UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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Molina Healthcare, Inc.

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held Wednesday, April 27, 2011

 

 

Dear Fellow Stockholder:

 

Our 2011 annual meeting of stockholders will be held at 10:00 a.m. local time on Wednesday, April 27, 2011, in the Huntington Conference Room at the Molina Healthcare building located at One Golden Shore Drive, Long Beach, California, 90802, for the following purposes:

 

 

The foregoing items of business are more fully described in the proxy statement accompanying this notice. The board of directors has fixed the close of business on March 8, 2011 as the record date for the determination of stockholders entitled to notice of and to vote at the annual meeting and at any continuation, adjournment, or postponement thereof.

 

This notice and the accompanying proxy statement are being mailed or transmitted on or about March 24, 2011 to the Company’s stockholders of record as of March 8, 2011.

 

Every stockholder vote is important. Please sign, date, and promptly return the enclosed proxy card in the enclosed envelope, or vote by telephone or Internet (instructions are on your proxy card), so that your shares will be represented whether or not you attend the annual meeting.

 

By order of the board of directors,

 

Joseph M. Molina, M.D.

Chairman of the Board, Chief Executive Officer,

and President

 

Long Beach, California

March 24, 2011

 

TABLE OF CONTENTS

 

 

 

 

 

ANNUAL MEETING OF STOCKHOLDERS

To Be Held Wednesday, April 27, 2011

 

 

 

 

 

Who is soliciting my vote?

 

The board of directors of Molina Healthcare, Inc. (sometimes referred to herein as “the Company”) is soliciting your vote at the 2011 annual meeting of Molina Healthcare’s stockholders.

 

What will I be voting on?

 

Stockholders will be voting on the following matters:

 

 

How many votes do I have?

 

You will have one vote for every share of Molina Healthcare common stock you owned on March 8, 2011, which was the record date.

 

How many votes can be cast by all stockholders?

 

30,537,338, consisting of one vote for each share of Molina Healthcare’s common stock that was outstanding on the record date. There is no cumulative voting.

 

How many votes must be present to hold the meeting?

 

A majority of the votes that can be cast, or 15,268,670 votes. We urge you to vote by proxy even if you plan to attend the annual meeting so that we will know as soon as possible whether enough votes will be present for us to hold the meeting.

 

How do I vote?

 

You can vote either in person at the annual meeting or by proxy whether or not you attend the annual meeting.

 

To vote by proxy, you must:

 

 

 

To ensure that your vote is counted, please remember to submit your vote by April 26, 2011, the day before the annual meeting.

 

If you want to vote in person at the annual meeting and you hold your Molina Healthcare stock through a securities broker (that is, in street name), you must obtain a proxy from your broker and bring that proxy to the meeting.

 

Can I change my vote or revoke my proxy?

 

Yes. Just send in a new proxy card with a later date, or cast a new vote by telephone or Internet, or send a written notice of revocation to Molina Healthcare’s Corporate Secretary at 200 Oceangate, Suite 100, Long Beach, California 90802. If you attend the annual meeting and want to vote in person, you can request that your previously submitted proxy not be used.

 

What if I do not vote for the six proposals listed on my proxy card?

 

If you return a signed proxy card without indicating your vote, in accordance with the board’s recommendation, your shares will be voted as follows:

 

 

Can my broker vote my shares for me on each of the proposals?

 

Proposals 1, 2, 3, 4, and 5 are not considered routine matters under New York Stock Exchange (NYSE) rules, and brokers will not be permitted to vote on any of such proposals if the beneficial owners fail to provide voting instructions. Under NYSE rules, Proposal 6 is considered a routine matter on which brokers will be permitted to vote in their discretion even if the beneficial owners do not provide voting instructions. Please vote your proxy so your vote can be counted.

 

Can my shares be voted if I do not return my proxy card and do not attend the annual meeting?

 

If you do not vote your shares held in street name, your broker can vote your shares on matters that the NYSE has ruled discretionary. As noted above, Proposals 1, 2, 3, 4, and 5 are not discretionary items. However, the proposal to ratify the appointment of Ernst & Young LLP is a discretionary item, and thus NYSE member brokers that do not receive instructions from beneficial owners may vote your shares at their discretion for that proposal.

 

If you do not vote the shares registered directly in your name, not in the name of a bank or broker, your shares will not be voted.

How many votes are needed for each proposal and how are the votes counted?

 

In the election of directors (Item 1 on the proxy card), the three nominees receiving the greatest number of votes cast for shall be elected as directors. Abstentions and broker non-votes will have no effect on the voting outcome with respect to the election of directors.

 

The favorable vote of a majority of the shares present in person or by proxy and entitled to vote will be required for:

 

 

Abstentions will be counted toward the tabulation of votes cast on Proposals 2, 3, 4, 5, and 6 and will have the effect of negative votes. Broker non-votes will have the effect of negative votes.

 

Could other matters be decided at the annual meeting?

 

We do not know of any other matters that will be considered at the annual meeting. If any other matters arise at the annual meeting, the proxies will be voted at the discretion of the proxy holders.

 

What happens if the meeting is postponed or adjourned?

 

Your proxy will still be good and may be voted at the postponed or adjourned meeting. You will still be able to change or revoke your proxy until it is voted.

 

Do I need proof of stock ownership to attend the annual meeting?

 

Yes, you will need proof of ownership of Molina Healthcare stock to enter the meeting.

 

When you arrive at the annual meeting, you may be asked to present photo identification, such as a driver’s license. If you are a stockholder of record, you will be on the list of Molina Healthcare’s registered stockholders. If your shares are held in the name of a bank, broker, or other holder of record, a recent brokerage statement or letter from a bank or broker is an example of proof of ownership. In accordance with our discretion, we may admit you only if we are able to verify that you are a Molina Healthcare stockholder.

 

How can I access Molina Healthcare’s proxy materials and 2010 Annual Report electronically?

 

This proxy statement and the 2010 Annual Report are available on Molina Healthcare’s website at www.molinahealthcare.com. From the Molina home page, click on “About Molina,” then click on “Investors,” and then click on “2011 Annual Meeting Materials.”

 

Most stockholders can elect not to receive paper copies of future proxy statements and annual reports and can instead view those documents on the Internet. If you are a stockholder of record, you can choose this option and save Molina Healthcare the cost of producing and mailing these documents by following the instructions provided when you vote over the Internet. If you hold your Molina Healthcare stock through a

bank, broker, or other holder of record, please refer to the information provided by that entity for instructions on how to elect not to receive paper copies of future proxy statements and annual reports. If you choose not to receive paper copies of future proxy statements and annual reports, you will receive an e-mail message next year containing the Internet address to use to access Molina Healthcare’s proxy statement and annual report. Your choice will remain in effect until you tell us otherwise.

 

Where can I find the voting results?

 

We intend to announce preliminary voting results at the annual meeting. We will publish the final results in a current report on Form 8-K, which we expect to file within four business days after the annual meeting is held. You can obtain a copy of the Form 8-K by logging on to our website at www.molinahealthcare.com, or through the EDGAR system of the Securities and Exchange Commission, or SEC, at www.sec.gov. Information on our website does not constitute part of this proxy statement.

 

If you received these materials by mail, you should have also received with them Molina Healthcare’s Annual Report to Stockholders for 2010. The 2010 Annual Report is also available on Molina Healthcare’s website at www.molinahealthcare.com as described above. We urge you to read these documents carefully. In accordance with the rules of the SEC, the Company’s performance graph appears on page 35 of our 2010 Annual Report.

 

Molina Healthcare continually strives to maintain high standards of ethical conduct, to report its results with accuracy and transparency, and to maintain full compliance with the laws, rules, and regulations that govern Molina Healthcare’s business.

