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AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is entered into as of the 12th day
of July, 1999, by and between Xxxxxx XxXxxxxxx ("Executive") and Coventry Health
Care, Inc ("Employer"), a Delaware corporation with its principal place of
business at 0000 Xxxxxxxxx Xxxxx, Xxxxx 000, Xxxxxxxx, XX 00000.
WITNESSETH:
WHEREAS, Executive and Employer are parties to an Employment Agreement
entered into as of the 13th day of March 1998 ("Employment Agreement") under
which, among other things, Executive became employed as Employer's Executive
Vice President commencing on April 1, 1998 (the "Date of Employment"); and
WHEREAS, the Employment Agreement contains a provision stating that
Executive shall be eligible to participate in a three-year long term incentive
compensation plan, the terms and conditions of which were to be mutually agreed
upon by Employer and Executive following the Date of Employment and included as
an amendment to the Employment Agreement; and
WHEREAS, Executive and Employer have reached agreement as to the terms
and conditions of said long term incentive compensation plan;
NOW THEREFORE, in consideration of the premises hereof and of the mutual
promises and agreements contained herein and in the Employment Agreement, the
parties hereto, intending to be legally bound, hereby agree to the following
Long Term Incentive Compensation Plan:
1. DEFINITIONS. For purposes of this Amendment to Employment Agreement:
A. The items defined in paragraph 25 of the Employment
Agreement have the same meaning herein as in the Employment
Agreement.
B. "Area of Performance" shall mean Risk Membership, General
and Administrative Expenses PMPM, Earnings Per Share, or
Medical Costs PMPM.
C. "Commercial Risk Medical Costs PMPM" shall mean the
Employer's medical costs per member per month for all
non-Medicare risk plans.
D. "Commercial Risk Membership" shall mean Employer's Risk
Membership associated with all non-Medicare risk plans.
E. "Earnings Per Share" shall mean the Employer's diluted
earnings per share, calculated according to the Employer's
normal accounting principles, after the exclusion of any
extraordinary items, to the extent such items are disclosed
in the Employer's regular financial statements. With
respect to the determination of the Base Line Performance
for 1998
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as set forth in paragraph 3, below, such extraordinary
charges specifically include the charge taken due to the
AHERF bankruptcy and the charge associated with the
Principal merger.
F. "General & Administrative Expenses PMPM" shall mean the
Employer's general and administrative expenses computed on
a per member per month basis, excluding charges for
depreciation and amortization of goodwill (and similar
intangible write-offs) calculated according to the
Employer's normal accounting principles. With respect to
the determination of the Base Line Performance for 1998 as
set forth in paragraph 3, below, all general and
administrative expenses directly attributable to the health
plans of PHC of Florida, Inc., and PHC of Illinois, Inc.
shall be excluded.
G. "Medical Costs PMPM" shall mean the Employer's medical
costs per member per month, calculated according to the
Employer's normal accounting principles.
H. "Medicare Risk Medical Costs PMPM" shall mean the
Employer's medical costs per member per month for Medicare
risk plans.
I. "Medicare Risk Membership" shall mean Employer's Risk
Membership associated with Medicare risk plans.
J. "PMPM" shall mean "per member per month."
K. "Risk Membership" shall mean the number of individuals
enrolled in a health plan for which Employer bears the
financial risk of medical costs. With respect to the
determination of the Base Line Performance for 1998 as set
forth in paragraph 3, below, it excludes all individuals
enrolled in the health plans of PHC of Florida, Inc., and
PHC of Illinois, Inc. With respect to the determination of
performance for the years 1999, 2000 and 2001, "Risk
Membership" shall exclude all individuals that were the
subject of acquisitions or sales on or after January 1,
1999.
L. "Sub-Area of Performance" shall mean Medicare Risk Medical
Costs PMPM or Commercial Risk Medical Costs PMPM.
