2008 Aetna Inc.

Notice of Annual Meeting and

Proxy Statement

 

 

To Our Shareholders:

 

Aetna Inc.’s 2008 Annual Meeting of Shareholders will be held on Friday, May 30, 2008, at 9:30 a.m. Central time at The Peninsula Chicago hotel in Chicago, Illinois, and we hope you will attend.

 

 

This booklet includes the Notice of the Annual Meeting and Aetna’s 2008 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 21, 2008

 

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 Peninsula Chicago hotel in Chicago, Illinois, on Friday, May 30, 2008, at 9:30 a.m. Central time for the following purposes:

 

 

The Board of Directors has fixed the close of business on March 28, 2008 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 28, 2008 record date or their authorized representatives. Parking at The Peninsula Chicago hotel will be available to all persons to whom the Annual Meeting is open. Validated parking is available to all shareholders who are admitted to the Annual Meeting. See the reverse side of this page for directions to The Peninsula Chicago 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, your name will be placed 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 28, 2008) 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 Proxy Statement and the Company’s 2007 Annual Report, Financial Report to Shareholders and 2007 Annual Report are available on Aetna’s Internet website at www.aetna.com/proxymaterials.

 

By order of the Board of Directors,

 

 

Christopher M. Todoroff

Vice President and Corporate Secretary

April 21, 2008

DIRECTIONS TO THE PENINSULA CHICAGO HOTEL

 

 

 

Table of Contents

 

 

AETNA INC.
151 FARMINGTON AVENUE, HARTFORD, CONNECTICUT 06156
APRIL 21, 2008

 

PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON FRIDAY, MAY 30, 2008

 

This proxy statement and related 2007 Annual Report, Financial Report to Shareholders and 2007 Annual Report 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 and/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 30, 2008, 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 21, 2008.

 

 

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 2008, 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 28, 2008, 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 29, 2008.

 

 

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 directions 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 directions 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 29, 2008), 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 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 Board of Directors. Please see “Director Elections — Majority Voting Standard” on page 9. An ABSTAIN vote on the election of Directors will have no effect on the outcome of the election. 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. If you vote to ABSTAIN, your shares will be counted as present for purposes of determining whether a majority of outstanding shares are present to hold the Annual Meeting.

 

 

A: If you sign and date your proxy card with no further instructions, your shares will be voted (1) FOR the election of each of Aetna’s Director 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 2008, 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 2008 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 unvoted shares on any of those proposals. Any unvoted 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 Peninsula Chicago hotel in Chicago, Illinois. Directions to The Peninsula Chicago 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 28, 2008 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, your name will be placed 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 28, 2008) 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, 2008.

 

 

A: Each share of Aetna’s Common Stock outstanding as of the close of business on March 28, 2008, the RECORD DATE, is entitled to one vote at the Annual Meeting. At the close of business on March 28, 2008, 486,343,202 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 28, 2008 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. Both abstentions and 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.

 

 

A: Under Pennsylvania corporation law and Aetna’s Articles of Incorporation and By-Laws, the approval of any corporate action taken at the shareholder 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 2008 Aetna Inc. Notice of Annual Meeting and Proxy Statement and 2007 Aetna Annual Report, Financial Report to Shareholders and 2007 Aetna Annual Report 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 2007 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 2007 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 2007 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.

 

 

In order for a shareholder proposal to be raised from the floor during next year’s Annual Meeting instead of being submitted for inclusion in Aetna’s proxy statement, the shareholder’s written notice must be RECEIVED by Aetna’s Corporate Secretary at least 90 calendar days before the date of next year’s Annual Meeting and must contain the information required by Aetna’s By- Laws. Please note that the 90-day advance notice requirement relates only to matters a shareholder wishes to bring before the Annual Meeting from the floor. It does not apply to proposals that a shareholder wishes to have included in Aetna’s proxy statement; that procedure is explained in the paragraph above.