 

The current charters of the audit committee, the corporate governance and nominating committee, the compensation committee, and the compliance committee, as well as Molina Healthcare’s corporate governance guidelines and code of business conduct and ethics, are available in the “Investors” section of Molina Healthcare’s website, www.molinahealthcare.com, under the link for “Corporate Governance.” Molina Healthcare stockholders may obtain printed copies of these documents free of charge by writing to Molina Healthcare, Inc., Juan Jose Orellana, Vice President of Investor Relations, 200 Oceangate, Suite 100, Long Beach, California 90802.

 

The corporate governance and nominating committee’s mandate is to review and shape corporate governance policies and identify qualified individuals for nomination to the board of directors. All of the members of the committee meet the independence standards contained in the NYSE corporate governance rules and Molina Healthcare’s Corporate Governance Guidelines.

 

Molina Healthcare has designated the chair of the board’s corporate governance and nominating committee — Ronna E. Romney — as its lead director. The lead director presides at executive sessions of the independent directors, serves as a liaison between the chairman and the independent directors, approves information sent to the board, approves meeting agendas for the board, and approves meeting schedules to ensure that there is sufficient time for discussion of all agenda items.

 

The committee considers all qualified candidates identified by members of the committee, by other members of the board of directors, by senior management, and by stockholders. Stockholders who would like to propose a director candidate for consideration by the committee may do so by submitting the candidate’s name, résumé, and biographical information to the attention of the Corporate Secretary as described below under “Submission of Future Stockholder Proposals.” All proposals for nominations received by the Corporate Secretary will be presented to the committee for its consideration.

The committee reviews each candidate’s biographical information and assesses each candidate’s independence, skills, and expertise based on a variety of factors, including breadth of experience reflecting that the candidate will be able to make a meaningful contribution to the board’s discussion of and decision-making regarding the array of complex issues facing the Company; understanding of the Company’s business environment; the possession of expertise that would complement the attributes of our existing directors; whether the candidate will appropriately balance the legitimate interests and concerns of all stockholders and other stakeholders in reaching decisions rather than advancing the interests of a particular constituency; and whether the candidate will be able to devote sufficient time and energy to the performance of his or her duties as a director. Application of these factors involves the exercise of judgment by the committee and the board.

 

Based on its assessment of each candidate’s independence, skills, and qualifications, the committee will make recommendations regarding potential director candidates to the board.

 

The committee follows the same process and uses the same criteria for evaluating candidates proposed by stockholders, members of the board of directors, and members of senior management.

 

For the 2011 annual meeting, the Company did not receive notice of any director nominations from our stockholders. The committee is continuing its consideration and evaluation of candidates to fill the existing vacancy in Class I of the board.

 

Diversity is among the factors that the corporate governance and nominating committee considers when evaluating the composition of the board. Among the criteria for board membership as stated in the Company’s Corporate Governance Guidelines is a diversified membership: “The Board shall be committed to a diversified membership, in terms of the various experiences and areas of expertise of the individuals involved.” The candidates nominated for election at the Company’s 2011 annual meeting include one woman and one nominee of Hispanic descent. In addition, each director candidate contributes to the board’s overall diversity by providing a variety of perspectives, personal, and professional experiences and backgrounds. The board is satisfied that the current nominees reflect an appropriate diversity of gender, age, race, geographical background, and experience, and is committed to continuing to consider diversity issues in evaluating the composition of the board.

 

The Company’s Corporate Governance Guidelines embody many of our practices, policies, and procedures, which are the foundation of our commitment to sound corporate governance practices. The Guidelines are reviewed annually and revised as necessary. The Guidelines outline the responsibilities, operations, qualifications, and composition of the board. The Guidelines provide that a majority of the members of the board shall be independent.

 

The Guidelines require that all members of the Company’s three standing committees be independent. Committee members are appointed by the board upon recommendation of the corporate governance and nominating committee. Committee membership and chairs are rotated from time to time in accordance with the board’s judgment. The board and each committee have the power to hire and fire independent legal, financial, or other advisors, as they may deem necessary.

 

Meetings of the non-management directors are held as part of every regularly scheduled board meeting and are presided over by the lead independent director.

 

Directors are expected to prepare for, attend, and participate in all board meetings, meetings of the committees on which they serve, and the annual meeting of stockholders. All of the directors then in office attended Molina Healthcare’s 2010 annual meeting.

 

The corporate governance and nominating committee conducts an annual review of board performance, and an annual review of individual director performance. In addition, each committee conducts its own self-evaluation. The results of these evaluations are reported to the board.

Directors have full and free access to senior management and other employees of Molina Healthcare. New directors are provided with an orientation program to familiarize them with Molina Healthcare’s business, and its legal, compliance, and regulatory profile. Molina Healthcare makes available to the board educational seminars on a variety of topics. These seminars are intended to allow directors to develop a deeper understanding of relevant health care, governmental, and business issues facing the Company.

 

The board reviews the compensation committee’s report on the performance of Dr. Molina, the Company’s current chief executive officer, and of John Molina, the Company’s current chief financial officer, in order to ensure that they are providing effective leadership for Molina Healthcare. The board also works with the compensation committee to identify potential successors to the chief executive officer and the chief financial officer.

 

The board of directors has determined that, except for Dr. Molina and Mr. Molina, each of the directors of the Company, including two of the three nominees identified in this proxy statement, has no material relationship with the Company that would interfere with the exercise of his or her independent judgment as a director, and is otherwise “independent” in accordance with the applicable listing requirements of the NYSE. In making that determination, the board of directors considered all relevant facts and circumstances, including the director’s commercial, consulting, legal, accounting, charitable, and familial relationships. The board of directors applied the following standards, which provide that a director will not be considered independent if he or she:

 

 

The independence of directors and the materiality of any business relationships delineated above shall be determined by the Board, and its determination shall be final.

 

The board has adopted a policy regarding the review, approval, and monitoring of transactions involving the Company and related persons (directors and executive officers or their immediate family members). Such related persons are required to promptly and fully disclose to the Company’s general counsel all financial, social, ethical, personal, legal, or other potential conflicts of interest involving the Company. The general counsel shall confer as necessary with the lead independent director and/or with the Company’s corporate governance and nominating committee regarding the facts of the matter and the appropriate resolution of any conflict of interest situation in the best interests of the Company, including potential removal of the related

person from a position of decision-making or operational authority with respect to the conflict situation, or other more significant steps depending upon the nature of the conflict.

 

The Company has an equity investment in a medical service provider that provides certain vision services to the Company’s members. The Company accounts for this investment under the equity method of accounting because the Company has an ownership interest in the investee that confers significant influence over operating and financial policies of the investee. As of December 31, 2010 and 2009, the carrying amount for this investment totaled $4.4 million, and $4.1 million, respectively. For the years ended December 31, 2010, 2009, and 2008, the Company paid $22.0 million, $21.8 million, and $15.4 million, respectively, for medical service fees to this provider.

 

The Company is a party to a fee-for-service agreement with Pacific Hospital of Long Beach. Until October 2010, Pacific Hospital was owned by Abrazos Healthcare, Inc., the shares of which are held as community property by the husband of Dr. Martha Bernadett, the sister of Dr. J. Mario Molina, the Company’s chief executive officer, and John Molina, the Company’s chief financial officer. Amounts paid to Pacific Hospital under the terms of this fee-for-service agreement were $1.0 million, $0.7 million, and $0.2 million, for the years ended December 31, 2010, 2009, and 2008, respectively. The Company believes that the fee-for-service agreement with Pacific Hospital was based on prevailing market rates for similar services. As of October 2010, Pacific Hospital is no longer owned by Abrazos Healthcare, Inc. or any other party related to the Company.

 

The persons listed on page 16 were the members of the compensation committee during 2010. No member of the compensation committee was a part of a “compensation committee interlock” during fiscal year 2010 as described under SEC rules. In addition, none of our executive officers served as a director or member of the compensation committee of another entity that would constitute a “compensation committee interlock.” No member of the compensation committee had any material interest in a transaction with Molina Healthcare. Except for Dr. J. Mario Molina and Mr. John C. Molina, no director is a current or former employee of Molina Healthcare or any of its subsidiaries.