2. AREAS OF PERFORMANCE. In addition to the compensation and benefits set
forth in the Employment Agreement, Executive may earn long term incentive
compensation based upon the Employer's actual performance in the following four
Areas of Performance: (1) Risk Membership; (2) General and Administrative
Expenses PMPM (3) Earnings Per Share; and (4) Medical Costs PMPM. The category
of Medical Costs PMPM shall be further divided into two Sub-Areas of
Performance: Medicare Risk Medical Costs PMPM and Commercial Risk Medical Costs
PMPM. In determining Executive's entitlement to long term incentive compensation
hereunder, each Area and Sub-Area of Performance will be assigned the following
weightings:
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AREA OF PERFORMANCE WEIGHTING
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Risk Membership 20 percent
General & Administrative PMPM 30 percent
Earnings Per Share 30 percent
Medical Costs PMPM 20 percent
Medicare Risk Medical Costs PMPM Medicare Risk Membership
divided by total Risk
Membership, as of December
31 of each year
Commercial Risk Medical Costs PMPM Commercial Risk Membership
divided by total Risk
Membership, as of December
31 of each year
3. BASE LINE PERFORMANCE. The Employer's performance as of December 31,
1998 in each of the Areas and Sub-Areas of Performance shall constitute the Base
Line Performance for measuring the rate of change in subsequent years. It is
agreed that the Base Line Performance as of December 31, 1998 in each of the
Areas and Sub-Areas of Performance was as follows:
AREA/SUB-AREA OF PERFORMANCE BASE LINE 12/31/98
---------------------------- ------------------
Risk Membership 1,167,041
General & Administrative PMPM $ 18.72
Earnings Per Share $ 0.49
Medical Costs PMPM
Medicare Risk Medical Costs PMPM $403.79
Commercial Risk Medical Costs PMPM $108.46
4. PERFORMANCE TARGETS. The parties have agreed to certain targeted
percentage rates of change in the Areas of Performance for the years 1999, 2000
and 2001, to be determined as at December 31, 1999, December 31, 2000 and
December 31, 2001, respectively.
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For 1999, the targeted percentage rates of change, based on the Base Line
Performance, are as follows:
AREA/SUB-AREA OF PERFORMANCE PERFORMANCE TARGETS (1999)
---------------------------- --------------------------
Risk Membership + 5 percent
General & Administrative PMPM - 6 percent
Earnings Per Share + 60 percent
Medical Costs PMPM
Medicare Risk Medical Costs PMPM No more than + 5 percent
Commercial Risk Medical Costs PMPM No more than + 3 percent
For 2000, the targeted percentage rates of change are as follows:
AREA/SUB-AREA OF PERFORMANCE PERFORMANCE TARGETS (2000)
---------------------------- --------------------------
Risk Membership + 10 percent
General & Administrative PMPM - 6 percent
Earnings Per Share + 25 percent
Medical Costs PMPM
Medicare Risk Medical Costs PMPM No more than + 6 percent
Commercial Risk Medical Costs PMPM No more than + 4 percent
For 2001, the targeted percentage rates of change are as follows:
AREA/SUB-AREA OF PERFORMANCE PERFORMANCE TARGETS (2001)
---------------------------- --------------------------
Risk Membership + 10 percent
General & Administrative PMPM - 5 percent
Earnings Per Share + 20 percent
Medical Costs PMPM
Medicare Risk Medical Costs PMPM No more than + 6 percent
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Commercial Risk Medical Costs PMPM No more than + 4 percent
For purposes of computing performance in the year 2000, the targeted percentage
rates of change shall be applied to a base equal to the targeted performance
levels for 1999. For purposes of computing performance in the year 2001, the
targeted percentage rates of change shall be applied to a base equal to the
targeted performance levels for 2000.
5. CALCULATION OF TOTAL PERCENTAGE OF TARGET ACHIEVED. For each of the
calendar years 1999, 2000 and 2001, the Total Percentage of Target Achieved
shall be calculated as follows:
A. In each Area of Performance (except Medical Costs PMPM),
the actual level of performance for the year shall be
divided by the targeted level of performance for that year
to yield the Percentage of Target Achieved for that Area of
Performance.
B. In the Medical Costs PMPM Area of Performance, the actual
level of performance for the year in each Sub-Area of
Performance shall first be divided by the targeted level of
performance for that Sub-Area. Since the targets for these
Sub-Areas are based on limiting the growth in medical
costs, the percentage so obtained will then be adjusted as
follows (unless it equals One Hundred Percent (100%)) to
yield the Percentage of Target for that Sub-Area:
(1) If the percentage so obtained is over One Hundred
Percent (100%), the percentage amount over One
Hundred Percent (100%) will be subtracted from One
Hundred Percent (100%).
(2) If the percentage so obtained is less then One
Hundred Percent (100%), the percentage amount less
than One Hundred Percent (100%) will be added to One
Hundred Percent (100%).
The Percentage of Target for each Sub-Area so obtained
shall then be multiplied by the weight assigned to that
Sub-Area to yield the Weighted Percentage achieved for that
Sub-Area. The Weighted Percentages achieved for the two
Sub-Areas shall then be added to obtain the overall
Percentage of Target Achieved for the Medical Costs PPM
Area of Performance.
