UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section
14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
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☑ | Definitive Proxy Statement | |
☐ | Definitive Additional Materials | |
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CVS Health Corporation
(Name of Registrant as Specified In Its
Charter)
(Name of Person(s) Filing Proxy
Statement, if Other Than the Registrant)
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Notice
of
Annual Meeting of Stockholders |
May 19, 2016; 9:00 a.m. |
CVS Health
Corporation |
Message from our Chairman and our Chief Executive Officer
Dear Fellow Stockholders:
CVS Health enjoyed a successful 2015 that was highlighted by excellent performance across our enterprise and two key acquisitions that support our strategy for growth in an evolving health care market. That strategy is focused on creating superior value for patients, payors, and providers through an unmatched suite of integrated assets.
We are truly a one-of-a-kind company that helps patients get the care they need through the channel that works best for them. Products such as Maintenance Choice®, Specialty Connect, and Pharmacy Advisor® remain unmatched in the marketplace. In specialty, we have unparalleled capabilities to holistically manage patients, provide clinical support, and drive superior outcomes.
From our nationwide retail footprint to our leading pharmacy benefits management (PBM) and specialty businesses, and now our leading presence in long-term pharmacy care, we have forged a competitive advantage that is helping us benefit from a broad range of market trends. We broadened our reach in 2015 with the acquisition of Omnicare, the nations leading provider of pharmacy services to the long-term care market. We also grew our core pharmacy business with the purchase of more than 1,670 pharmacies and nearly 80 retail clinics from Target Corporation, which expanded our pharmacy count by 20 percent and our number of clinics by 8 percent. Both acquisitions represent efficient strategic uses of our capital that will help drive long-term growth.
Importantly, we maintained our focus on the three pillars that we consider essential to maximizing stockholder value: driving productive, long-term growth; generating significant free cash flow; and optimizing capital allocation. We delivered solid year-over-year growth in revenues, operating profit and earnings per share, and returned more than $6 billion to stockholders through dividends and share repurchases.
As a pharmacy innovation company, we are working every day to provide people with high quality pharmacy and basic health care services, and to make these services accessible and affordable. Our corporate social responsibility roadmap, Prescription for a Better World, aligns with our purpose of helping people on their path to better health and extends to our sustainable business operations, workplace, supply chain and communities.
In addition to engaging with our communities, we seek to engage proactively with our stockholders to ensure that we understand your needs. We believe that accountability to our stockholders is a mark of good governance, and we pride ourselves on strong corporate governance practices. As a result of conversations with many of you last year, we redesigned our long-term incentive plan payout and adopted a proxy access by-law. Youll find the details within this proxy statement, and we certainly welcome your feedback.
Our 2016 Annual Meeting of Stockholders will be held on Thursday, May 19, 2016, at 9:00 a.m., at the CVS Health Customer Support Center located at One CVS Drive in Woonsocket, Rhode Island. We invite you to attend, and ask you to please vote at your earliest convenience, whether or not you plan to attend. Your vote is important.
We remain confident that our leadership across the pharmacy spectrum will allow us to continue to drive superior value for our health care partners and our shareholders. Thank you for investing in CVS Health.
Sincerely, |
||
David W. Dorman |
Larry J. Merlo |
CVSHealthannualmeeting.com |
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2016 Proxy Statement |
CVSHealthannualmeeting.com |
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Notice of Annual
Meeting of
Stockholders
Date and Time
May 19, 2016, 9:00 A.M. EDT
Place
CVS Health Corporation
Customer Support Center
One CVS
Drive
Woonsocket, Rhode Island 02895
● |
Elect
11 directors named in this proxy statement; |
● |
Ratify the appointment of Ernst
& Young LLP (Ernst & Young) as the Companys independent
registered public accounting firm for fiscal 2016;
|
● |
Act, by non-binding vote, to approve
the Companys executive compensation as disclosed in this proxy statement;
|
● |
Act
on two stockholder proposals, if properly presented; and
|
● |
Conduct any other business properly brought before the Meeting. |
Eligibility to Vote
Stockholders of record at the close of business on March 24,
2016 may vote at the Meeting.
By Order of the Board of Directors,
Colleen M. McIntosh
Senior Vice President & Corporate
Secretary
How to Vote
Your vote is important to the future of CVS Health. You are eligible to
vote if you were a stockholder of record at the close of business on March 24,
2016. Even if you plan to attend the meeting, please vote as soon as possible
using one of the following methods. In all cases, you should have your proxy
card in hand:
Use the
Internet | ||
Use a Mobile
Device | ||
Call
Toll-Free | ||
Mail Your Proxy Card
|
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting to Be Held on May 19, 2016:
The proxy statement and annual report to security holders are available at www.cvshealthannualmeeting.com and at www.proxyvote.com/cvs.
Your vote is important.
Whether or not you plan to attend the Annual Meeting, please vote your shares. In addition to voting in person or by mail, stockholders of record have the option of voting by telephone or via the Internet. If your shares are held in the name of a bank, broker or other holder of record (i.e., in street name), please read your voting instructions to see which of these options are available to you. Even if you are attending the Annual Meeting in person, we encourage you to vote in advance by mail, phone or Internet.
We began mailing this proxy statement and the enclosed proxy card on or about April 8, 2016 to all stockholders entitled to vote. Our 2015 Annual Report, which includes our financial statements, is being sent with this proxy statement.