 

The board has adopted a Code of Business Conduct and Ethics governing all employees of Molina Healthcare and its subsidiaries. A copy of the Code of Business Conduct and Ethics is available on our website at www.molinahealthcare.com. From the Molina home page, click on “About Molina,” then click on “Investors,” and then click on “Corporate Governance.” There were no waivers of our Code of Business Conduct and Ethics during 2010. We intend to disclose amendments to, or waivers of, our Code of Business Conduct and Ethics, if any, on our website.

 

The Company encourages employees to raise possible ethical issues. The Company offers several channels by which employees and others may report ethical concerns or incidents, including, without limitation, concerns about accounting, internal controls, or auditing matters. We provide a Compliance Hotline that is available 24 hours a day, seven days a week. Individuals may choose to remain anonymous. We prohibit retaliatory action against any individual for raising legitimate concerns or questions regarding ethical matters, or for reporting suspected violations.

 

Stockholders or other interested parties who wish to communicate with a member or members of the board of directors, including the lead independent director or the non-management directors as a group, may do so by addressing their correspondence to the individual board member or board members, c/o Corporate Secretary, Molina Healthcare, Inc., 200 Oceangate, Suite 100, Long Beach, California 90802. The board of directors has approved a process pursuant to which the Corporate Secretary shall review and forward correspondence to the appropriate director or group of directors for response.

 

Our nine-member board of directors is divided into three classes — Class I, Class II, and Class III — with each class having three board seats. The terms of the Class III directors expire at the 2011 annual meeting, while the terms of the Class I directors expire at the 2012 annual meeting, and the terms of the Class II directors expire at the 2013 annual meeting. There is currently a vacant board seat in Class I of the board of directors.

 

The three current Class III directors are Dr. J. Mario Molina, Steven J. Orlando, and Ronna E. Romney. The directors to be elected as Class III directors at the 2011 annual meeting will serve until the 2014 annual meeting. All directors serve until the expiration of their respective terms and until their respective successors are elected and qualified or until such director’s earlier resignation, removal from office, death, or incapacity. Each nominee receiving more votes for his or her election than votes against his or her election will be elected.

 

The board of directors, upon recommendation of the corporate governance and nominating committee, has nominated the three incumbent Class III directors — Dr. J. Mario Molina, Steven J. Orlando, and Ronna E. Romney — for election as Class III directors at the 2011 annual meeting. Proxies can only be voted for the three named nominees.

 

In the event any nominee is unable or declines to serve as a director at the time of the meeting, the proxies will be voted for any nominee who may be designated by the board of directors to fill the vacancy. As of the date of this proxy statement, the board of directors is not aware of any nominee who is unable or will decline to serve as a director.

 

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE ELECTION OF EACH THE THREE NOMINEES LISTED ABOVE.

 

 

During 2010, the board of directors met nine times, the audit committee met nine times, the corporate governance and nominating committee met four times, the compensation committee met six times, and the compliance committee, which was organized on September 1, 2010, met one time. Each director attended at least 75% of the total number of meetings of the board and board committees of which he or she was a member in 2010 and each director attended the 2010 annual meeting of stockholders held on May 4, 2010.

 

The Company’s non-management directors meet in executive session without any management directors in attendance each time the full board convenes for a regularly scheduled in-person board meeting, which is usually four times each year, and, if the board convenes a special meeting, the non-management directors may meet in executive session if the circumstances warrant. The lead independent director presides at each executive session of the non-management directors.

 

Dr. J. Mario Molina currently serves as both the Company’s chairman of the board and its chief executive officer. The board believes that Dr. Molina’s serving in these dual roles provides for productive and transparent communications between management and the board. In addition, the board strongly supports having an independent director in a board leadership position at all times. The lead independent director — Ronna E. Romney — has similar duties to the chairman, including leading the executive sessions of the non-management directors at board meetings. Having an independent lead director enables non-management directors to raise issues and concerns for board consideration without immediately involving management. Ms. Romney also serves as a liaison between the board and senior management. The Company’s board has determined that the current board leadership structure, with a combined chairman and chief executive officer, along with a separate lead independent director, is the most appropriate structure at this time.

 

The board oversees the Company’s overall risk management function. The board regularly receives a report on risks from senior management with respect to the Company’s management of major risks, including efforts to identify, assess, manage, and mitigate risks that may affect the Company’s ability to execute on its corporate strategy and fulfill its business objectives. The board’s role is to oversee this effort and to consult with management on the effectiveness of risk identification, measurement, and monitoring processes, and the adequacy of staffing and action plans, as needed. In addition, the compensation committee reviews compensation programs to ensure that they do not encourage unnecessary or excessive risk-taking.

 

The four standing committees of the board of directors are: (i) the audit committee; (ii) the corporate governance and nominating committee; (iii) the compensation committee; and (iv) the compliance committee.

 

The audit committee performs a number of functions, including: (i) reviewing the adequacy of the Company’s internal system of accounting controls, (ii) meeting with the independent accountants and management to review and discuss various matters pertaining to the audit, including the Company’s financial statements, the report of the independent accountants on the results, scope, and terms of their work, and the recommendations of the independent accountants concerning the financial practices, controls, procedures, and policies employed by the Company, (iii) resolving disagreements between management and the independent accountants regarding financial reporting, (iv) reviewing the financial statements of the Company, (v) selecting, evaluating, and, when appropriate, replacing the independent accountants, (vi) reviewing and approving fees to be paid to the independent accountants, (vii) reviewing and approving all permitted non-audit services to be performed by the independent accountants, (viii) establishing procedures for the receipt, retention, and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters and the confidential, anonymous submission by the Company’s employees of concerns

regarding questionable accounting or auditing matters, (ix) considering other appropriate matters regarding the financial affairs of the Company, and (x) fulfilling the other responsibilities set out in its charter, as adopted by the board. The report of the audit committee required by the rules of the SEC is included in this proxy statement.

 

The audit committee consists of Mr. Fedak (Chair), Ms. Romney, Mr. Szabo, and Mr. Orlando. The board has determined that each of Mr. Fedak and Mr. Orlando qualify as an “audit committee financial expert” as defined by the SEC. In addition to being independent according to the board’s independence standards as set out in its Corporate Governance Guidelines, each member of the audit committee is independent within the meaning of the corporate governance rules of the NYSE. Each member of the audit committee is also financially literate. The audit committee charter is available for viewing in the “Investors” section of Molina Healthcare’s website, www.molinahealthcare.com, under the link, “Corporate Governance.”

 

The corporate governance and nominating committee is responsible for identifying individuals qualified to become board members and recommending to the board the director nominees for the next annual meeting of stockholders. It leads the board in its annual review of the board’s performance and recommends to the board director candidates for each committee for appointment by the board. The committee takes a leadership role in shaping corporate governance policies and practices, including recommending to the board the Corporate Governance Guidelines and monitoring Molina Healthcare’s compliance with these Guidelines. The committee is responsible for reviewing potential conflicts of interest involving directors, executive officers, or their immediate family members. The committee also reviews Molina Healthcare’s Code of Business Conduct and Ethics and other internal policies to help ensure that the principles contained in the Code are being incorporated into Molina Healthcare’s culture and business practices.

 

The corporate governance and nominating committee currently consists of Ms. Romney (Chair), Ms. Richardson, Dr. Murray, and Mr. Orlando, each of whom is “independent” under the NYSE listing standards and the Company’s Corporate Governance Guidelines. The corporate governance and nominating committee charter is available for viewing in the “Investors” section of Molina Healthcare’s website, www.molinahealthcare.com, under the link, “Corporate Governance.”