C. Any Percentage of Target Achieved for an Area of
Performance which is less than Zero Percent (0%) shall be
considered to be Zero Percent (0%). Any Percentage of
Target Achieved for an Area of Performance that is greater
than One Hundred Fifty Percent (150%) of the target shall
be considered to be One Hundred Fifty Percent (150%).
D. The percentage weight assigned to each Area of Performance
shall then be multiplied by the Percentage of Target
Achieved for that Area of
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Performance to yield the Weighted Percentage of Target
Achieved for that Area of Performance for that year.
E. The Weighted Percentage of Target achieved for each Area of
Performance shall then be added to yield the Total
Percentage of Target Achieved for that year in all Areas of
Performance.
6. CALCULATION OF LONG TERM INCENTIVE COMPENSATION. For each of the years
1999, 2000 and 2001, Executive shall be eligible to earn from $250,000 up to
$1,000,000 in long term incentive compensation, depending on the Total
Percentage of Target Achieved for that year in all Areas of Performance, as
follows:
TOTAL PERCENTAGE OF TARGET ACHIEVED AMOUNT
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At least 80 percent but less than 81 percent $ 250,000
At least 81 percent but less than 82 percent $ 275,000
At least 82 percent but less than 83 percent $ 300,000
At least 83 percent but less than 84 percent $ 325,000
At least 84 percent but less than 85 percent $ 350,000
At least 85 percent but less than 86 percent $ 380,000
At least 86 percent but less than 87 percent $ 410,000
At least 87 percent but less than 88 percent $ 440,000
At least 88 percent but less than 89 percent $ 470,000
At least 89 percent but less than 90 percent $ 500,000
At least 90 percent but less than 91 percent $ 550,000
At least 91 percent but less than 92 percent $ 600,000
At least 92 percent but less than 93 percent $ 650,000
At least 93 percent but less than 94 percent $ 700,000
At least 94 percent but less than 95 percent $ 750,000
At least 95 percent but less than 96 percent $ 800,000
At least 96 percent but less than 97 percent $ 850,000
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At least 97 percent but less than 98 percent $ 900,000
At least 98 percent but less than 99 percent $ 950,000
At least 99 percent through 100 percent $1,000,000
Executive will not earn any long term incentive compensation if the Total
Percentage of Target Achieved is less than 80 percent. There will be no increase
in the amount of long term incentive compensation payable hereunder for a Total
Percentage of Target Achieved that is greater than 100 percent. REGARDLESS OF
THE TOTAL PERCENTAGE OF TARGET ACHIEVED, EXECUTIVE WILL NOT BE ELIGIBLE TO EARN
ANY LONG TERM INCENTIVE COMPENSATION IN ANY YEAR UNLESS THE EMPLOYER ACHIEVES AT
LEAST 80% OF THE TARGETED PERCENTAGE RATE OF INCREASE IN THE EARNINGS PER SHARE
AREA OF PERFORMANCE FOR THAT YEAR. Long term incentive compensation for which
Executive is eligible hereunder shall be considered earned on January 1, 2000
(for the 1999 performance year), on January 1, 2001 (for the 2000 performance
year) and on January 1, 2002 (for the 2001 performance year), respectively.
7. PAYMENT OF EARNED LONG TERM INCENTIVE COMPENSATION. Except as
otherwise provided herein, any long term incentive compensation earned will be
paid on the first business day in April of the year following the calendar year
on which it is based, i.e. incentive compensation earned for the year 1999 will
be paid on April 3, 2000, incentive compensation earned for the year 2000 will
be paid on April 2, 2001 and incentive compensation earned for the year 2001
will be paid on April 1, 2002. Payment shall be made in cash, less required
withholdings.
8. FORFEITURE OF EARNED LONG TERM INCENTIVE COMPENSATION. If the
employment of Executive with Employer is terminated prior to the date of payment
(a) by Employer for Good Cause, as defined in Section 25 of the Employment
Agreement, or (b) by Executive for any reason other than Good Reason, as defined
in Section 25 of the Employment Agreement, then Executive shall forfeit any
right to payment of such earned long term incentive compensation.
