HEALTH NET, INC. MANAGEMENT INCENTIVE PLAN

Exhibit 10.40

HEALTH NET, INC.

MANAGEMENT INCENTIVE PLAN

The Health Net, Inc. Management Incentive Plan (the “Plan”) seeks to create incentives for key employees of Health Net, Inc. (the “Company”) and its subsidiaries to enhance the efficiency and profitability of the Company and its subsidiaries by providing participating employees with an opportunity to earn financial rewards in the form of annual incentive payments if certain performance objectives are met.

For purposes of the Plan, certain terms used herein shall be defined as follows:

A Management Employee shall be eligible to participate in the Plan for a Plan Year if he or she is employed on or before September 30 of such Plan Year by the Company or a Subsidiary, unless the Management Employee is eligible to participate in any other incentive bonus plan of the Company or a Subsidiary (e.g., the Health Net, Inc. Executive Officer Incentive Plan or other specific bonus plan).

The Compensation and Stock Option Committee shall determine which eligible Management Employees shall become Participants in the Plan for a Plan Year prior to the beginning of such Plan Year, or as soon as practicable thereafter, based upon recommendations of senior management of the Company. As soon as reasonably practicable thereafter, such Participants shall be notified of their selection for participation in the Plan for such Plan Year and of the manner in which their Incentive Awards may be earned.

The Compensation and Stock Option Committee shall also have discretion during any Plan Year (i) to select additional eligible Management Employees for participation in the Plan and (ii) to terminate the participation in the Plan of any Participants. In any such case, Incentive Awards for any such Management Employee shall be prorated, based on the portion of the Plan Year during which the Management Employee was a Participant. The Incentive Award of any Participant who is on an unpaid leave of absence for 30 days or more during a Plan Year may be prorated based on the number of days of such Plan Year during which such Management Employee was in active pay status, as determined by the Senior Vice President Organization Effectiveness.

A Management Employee shall not be entitled to participate in the Plan for a Plan Year solely because such Management Employee was selected to participate in the Plan for any prior Plan Year.

Prior to the beginning of each Plan Year, or as soon thereafter as is reasonably practicable, the Compensation and Stock Option Committee shall determine the various categories of Incentive Awards, based upon employment responsibilities (the “Incentive Award Groups”), that shall be available under the Plan for the Plan Year.

Each Plan Year, the Compensation and Stock Option Committee also shall establish with respect to each Incentive Award Group, a target incentive level (the “Target Incentive Level”) which shall apply to Participants in the Incentive Award Group for such Plan Year. The Target Incentive Level for each Incentive Award Group shall be expressed as a

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percentage of the Base Salary of the Participants therein, and, when multiplied by each such Participant’s Base Salary, shall represent the amount of the Incentive Award that such Participant would be entitled to receive if the relevant Performance Objectives, as hereinafter defined, have been fully attained. The Compensation and Stock Option Committee shall have discretion each Plan Year to establish with respect to any Performance Objective a minimum performance level to be attained for such Plan Year below which no Incentive Award would be payable hereunder. Notwithstanding the preceding sentences of this Section V(b), the Compensation and Stock Option Committee shall have discretion each Plan Year to establish, with respect to any Performance Objectives, performance levels which will result in the payment of Incentive Awards which are in an amount either greater than the Target Incentive Levels or less than any minimum performance level previously established for such Plan Year.

The payment of Incentive Awards to Participants under the Plan shall be determined by the extent to which certain performance objectives (the “Performance Objectives”) have been attained with respect to each Plan Year. Prior to the beginning of each Plan Year, or as soon thereafter as is reasonably practicable, the Compensation and Stock Option Committee shall establish the Performance Objectives which will apply to each Incentive Award Group for the Plan Year and the manner in which Incentive Awards may be earned for such Plan Year. Unless otherwise determined by the Compensation and Stock Option Committee, there shall be three (3) categories of Performance Objectives, as follows:

(1) Company Performance Objectives;

(2) Business Unit Performance Objectives; and

(3) Individual Performance Objectives.

Incentive Awards with respect to Participants in each Incentive Award Group may be determined for any Plan Year on the basis of one or any combination of the Performance Objectives, as determined by the Compensation and Stock Option Committee in its discretion.

The Company Performance Objective for each Plan Year shall be established by the Compensation and Stock Option Committee, taking into account the recommendations of the Chief Executive Officer of the Company (the “CEO”) and, unless otherwise determined by the Compensation and Stock Option Committee with respect to any Plan Year, shall be stated on the basis of the Earnings Per Share of the Company. The Compensation and Stock Option Committee may, in its sole discretion, adjust such Company Performance Objectives on account of any extraordinary changes which occur during the Plan Year, such as changes in accounting practices or the law.

