agenda for Board meetings and the Board meeting schedule. The Presiding Director also consults with the other Directors and advises the Chairman and Chief Executive Officer about the quality, quantity and timeliness of information provided to the Board and the Board’s decision making processes.

 

To contact Ronald A. Williams, Aetna’s Chairman of the Board and Chief Executive Officer, you may write to Mr. Williams at Aetna Inc., 151 Farmington Avenue, Hartford, CT 06156. Communications sent to Mr. Williams will be delivered directly to him. Anyone wishing to make their concerns known to Aetna’s nonmanagement Directors or to send a communication to the entire Board may contact Mr. Greenwald by writing to the Presiding Director at P.O. Box 370205, West Hartford, CT 06137-0205. All such communications will be kept confidential and forwarded directly to the Presiding Director or the Board, as applicable.

 

The Board has established guidelines (“Director Independence Standards”) to assist it in determining Director independence. In accordance with the Director Independence Standards, the Board must determine that each independent Director has no material relationship with the Company other than as a Director and/or a shareholder of the Company. Consistent with the NYSE listing standards, the Director Independence Standards specify the criteria by which the independence of our Directors will be determined, including guidelines for Directors and their immediate family members with respect to past employment or affiliation with the Company or its external auditor. A copy of the Director Independence Standards is attached to this Proxy Statement as Annex A and also is available at www.aetna.com/governance and in print to shareholders free of charge by calling 1-800-237-4273.

 

Pursuant to the Director Independence Standards, the Board undertook its annual review of Director independence in February of 2009. The purpose of this review was to determine whether any Director’s relationships or transactions are inconsistent with a determination that the Director is independent. During this review, the Board considered transactions and relationships between each Director or any member of his or her immediate family (or any entity of which a Director or an immediate family member is a partner, shareholder or officer) and the Company and its subsidiaries. The Board also considered whether there were any transactions or relationships between Directors or any member of their immediate family and members of the Company’s senior management or their affiliates.

 

As a result of this review, the Board affirmatively determined in its business judgment that each of Frank M. Clark, Betsy Z. Cohen, Molly J. Coye, M.D., Roger N. Farah, Barbara Hackman Franklin, Jeffrey E. Garten,

Earl G. Graves, Gerald Greenwald, Ellen M. Hancock, Richard J. Harrington, Edward J. Ludwig and Joseph P. Newhouse, each of whom also is standing for election at the Annual Meeting, is independent as defined in the NYSE listing standards and under Aetna’s Director Independence Standards and that any relationship with the Company (either directly or as a partner, shareholder or officer of any organization that has a relationship with the Company) has been deemed to be immaterial under the independence thresholds contained in the NYSE listing standards and under Aetna’s Director Independence Standards.

 

In determining that each of the nonmanagement Directors is independent, the Board considered that the Company in the ordinary course of business sells products and services to, and/or purchases products and services from, companies and other entities at which some of our Directors or their immediate family members are or have been officers and/or significant equity holders or have certain other relationships. Specifically, the Board considered the existence of the following transactions, all of which were made in the ordinary course of business and which the Board believes were in, or not inconsistent with, the best interests of the Company, and in each case were not material. The Company sells healthcare products and related services in the ordinary course to corporations or organizations with which the following directors, or their immediate family members, are affiliated: Messrs. Clark, Farah, Garten, Graves, Greenwald, Ludwig and Mrs. Cohen. The Company may purchase electric power and other utility services from Commonwealth Edison Company. Mr. Clark is the Chairman and Chief Executive Officer of Commonwealth Edison Company. The Company advertises in and participates as a co-sponsor in certain marketing events hosted by Black Enterprise magazine, of which Mr. Graves is the Publisher. Mr. Graves also is the Chairman of Earl G. Graves, Ltd., which publishes that magazine. Harvard University provides medical content for the Company’s InteliHealth website and has provided certain other services to the Company’s ActiveHealth Management subsidiary. In addition, the Company purchased periodicals from, sponsored various conferences and ceremonies at, as well as paid tuition to Harvard University in order for Company employees to participate in certain educational programs at Harvard. Dr. Newhouse is employed by Harvard University but is not involved in Harvard’s relationship with the Company. The Company paid tuition to Yale University in order for Company employees to participate in certain educational programs at Yale and also sponsored healthcare conferences at Yale University. Mr. Garten is employed by Yale University but is not involved in Yale’s relationship with the Company. In each of these cases, the aggregate amounts paid to or received from these companies or other entities in each of the last three years did not approach the total revenue threshold in the Director Independence Standards (i.e., 2% of the other companies’ revenue) and/or was below $1 million. The Company may also hold equity and/or debt securities as investments in the ordinary course in corporations or organizations with which Messrs. Clark and/or Farah are affiliated. The amount of each such holding is below the 5% threshold amount in the Director Independence Standards. The Board determined that none of these relationships was material or impaired the independence of any Director.

 

All members of the Audit Committee, the Committee on Compensation and Organization (the “Compensation Committee”) and the Nominating Committee are, in the business judgment of the Board, independent Directors as defined in the NYSE listing standards and in Aetna’s Director Independence Standards.

 

Under Aetna’s Code of Conduct, the Board or an independent Committee reviews any potential conflicts between the Company and any Director or executive officer. In addition, the Board has adopted a written Related Party Transaction Policy (the “Policy”) which applies to Directors, executive officers, significant shareholders and their immediate family members (each a “Related Person”). Under the Policy, all transactions involving the Company in which a Related Person has a direct or indirect material interest must be reviewed and approved (1) by the Board or the Nominating Committee if involving a Director, (2) by the Board or the Audit Committee if involving an executive officer, or (3) by the full Board if involving a significant shareholder. The Board or relevant Committee considers relevant facts and circumstances, which may include, without limitation, the commercial reasonableness of the terms, the benefit to the Company, opportunity costs of alternate transactions, the materiality and character of the Related Person’s

direct or indirect interest, and the actual or apparent conflict of interest of the Related Person. A transaction may be approved if it is determined, in the Board’s or relevant Committee’s reasonable business judgment, that the transaction is in, or not inconsistent with, the best interests of the Company and its shareholders, and considering the interests of other relevant constituents, when deemed appropriate. Determinations of materiality are made by the full Board or relevant Committee, as applicable.

 

The members of the Compensation Committee are Betsy Z. Cohen (Chairman), Frank M. Clark, Roger N. Farah, Barbara Hackman Franklin and Jeffrey E. Garten. None of the members of the Compensation Committee has ever been an officer or employee of the Company. There are no interlocking relationships with any of our executive officers or Compensation Committee members.