 

The compensation committee is responsible for determining the compensation for Dr. Molina, our chief executive officer, for John Molina, our chief financial officer, and also approves the compensation Dr. Molina recommends as chief executive officer for the other senior executive officers. The committee reviews and discusses with management the Compensation Discussion and Analysis, and, if appropriate, recommends to the board that the Compensation Discussion and Analysis be included in Molina Healthcare’s proxy statement filing with the SEC. In addition, the committee administers Molina Healthcare’s 2002 Equity Incentive Plan and, if approved, its 2011 Equity Incentive Plan. The committee also reviews Molina Healthcare’s succession planning and executive development activities, as well as the performance of senior management.

 

Each committee has the authority to retain special consultants or experts to advise the committee, as the committee may deem appropriate or necessary in its sole discretion. From time to time, the compensation committee has retained a compensation consultant to provide the committee with comparative data on executive compensation and advice on Molina Healthcare’s compensation programs for senior management.

 

The compensation committee currently consists of Mr. Szabo (Chair), Mr. Fedak, Ms. Richardson, Mr. Orlando, Dr. Murray, and Ms. Romney. The board has determined that in addition to being independent according to the board’s independence standards as set out in its Corporate Governance Guidelines, each of the members of the compensation committee is independent according to the corporate governance rules of the NYSE. In addition, each of the members of the committee is a “non-employee director” as defined in Section 16 of the Securities Exchange Act of 1934, and is also an “outside director” as defined by Section 162(m) of the Internal Revenue Code.

 

A copy of the compensation committee charter is available for viewing in the “Investors” section of Molina Healthcare’s website, www.molinahealthcare.com, under the link, “Corporate Governance.”

 

The compliance committee, which was organized on September 1, 2010, currently consists of Ms. Richardson (Chair), Mr. Fedak, Dr. Murray, Mr. Szabo, and John Molina. With the exception of

Mr. Molina, all members of the compliance committee are “independent” under the NYSE listing standards and the Company’s Corporate Governance Guidelines. The compliance committee, together with the audit committee, assists the board of directors in its oversight of the Company’s compliance with applicable legal and regulatory requirements. Whereas the audit committee has oversight over matters of financial compliance (e.g., accounting, auditing, financial reporting, and investor disclosures), as to all other areas of compliance (“non-financial compliance”), the compliance committee has oversight responsibility in the first instance. However, the two committees meet jointly at least annually to review the major non-financial compliance matters, including the overall state of compliance, significant legal or regulatory compliance exposures, and material reports or inquiries from regulators. The compliance committee also is responsible for overseeing the Company’s compliance program and monitoring its performance. The compliance committee charter is available for viewing in the “Investors” section of Molina Healthcare’s website, www.molinahealthcare.com, under the link, “Corporate Governance.”

 

There are no legal proceedings to which any director, officer, nominee, or principal stockholder, or any affiliate thereof, is a party adverse to the Company or has a material interest adverse to the Company.

 

The compensation committee makes recommendations to the board with respect to the compensation level of directors, and the board determines their compensation. During 2010, the Company paid each non-employee director an annual retainer of $35,000. We also paid an additional annual retainer of $7,500 to the chair of the audit committee, $5,000 to each audit committee member, and $2,500 to the chairs of each of the corporate governance and nominating committee and the compensation committee. We paid each non-employee director $1,200 for each board and committee meeting attended in person, except each audit committee member received $2,400 for each audit committee meeting attended. Non-employee directors also received $600 for participation in each telephonic board meeting. The Company also reimburses its board members for expenses incurred in attending board and committee meetings or performing other services for Molina Healthcare in their capacities as directors. Such expenses include food, lodging, and transportation. Directors who are employees of the Company or its subsidiaries do not receive any compensation for their services as directors. In 2010, the directors who were employees were Dr. J. Mario Molina and John Molina.

 

In order to link the financial interests of the non-employee directors to the interests of the stockholders, encourage support of the Company’s long-term goals, and align director compensation to the Company’s performance, each non-employee director was granted 5,000 shares of common stock, vesting in 1,250 share increments at the end of each fiscal quarter subsequent to the date of the annual stockholder meeting. The total value of this stock grant in 2010 for each non-employee director was $140,300.

 

NON-EMPLOYEE DIRECTOR COMPENSATION

 

 

 

 

The compensation committee annually reviews benchmarking assessments of director compensation at comparable companies in order to determine competitive levels of compensation to attract qualified candidates for board service. In an effort to assess where the Company’s current compensation levels for directors stand in relation to the compensation levels of the Company’s industry peers, in early 2010 the compensation committee engaged the consulting firm of James F. Reda & Associates, LLC (the “Reda Firm”), to conduct a compensation study for the Company’s directors. The Reda Firm (which was recently acquired by Arthur J. Gallagher & Co.) developed a peer comparison group made up of 20 health care service companies, which were also used in the Reda Firm’s study of the Company’s top executives compensation. The peer comparison group consisted of the following companies: Aetna Inc., Amedisys, Inc., Amerigroup Corporation, Catalyst Health Solutions, Inc., Centene Corporation, CIGNA Corporation, Coventry Health Care, Inc., Gentiva Health Services, Inc., Health Net, Inc., HealthSpring, Inc., Healthways, Inc., Humana Inc., IPC The Hospitalist Company Inc., Magellan Health Services, Inc., MAXIMUS, Inc., Triple-S Management Corporation, UnitedHealth Group Incorporated, Universal American Corp., Wellcare Health Plans, Inc., and WellPoint, Inc. The market study concluded that the cash compensation for our directors was below market. Based upon the Reda Firm’s director compensation findings, the compensation committee’s benchmarking assessment, and upon recommendation of the compensation committee, effective January 1, 2011, the board of directors increased the compensation paid to our directors. During 2011, the Company shall pay each non-employee director an annual retainer of $50,000. We will also pay an additional annual retainer of $20,000 to the lead independent director, $17,500 to the chair of the audit committee, $5,000 to each audit committee member, $12,500 to the chairs of each of the corporate governance and nominating committee and the compensation committee, and $7,500 to the chair of the compliance committee. We will pay each non-employee director $2,000 for each board and committee meeting attended in person, except each audit committee member shall receive $2,500 for each audit committee meeting attended. Non-employee directors shall also receive $1,000 for participation in each telephonic board or committee meeting. Each non-employee director shall also be granted 8,000 shares of common stock, vesting in 2,000 share increments at the end of each fiscal quarter subsequent to the date of the 2011 annual stockholder meeting.

 

The board of directors of the Company believes that individual directors should own and hold a reasonable number of shares of common stock of the Company to further align the director’s interests and actions with those of the Company’s stockholders, and also to demonstrate confidence in the long-term prospects of the Company.

 

Directors of the Company are encouraged to own at least 3,000 shares of the Company’s common stock. Shares that satisfy these guidelines may be those owned directly, through a trust, or by a spouse or child, and shall include shares purchased on the open market, vested or unvested shares of restricted stock, or exercised and retained option shares. Each director of the Company satisfied these stock ownership guidelines as of December 31, 2010.

 

Two of our directors, J. Mario Molina, M.D. and John C. Molina, J.D., and the following persons were our executive officers at December 31, 2010.

 

Terry P. Bayer, 60, has served as our chief operating officer since November 2005. She had formerly served as our executive vice president, health plan operations since January 2005. Ms. Bayer has 25 years of healthcare management experience, including staff model clinic administration, provider contracting, managed care operations, disease management, and home care. Prior to joining us, her professional experience included regional responsibility at FHP, Inc. and multi-state responsibility as regional vice-president at Maxicare; Partners National Health Plan, a joint venture of Aetna Life Insurance Company and Voluntary Hospital Association (VHA); and Lincoln National. She has also served as executive vice president of managed care at Matria Healthcare, president and chief operating officer of Praxis Clinical Services, and as Western Division President of AccentCare. She holds a juris doctorate from Stanford University, a master’s degree in

public health from the University of California, Berkeley, and a bachelor’s degree in communications from Northwestern University.