 

 

 

 

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 2007, the Board determined, among other matters, to (a) provide for majority voting in uncontested elections of Directors in our Articles of Incorporation, which received the required shareholder vote at the 2007 Annual Meeting and (b) raise the retirement age for Directors to 75.

 

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 have no effect on the outcome of the election but will be counted for purposes of determining whether a quorum is present to hold the Annual Meeting. 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, if any, 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 2007, the nonmanagement Directors, each of whom is independent, met six 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 held by the Board regularly, 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 who is also the 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 an Annex 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 2008. 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, 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. The Board conducted a similar review in 2007 and determined, among other things, that Michael H. Jordan, who served as a Director until April of 2007, was independent and did not have any material relationships with the Company during 2007.

 

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 interest 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, which is a subsidiary of Exelon Corporation. 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 Active Health Management subsidiary. Dr. Newhouse is employed by Harvard University but is not involved in Harvard’s relationship with the Company. The Company may pay tuition to Yale University in order for Company employees to participate in certain educational programs at Yale. Mr. Garten is employed by Yale University. 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 consist of 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 2007, the Board met seven times. The average attendance of Directors at all meetings during the year was 94%, 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 2007 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 8-K filed on December 6, 2006. 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, 2008, the key standing Committees of the Board, the membership of such Committees and the number of times each such Committee met in 2007. 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 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. In accordance with the policy formalized by the Committee in 2006, 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 Company’s Nominating Committee regarding Director compensation. The Company does not engage Cook for any services other than in support of these Committees. A representative of the consultant attended eight of the Compensation Committee’s meetings in 2007. The Committee conducts an annual evaluation of its performance.

 

As explained below, the Nominating Committee reviews the compensation of, and benefits for, Directors and makes Director compensation recommendations to the Board.

 

assists the Board in identifying individuals qualified to become Board members, consistent with criteria approved by the Board; oversees the organization of the Board to discharge the Board’s duties and responsibilities properly and efficiently; and identifies best practices and recommends to the Board corporate governance principles. Other specific duties and responsibilities of the Nominating Committee include: annually assessing the size and composition of the Board; annually reviewing and recommending Directors for continued service; reviewing the compensation of, and benefits for, Directors; recommending the retirement policy for Directors; coordinating and assisting the Board in recruiting new members to the Board; reviewing potential conflicts of interest or other issues arising out of other positions held or proposed to be held by, or any changes in circumstances of, a Director; recommending Board Committee assignments; overseeing the annual evaluation of the Board; conducting an annual performance evaluation of the Nominating Committee; conducting a preliminary review of Director independence and the financial literacy and expertise of Audit Committee members; and interpreting, as well as reviewing any proposed waiver of, Aetna’s Code of Conduct, the code of business conduct and ethics applicable to Directors. The Nominating Committee has the authority to retain counsel and other experts or consultants as it may deem appropriate. Further, the Nominating Committee has the sole authority to select, retain and terminate any search firm used to identify Director candidates and to approve the search firm’s fees and other retention terms.

 

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 an outside consultant, but neither the Nominating Committee nor the Board delegates any Director compensation decision making authority. As discussed above in “Committee on Compensation and Organization,” 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 2008 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 12 Director nominees named in this Proxy Statement based on that recommendation.

 

Roger N. Farah has not been elected previously to the Board by shareholders. In 2007, 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. Farah to the full Board, and the Board appointed Mr. Farah a Director of Aetna effective June 28, 2007.

 

Aetna will nominate 12 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 12 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 as of April 1, 2008, and a brief description of the business experience of each for at least the last five years.

 

The 12 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 receive 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 12 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 12 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 its review, the Nominating Committee and the Board consider, among other factors, the Director compensation practices at a comparative group of public companies (the “comparison 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 stock-based 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 2007, 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 28, 2008, 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 upon the value of the Common Stock.

 

For 2007, Director compensation for Aetna’s nonmanagement Directors approximated the median level paid to nonmanagement Directors in 2006 in relevant comparison groups.