 

The Board and its Committees meet throughout the year on a set schedule, and also hold special meetings from time to time, as appropriate. During 2008, the Board met ten times. The average attendance of Directors at all meetings during the year was 96%, and no Director attended less than 75% of the aggregate number of Board and Committee meetings that he or she was eligible to attend. It is the policy of the Board that all Directors should be present at Aetna’s Annual Meeting of Shareholders. All of the Directors then in office and standing for election attended Aetna’s 2008 Annual Meeting of Shareholders.

 

Aetna’s Code of Conduct applies to every employee and to our Directors, and is available at www.aetna.com/governance. A complete copy was filed as Exhibit 14.1 to Aetna’s Form 10-K filed on February 27, 2009. The Code of Conduct is designed to ensure that Aetna’s business is conducted in a consistently legal and ethical manner. The Code of Conduct includes policies on employee conduct, conflicts of interest and the protection of confidential information, and requires strict adherence to all laws and regulations applicable to the conduct of our business. Aetna will disclose any amendments to the Code of Conduct, or waivers of the Code of Conduct relating to Aetna’s Directors, executive officers and principal financial and accounting officers or persons performing similar functions, on its website at www.aetna.com/governance within four business days following the date of any such amendment or waiver. To date, no waivers have been requested or granted. The Code of Conduct also is available in print to shareholders free of charge by calling 1-800-237-4273.

 

Aetna’s Board oversees and guides the Company’s management and its business. Committees support the role of the Board on issues that are better addressed by a smaller, more focused subset of Directors.

The following table presents, as of April 1, 2009, the key standing Committees of the Board, the membership of such Committees and the number of times each such Committee met in 2008. Board Committee Charters adopted by the Board for each of the six Committees listed below are available at www.aetna.com/governance and in print to shareholders free of charge by calling 1-800-237-4273.

 

 

 

The functions and responsibilities of the key standing Committees of Aetna’s Board are described below.

 

 

The Audit Committee can be confidentially contacted by employees and others wishing to raise concerns or complaints about the Company’s accounting, internal accounting controls or auditing matters by

calling AlertLine^®, an independent toll-free service, at 1-888-891-8910 (available seven days a week, 24 hours a day), or by writing to: Aetna Inc. Audit Committee, c/o Corporate Compliance, P.O. Box 370205, West Hartford, CT 06137-0205.

 

 

The Compensation Committee has the authority to retain counsel and other experts or consultants as it may deem appropriate. The Compensation Committee has the sole authority to select, retain and terminate any consultant used to assist the Compensation Committee and has the sole authority to approve each consultant’s fees and other retention terms. In accordance with this authority, the Compensation Committee engages Frederic W. Cook & Co., Inc. (“Cook”) as an independent outside compensation consultant to advise the Compensation Committee on all matters related to Chief Executive Officer and other executive compensation. The Company may not engage Cook for any services other than in support of the Compensation Committee without the prior approval of the Chairman of the Compensation Committee. Cook also advises the Nominating Committee regarding Director compensation. The Company does not engage Cook for any services other than in support of these Committees. A representative of Cook attended eight of the Compensation Committee’s meetings in 2008.

 

 

The Board makes all Director compensation determinations after considering the recommendations of the Nominating Committee. In setting Director compensation, both the Nominating Committee and the Board review director compensation data obtained from Cook, but neither the Nominating Committee nor the Board delegates any Director compensation decision making authority. Cook advises the Nominating Committee regarding Director compensation.

 

 

Corporate Secretary

Aetna Inc.

151 Farmington Avenue, RW61

Hartford, CT 06156

 

In addition, Aetna’s By-Laws permit shareholders to nominate Directors for consideration at a meeting of shareholders at which one or more Directors are to be elected. For a description of the process for nominating Directors in accordance with Aetna’s By-Laws, see “CAN I PROPOSE ACTIONS FOR CONSIDERATION AT NEXT YEAR’S ANNUAL MEETING OF SHAREHOLDERS OR NOMINATE INDIVIDUALS TO SERVE AS DIRECTORS?” beginning on page 7.

 

 

The Board and the Nominating Committee each assessed the characteristics and performance of the individual Directors standing for election to the Board at the 2009 Annual Meeting against the foregoing criteria, and, to the extent applicable, considered the impact of any change in the principal occupations of all Directors during the last year. Upon completion of this evaluation process, the Nominating Committee reported to the full Board its conclusions and recommendations for nominations to the Board, and the Board nominated the 13 Director nominees named in this Proxy Statement based on that recommendation.

 

Richard J. Harrington has not been elected previously to the Board by shareholders. In 2008, the Nominating Committee engaged and paid the fees of a professional search firm to assist the Nominating Committee in identifying and evaluating potential nominees. Following the candidate identification and evaluation process, the Nominating Committee considered and recommended Mr. Harrington to the full Board, and the Board appointed Mr. Harrington a Director of Aetna on September 26, 2008.

 

Aetna will nominate 13 individuals for election as Directors at the Annual Meeting (the “Nominees”). The terms of office for the Directors elected at this meeting will run until the next Annual Meeting and until their successors are duly elected and qualified. The Nominating Committee recommended the 13 Nominees for nomination by the full Board. Based on that recommendation, the Board nominated each of the Nominees for election at the Annual Meeting.

 

All Nominees are currently Directors of Aetna. The following pages list the names and ages of the Nominees as of the date of the Annual Meeting, the year each first became a Director of Aetna or one of its predecessors, the principal occupation, publicly traded company directorships and certain other directorships of each Nominee as of April 1, 2009, and a brief description of the business experience of each Nominee for at least the last five years.

 

Each of the 13 individuals (or such lesser number if the Board has reduced the number of Directors to be elected at the Annual Meeting as described on page 7 under “WHAT IF A DIRECTOR NOMINEE IS UNWILLING OR UNABLE TO SERVE?”) who receives more “for” votes than “against” votes cast at the Annual Meeting will be elected Directors. In addition, as described in more detail on page 9 under “Director Elections — Majority Voting Standard,” Aetna’s Corporate Governance Guidelines require any nominee for Director in an uncontested election who receives more “against” votes than “for” votes to promptly submit his or her resignation for consideration by the Nominating Committee. The Nominating Committee and the Board are then required to act on the resignation, in each case within a reasonable period of time.

 

The Board recommends a vote FOR each of the 13 Nominees. If you complete the enclosed proxy card, unless you direct to the contrary on that card, the shares represented by that proxy card will be voted FOR the election of all 13 Nominees.

 

Nominees for Directorships

 

 

Each year, the Nominating and Corporate Governance Committee of Aetna’s Board of Directors reviews compensation for nonmanagement Directors and makes recommendations regarding the prospective level and composition of Director compensation to the full Board of Directors for its approval.

 

The Nominating Committee’s goal is to develop a compensation program that:

 

 

As part of their review, the Nominating Committee and the Board consider, among other factors, the Director compensation practices at a comparative group of public companies (the “comparative group”), based on market comparison studies prepared by an outside consultant, Frederic W. Cook & Co., Inc. (“Cook”). Cook also serves as the compensation consultant to the Committee on Compensation and Organization, as described on page 14.