 

Joseph W. White, 52, has served as our Chief Accounting Officer since 2003. In his role as Chief Accounting Officer, Mr. White is responsible for oversight of the Company’s accounting, reporting, forecasting, budgeting, actuarial, procurement, treasury and facilities functions. Mr. White has 25 years of financial management experience in the health care industry. Prior to joining the Company in 2003, Mr. White worked for Maxicare Health Plans, Inc. from 1987 through 2002. Mr. White holds a Master’s degree in Business Administration and a Bachelor’s degree in Commerce from the University of Virginia. Mr. White is a Certified Public Accountant.

 

James W. Howatt, 64, had served as our chief medical officer from May 2007 to February 2011. Effective February 17, 2011, Dr. Howatt was reassigned to the position of medical director of the Company’s Subsidiary, Molina Medicaid Solutions, or MMS. As medical director of MMS, Dr. Howatt will serve as the clinical leader for existing and future MMS product offerings, and will direct efforts to incorporate care coordination solutions into the government health care programs served by MMS. Prior to joining Molina Healthcare in February 2006, Dr. Howatt was Western Regional Medical Director for Humana. Dr. Howatt received B.S. and M.D. degrees from the University of California, San Francisco, and also holds a Master of Business Administration degree with an emphasis in Health Management from the University of Phoenix.

 

Executive officers are appointed annually by the board of directors, subject to the terms of their employment agreements.

 

The audit committee (“committee”) operates under a charter that specifies the scope of the committee’s responsibilities and how it carries out those responsibilities.

 

The board of directors has determined that all four members of the committee are independent based upon the standards adopted by the board, which incorporate the independence requirements under applicable laws, rules, and regulations.

 

Management is responsible for the financial reporting process, the system of internal controls, including internal control over financial reporting, risk management and procedures designed to ensure compliance with accounting standards and applicable laws and regulations. Ernst & Young LLP, the Company’s independent registered public accounting firm (“independent auditors”), is responsible for the integrated audit of the consolidated financial statements and internal control over financial reporting. The committee’s responsibility is to monitor and oversee these processes and procedures. The committee relies, without independent verification, on the information provided to it and on the representations made by management regarding the effectiveness of internal control over financial reporting, that the financial statements have been prepared with integrity and objectivity and that such financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The committee also relies on the opinions of the independent auditors on the consolidated financial statements and the effectiveness of internal control over financial reporting.

 

The committee’s meetings facilitate communication among the members of the committee, management, the internal auditors, and the Company’s independent auditors. The committee separately met with each of the internal and independent auditors with and without management, to discuss the results of their examinations and their observations and recommendations regarding the Company’s internal controls. The committee also discussed with the Company’s independent auditors all communications required by generally accepted auditing standards.

The committee reviewed and discussed the audited consolidated financial statements of the Company as of and for the year ended December 31, 2010 with management, the internal auditors, and the Company’s independent auditors.

 

The committee has received the written disclosures required by PCAOB Rule 3526 — “Communication with Audit Committees Concerning Independence.” The committee discussed with the independent auditors any relationships that may have an impact on their objectivity and independence and satisfied itself as to the auditors’ independence.

 

The committee has reviewed and approved the amount of fees paid to the independent auditors for audit, audit related, and tax compliance services. The committee concluded that the provision of services by the independent auditors is compatible with the maintenance of their independence.

 

Based on the above-mentioned review and discussions, and subject to the limitations on our role and responsibilities described above and in the committee charter, the committee recommended to the board that the Company’s audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 for filing with the SEC.

 

Audit Committee

 

Charles Z. Fedak, CPA, MBA, Chair

Ronna E. Romney

John P. Szabo, Jr.

Steven J. Orlando, CPA (inactive)

 

The compensation committee has reviewed and discussed the following Compensation Discussion and Analysis with the members of management of the Company. Based on its review and discussions, the compensation committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

Compensation Committee

 

John P. Szabo, Jr., Chair
Charles Z. Fedak, CPA, MBA
Frank E. Murray, MD
Steven J. Orlando, CPA (inactive)
Sally K. Richardson
Ronna E. Romney

 

March 18, 2011

 

Overview

 

The Company is committed to responsible compensation practices and structures. For 2011, the Company has balanced the need to retain, motivate, and reward its employees fairly and competitively based on their performance, while assuring that their compensation reflects principles of risk management and performance

metrics that reflect long-term contributions to sustained profitability, as well as fidelity to the values and rules of conduct expected of them.

 

The Role of the Compensation Committee

 

The compensation committee has primary responsibility for overseeing and reviewing the design and structure of the Company’s compensation programs to ensure that such programs achieve their intended purposes in furtherance of the Company’s strategic priorities. In addition, the committee seeks to align the interests of management with the interests of the Company’s stockholders by linking pay with performance. Doing so, we believe, incentivizes performance which promotes the ultimate objective of increasing stockholder value. Further, the compensation committee is directly responsible for evaluating the performance of and determining the compensation paid to our chief executive officer and our chief financial officer. Finally, the compensation committee is responsible for evaluating and approving the compensation levels of our other key executive officers as recommended to the committee by the chief executive officer.

 

Our Compensation Approach

 

The health care environment and managed care industry are very complex, and there is a limited pool of executives with the relevant industry experience and management skills to provide effective leadership in this environment. Moreover, because of the significant competition within our industry, there is a continuing demand for managed care executive talent. Given that industry background, our compensation programs are intended to attract and retain executives with the knowledge, experience, and leadership capability necessary for us to operate our business successfully. Moreover, our compensation programs seek to align the interests of our executives with those of our stockholders by rewarding our executives with a cash bonus for results that create short-term stockholder value, and with equity compensation for results that create short-term or long-term stockholder value.

 

In an effort to assess where the Company’s current compensation levels and programs for its chief executive officer and chief financial officer stand in relation to the compensation levels of the Company’s industry peers, in early 2010 the compensation committee engaged the Reda Firm to conduct a total compensation study for the Company’s top executives. The Reda Firm (which was recently acquired by Arthur J. Gallagher & Co.) developed a peer comparison group made up of 20 health care service companies. Nine of the companies had been used in prior compensation benchmarking studies used by the Company, and represent industries peers that the Company competes with for executive talent. Eleven of the companies were added to the peer comparison group based on their size, with a primary focus on their comparable revenues, and their industry classification under the GICS and SIC classifications. The peer comparison group consisted of the following companies: Aetna Inc., Amedisys, Inc., Amerigroup Corporation, Catalyst Health Solutions, Inc., Centene Corporation, CIGNA Corporation, Coventry Health Care, Inc., Gentiva Health Services, Inc., Health Net, Inc., HealthSpring, Inc., Healthways, Inc., Humana Inc., IPC The Hospitalist Company Inc., Magellan Health Services, Inc., MAXIMUS, Inc., Triple-S Management Corporation, UnitedHealth Group Incorporated, Universal American Corp., Wellcare Health Plans, Inc., and WellPoint, Inc. The total compensation paid to the Reda Firm for its consulting services was less than $30,000. The market study concluded that the total direct compensation paid to our chief executive officer has been and continues to be well below market, in particular with respect to his long-term incentive compensation. The long-term incentive compensation paid to our chief financial officer is also below market.

 

Although the compensation committee has historically conducted an annual benchmarking review, the compensation committee does not attempt to set each compensation element for each executive within a specific range relative to the compensation levels paid by industry peers. Instead, the compensation committee uses market comparisons as simply a reference point, and as one among many factors it considers in making compensation decisions. Other factors the compensation committee considers when making individual executive compensation decisions include:

 

 

 

We do not have a pre-defined framework that determines which of these factors may be more or less important, and the emphasis placed on specific factors may vary among the executives. Our approach is fundamentally driven by market realities and job responsibilities, which in most instances go beyond the job descriptions of our executive officers’ counterparts within peer companies. The compensation committee’s analysis is subjective in nature and utilizes no specific weighting of factors or formula in determining an executive’s compensation.