 

The comparison groups used by the Nominating Committee consisted of 28 companies:

 

 

In line with the competitive compensation of the comparison groups, the Board approved the following changes for 2007:

 

 

 

¹ The nine companies are Amerigroup Corporation, Centene Corporation, CIGNA Corporation, Coventry Health Care, Inc., Health Net, Inc., Humana Inc., Molina Healthcare, Inc., UnitedHealth Group Incorporated and WellPoint, Inc.

² The nineteen companies are American Express Company, American International Group, Inc., Becton, Dickinson and Company, Bristol-Myers Squibb Co., Caterpillar Inc., Coca-Cola Co., Colgate-Palmolive Company, Dell Inc., The Dow Chemical Co., E.I. du Pont de Nemours and Company, Electronic Data Systems Corporation, The Hartford Financial Services Group Inc., Hewlett-Packard Company, Johnson & Johnson, MedImmune, Inc., Merck & Co., Inc., Pacific Gas & Electric Corp., Pfizer Inc. and The Procter & Gamble Co.

 

 

Details regarding retainer fees for Board and Committee service are set forth in footnote 2 to the 2007 Director Compensation Table.

 

The 2007 Director Compensation Table sets forth for 2007 the total compensation of each of the Directors. Actual compensation for any Director, and amounts shown in the 2007 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 2007 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 estimated fair value of equity awards held by each Director that were required to be expensed during 2007 for accounting purposes, not the full grant date values for 2007 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 2007.

 

Because of the factors discussed above, the total compensation of some Directors, as listed in the 2007 Director Compensation Table, varies from that of other Directors:

 

 

 

 

 

As of December 31, 2007, the number of outstanding stock awards, consisting solely of RSUs, held by each Director was as follows: Frank M. Clark, 1,391; Betsy Z. Cohen, 2,579; Molly J. Coye, M.D., 2,059; Roger N. Farah, 0; Barbara Hackman Franklin, 2,579; Jeffrey E. Garten, 2,579; Earl G. Graves, 2,579; Gerald Greenwald, 2,579; Ellen M. Hancock, 2,579; Michael H. Jordan, 0; Edward J. Ludwig, 2,579; and Joseph P. Newhouse, 2,579. Refer to the Beneficial Ownership Table on page 32 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 2007 Director Compensation Table include amounts that were deferred by Directors during 2007 under the Director Plan. Under the Director Plan, nonmanagement Directors may defer payment of some or all of their annual retainer fees and dividend equivalents paid on stock units 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 (4.7% per year for the period January to June 2008).

 

Under the Director Plan, beginning at age 68, Directors are allowed to make an annual election to diversify up to 100% of their voluntarily deferred stock unit account (annual cash retainer) out of stock units and into an interest account. During 2007, 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.

 

On April 27, 2007, Aetna granted each nonmanagement Director then in office Annual Units of 1,071 deferred stock units convertible upon retirement from Board service into shares of the Common Stock. The Annual Units were valued at $50,401 as of the date of grant. Generally, to become fully vested in these units, a Director must complete, in the case of the Initial Units, three years of service and, in the case of the Annual Units, one year of service, each 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 three years or one year of service, as applicable, from the grant date of any 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.

 

Nonmanagement Directors were granted RSUs under the Director Plan during 2007. On February 9, 2007, Aetna granted each nonmanagement Director then in office 1,391 RSUs, which were valued at $59,215 as of the date of grant.

 

The RSUs granted in 2007 vest in three substantially equal annual installments beginning February 9, 2008, and are payable at vesting in shares of the Common Stock or can be deferred 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 immediately 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 joining the Board. After a review of the Program and competitive practices, the Board has decided to close the Program, and new Directors who join 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 (this was 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 by life insurance on the lives of the participating 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 4 to the 2007 Director Compensation Table on page 28 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 4.75%.

 

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 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 functions on Company aircraft.