 

The primary elements of Aetna’s Director compensation program are annual cash retainer fees and annual restricted stock unit awards. Directors also receive certain benefits. Directors who are officers of Aetna receive no additional compensation for membership on the Board or any of its Committees. In 2008, the Presiding Director received no additional compensation for his service as Presiding Director.

 

The Board has established Director Stock Ownership Guidelines under which each nonmanagement Director is required to own, within five years of joining the Board, shares of Common Stock or stock units having a dollar value equal to $400,000. As of March 27, 2009, all of Aetna’s nonmanagement Directors are in compliance with these guidelines.

 

Aetna’s Code of Conduct prohibits Directors from engaging in hedging strategies using puts, calls or other types of derivative securities based on the value of the Common Stock.

 

For 2008, Director compensation for Aetna’s nonmanagement Directors approximated the median level paid to nonmanagement directors in the prior year in the comparative group.

 

The 2008 comparative group is a blend of:

 

 

Details regarding retainer fees for Board and Committee service are set forth in footnote 1 to the 2008 Director Compensation Table on page 26.

 

The 2008 Director Compensation Table sets forth for 2008 the total compensation of each of the Directors. Actual compensation for any Director, and amounts shown in the 2008 Director Compensation Table, may vary by Director due to: (a) initial stock awards given to Directors first joining the Board, which for accounting purposes are amortized over the first three years of service; (b) the time of year when the Director was first elected, if 2008 is his or her first year of Board service; (c) whether a Director elected to defer a stock-based award into a stock unit account or interest account, which in turn affects the accounting for the cost of those units; and (d) whether a Director qualifies for accelerated vesting of stock-based awards due to retirement eligibility, which in turn requires that the value of the awards be recognized for accounting purposes on an accelerated basis.

Actual compensation also may vary by Director due to the Committees on which a Director serves as well as other factors. Also, when setting Director compensation, the Nominating Committee and the Board consider the full grant date values of stock awards in the year granted. However, in accordance with SEC reporting regulations, amounts shown in the table below represent the grant date fair value of equity awards held by each Director that were required to be expensed during 2008 for accounting purposes, not the full grant date values for 2008 stock awards. As a result, amounts shown in the table below for stock-based awards include portions of prior year awards, as well as a portion of the value of awards granted in 2008.

 

 

 

 

 

As of December 31, 2008, the number of outstanding stock awards, consisting solely of RSUs, held by each Director was as follows: Frank M. Clark, 2,624; Betsy Z. Cohen, 2,958; Molly J. Coye, M.D., 2,958; Roger N. Farah, 1,697; Barbara Hackman Franklin, 2,958; Jeffrey E. Garten, 2,958; Earl G. Graves, 2,958; Gerald Greenwald, 2,958; Ellen M. Hancock, 2,958; Richard J. Harrington, 0; Edward J. Ludwig, 2,958; and Joseph P. Newhouse, 2,958. Refer to the Beneficial Ownership Table on page 31 for more information on Director holdings of the Common Stock.

 

 

 

 

Director Deferrals

 

The amounts shown in the “Fees Earned or Paid in Cash” and “Stock Awards” columns of the 2008 Director Compensation Table include amounts that were deferred by Directors during 2008 under the Aetna Inc. Non-Employee Director Compensation Plan (the “Director Plan”). Under the Director Plan, nonmanagement Directors may defer payment of some or all of their annual retainer fees, dividend equivalents paid on stock units and vested RSUs to an unfunded stock unit account or unfunded interest account until after they have resigned or retired (as defined in the Director Plan) from the Board or elect to diversify their stock unit holdings as described below.

 

During the period of deferral, amounts deferred to the stock unit account track the value of the Common Stock and earn dividend equivalents. During the period of deferral, amounts deferred to the interest account accrue interest pursuant to a formula equal to the rate of interest paid from time to time under the fixed interest rate fund option of the 401(k) Plan (3.2% per year for the period January to June 2009).

 

Under the Director Plan, beginning at age 68, Directors are allowed to make an annual election to diversify up to 100% of their voluntary deferrals into the stock unit account (consisting of the annual cash retainers and dividend equivalents) out of stock units and into an interest account. During 2008, no Directors made such a diversification election. Directors who make a diversification election remain subject to the Board’s Director Stock Ownership Guidelines.

 

Stock Unit and Restricted Stock Unit Awards

 

Pursuant to the Director Plan, nonmanagement Directors, upon their initial election to the Board, receive Initial Units in the form of a one-time grant of deferred stock units convertible upon retirement from Board service into 6,000 shares of the Common Stock. Generally, to become fully vested in the Initial Units, a Director must complete three years of service following the grant. If service is sooner terminated by reason of death, disability, retirement or acceptance of a position in government service, a Director is entitled to receive the full grant if the Director has completed a minimum of six consecutive months of service as a Director from the date of grant.

 

A Director’s right with respect to unvested units also will vest upon a change-in-control of Aetna (as defined in the Director Plan). If a Director terminates Board service prior to completion of one year of service from the grant date of any Initial Units that have not otherwise vested under the terms of the Director Plan, the Director will be entitled to receive a pro rata portion of the award. Although Directors receive dividend equivalents on the deferred stock units, they have no voting rights with respect to the units granted. The deferred stock units granted are not transferable.

 

On May 30, 2008, Aetna granted each nonmanagement Director then in office 3,393 RSUs under the Director Plan. The full grant date value of these RSUs was $160,014. The RSUs vest in quarterly increments over a one-year period beginning May 30, 2008, and are payable at the end of the one-year period in shares of the Common Stock or can be deferred under the Director Plan to a stock unit account or an interest account as described above. The RSUs granted to a nonmanagement Director will vest immediately if the Director ceases to be a Director because of death, disability, retirement or acceptance of a position in government service. All RSUs granted to nonmanagement Directors also will vest upon a change-in-control of Aetna (as defined in the Director Plan).

 

Director Charitable Award Program

 

Prior to January 26, 2008, Aetna maintained a Director Charitable Award Program (the “Program”) for nonmanagement Directors serving on the Board. After a review of the Program and competitive practices, the Board decided to close the Program, and any Director who first joins the Board after January 25, 2008 will not be eligible to participate. However, to recognize pre-existing commitments, the Program will remain in place for Directors serving prior to that date. Under the Program, Aetna will make a charitable contribution of $1 million in ten equal annual installments allocated among up to five charitable organizations recommended by a participating Director once they reach age 72 (the mandatory retirement age for Directors prior to an increase in the retirement age to 75 made in 2007). For Mr. Farah, who joined the Board in 2007, contributions would occur once he reaches age 75. The Program may be funded indirectly by life insurance on the lives of the participating Directors. Mr. Harrington is not eligible to participate in the Program because he joined the Board after the Program closed to new Directors.