 

Elements of Compensation

 

The Company, through the activity of its compensation committee, seeks to achieve the objectives of its compensation programs through the following key compensation elements:

 

 

We use each element of compensation to satisfy one or more of our compensation objectives, and each element is an integral part of and supports our overall compensation program. Our annual performance-based incentive cash award program rewards short-term financial performance, while our equity compensation program rewards sustained performance and financial growth (as reflected in our stock price) and aligns the interests of our management with those of our stockholders. Each of these elements helps us to attract and retain qualified and capable executive officers.

 

Set forth below is a discussion of each element of compensation, the reason the Company pays each element, and how that element fits into the Company’s overall compensation philosophy. We believe the levels of compensation we provide should be competitive, reasonable, and appropriate for our business needs and circumstances.

 

Base Salary.  The objective of base salary is to reflect job responsibilities, value to the Company, and individual performance with respect to market competitiveness. These salaries are determined based on the factors described above, as well as the recommendation of our chief executive officer (except with respect to his own salary). Base salary amounts are reviewed at least annually. Subject to final board approval, the compensation committee sets the base salary levels of the Company’s chief executive officer and chief financial officer. The chief executive officer recommends for approval by the compensation committee the base salary levels of the Company’s other senior executive officers.

Annual Cash Bonus Incentives.  The compensation program provides for an annual cash bonus that is performance linked. The objective of the program is to compensate individuals based on the achievement of specific and objective annual goals that are intended to correlate closely with the growth of stockholder value.

 

For the chief executive officer and the chief financial officer, at the outset of the fiscal year the compensation committee sets overall objective Company performance goals for the year. The compensation committee then sets target bonus amounts which correspond to the respective performance goals. Once the fiscal year is concluded, achievement of the objective performance goals is assessed to determine the bonus payment for which the chief executive officer and chief financial officer are eligible. The objective performance goals established for fiscal 2011 are discussed below under “Fiscal Year 2011 Bonus Measures.” The achievement of the objective performance goals for fiscal 2010, and the related bonus payouts for the chief executive officer and chief financial officer, are discussed below under “Fiscal Year 2010 Bonus Achievement and Bonus Payouts.”

 

As it sets Company-wide performance goals, the compensation committee, working with senior management, also sets individual performance measures for each named executive officer other than the chief executive officer and chief financial officer. These measures allow the Company to incentivize performance objectives beyond purely financial measures, including, for example, exceptional performance of each executive’s particular functional responsibilities, his or her leadership, creativity and innovation, collaboration, the successful completion of a particular project or initiative, and other activities that are critical to driving long-term value for stockholders.

 

For the named executive officers, the preliminary bonus determination is based as a threshold matter upon the Company’s achievement of a specified amount of earnings before interest, tax, depreciation, and amortization, or EBITDA. The Company’s EBITDA performance is then combined with the recommendation of the chief executive officer, as well as the named executive officer’s performance as assessed against the goals set at the outset of the year. This assessment allows bonus decisions to take into account each named executive officer’s individual performance and unique contributions. This portion of the bonus may be adjusted up or down depending on the level of performance against the departmental and individual goals.

 

Compliance with Section 162(m).  Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public corporations for compensation over $1 million paid for any fiscal year to the corporation’s chief executive officer and four other most highly compensated executive officers as of the end of the fiscal year. However, the statute exempts qualifying performance-based compensation from the $1 million deduction limit if certain requirements are met. To the extent practicable, the compensation committee seeks to design the components of compensation so that these requirements are met and full deductibility under Section 162(m) is allowed. In particular, the compensation committee seeks to establish objective performance measures under the Company’s Incentive Compensation Plan. The compensation committee believes, however, that stockholder interests are best served by not restricting the compensation committee’s discretion and flexibility in crafting compensation programs, even though such programs may result in certain non-deductible compensation expenses. Accordingly, the compensation committee may approve elements of compensation for certain officers that are not fully deductible under Section 162(m).

 

Recently enacted federal legislation (the Patient Protection and Affordable Care Act, or ACA) amended the Internal Revenue Code to limit the amount that certain health care insurers and providers, including the Company, may deduct for a tax year beginning after 2012 for compensation to any employee in excess of $500,000. In contrast to Section 162(m) as currently in effect, this new legislation does not create any exceptions for performance-based compensation. The compensation committee did not consider the impact of this legislation when reviewing and determining executive bonuses for 2010 or compensation levels for 2011. However, the compensation committee reserves the right to use its judgment to authorize compensation payments that may be subject to the limit when the compensation committee believes such payments are appropriate and in the best interests of our stockholders, after taking into consideration changing business conditions and the performance of its employees.

 

Equity-Based Incentive Compensation.  The equity-based incentive compensation program provides a periodic award — typically annual — that is related to the underlying value of the Company’s common stock.

The objective of the program is to align compensation for both named executive officers and other management employees over a one-year or multi-year period directly with the interests of stockholders of the Company by motivating and rewarding the creation and preservation of stockholder value. The level of equity-based incentive compensation is determined based on an evaluation of competitive factors in conjunction with total compensation provided to the named executive officers and the goals of the compensation program as described above.

 

Pursuant to Company policy, equity incentive awards to the named executive officers and other management personnel are generally made on March 1st of each year. For new hires, restricted stock and stock option grants are approved by our chief executive officer pursuant to authority delegated to him by the compensation committee (but only with regard to non-Section 16 reporting persons), with the grant generally being made as of the first day of the first full month following the employee’s hire date.

 

The compensation committee reviews at least annually both the annual bonus program and the equity-based incentive program to ensure that their key elements continue to meet the objectives described above.

 

Retirement Plans.  The Company does not maintain a retirement pension plan. However, the named executive officers are eligible to participate in the Molina 401(k) Salary Savings Plan. The purpose of this program is to provide all Molina Healthcare employees with tax-advantaged savings opportunities and income after retirement. Eligible pay under the plans is limited to Internal Revenue Code annual limits. The Company makes a dollar-for-dollar match on the first four percent (4%) of salary electively deferred under the 401(k) Plan by all participants.

 

Deferred Compensation Plan.  The Company has established an unfunded non-qualified deferred compensation plan for certain key employees, including the named executed officers. Under the deferred compensation plan, eligible participants can defer up to 100% of their base salary and 100% of their bonus to provide for tax-deferred growth. The funds deferred are invested in any of twenty different mutual funds, including bond, money market, and large and small cap stock funds.

 

Employee Stock Purchase Plan.  With the exception of our chief executive officer and our chief financial officer who are not eligible due to their possessing more than five percent of our voting common stock as determined under Section 424(d) of the Internal Revenue Code, the named executive officers are eligible to participate in the Company’s 2002 Employee Stock Purchase Plan and, if approved by the stockholders, the 2011 Employee Stock Purchase Plan, on an equal basis with all other employees. The Employee Stock Purchase Plan allows eligible employees to purchase from the Company shares of its common stock at a 15% discount to the market price during the successive six-month offering periods under the plan.

 

Health and Insurance Benefits.  With limited exceptions, the Company supports providing benefits to named executive officers that are substantially the same as those offered to salaried employees generally. The named executive officers are eligible to participate in Company-sponsored benefit programs on the same terms and conditions as those made available to salaried employees generally. Basic health benefits, life insurance, disability benefits, and similar programs are provided to ensure that employees have access to healthcare and income protection for themselves and their family members.

 

Severance and Change in Control Benefits.  We have entered into employment or change in control agreements with our named executive officers pursuant to which they are eligible under certain circumstances for severance and change in control benefits. The severance and change in control payments and benefits provided under the employment or change in control agreements are independent of other elements of compensation. A description of the material terms of our severance and change in control arrangements can be found later in this proxy statement under “Potential Payments Upon Termination and Change in Control.” The compensation committee believes that severance and change in control benefits are necessary to attract and retain senior management talent. Our agreements are designed to attract key employees, preserve executive morale and productivity, and encourage retention in the face of the potentially disruptive impact of an actual or potential change in control. These benefits allow executives to assess takeover bids objectively without regard to the potential impact on their own job security.