 

2008 Nonmanagement Director Compensation

 

Following a review with Cook, the Board set the value of cash and equity compensation for Aetna nonmanagement Directors for 2008 to approximate the median nonmanagement Director compensation for 2007 at a relevant comparative group of public companies.

 

The 2008 comparison group is a blend of:

 

 

The 2008 compensation consists of:

 

 

In addition, nonmanagement Directors, upon their initial election to the Board, will continue to receive a one-time grant of Initial Units. Annual Units will not be granted to Directors in 2008.

 

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, 2007, our Directors and executive officers timely met all applicable SEC filing requirements, except that the initial Form 3 filed on behalf of Mr. Zubretsky was amended after the filing date to correct the number of non-derivative securities reported.

 

The following table presents, as of December 31, 2007, 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 28, 2008, 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 2007 Summary Compensation Table on page 49, 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, and none of the shares reported are pledged as security.

Notes to Beneficial Ownership Table

 

 

 

 

 

Our executive compensation program recognizes and rewards the achievement of financial results.

 

2007 was a very successful year for the Company and its shareholders.

 

 

We believe the Company’s executive compensation philosophy has directly contributed to Aetna’s superior financial performance and significant increase in shareholder value.

The chart below compares our cumulative total return over the past five years versus our competitors and the S&P 500.

 

 

* The Competitor Group is composed of the companies included in the Healthcare Comparison Group (listed on page 47). S&P 500 is the Standard & Poor’s 500 Stock Index. The chart assumes reinvestment of dividends.

 

More than any other element, our focus on equity based compensation aligns the interest of our executives with shareholders and has been a driver of the growth of our market capitalization. The growth in our market capitalization has created value for our shareholders and our senior executives.

 

The chart below shows the mix of annual target compensation opportunity (base salary, target performance-based annual bonus, long-term incentive equity award) for 2007 for each Named Executive Officer (Messrs. Bennett and Callen are not included in this chart because they terminated employment during 2007).

 

 

Our executive compensation program also recognizes and rewards the achievement of non-financial results for the Company.

 

In 2007, we continued to lead efforts to improve health care quality, access and affordability in the United States.

 

 

We believe our compensation program must:

 

 

 

 

Summary of 2007 Compensation Decisions.  The alternative compensation table below summarizes the individual compensation decisions made by the Compensation Committee for 2007. The table reflects how the Committee views the annual total direct compensation opportunity of our Named Executive Officers for 2007. As described in more detail below, the alternative compensation table differs from the 2007 Summary Compensation Table shown on page 49.

 

 

The alternative compensation table above differs from the 2007 Summary Compensation Table shown on page 49, which is prepared in accordance with Securities and Exchange Commission (“SEC”) rules. SEC disclosure rules require that we include in the 2007 Summary Compensation Table the value of equity awards that are expensed in 2007 under applicable accounting rules. Under these rules, the value of equity awards shown in the 2007 Summary Compensation Table includes the value of equity awards granted in prior years, and the amounts shown as expensed in any one year can be affected by the retirement eligibility of an executive. As a result, while the salary and cash bonus award columns of the 2007 Summary Compensation Table presents the annual cash incentives for the performance year indicated, the equity award values presented represent accounting expenses incurred in the year, not the value of the awards approved by the Committee. Additionally, because the Committee approves the dollar value of equity awards in advance of the effective date of the grant, the Committee values the SAR component of an executive officer’s compensation opportunity using an estimated grant effective date Black-Scholes value (for 2007 grants, this estimated value was 33.3%). The actual grant date fair value used for calculating

accounting expense is determined on the effective date of the grant in accordance with accounting rules. As a result, the actual grant date fair value used to calculate accounting expense for SARs may differ from the estimated grant effective date value approved by the Committee. The 2007 Summary Compensation Table also reflects indirect compensation (such as pension accruals and perquisites) which we have not repeated in the alternative compensation table above.

 

Mr. Williams’ 2007 Compensation.