 

Beneficiary organizations recommended by Directors must be, among other things, tax exempt under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”). Donations Aetna ultimately makes are expected to be deductible from taxable income for purposes of U.S. federal and other

income taxes payable by Aetna. Directors derive no personal financial or tax benefit from the Program, since all insurance proceeds and charitable deductions accrue solely to Aetna.

 

The Charitable Award Program values included in footnote 3 to the 2008 Director Compensation Table on page 27 represent an estimate of the present value of the total annual economic net cost of the Program, pre-tax, for current and former Directors, allocated equally among the current Directors still participating in the Program. The present value calculation considers estimates of (a) premiums paid on whole life insurance policies purchased with respect to certain of the Directors to fund part of the Program; (b) the expected future charitable contributions to be paid by Aetna on behalf of current and former Directors; (c) expenses associated with administering the Program; and (d) the expected future proceeds from such whole life insurance policies which are, in turn, based on expected mortality, as well as assumptions related to future investment returns of the policies. The discount rate applied in such present value calculation is 4.4%.

 

Other Benefits

 

Aetna provides $150,000 of group life insurance and $100,000 of business travel accident insurance (which includes accidental death and dismemberment coverage) for its nonmanagement Directors. Optional medical, dental and long-term care coverage for nonmanagement Directors and their eligible dependents also is available to Directors at a cost similar to that charged to Aetna employees and may be continued into retirement by eligible Directors.

 

Aetna also reimburses nonmanagement Directors for the out-of-pocket expenses they incur that pertain to Board membership, including travel expenses incurred in connection with attending Board, Committee and shareholder meetings, and for other Aetna business-related expenses (including the business-related travel expenses of spouses if they are specifically invited to attend the event).

 

From time to time, Aetna also may transport Directors to and from Board meetings or Directors and their guests to and from other Aetna business functions on Company aircraft.

 

2009 Nonmanagement Director Compensation

 

Following a review with Cook, the Board set the value of cash and equity compensation for nonmanagement Directors for 2009 to be the same as their 2008 cash and equity compensation.

 

Section 16(a) of the Securities Exchange Act of 1934 requires our Directors, our executive officers and certain other persons to file reports of holdings and transactions in our Common Stock with the SEC. Based on our records and other information, we believe that during our fiscal year ended December 31, 2008, our Directors and executive officers timely met all applicable SEC filing requirements.

 

The following table presents, as of December 31, 2008, the names of the only persons known to Aetna to be the beneficial owners of more than 5% of the outstanding shares of our Common Stock. The information set forth in the table below and in the related footnotes was furnished by the identified persons to the SEC.

 

 

 

The following table presents, as of March 27, 2009, the beneficial ownership of, and other interests in, shares of our Common Stock of each current Director, each Nominee, each executive officer named in the 2008 Summary Compensation Table on page 48, and Aetna’s Directors and executive officers as a group. The information set forth in the table below and in the related footnotes has been furnished by the respective persons.

 

*  Less than 1%

 

Unless noted in the footnotes below, each person currently has sole voting and investment powers over the shares set forth in the Beneficial Ownership Table. None of the shares reported are pledged as security.

Notes to Beneficial Ownership Table

 

 

 

 

 

Despite the challenging economy, the Company’s 2008 operating performance led our industry

 

In 2008, economic conditions challenged businesses across the country and globally. Shareholders faced a particularly difficult year due to the unprecedented turbulence in the financial markets, and Aetna’s shareholders were not immune to this pressure.

 

Despite this economic impact, Aetna achieved outstanding operational performance as compared with our closest competitors.

 

 

The Company’s 2008 financial performance presented the only positive operating earnings per share growth among our health care competitors, as illustrated below.

 

 

 

 

Aetna’s Executive Compensation program is based on the following principles:

 

Recognize and reward the achievement of financial results

 

 

Support our business strategy

 

 

Maintain a strong management team

 

 

Aetna’s compensation philosophy requires that a significant portion of the compensation of executive officers be “at risk” in the form of equity and other performance-based awards.

 

Based on information reported in our competitors’ 2008 proxy statements, our executives have more of their compensation “at risk” than the executives of our competitors. The chart below shows the mix of target compensation opportunity for each of the 2008 Named Executive Officers.

 

 

We believe the emphasis on equity-based compensation aligns the interests of our executives with those of our shareholders. During 2008, our stock price declined significantly. As the stock markets declined, so did the value of the equity compensation previously awarded to our executives.

The chart below shows the percentage decline in our stock price during 2008 compared to the decline in the value of equity awards held by our Named Executive Officers.

 

 

* The decline in equity value for a shareholder was determined by comparing the stock price on January 1, 2008 to December 31, 2008. The decline in equity value for the Named Executive Officers was determined by comparing the in the money value of all outstanding equity awards on January 1, 2008 to December 31, 2008.

 

Our executive compensation program also recognizes and rewards the achievement of non-financial results that directly affect the Company’s reputation as a leader and its ability to drive change.

 

The Company and our executives have a deep commitment to finding ways to ensure access to high quality, affordable health coverage for the 45 million Americans who are without insurance, and also holding down costs for our members. Our work includes close cooperation and dialogue with employers, customers, doctors and other health care professionals, as well as government leaders, with the goal of finding practical solutions. The Company has outlined five core concepts to bring about pragmatic change in the health care system: broad-based affordable access; public and private sector collaboration; universal participation; building from the strengths and successes of the competitive marketplace; and empowering consumers with information technology.

 

In 2008, we helped drive legislation to bring about mental health parity; worked to increase national support of health information technology; promoted patient safety by leading the effort to have hospitals report medical errors; took proactive steps to increase health literacy among underserved populations; and brought the discussion of disparities in health care to communities across the country.

 

The Company was active throughout the year in promoting our views at all levels of government, including testimony before the Senate Finance Committee, meetings with the presidential candidates and by having senior executives meet with more than 30 state governors. The Company has been successful in advocating our legislative priorities and tying them to the fundamental need for a change in the current health care system.

 

Mr. Williams’ 2008 Compensation

 

 

The Committee did not change Mr. Williams’ salary or target bonus opportunity percentage in 2008. After taking into account other elements of compensation, the Committee believed Mr. Williams’ salary and target bonus opportunity reflected an appropriate mix of fixed versus variable compensation. In reaching its decisions on the other elements of Mr. Williams’ compensation, the Committee evaluated the Company’s superior operating performance and our performance against the Annual Bonus Plan (“ABP”) goals described below. In addition, the Committee made a subjective assessment of Mr. Williams’ individual performance during 2008 and related contribution to our 2008 performance. The Committee also consulted with the non-management members of our Board of Directors.