Perquisites and Other Personal Benefits.  The Company does not provide named executive officers with any material perquisites or other personal benefits.

 

Fiscal Year 2011 Base Salaries

 

Effective as of January 1, 2011, the compensation committee determined that Dr. J. Mario Molina’s fiscal year 2011 base salary as chief executive officer shall be increased from $850,000 to $935,000, John Molina’s fiscal year 2011 base salary as chief financial officer shall be increased from $775,000 to $852,500, and Terry Bayer’s fiscal year 2011 base salary as chief operating officer shall be increased from $500,000 to $625,000. The fiscal year 2011 base salary for Joseph W. White, our chief accounting officer, shall be increased from $390,000 to $410,000. In connection with his reassignment to the position of medical director of MMS, Dr. Howatt’s 2011 base salary shall be $350,000. Since 2011 bonus measures are based on a percentage of base salary, base salary increases shall have the effect of increasing the size of cash incentive bonuses.

 

Fiscal Year 2011 Bonus Measures

 

Bonus Opportunity Levels.  In February 2011, the compensation committee established the cash incentive bonus opportunity levels and bonus measures for the chief executive officer, chief financial officer, and chief operating officer for fiscal year 2011. Dr. Molina’s bonus opportunity shall be 120% of his base salary, or $1,122,000; John Molina’s bonus opportunity shall be 100% of his base salary, or $852,500; and the bonus opportunity for Ms. Bayer shall be 85% of her base salary, or $531,250. The bonus opportunity for Mr. White shall be 40% of his base salary, or $164,000. Notwithstanding these bonus opportunity amounts, the compensation committee shall retain the discretion to grant cash bonus awards in excess of these amounts for exemplary performance.

 

CEO Bonus Measure.  Dr. Molina’s bonus performance measure as chief executive officer for 2011 shall be the Company’s fiscal year 2011 EBITDA as reported in its financial statements. EBITDA shall be calculated by adding back depreciation and amortization to operating income as reported in the Company’s condensed consolidated statement of cash flows. The EBITDA levels and related bonus payouts for the measure shall be as follows:

 

 

No bonus shall be earned under this measure for performance below the 50% threshold level of EBITDA. The bonus amounts shall be interpolated linearly to correspond with the achievement of EBITDA between the 50% and 125% levels, and shall be capped at the 125% level.

 

CFO, COO, and CAO Bonus Measures.  The single bonus performance measure for each of the chief financial, the chief operating officer, and the chief accounting officer, shall also be EBITDA. The EBITDA measure shall be applied in the same manner as for Dr. Molina, subject to the differing baseline bonus opportunity percentages and base salary levels.

 

The compensation committee reserves the right to exercise its discretion to increase or decrease the overall cash bonus to be paid to a named executive officer. However, the compensation committee shall not increase a particular bonus award that is otherwise compliant with Internal Revenue Code Section 162(m) such that that award becomes non-compliant.

 

2011 Equity-Based Incentive Compensation

 

In January 2011, the compensation committee retained the Reda Firm to analyze the potential award of a one-time equity grant to the chief executive officer, the chief financial officer, and the chief operating officer in order to make their equity-based incentive compensation closer to the market median, and also to reward superior performance over the preceding several years. The Reda Firm analyzed the potential size of the

awards, the design of the awards such as the vesting schedule and/or possible performance conditions, and other considerations such as Section 162(m) tax deductibility and best corporate governance practices. The Reda Firm noted that the long-term incentive awards to the identified executives had been well below market in the preceding two years, and that the Company’s performance as measured by both one-year and three-year total shareholder return had been at or slightly above the median of both the 400-plus companies within Global Industry Classification Standard 3510, and the subcategory of managed health care companies (GICS 35102030) within that Standard.

 

Based on the Reda Firm’s analysis and the considerations discussed above, the compensation committee decided to grant to Dr. Molina 100,000 shares of restricted stock, to John Molina 75,000 shares of restricted stock, and to Terry Bayer 18,000 shares of restricted stock. Each of the grants were made effective as of March 1, 2011, and shall vest on March 1, 2012, provided that: (i) the Company’s total operating revenue for 2011 is equal to or greater than $3,678,000,000; and (ii) the respective officer continues to be employed by the Company as of March 1, 2012. In the event both vesting conditions are not achieved, the equity compensation awards shall lapse. The compensation committee also granted to Mr. White 25,000 shares of restricted stock, vesting in one-quarter increments over four years.

 

Fiscal Year 2010 Bonus Achievement and Bonus Payouts

 

As established by the compensation committee in early 2010, the 2010 bonus award for Dr. Molina was to be based on the two performance benchmarks of health plan EBITDA, and total dividends to the parent. EBITDA was calculated by adding back depreciation and amortization expense to health plan operating income, and total dividends to the parent included total dividends paid to Molina Healthcare, Inc. during fiscal year 2010 by its nine health plan subsidiaries (excluding the recently acquired Wisconsin health plan). For Dr. Molina, the EBITDA measure corresponded to a bonus opportunity equal to 90% of his 2010 base salary or $765,000, and the total dividends to parent measure corresponded to the remaining 10% of his base salary, or $85,000. Both performance measures were achieved in full, resulting in a 2010 cash bonus payout to Dr. Molina under these measures of $850,000.

 

The 2010 bonus award for John Molina was to be based on the four performance benchmarks of EBITDA, total dividends to the parent, the closing of the acquisition of the health information management, or HIM, business of Unisys Corporation, and the establishment of a new line of business or the award of a contract in a new state (other than HIM). For John Molina, the EBITDA measure corresponded to 45% of his bonus opportunity, or $261,563; the total dividends to parent measure corresponded to 25% of his bonus opportunity, or $145,313; the closing of the acquisition of the HIM business of Unisys Corporation corresponded to 15% of his bonus opportunity, or $87,188; and the establishment of a new line of business or the award of a contract in a new state corresponded to the the final 15% of his bonus opportunity, or $87,188. John Molina’s total bonus opportunity was 75% of his base salary, or $581,250. All four of the bonus measures were achieved in full, resulting in a 2010 cash bonus payout to John Molina under these measures of $581,250.

 

In addition to these cash bonus awards to Dr. Molina and John Molina, and taking into account the Company’s strong 2010 financial results, the strategic positioning of the Company, the compensation committee’s discretionary decision to withhold earned bonuses for 2009, and the below-market total compensation paid in prior years, the compensation committee exercised its discretion to award Dr. Molina an additional cash bonus for 2010 in the amount of $1.1 million, and to award John Molina an additional cash bonus for 2010 of $900,000.

 

The baseline bonus potential for fiscal year 2010 for Ms. Bayer and Dr. Howatt was to be 50% of their 2009 base salary, or $250,000 and $208,500, respectively. For Ms. Bayer, 45% of her bonus potential, or $112,500, was based on the EBITDA target; 10%, or $25,000, was based on the total dividends to the parent; 25%, or $62,500, was based on the closing of the acquisition of the HIM business; and 20%, or $50,000, was based on the Company’s Medicare enrollment project. All four of the bonus measures were achieved in full, resulting in a 2010 cash bonus payout to Terry Bayer under these measures of $250,000.

For Dr. Howatt, 30% of his bonus potential, or $64,500, was based on the EBITDA target; 35%, or $72,250, on the completion of a project to improve patient safety and quality; and 35%, or $72,250 on the completion of a project to improve the appropriateness of utilization. The patient safety project pertained to the improved management of high risk pregnancies through the 17-P pharmacy program, decreasing hospital re-admissions, and decreasing inappropriate emergency room use. The utilization project pertained to improving access to primary care and shifting inappropriate emergency room care back to the primary care doctor’s office, decreasing the inappropriate use of pharmaceuticals, and re-directing pharmaceuticals away from outpatient vendors to contracted providers. All four of the bonus measures were achieved in full, resulting in a 2010 cash bonus payout to Dr. Howatt under these measures of $208,500.