 

 

The Committee did not change Mr. Williams’ salary or target bonus opportunity because, after taking into account other elements of compensation, the Committee believed Mr. Williams’ salary and target bonus opportunity reflects an appropriate mix of fixed versus variable compensation. In reaching its decisions on the other elements of Mr. Williams’ compensation, the Committee evaluated our overall superior financial 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 2007 and related contribution to our 2007 performance. The Committee also consulted with the nonmanagement members of our Board of Directors. The individual performance factors considered included: the continued success in implementation of our consumerism strategy, including growth of membership in that market segment; implementation of medical management strategies; effective execution of acquisition strategies; expansion of the availability of products and services; penetration of new customer market segments; sustained leadership in medical cost and quality; consistent improvement of operating efficiencies and Board of Directors management. In addition, the Committee believes that Mr. Williams continues to champion The Aetna Way, our core values and business ethics program, and has improved the Company’s talent development and succession planning processes. The Committee also noted that Mr. Williams has become a sought after and influential leader on health care issues and that he continues to build effective relationships with our key constituents. The Committee’s 2007 compensation decisions place Mr. Williams’ compensation above the median of similar positioned executives in a comparison group of companies reviewed by the Committee (the “Comparison Group”) (75th percentile) which the Committee views as appropriate given the Company’s superior financial performance and Mr. Williams’ strong leadership and individual performance. Mr. Williams’ long-term incentive opportunity is significantly higher than the other Named Executive Officers. This difference is not the result of different policies, but rather, is driven by the market pay for the CEO position and the Committee’s subjective review of Mr. Williams’ past performance and expected future contribution to the success of the Company.

 

Mr. Bertolini’s 2007 Compensation.

 

 

In connection with Mr. Bertolini’s appointment as President on July 24, 2007, his base salary and target bonus opportunity were increased. These increases reflect the increased scope and responsibility of his position as President and the amounts were chosen after a review of the market compensation data for similar positions and consideration of the amount paid to Mr. Williams when he was appointed President. In addition, the Committee approved a one-time promotion SAR grant of $5,000,000. The amount and form of

this award was chosen to provide a significant compensation opportunity that is paid only if we continue our financial success and to serve as a retention vehicle (the promotion SAR vests ratably over 3 years). In reaching its decisions on the other elements of Mr. Bertolini’s compensation, the Committee evaluated our overall superior financial performance and our performance against the ABP described below. In addition, the Committee considered the recommendation of the CEO and made a subjective assessment of Mr. Bertolini’s individual performance during 2007 and related contribution to our 2007 performance. The individual performance factors included: net membership growth; strong product service area and distribution expansion in specified markets; completion of strategic acquisitions; implementation of new products and services; and his leadership. The 2007 compensation decisions place Mr. Bertolini’s compensation above the median (just below the 75th percentile) of the Comparison Group which the Committee believes is appropriate given the scope of Mr. Bertolini’s position, his experience and individual performance, and is necessary to retain Mr. Bertolini’s services.

 

Mr. Casazza’s 2007 Compensation.

 

 

The Committee increased Mr. Casazza’s salary 3.5% and did not change his target bonus opportunity. The salary increase was consistent with the salary increase percentage applied across the Company generally. In reaching its decisions on the other elements of Mr. Casazza’s 2007 compensation, the Committee evaluated our overall superior financial 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 2007 and the related contribution to our 2007 performance. The individual performance factors included: effective deployment of legal resources to support Company growth initiatives; support of the Company’s capital market initiatives; litigation management and advancement of the Company’s state and federal regulatory agenda. The 2007 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.

 

Mr. Holt’s 2007 Compensation.