 

The individual performance factors considered by the Committee and the Board included: leading the Board in the development of a differentiated enterprise strategy, achieving market differentiation by launching new products and services; expanding transparency tools in new markets; and expanding health information technology capabilities. In addition, Mr. Williams continues to strengthen the stewardship of The Aetna Way, our core values and business ethics program, and has significantly improved the Company’s talent development and succession planning processes. Mr. Williams is a sought after and influential leader on health care issues and continues to build effective relationships with our key constituents.

 

The Committee’s 2008 compensation decisions placed Mr. Williams’ compensation generally at the 75th percentile of similarly positioned executives in a comparison group of companies reviewed by the Committee (the “Comparison Group”). The Committee views these decisions as appropriate in light of the Company’s superior operating performance and Mr. Williams’ strong leadership and outstanding individual performance. Mr. Williams’ long-term incentive opportunity is significantly higher than that of the other Named Executive Officers. Market pay for the CEO position, not different compensation policies, drives this difference, as does the Committee’s subjective review of Mr. Williams’ past performance and expected future contribution to the Company’s success.

 

Mr. Bertolini’s 2008 Compensation

 

The Committee increased Mr. Bertolini’s salary 4% and did not change his target bonus opportunity percentage. The salary increase percentage was generally consistent with the salary increase percentage applied across the Company for 2008. In reaching its decisions on the other elements of Mr. Bertolini’s 2008 compensation, the Committee evaluated the Company’s superior operating performance and our performance against the ABP goals described below. In addition, the Committee considered the recommendation of the CEO and made a subjective assessment of Mr. Bertolini’s individual performance during 2008 and related contribution to our 2008 performance.

 

The individual performance factors considered by the Committee included: business operating earnings growth; implementation of new products and services; successful integration of acquisitions; exceeding expense reduction targets; and strong leadership to the Company’s business operations. The 2008 compensation decisions place Mr. Bertolini’s compensation between the median and the 75th percentile of his Comparison Group, which the Committee believes is appropriate given Mr. Bertolini’s experience and individual performance.

 

Mr. Casazza’s 2008 Compensation

 

 

 

The Committee increased Mr. Casazza’s salary 3.9% and did not change his target bonus opportunity percentage. The salary increase percentage was generally consistent with the salary increase percentage applied across the Company for 2008. In reaching its decisions on the other elements of Mr. Casazza’s 2008 compensation, the Committee evaluated the Company’s superior operating performance and our performance against the ABP goals described below. In addition, the Committee considered the recommendation of the CEO and made a subjective assessment of Mr. Casazza’s individual performance during 2008 and related contribution to our 2008 performance.

 

The individual performance factors considered by the Committee included: effective deployment of legal resources to support Company initiatives; support of a broad range of business growth initiatives; litigation management; and advancement of the Company’s state and federal regulatory agenda. The 2008 compensation decisions place Mr. Casazza’s compensation at approximately the median of his Comparison Group, which the Committee believes is appropriate given Mr. Casazza’s experience and individual performance.

Dr. Reisman’s 2008 Compensation

 

 

 

In connection with Dr. Reisman’s appointment as Senior Vice President and Chief Medical Officer in November 2008, the Committee increased his base salary and target bonus opportunity percentage. These increases reflected the increased scope of his responsibilities, and the amounts were determined after a review of the market compensation data for similar positions. In reaching its decisions on Dr. Reisman’s 2008 compensation, the Committee also considered the Company’s superior operating performance and our performance against the ABP goals described below. In addition, the Committee considered the recommendation of the CEO and made a subjective assessment of Dr. Reisman’s individual performance during 2008 and related contribution to our 2008 performance.

 

The individual performance factors considered by the Committee included: strong year over year growth in revenue and earnings; sales successes; advancement of international strategy; and Dr. Reisman’s individual leadership. The multi-year performance payout was based on Dr. Reisman’s prior position as CEO of our ActiveHealth subsidiary. This bonus was determined based on performance by that business unit against specific revenue and earnings growth targets over a two-year period (2007-2008). The payment was 124% of target based on the level of revenue and earnings growth of that business unit. As Chief Medical Officer, Dr. Reisman no longer participates in the ActiveHealth bonus program.

 

The 2008 compensation decisions place Dr. Reisman’s compensation between the median and the 75th percentile of his Comparison Group, which the Committee believes is appropriate given Dr. Reisman’s experience and individual performance.

 

Mr. Zubretsky’s 2008 Compensation

 

 

The Committee increased Mr. Zubretsky’s salary 4% and did not change his target bonus opportunity percentage. The salary increase percentage was generally consistent with the salary increase percentage applied across the Company for 2008. In reaching its decisions on the other elements of Mr. Zubretsky’s 2008 compensation, the Committee evaluated the Company’s superior operating performance and our performance against the ABP goals described below. In addition, the Committee considered the recommendation of the CEO and made a subjective assessment of Mr. Zubretsky’s individual performance during 2008 and related contribution to our 2008 performance.

 

The individual performance factors considered by the Committee included: leadership during an extreme financial markets crisis; implementation of Company financial management initiatives; expansion of his role beyond traditional CFO duties; making significant contributions to strategic business plans; effective management of the shareholder base; and his recognition by the financial media as a respected Company spokesman. The 2008 compensation decisions place Mr. Zubretsky’s compensation between the median and the 75th percentile of his Comparison Group, which the Committee believes is appropriate given Mr. Zubretsky’s experience and individual performance.

 

 

What are the elements of the Company’s executive compensation program?

 

The 2008 compensation program for executives consisted of the following elements:

 

 

The Company also provides health, welfare and retirement benefits to its executive officers and employees generally.

 

How are the total cash and equity compensation amounts determined?

 

Our compensation program, in general, is designed to set total cash and equity compensation opportunity (considered as base salary, performance-based annual bonus and long-term incentive equity awards) for senior executives at an amount that is competitively reasonable and appropriate for our business needs and circumstances. In making compensation decisions, the Committee reviews the cash and equity compensation opportunities available to similarly positioned executives at companies in a Comparison Group or groups selected for each position. The program is designed, in general, to deliver above median total compensation for above median performance and below median total compensation for below median performance. Median is used because it generally represents the level that an informed industry investor would expect based on year-to-year trends and a level of program expense that is consistent with our competitors (in the aggregate). In setting total compensation opportunity, the Compensation Committee does not, on a formulaic basis, set target compensation opportunity at the precise median of the Comparison Group. Instead, the Compensation Committee uses the Comparison Group information as a reference point, and uses the median as a guide to make what is ultimately a subjective decision that balances (i) providing a competitive level of compensation for a position; (ii) executive experience and scope of responsibility; (iii) individual performance; and (iv) retention. There is not a pre-defined formula that determines which of these factors is more or less important, and the emphasis placed on a specific factor may vary among executive officers and will reflect market conditions and business needs at the time the pay decision is made. For 2008, the Named Executive Officers’ total compensation opportunity ranged from median to approximately the 75th percentile.