 

Mr. White received a bonus of $156,000 for fiscal year 2010, representing 40% of his 2010 annual base salary.

 

Mr. Andrews’ employment with the Company terminated on July 29, 2010. As part of his severance payment, the Company paid Mr. Andrews a prorated amount of his 2010 $250,000 bonus opportunity, or $145,833.

 

The following table provides information concerning total compensation earned or paid to the chief executive officer, the chief financial officer, and the three other most highly compensated executive officers of the Company who served in such capacities as of December 31, 2010 for services rendered to the Company during the last year. These five officers are referred to as the “named executive officers” in this proxy statement.

 

SUMMARY COMPENSATION TABLE

 

 

 

 

 

The following table provides information with respect to grants of plan-based awards made during fiscal year 2010 to the named executive officers. The options have an exercise price equal to the closing price of the Company’s common stock on the NYSE on the grant date, have a ten-year life, and vest in equal installments over four years beginning one year after grant date, subject to acceleration in certain circumstances. The shares of restricted stock vest in equal installments over four years, beginning one year after the grant date, subject to acceleration in certain circumstances.

 

GRANTS OF PLAN-BASED AWARDS

 

 

 

 

The following table provides information with respect to outstanding stock options and restricted stock awards held by the named executive officers as of the end of the fiscal year 2010. The market value of restricted stock awards is computed using our closing stock price on December 31, 2010, of $27.85.

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

 

 

The following table provides information with respect to the vesting of restricted stock awards during fiscal year 2010 held by the named executive officers. No named executive officers exercised any options during 2010.

 

OPTION EXERCISES AND STOCK VESTED

 

 

 

Pursuant to the Company’s unfunded and non-qualified 2004 Deferred Compensation Plan, eligible participants can defer up to 100% of their base salary and 100% of their bonus so that it can grow on a tax deferred basis. The investment options available to an executive under the deferral program consist of twenty different mutual funds, including bond, money market, and large and small cap stock funds.

 

The following table provides information for fiscal year 2010 for each named executive officer regarding such individual’s accounts in the 2004 Deferred Compensation Plan as of the end of fiscal year 2010.

 

NONQUALIFIED DEFERRED COMPENSATION

 

 

We have entered into certain employment or change in control agreements that will require the Company to provide compensation to the named executive officers in the event of a termination of employment or a change of control of the Company.

 

We have entered into employment agreements with our chief executive officer, J. Mario Molina and our chief financial officer, John C. Molina.

 

Unless terminated, the agreements with each of Dr. Molina and Mr. Molina are automatically renewed on an annual basis. During fiscal year 2010, Dr. Molina’s annual salary was $850,000, with a baseline target bonus of up to 100% of his base salary; John Molina’s annual salary was $775,000, with a baseline target bonus of up to 75% of his base salary. On February 16, 2011, the compensation committee determined to increase Dr. Molina’s and Mr, Molina’s annual salaries for fiscal year 2011 and their baseline target bonuses for fiscal year 2011 as footnoted in their respective tables below.

 

The agreements with each of Dr. Molina and Mr. Molina provide for the employees’ continued employment for a period of two years following the occurrence of a change of control (as defined below). Under the agreements, each executive’s terms and conditions of employment, including his or her rate of base salary, bonus opportunity, benefits, and title, position, duties, and responsibilities, are not to be modified in a manner adverse to the executive following the change of control. If an eligible executive’s employment is terminated by us without cause (as defined below) or is terminated by the executive for good reason (as defined below) within two years of a change of control, we will provide the executive as a severance payment with two times the executive’s combined annual base salary and termination bonus for the year of termination, plus the full termination bonus for the year of termination, full vesting of Section 401(k) employer

contributions and stock options, and a cash payment of $135,000 for three years’ worth of continued health and welfare benefits. We will also make additional payments to the executive who incurs any excise taxes pursuant to the golden parachute provisions of the Internal Revenue Code in respect of the benefits and other payments provided under the agreement or otherwise on account of the change of control. The additional payments will be in an amount such that, after taking into account all applicable federal, state and local taxes applicable to such additional payments, the executive is able to retain from such additional payments an amount equal to the excise taxes that are imposed without regard to these additional payments.

 

Additionally, if the executive’s employment is terminated by us without cause or the executive resigns for good reason, the executive will be entitled to receive one year’s base salary, the termination bonus for the year of the employment termination, full vesting of Section 401(k) employer contributions and stock options, and a cash payment of $65,000 for 18 months’ worth of continued health and welfare benefits. Payment of severance benefits is contingent upon the executive’s signing a release agreement waiving claims against us. As required by Internal Revenue Code Section 409A, applicable amounts will be paid six months after the executive’s separation from service.

 

A change of control generally means a merger or other change in corporate structure after which the majority of our stockholders are no longer stockholders, a sale of substantially all of our assets, or our approved dissolution or liquidation. Cause is generally defined as the occurrence of one or more acts of unlawful actions involving moral turpitude or gross negligence or willful failure to perform duties or intentional breach of obligations under the employment agreement. Good reason generally means the occurrence of one or more events that have an adverse effect on the executive’s terms and conditions of employment, including any reduction in the executive’s base salary, a material reduction of the executive’s benefits or substantial diminution of the executive’s incentive awards or fringe benefits, a material adverse change in the executive’s position, duties, reporting relationship, responsibilities or status with us, the relocation of the executive’s principal place of employment to a location more than 50 miles away from his prior place of employment or an uncured breach of the employment agreement. However, no reduction of salary or benefits will be good reason if the reduction applies to all executives proportionately.

 

The tables below reflect the approximate amount of compensation payable to each of the named executive officers of the Company in the event of termination of such executive’s employment under the various listed scenarios. The amount of compensation payable to each such named executive officer in the event of voluntary termination, early retirement, involuntary not-for-cause termination, for cause termination, termination following a change of control, disability, or death, is shown below. The amounts shown assume that such termination was effective as of December 31, 2010, and exclude ordinary course amounts earned or benefits accrued as a result of prior service during the year. The various amounts listed are estimates only. The actual amounts to be paid can only be determined at the time of such executive’s separation from the Company.

The following table describes the potential payments upon termination or change in control of the Company for J. Mario Molina, the Company’s chief executive officer.

 

 

 

 

The following table describes the potential payments upon termination or change in control of the Company for John C. Molina, the Company’s chief financial officer.

 

 

 

 

We have entered into change of control agreements with Terry Bayer, our chief operating officer, James W. Howatt, our former chief medical officer and now medical director of MMS, and Joseph W. White, our chief accounting officer. The agreements with Ms. Bayer, Dr. Howatt, and Mr. White provide for the employees’ continued employment for a period of twelve months following the occurrence of a change of control. Under these agreements, each executive’s terms and conditions of employment, including his or her rate of base salary, bonus opportunity, benefits, and title, position, duties, and responsibilities, are not to be modified in a manner adverse to the executive following the change of control. If an eligible executive’s employment is terminated by us without cause or is terminated by the executive for good reason within twelve months of a change of control, we will provide the executive with two times the executive’s annual base salary, a pro rata portion of the executive’s target bonus for the year of termination, full vesting of Section 401(k) employer contributions and stock options, and a cash payment of $43,500 for 12 months’ worth of continued health and welfare benefits. Payment of any severance benefits is contingent upon the executive’s signing a release agreement waiving claims against us. As required by Internal Revenue Code Section 409A, applicable amounts will be paid six months after the executive’s separation from service.

The following table describes the potential payments upon termination or change in control of the Company for Terry Bayer, the Company’s chief operating officer.