 

 

The Committee increased Mr. Holt’s salary by 5% and did not change his target bonus opportunity. The salary increase was slightly higher than the salary increase applied across the Company generally due to Mr. Holt’s strong individual performance. In reaching its decisions on the other elements of Mr. Holt’s 2007 compensation, the Committee evaluated our overall superior financial performance, our performance against the ABP goals described below, and Mr. Holt’s individual performance. The Committee also considered the recommendations of the CEO. Due to Mr. Holt’s position as Chief Investment Officer, his annual bonus amount is determined slightly differently than the other Named Executive Officers. His bonus is determined 60% based on the performance of the investment and other units he oversees and 40% based on our performance against the ABP goals discussed below. The investment and other unit business goals established for Mr. Holt related to: (i) investment return versus our internal operating plan; (ii) large-case pension results versus our internal operating plan; and (iii) leadership. In 2007, Mr. Holt’s performance against these goals was at the superior level. This special bonus weighting is the reason Mr. Holt’s 2007

annual bonus as a percent of his bonus target is higher than the other Named Executive Officers. The 2007 compensation decisions place Mr. Holt’s compensation above the median (just below the 75th percentile) of his Comparison Group which the Committee believes to be appropriate given Mr. Holt’s experience and strong individual performance.

 

Mr. Zubretsky’s 2007 Compensation.

 

 

In connection with Mr. Zubretsky’s offer of employment, the Committee approved the salary, target bonus opportunity, and long-term incentive set forth above. These amounts place Mr. Zubretsky’s cash and equity compensation opportunity above the median (just below the 75th percentile) of his Comparison Group which the Committee believed was necessary to induce Mr. Zubretsky to leave his then current position and join the Company as Chief Financial Officer. The special equity grant on hire was designed to compensate him for the forfeiture of certain compensation and benefits from his former employer and the amount was determined based on the amount forfeited. The special equity award vests ratably over a three-year time period and also serves as a retention vehicle. In determining Mr. Zubretsky’s 2007 annual bonus award, the Committee considered our performance against the ABP goals discussed below, the recommendation of the CEO and a subjective assessment of Mr. Zubretsky’s individual performance. The individual performance factors included: effective assimilation to our business and culture; development of improvements to our strategic and operating planning processes; development of a strong, visible role with investors; and providing strategic and operational direction in the execution of our acquisition strategy.

 

 

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

 

The 2007 compensation program for executives consisted of the following elements:

 

 

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 opportunity available to similarly positioned executives at companies in a Comparison Group 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 2007, the Named Executive Officers’ total compensation opportunity ranged from median to the 75th percentile.

 

The Comparison Group for each position differs in order to review pay decisions against the publicly traded companies that are major competitors in the marketplace for talent at that position and due to availability of pay data. For positions that are primarily health care related, the Comparison Group is made up of the Company’s primary health care competitors (the “Healthcare Comparison Group”). For other positions, the Comparison Group is selected from forty-seven general industry and financial services companies (the “General Industry & Financial Services Comparison Group”). For some positions, including the Named Executive Officers, the Committee reviews both the Healthcare Comparison Group and the General Industry & Financial Services Comparison Group. For Mr. Holt, the Committee reviewed the McLagan Investment Management Survey and the General Industry & Financial Services Group, due to Mr. Holt’s position as Chief Investment Officer. The Comparison Group for each Named Executive Officer and the companies that make up each Comparison Group are listed on pages 47 and 48.

 

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 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 salary determinations, the Compensation Committee considers the terms of any employment contract 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, 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 the highest percentage subject to performance-based standards (performance-based annual bonus and long-term incentives). The chart on page 36 shows the mix of annual target compensation opportunity (base salary, target performance-based annual bonus, long-term incentive equity award) for 2007 for each Named Executive Officer who was actively employed on December 31, 2007.

 

How are annual performance-based bonuses determined?

 

The purpose of the annual bonus program is to align the interests of executive officers with 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. This plan, in turn, is developed, in part, based upon a review of what we need to accomplish to meet or exceed the performance of our competitors. Achievement of

our internal financial operating plan approved by the Board is considered target financial performance under the ABP and is the highest weighted performance category under that Plan.