 

For the Named Executive Officers, the Committee reviews both the compensation paid by our health care competitors (the “Healthcare Comparison Group”) and compensation paid to a comparison group selected from 52 general industry and financial services companies (the “General Industry & Financial Services Comparison Group”). The companies that make up each Comparison Group and why they were selected are

listed on pages 46 and 47. The pay information for each Comparison Group is developed using market pay survey data provided by the Committee’s independent compensation consultant, Frederic W. Cook & Co., Inc. (“Cook”), and from market pay survey data purchased from third-party compensation vendors. The third-party vendors are selected by our human resources department, and the data provided by the vendors is reviewed by Cook. The data presented to the Committee includes a regression analysis (adjustment to market compensation data to account for company size based on revenue). The compensation of executive officers is compared across the executive officer group and with the compensation of other senior executives of the Company for internal pay relativity purposes. The Committee, however, has not established a specific pay relativity percentage.

 

How are base salaries for executive officers determined?

 

Base salaries are used to attract and retain employees by providing a portion of compensation that is not considered “at risk.” In making annual base salary determinations, the Compensation Committee considers the terms of any employment agreement with the executive, the recommendations of the CEO (as to other executives), salary paid to persons in comparable positions in the executive’s Comparison Group, the executive’s experience and scope of responsibility, and a subjective assessment of the executive’s individual past and potential future contribution to Company results. Base salary, as a percent of total compensation, also differs based on the executive’s position and function. Although the Committee has not established a specific ratio of base salary to total compensation, in general, executives with the highest level and amount of responsibility have the lowest percentage of their compensation fixed as salary and have the highest percentage of their compensation subject to performance-based standards (performance-based annual bonus and long-term incentives). The chart on page 35 shows the mix of annual target compensation opportunity (base salary, target performance-based annual bonus, long-term incentive equity award) for 2008 for each of the Named Executive Officers.

 

How are annual performance-based bonuses determined?

 

The purpose of the annual bonus program (“ABP”) is to align the interests of executive officers with those of our shareholders by motivating executive officers to achieve superior annual financial and operational performance. Annual bonuses are paid in cash. All executive officers and managers are eligible to participate in the ABP. The Compensation Committee, after consulting with the Board, establishes specific financial and operational goals at the beginning of each performance year, and annual bonus funding is linked directly to the achievement of these annual goals. Following the completion of the performance year, the Compensation Committee assesses performance against the pre-established performance goals to determine bonus funding for the year. The ABP goals, described in more detail below, are directly derived from our strategic and business operating plan approved by the Board.

 

Under the ABP, if all of the goals are met at the target level in the aggregate, then up to 100% of the target bonus pool is funded. If the goals are exceeded in the aggregate, by a sufficient margin, then up to a maximum of 200% of the bonus pool is funded. If performance falls short of a threshold level, no funding will occur unless the Compensation Committee, at its discretion, decides to approve minimal funding given the circumstances at the time (e.g., retention of an executive). At the threshold performance level, 40% of the target bonus pool is funded. For executive officers subject to Section 162(m) of the Code, the annual bonus cannot exceed $3 million and, if Company performance falls below a specified level of performance, no bonus may be paid.

For 2008, bonus pool funding under the ABP was determined as set forth below:

 

 

 

As a result of the performance noted above, after applying the weightings, the Compensation Committee set the 2008 ABP bonus pool funding at 101.9% of target. Within this pool funding, the Compensation Committee set actual bonus amounts after conducting a subjective review of each executive officer’s individual performance for the year and considering the recommendations of the CEO (as to other executives). In determining the annual bonus of the CEO, the Committee consulted with the nonmanagement members of the Board. The Committee has the discretion to pay an individual executive above or below the target performance based on its assessment of individual performance.

 

The chart below shows for each Named Executive Officer: (i) the 2008 target bonus opportunity as a percentage of base salary paid during the year; (ii) the 2008 bonus earned; and (iii) the 2008 earned bonus as a percentage of the target.

 

 

 

The factors considered in determining individual bonus amounts are discussed on pages 37 through 40.

 

How are long-term incentive equity awards (stock appreciation rights and performance stock units) determined?

 

In 2008, the Company’s executive long-term incentive equity award program was delivered in the form of stock appreciation rights (“SARs”) and performance stock units (“PSUs”). The objective of the SAR and PSU awards is to advance the longer-term interests of the Company and our shareholders by directly aligning executive compensation with increases in our stock price and to incent executives to meet the specified PSU two-year performance goal. These awards complement cash incentives tied to annual performance by providing incentives for executives to increase earnings and shareholder value over time.

As described above, the amount of individual long-term equity awards (SARs and PSUs) is determined so that, in general, when combined with base salary and annual bonus, an executive’s total target compensation opportunity is set at approximately the median level of the compensation paid to similarly positioned executives at companies in the executive’s Comparison Group at median performance. The theoretical value of the long-term incentive equity awards is delivered 70% in SARs and 30% in PSUs. This split aligns the majority (70%) of the long-term incentive value directly with shareholder interests of increasing the value of our stock, and does not reward executives if the stock price declines. While the remaining 30% of the long-term incentive value is also tied to the full value of our stock, vesting will only occur if we meet or exceed specified performance goals. The SAR grants made in 2008 vest pro-rata over a three-year period. The PSU grant made in 2008 will vest 100% only if the two-year performance goal set at the time of grant is met at the target level. These awards are settled in Common Stock net of applicable withholding taxes in order to reduce shareholder dilution resulting from the awards.

 

To determine the number of SARs awarded, the value of the SAR component of an executive officer’s compensation opportunity is converted into a specific number of SARs by assigning each SAR an estimated grant date fair value using a modified Black-Scholes formula. SARs do not deliver any value to an executive unless our stock price appreciates above the grant price. In order for our executives to realize the full 2008 SAR grant date fair value shown in the 2008 Grants of Plan-Based Awards Table, the Company will have to create shareholder value of $7.2 billion (calculated using the number of shares outstanding on December 31, 2008). PSUs are valued based on the closing price of our Common Stock on the date of grant.

 

Given the size of our dividend (currently $.04 per share annually), the Company does not generally pay dividend equivalents on PSUs or previously granted restricted stock units (“RSUs”) due to the administrative cost involved.

 

Why was the long-term incentive equity program changed in 2008?

 

For 2008, the Compensation Committee modified the RSU portion of the long-term incentive equity program for senior executives to replace the RSU portion of the award with PSUs which will vest only if the Company meets a two-year performance goal set at the time of grant. This program design change reinforces and supports our philosophy of paying for performance by changing from a time-based vesting vehicle to a vehicle that considers the Company’s actual performance results against internal goals, while also directly connecting the unit value to the stock price value returns to our shareholders. This change also considers evolving practices at other major public corporations and related increased focus on performance-based compensation. The program is designed to reward executives for the creation of shareholder value.