9. ELIGIBILITY TO EARN LONG TERM INCENTIVE COMPENSATION AFTER
TERMINATION. If, prior to the date on which any long term incentive compensation
is earned pursuant to paragraph 6 above, the employment of Executive is
terminated (a) by Employer for any reason other than Good Cause, as defined in
Section 25 of the Employment Agreement, or (b) by Executive for Good Reason, as
defined in Section 25 of the Employment Agreement, then Executive shall remain
eligible to earn and be paid a portion of the long term incentive compensation
for the performance year in which such termination occurs, based on the
performance targets set forth herein, pro-rata based on the percent of the
performance year for which he was employed.
10. CHANGE IN CONTROL. In the event that there is a change in control of
Employer, as defined in paragraph 25(c) of the Employment Agreement, Executive
shall be paid in full for any earned long term incentive compensation, and shall
be paid the following percentage of the maximum amount of any long term
incentive compensation not yet earned:
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CHANGE OF CONTROL YEAR PERCENTAGE
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1999 50%
2000 75%
2001 100%
All such payments will be made at the time of closing of the transaction giving
rise to the change in control.
11. EXECUTIVE ASSIGNMENT. No interest of Executive or his spouse or any
other beneficiary under this Amendment to Employment Agreement, or any right to
receive any payment or distribution hereunder, shall be subject in any manner to
sale, transfer, assignment, pledge, attachment, garnishment, or other alienation
or encumbrance of any kind, nor may such interest or right to receive a payment
or distribution be taken, voluntarily or involuntarily, for the satisfaction of
the obligations or debts of, or other claims against, Executive or his spouse or
other beneficiary, including claims for alimony, support, separate maintenance,
and claims in bankruptcy proceedings.
12. DEATH. If Executive dies during the term of this Agreement all long
term incentive compensation amounts earned pursuant to paragraph 7, above, prior
to his death shall be paid to his surviving spouse. On the death of the survivor
of Executive and his spouse, no further long term incentive compensation amounts
will be paid.
13. BENEFITS UNFUNDED. All rights of Executive and his spouse or other
beneficiary under this Amendment to Employment Agreement shall at all times be
entirely unfunded and no provision shall at any time be made with respect to
segregating any assets of Employer for payment of any amounts due hereunder.
Neither Executive nor his spouse or other beneficiary shall have any interest in
or rights against any specific assets of Employer, and Executive and his spouse
or other beneficiary shall have only the rights of a general unsecured creditor
of Employer.
14. NOTICES. Any notice required or permitted to be given under this
Amendment to Employment Agreement shall be sufficient if in writing and sent by
registered or certified mail to his residence in the case of Executive, or to
its principal office in the case of the Employer and the date of receipt shall
be deemed the date which such notice has been provided.
15. WAIVER OF BREACH. The waiver by either party of any provision of this
Amendment to Employment Agreement shall not operate or be construed as a waiver
of any subsequent breach by the other party.
16. ASSIGNMENT. The rights and obligations of the Employer under this
Amendment to Employment Agreement shall inure to the benefit of and shall be
binding upon the successors and assigns of the Employer, subject to the
provisions of paragraph 10, above. The Executive acknowledges that the services
to be rendered by him are unique and personal, and Executive may not assign any
of his rights or delegate any of his duties or obligations under this Amendment
to Employment Agreement.
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17. ENTIRE AGREEMENT. This instrument contains the entire agreement of
the parties and supersedes all other prior agreements, employment contracts and
understandings, both written and oral, express or implied with respect to the
subject matter of this Amendment to Employment Agreement and may not be changed
orally but only by an agreement in writing signed by the party against whom
enforcement of any waiver, change, modification, extension or discharge is
sought.
18. APPLICABLE LAW. This Amendment to Employment Agreement shall be
governed by the laws of the State of Maryland, without giving effect to the
principles of conflicts of law thereof.
19. HEADINGS. The sections, subjects and headings of this Amendment to
Employment Agreement are inserted for convenience only and shall not affect in
any way the meaning or interpretation of this Agreement.
20. COUNTERPARTS. This Amendment to Employment Agreement may be executed
in counterparts, each of which shall be deemed an original.
21. SEVERABILITY. In the event any provision of this Amendment to
Employment Agreement is held illegal or invalid, the remaining provisions of
this Amendment to Employment Agreement shall not be affected thereby.
IN WITNESS WHEREOF, the parties have executed this Amendment to
Employment Agreement on the day and year first written above.
/s/ Xxxxxx XxXxxxxxx
-------------------------------
Xxxxxx XxXxxxxxx
COVENTRY HEALTH CARE INC
By: /s/ Xxxxx X. Xxxx
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Xxxxx X. Xxxx
President and Chief Executive Officer
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