 

For 2007, bonus pool funding under the ABP depended upon performance against the following measures (each weighted as noted):

 

 

These measures were selected because they represent key elements of our financial and strategic business plan approved by the Board. We have not disclosed the specific financial and strategic targets in this Compensation Discussion and Analysis because we believe that this information is competitively sensitive and disclosure of this information would result in competitive harm to the Company. In many instances, achievement of the targets would require early success on strategic initiatives that span multiple years. We intentionally set ambitious targets that require our executives and the entire organization to perform at a high level in order to achieve the business results necessary for payment under the ABP. The targets are difficult to achieve.

 

In recent years, the Company has consistently performed as one of the top companies in the Healthcare Comparison Group on key financial measures important to shareholders. Despite this performance, during this same period, funding under the ABP has been below or only slightly above target levels.

 

LINKAGES TO SELECT INTERNAL ABP MEASURES

 

 

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, 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 threshold performance level, 40% of the target bonus pool is funded. For executive officers subject to Section 162(m) of the Code, if Company performance falls below a specified level of performance no bonus may be paid, and the annual bonus cannot exceed $3 million.

 

For 2007, we reported operating earnings of $1.8 billion, which exceeded the targeted level of operating earnings, and the financial goals in the aggregate were met above the target level. The health cost management goal was met above the target level. With respect to the profitable growth goals, we performed below the target level. Performance relative to the constituent focus goals was above the target level. As a result of this performance, after applying the weightings noted above, the Compensation Committee set the 2007 ABP bonus pool funding at just above the target level (104.8% of target). Within this pool funding, the

Compensation Committee set actual bonus amounts after a subjective review of each executive officer’s individual performance for the year and consideration of recommendations from 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. A discussion of the bonus decisions for each Named Executive Officer begins on page 38.

 

The chart below shows:  (i) the 2007 target bonus opportunity as a percentage of base salary paid during the year; (ii) the 2007 bonus earned; and (iii) the 2007 earned bonus as a percentage of the target for each Named Executive Officer (Messrs. Bennett and Callen are not included in this chart because they terminated employment during 2007).

 

 

 

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

 

The Company’s long-term incentive equity award program is delivered in the form of stock appreciation rights (“SARs”) and restricted stock units (“RSUs”). The objective of the SAR and RSU 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. These awards complement cash incentives tied to annual performance by providing incentives for executives to increase shareholder value over time. As described above, the amount of the long-term equity award (SARs and RSUs) is determined, in general, when combined with base salary and annual bonus, to set total target compensation opportunity 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 RSUs (as described above, the total target opportunity as a percent of median may be adjusted upward or downward at the subjective discretion of the Committee). The grants made in 2007 vest pro-rata over a three year period. The awards are settled in Common Stock net of applicable withholding taxes in order to reduce shareholder dilution resulting from the awards.

 

We believe that this mix of long-term incentives, which is more heavily weighted to deliver compensation only when shareholder value is created, provides a balance between attraction, retention and motivation of executives and the creation of shareholder value. While both SARs and RSUs serve to motivate executives to increase our Common Stock price, the award is more heavily weighted toward SARs to deliver compensation only when shareholder value is created. RSUs, on the other hand, provide a base value that serves as a vehicle to attract and retain executives but also offers an upside potential if shareholder value is created. The 70/30 mix was chosen because it supports our strategic growth objectives by placing the large majority of the long-term award at risk and connecting it directly to stock price appreciation.

 

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 effective 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 2007 SAR grant value shown in the 2007 Grants of Plan-Based Awards Table, we will have to create shareholder value of $7 billion. (Calculated using the number of shares outstanding on December 31, 2007.)

RSUs 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 RSUs due to the administrative cost associated with administering this feature.

 

Will there be changes to the long-term incentive equity program for 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 Performance Stock Units (“PSUs”), which will vest only if the Company meets a two-year performance goal set at the time of grant. The decision to redesign the program took into account evolving practices at other major public corporations and is designed to reward executives for the further creation of shareholder value. We believe this change supports and reinforces our performance-based culture, which focuses on delivering rewards when results are achieved or exceeded. The change from RSUs to PSUs in 2008 does not impact the 2007 compensation reported in this Proxy Statement.