 

What is the PSU performance goal and why was it selected?

 

The PSUs will vest at 100% if the Company attains compound annual operating earnings per share growth of 15% over the period of 2008-2009 (as defined in the award agreement). The goal was selected because at the time it was set, this represented the Company’s goal for two-year operating earnings growth.

 

Does the Committee consider prior equity grants when making compensation decisions?

 

In making individual long-term incentive equity award decisions, the Compensation Committee generally does not take into account prior equity grants or amounts realized on the exercise or vesting of prior equity grants in determining the number of SARs or PSUs to be granted. The Company’s philosophy is to pay an annualized market value for the executive’s position, sized according to the performance level of the individual in the position. The Committee does review prior equity grants of executives in evaluating the overall design, timing and size of the long-term incentive program. In addition, in assessing the recruitment/retention risk for executives, the Committee considers the value of unvested equity awards.

 

What is the Company’s policy on the grant date of equity awards?

 

As was the case with equity awards granted in prior years, the effective date of the annual long-term incentive equity grant is the stock market trading day after our annual earnings are announced and the exercise price of our SARs is the closing price of our Common Stock on that day. Our annual earnings are announced prior to the opening of trading on the New York Stock Exchange. The Compensation Committee

has selected this timing so that the award value reflects the current market value of our Common Stock, incorporating our most recent full-year earnings information and outlook.

 

The Committee also makes grants during the year, primarily in connection with hiring and promotions. Under our current policy, these grants are generally effective either on the 10th day of the month following the hire or promotion date or on the date of the hire or promotion. The exercise price of SARs is not less than the closing price of our Common Stock on the date of grant.

 

What are the health, welfare and pension benefits offered?

 

To attract and retain employees at all levels, we offer a subsidized health and welfare benefits program which includes medical, dental, life, accident, disability, vacation and severance benefits. Our subsidy for employee health benefits is graduated so that executives pay a higher contribution than more moderately paid employees.

 

In addition, we offer a tax-qualified 401(k) plan and a defined benefit pension plan. These benefits are available to substantially all of our employees, including the Named Executive Officers. As of January 2007, the tax-qualified defined benefit pension formula was reduced for all employees.

 

We also offer a nonqualified supplemental 401(k) plan to provide benefits above Code benefit limits and a supplemental defined benefit pension plan. There is no Company matching contribution in the supplemental 401(k). As of January 2007, the supplemental defined benefit pension plan is no longer used to accrue future pension benefits. Interest continues to accrue on outstanding supplemental pension cash balance accruals, and the supplemental pension plan may continue to be used to credit benefits for special pension arrangements.

 

In some instances, special pension arrangements have been made in order to attract and/or retain key executives. Mr. Williams is the only Named Executive Officer with a contractual arrangement for an enhanced pension benefit. Details of the enhanced pension arrangements are included in the footnotes to the 2008 Pension Benefits Table on page 54. Mr. Williams’ pension enhancement was negotiated as a recruitment incentive when Mr. Williams was hired in 2001.

 

Does the Company have an Employee Stock Purchase Plan?

 

Our tax-qualified employee stock purchase plan is available to substantially all employees, including the Named Executive Officers. This program allows our employees to buy our Common Stock at a 5% discount to the market price on the purchase date (up to $25,000 per year). We offer this program because we believe it is important for all employees to focus on increasing the value of our Common Stock and to have an opportunity to share in our success. Messrs. Williams and Zubretsky participated in this program in 2008.

 

Does the Company provide perquisites to its executives?

 

We provided limited perquisites to the Named Executive Officers in 2008 (see the All Other Compensation table in footnote 6 on page 50). These perquisites represent a very small fraction of the total compensation for each Named Executive Officer. The largest item shown in the perquisites table is personal use of corporate aircraft. In the interest of security, with certain exceptions, the Company requires that the CEO use corporate aircraft for personal travel whenever use of the aircraft is not required for a business purpose. Other senior executives are also permitted to use corporate aircraft for personal travel at the discretion of the CEO. The Committee believes this perquisite is reasonable and appropriate given the demands put on our Named Executive Officers’ time. Perquisites are taxable income to the executive; the Company does not provide a related tax-gross up.

 

What is the Company’s policy on Internal Revenue Code Section 162(m)?

 

Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), limits the tax deductibility of compensation in excess of $1 million paid to certain executive officers, unless the payments are made under plans that satisfy the technical requirements of the Code. The Committee believes that pay over $1 million is, in some circumstances, necessary to attract and retain executives in a competitive marketplace. Annual bonuses, SARs and PSUs are designed so that the compensation paid will be tax deductible by the Company.

In addition, in situations where we pay a base salary amount above $1 million, the Committee has mandated that the amount in excess of $1 million be deferred by the executive to preserve the tax deductibility of the payment. The Committee believes that there are circumstances under which it is appropriate for the Committee not to require deductibility to maintain flexibility or to continue to pay competitive compensation.

 

Do executives have to meet stock ownership requirements?

 

The CEO and other senior executives are subject to minimum stock ownership requirements. The ownership requirements are based on the executive’s pay opportunity and position within the Company and must be met no later than the third anniversary of the executive’s first grant of a long-term incentive award. The ownership levels (which include shares owned and vested stock units but not stock options or SARs) are as follows:

 

Stock Ownership as a Multiple of Base Salary

 

 

As of July 31, 2008, Messrs. Williams, Bertolini, and Casazza and Dr. Reisman each held Common Stock and vested stock units in excess of the requirement applicable to them at that time. Mr. Zubretsky joined the Company in 2007 and had until February 2010 to satisfy the requirement. Given the current turbulence in the financial markets, and the fact that our share price declined 50.6% during 2008, the value of some (but not all) executives’ ownership fell below the required amount. The Committee has agreed to allow executives until December 2010 (additional 24 months) to return to compliance with the policy. The Company’s Code of Conduct prohibits all employees (including executives) and Directors from engaging in hedging strategies using puts, calls or other types of derivative securities based upon the value of our Common Stock.

 

Why do the amounts of severance paid following termination of employment differ among the Named Executive Officers?

 

The narrative and tables beginning on page 57 outline the potential payments made to the Named Executive Officers following their termination of employment under various scenarios. The difference in treatment among the Named Executive Officers is due primarily to the dynamics of negotiation at the time the executive was hired (or promoted), the executive’s position in the Company, market practices and Company policies in effect at the time of entry into the agreement.

 

 

Does the Committee use an independent compensation consultant?