The Business Unit Performance Objectives and Individual Performance Objectives shall be determined by the Compensation and Stock Option Committee each Plan Year, taking into account the recommendations of the CEO and other designated officers of the Company, and shall be based upon specific written goals and objectives which are unique to the relevant Business Unit or eligible Management Employee.

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As soon as practicable following the end of each Plan Year, the Compensation and Stock Option Committee, after taking into account evaluations and recommendations of the CEO and other designated officers of the Company, shall evaluate the degree to which the Performance Objectives have been met for the Plan Year for purposes of determining the amounts of any Incentive Awards payable under the Plan.

Incentive Awards shall be payable to Participants no later than the March 15th occurring immediately after the Plan Year in which an Incentive Award was earned, unless a Participant elects, at the time and in the manner determined by the Compensation and Stock Option Committee, to defer the receipt of an Incentive Award in accordance with rules and procedures established by the Senior Vice President Organization Effectiveness.

Unless otherwise determined by the Compensation and Stock Option Committee, the Incentive Award for a Participant who changes his or her employment position within the Company during a Plan Year shall be determined by prorating the Target Incentive Level and the Incentive Award pertaining to each of the Participant’s positions on the basis of the portion of the Plan Year employed in each position.

Unless otherwise determined by the Compensation and Stock Option Committee, a Participant whose employment terminates for any reason prior to December 31 of a Plan Year, shall not be entitled to receive an Incentive Award for such Plan Year.

The Plan shall be administered by the Compensation and Stock Option Committee, which shall have full power and authority to interpret, construe and administer the Plan in accordance with the provisions herein set forth. The Compensation and Stock Option Committee’s interpretation and construction hereof, and actions hereunder, or the amount or recipient of the payments to be made herefrom, shall be binding and conclusive on all persons for all purposes. In this connection, the Compensation and Stock Option Committee may delegate to any corporation, committee or individual, regardless of whether the individual is an employee of the Company or a Subsidiary, the duty to act for the Compensation and Stock Option Committee hereunder. No officer or employee of the Company or any Subsidiary shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of the Plan unless attributable to his or her own willful misconduct or lack of good faith. The expenses of administering the Plan shall be paid by the Company and each Subsidiary and shall not be charged against the Plan.

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The Plan may be amended or terminated at any time and for any reason by the Compensation and Stock Option Committee. The Compensation and Stock Option Committee may, in its sole discretion, reduce or eliminate an Incentive Award to any Participant at any time and for any reason. The Plan is specifically designed to guide the Company in granting Incentive Awards and shall not create any contractual right of any Management Employee to any Incentive Award prior to the payment of such award.

No Incentive Award payable hereunder, nor any right to receive any future Incentive Award hereunder, may be assigned, alienated, sold, transferred, anticipated, pledged, encumbered, or subjected to any charge or legal process, and if any such attempt is made, or a person eligible for any Incentive Award hereunder becomes bankrupt, the Incentive Award under the Plan which would otherwise be payable with respect to such person may be terminated by the Compensation and Stock Option Committee which, in its sole discretion, may cause the same to be held or applied for the benefit of one or more of the dependents of such person or make any other disposition of such award that it deems appropriate.

The Company shall have the right to deduct and withhold from all Incentive Awards all federal, state and local taxes as may be required by law. In addition to the foregoing, the Company shall have the right to set off against the amount of any Incentive Award which would otherwise be payable hereunder, the amount of any debt, judgment, claim, expense or other obligation owed at such time by the Participant to the Company or any Subsidiary.

Nothing in this Plan shall require the Company or any Subsidiary to segregate or set aside any funds or other property for purposes of paying all or any portion of an Incentive Award hereunder. No Participant shall have any right, title or interest in or to any Incentive Award hereunder prior to the actual payment thereof, nor to any property of the Company or any Subsidiary. Neither the adoption of the Plan nor the continued operation thereof shall confer upon any employee any right to continue in the employ of the Company or any Subsidiary or shall in any way affect the right and power of the Company or any Subsidiary to dismiss or otherwise terminate the employment of any employee at any time for any reason, with or without cause.

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Titles and headings of sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.

All questions pertaining to the construction, validity and effect of the Plan shall be determined in accordance with the laws of the State of Delaware.

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