 

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 RSUs 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 consider prior equity grants (and related wealth accumulation) 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. 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 new hires and promotions. Under our current policy, these grants are effective either on the 10th day of the month following the hire/promotion date or on the date of the hire/promotion. The strike 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) and 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. Messrs. Williams and Bennett are the only Named Executive Officers with contractual arrangements for an enhanced pension benefit. Details of the enhanced pension arrangements are included in the footnotes to the pension tables. Mr. Williams’ pension enhancement was negotiated as a recruitment incentive when Mr. Williams was hired in 2001. Mr. Bennett’s pension arrangement was negotiated in 2004 as part of a special retention incentive.

 

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 2007.

 

Does the Company provide perquisites to its executives?

 

We provided limited perquisites to the Named Executive Officers in 2007. These perquisites represent a 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.

 

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

 

Section 162(m) of 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 the new 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 opportunities 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 vested stock options or SARs) are as follows:

 

Stock Ownership as a Multiple of Base Salary

 

As of December 31, 2007, Messrs. Williams, Bertolini, Casazza and Holt each held Common Stock and vested stock units in excess of the requirements. Mr. Zubretsky joined the Company in 2007 and needs to satisfy the requirement by February 2010. 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 59 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 amended 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 2007, a representative of Cook attended eight of the nine 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 2007, we paid Cook $177,032.

 

What is the role of the CEO 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 of his own performance. The CEO does not, however, present a recommendation for his own compensation. The Committee, after consulting with the nonmanagement members of the Board of Directors and receiving input from Cook, develops its own assessment of the CEO’s performance and 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 2007 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 the 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 2007, the information in the tally sheets was consistent with the Committee’s expectations and, therefore, the tally sheets did not have a material impact on individual compensation decisions.

 

 

The Comparison Groups reviewed for each Named Executive Officer are noted below (Messrs. Bennett and Callen are not included in this table because they terminated employment in 2007):

 

 

The companies in the Healthcare Comparison Group are:

 

 

The companies in General Industry & Financial Services Comparison Group are selected from:*

 

 

The companies in the McLagan Investment Management Survey (insurance company cut) are:

 

 

 

The 2007 Summary Compensation Table summarizes the total compensation paid or earned for the fiscal year ended December 31, 2007 by the Chairman and Chief Executive Officer, each of the persons who served as Chief Financial Officer during the year and our most highly paid executive officers (collectively, the “NEOs” or “Named Executive Officers”). The 2007 Grants of Plan-Based Awards Table discloses information about the 2007 Annual Bonus Plan awards, as well as the number of RSUs and SARs awarded to each of the Named Executive Officers in the fiscal year ended December 31, 2007. 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 63 for a discussion of those employment arrangements.

 

The 2007 Annual Bonus Plan award amounts are disclosed in the 2007 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 on January 24, 2008, except for Mr. Williams’ Annual Bonus Plan award, which was approved by the Committee, after consultation with the Board, on January 25, 2008. Please refer to the footnotes in the 2007 Grants of Plan-Based Awards Table beginning on page 51 for a discussion of the RSU and SAR grants made in 2007.

 

Consistent with SEC reporting regulations, amounts shown in the Stock Awards and Option Awards columns in the 2007 Summary Compensation Table represent the expense recognized in 2007 with respect to such awards. Accounting rules require that the estimated fair value of equity awards be allocated over the amount of time that the Named Executive Officer must work in order to be eligible for the award. As a result, amounts shown in the Stock Awards column include the value of portions of prior year RSUs that vested during 2007, as well as a portion of the value of RSUs granted in 2007. Similarly, amounts shown in the Option Awards column include the value of portions of prior year SARs and stock option awards that vested during 2007, as well as a portion of the value of SARs granted in 2007.

 

The following table sets forth for 2007 the compensation of the Named Executive Officers.