 

The Compensation Committee has engaged Cook to provide independent compensation consulting services to the Committee. The role of the compensation consultant is to ensure that the Compensation Committee has objective information needed to make informed decisions in the best interests of shareholders based on compensation trends and practices in public companies. During the past year, the Committee requested Cook to: (i) assist in the development of agendas and materials for Compensation Committee meetings; (ii) analyze new and existing employment agreements; (iii) provide market data and alternatives to consider for making compensation decisions for the CEO and other executive officers; (iv) assist in the redesign of the Company’s long-term compensation program; and (v) generally keep the Compensation Committee and the Board abreast of changes in the executive compensation environment. In 2008, a representative of Cook attended 8 of 11 Committee meetings, including, when invited, executive sessions. Cook also advises our Board’s Nominating and Corporate Governance Committee regarding Director compensation. In accordance with Compensation Committee policy, the Company does not engage Cook for any services other than in support of the Committees. The Compensation Committee has the sole authority to determine the compensation for and to terminate the services of Cook. For services provided to the Compensation Committee and the Nominating and Corporate Governance Committee in 2008, we paid Cook $84,515.

What is the role of the CEO and the Board of Directors in determining compensation?

 

The CEO personally reviews and reports to the Compensation Committee on the performance of all senior executives and provides specific compensation recommendations to the Committee. The Compensation Committee considers this information in making compensation decisions for these executives, but the Committee does not delegate its decision making authority to the CEO or other individuals. The CEO also provides to the Committee a self-evaluation. The CEO does not, however, present a recommendation for his own compensation. Prior to making any decisions regarding CEO compensation, the Committee consults with the nonmanagement members of the Board of Directors and receives input from Cook. After discussing proposed compensation decisions for the CEO with the nonmanagement members of the Board of Directors, the Committee determines the CEO’s compensation. The CEO is not present when his performance or compensation is evaluated and determined, unless invited by the Committee.

 

Does the Compensation Committee review tally sheets?

 

In setting executive officer compensation, the Compensation Committee, with assistance from Cook, reviews tally sheets prepared for each executive officer. The tally sheets provide information that is in addition to the information shown in the 2008 Summary Compensation Table. The tally sheets show not only current year compensation, but also historical equity gains and in-the-money value of outstanding equity awards (vested and unvested). The tally sheets also show payments that would be paid under various termination of employment scenarios. While compensation decisions are based on competitive market pay data and individual performance, the Committee uses the tally sheet as a reference point, and as a basis for comparing program participation across the executive group. In particular, the Committee uses the tally sheets to understand the effect compensation decisions have on various possible termination of employment scenarios. During 2008, the information in the tally sheets was consistent with the Committee’s expectations and, therefore, the tally sheets did not have an effect on individual compensation decisions.

 

Does the Company have a clawback/recoupment policy?

 

Effective January 1, 2009, the Company adopted a policy regarding the recoupment of performance-based incentives. Under the policy, if the Board of Directors determines that a senior executive of the Company has engaged in fraud or intentional misconduct that has caused a material restatement of the Company’s financial statements, the Board will review the performance-based compensation earned by that senior executive on the basis of the Company’s performance during the periods affected by the restatement. If, in the Board’s view, the performance-based compensation would have been lower if it had been based on the restated results, the Board may seek recoupment of the portion of the performance-based compensation that would not have been awarded to that senior executive. This policy applies to the Company’s executive officers as well as the Chief Accounting Officer and head of Internal Audit. In addition, equity awards issued to employees generally include a provision that allows the Company to recoup gains if the employee violates covenants that prohibit terminated employees from soliciting our customers and employees, disclosing confidential information and, for some employees, providing services to certain competitors of the Company.

 

Does the Committee consider risk in setting performance goals?

 

In the past, when setting performance goals, the Compensation Committee has informally considered risk. The Compensation Committee recently amended its work plan to expressly include a review of performance goals to ensure they are designed to appropriately balance risk and reward. During 2009, the Committee will conduct a further assessment of risk in the Company’s executive compensation program.

 

 

To assist the Committee in its compensation determinations, we compare our compensation and benefit practices to the five health care companies that we consider to be our closest competitors (the “Healthcare Comparison Group”).

 

As a result of continued health care industry consolidation, resulting in a reduction in available high quality talent within the health care industry, the Committee also considers executive compensation levels at companies selected from the S&P 500 that we compete against for talent and capital, or are considered a

“best practice” company, without regard to industry. These companies are considered the “General Industry & Financial Services Comparison Group.”

 

The Committee also reviews broad-based, third party pay survey data as supplemental information to assist in understanding general cross industry pay practices.

 

The companies in each of the Comparison Groups generally remain constant year-to-year to provide the Committee with compensation trend information. The pay information for each group is developed using market pay survey data provided by Cook and purchased from third party compensation vendors. The third-party vendors are selected by our human resources department, and the data provided by the vendors is reviewed by Cook.

 

Healthcare Comparison Group:

 

 

General Industry & Financial Services Comparison Group(1):

 

 

 

The 2008 Summary Compensation Table summarizes the total compensation paid or earned for the fiscal year ended December 31, 2008 by the Chairman and Chief Executive Officer, the Chief Financial Officer and our most highly paid executive officers (collectively, the “NEOs” or “Named Executive Officers”). The 2008 Grants of Plan-Based Awards Table discloses information about the 2008 Annual Bonus Plan awards, as well as the number of PSUs and SARs awarded to each of the Named Executive Officers in the fiscal year ended December 31, 2008. When setting compensation for each of the Named Executive Officers, the Compensation Committee reviews tally sheets which show the executive’s current compensation, including equity and non-equity based compensation.

 

The Company has entered into employment arrangements with certain of the Named Executive Officers. Refer to “Agreements with Named Executive Officers” beginning on page 62 for a discussion of those employment arrangements.

The 2008 Annual Bonus Plan award amounts are disclosed in the 2008 Summary Compensation Table as “Non-Equity Incentive Plan Compensation” and are not categorized as a “Bonus” payment under SEC rules. The amounts listed under “Non-Equity Incentive Plan Compensation” were approved by the Compensation Committee in January of 2009. Please refer to the footnotes to the 2008 Grants of Plan-Based Awards Table beginning on page 51 for a discussion of the PSU and SAR grants made to the Named Executive Officers in 2008.

 

The following table sets forth for 2008 the compensation of the Named Executive Officers. Consistent with SEC reporting regulations, amounts shown in the “Stock Awards” and “Option Awards” columns in the 2008 Summary Compensation Table represent the aggregate expense recognized in 2008 under applicable accounting rules. Accounting rules require the Company to recognize expense in 2008 for portions of equity awards granted from 2005 through and including 2008. As a result, the values illustrated in the “Stock Awards” and “Option Awards” columns are different from the 2008 equity award values approved by the Compensation Committee for 2008. The grant date fair values for equity awards approved by the Compensation Committee for 2008 are shown in the 2008 Grants of Plan-Based Award Table on page 51.