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2016 Proxy Statement |
This summary highlights selected information in this Proxy Statement please review the entire document before voting.
All of our Annual Meeting materials are available in one place at www.cvshealthannualmeeting.com. There, you can download electronic copies of our Annual Report and Proxy Statement, and use the link to vote. |
The CVS Health Board
You are asked to vote on the election of
the following 11 director nominees to serve on the Board of CVS Health. All
directors are elected by a majority of votes cast.
DIRECTOR SINCE |
OTHER PUBLIC COMPANY BOARDS |
CVS HEALTH COMMITTEES* |
||||||||||||||||||
NAME, PRIMARY OCCUPATION | AGE | INDEPENDENT | A | MP&D | N&CG | PS&CQ | E | |||||||||||||
Richard M. Bracken | 63 | 2015 | YES | None | | | ||||||||||||||
Chairman and CEO of HCA Holdings, Inc. (Retired) | ||||||||||||||||||||
C. David Brown II | 64 | 2007 | YES | 2 | | | | |||||||||||||
Chairman of Broad and Cassel | ||||||||||||||||||||
Alecia A. DeCoudreaux | 61 | 2015 | YES | None | | | ||||||||||||||
President of Mills College | ||||||||||||||||||||
Nancy-Ann M. DeParle | 59 | 2013 | YES | 1 | | | ||||||||||||||
Co-Founding Partner of | ||||||||||||||||||||
Consonance Capital Partners, LLC | ||||||||||||||||||||
David W. Dorman | 62 | 2006 | YES | 2 | | | | |||||||||||||
Chairman of the Board of | ||||||||||||||||||||
CVS Health Corporation, Founding Partner of | ||||||||||||||||||||
Centerview Capital Technology Fund | ||||||||||||||||||||
Anne M. Finucane | 63 | 2011 | YES | None | | | ||||||||||||||
Vice Chairman of | ||||||||||||||||||||
Bank of America Corporation | ||||||||||||||||||||
Larry J. Merlo | 60 | 2010 | NO | None | | |||||||||||||||
President and CEO of | ||||||||||||||||||||
CVS Health Corporation | ||||||||||||||||||||
Jean-Pierre Millon | 65 | 2007 | YES | None | | | ||||||||||||||
President and CEO of | ||||||||||||||||||||
PCS Health Systems, Inc. (Retired) | ||||||||||||||||||||
Richard J. Swift | 71 | 2006 | YES | 4 | | | ||||||||||||||
Chairman of the Board, President and CEO of | ||||||||||||||||||||
Foster Wheeler Ltd. (Retired) | ||||||||||||||||||||
William C. Weldon | 67 | 2013 | YES | 2 | | | ||||||||||||||
Chairman of the Board and CEO of | ||||||||||||||||||||
Johnson & Johnson (Retired) | ||||||||||||||||||||
Tony L. White | 69 | 2011 | YES | 2 | | | ||||||||||||||
Chairman of the Board, President and CEO of | ||||||||||||||||||||
Applied Biosystems, Inc. (Retired) |
●: Committee Chair |
MP&D: Management Planning & Development |
PS&CQ: Patient Safety & Clinical Quality | ||
A: Audit |
N&CG: Nominating & Corporate Governance |
E: Executive |
* | Please note that the above chart shows committee membership as of our mailing date, April 8, 2016. Committee membership changed effective March 1, 2016 with the formation of our new Board committee. See pages 22-29 for details. |
CVSHealthannualmeeting.com |
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Proxy Statement Highlights |
|
The CVS Health Board
Director Independence |
Director Gender |
Director Tenure | ||
Independent: 10 Not Independent: 1 |
Female: 3 Male: 8 |
0-3 Years: 4 4-7 Years: 3 >7 Years: 4 | ||
10 CVS Health Directors, including our Chairman, are independent of management. |
Our director nominees bring a balance of experience and fresh perspective to our boardroom. The average tenure of CVS Health directors is under six years. |
Director Skills and Experience
Our director nominees possess relevant experience, skills and qualifications that contribute to a well-functioning Board to effectively oversee the Companys strategy and management. Areas of director expertise include:
For more information about our director nominees, please refer to pages 11-16 of this proxy statement. |
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2016 Proxy Statement |
|
Proxy Statement Highlights |
Board
Developments and Highlights
The CVS Health
Board continues to evaluate our governance arrangements to ensure that the right
mix of individuals are present in our boardroom, to best serve the stockholders
we represent by ensuring effective oversight of our strategy and
management.
FURTHER | ||||
2015-2016
Board |
●Formation of a new
Committee focused on patient safety and clinical quality |
page 28 | ||
●Adoption of a proxy
access by-law |
page 22 | |||
Board |
●Our Board supports
our stockholder outreach program and has responded to stockholder input
with changes in our compensation program and other areas |
pages 9, 20, 33, 37 | ||
●CVS Health directors
welcome communications from our stockholders and other interested parties
|
page 20 | |||
Director Alignment |
●At least 75% of our
directors annual retainer mix is paid in shares of CVS Health common
stock |
page 29 | ||
●Directors must own
at least 10,000 shares of CVS Health common stock |
page 68 | |||
●All directors had
over 75% meeting attendance |
page 29 |
Corporate Governance Highlights
The Board of CVS Health is committed to maintaining the highest standards of corporate governance, and has established a strong and effective framework by which the Company is governed and reviewed. Highlights include:
FURTHER | ||||
2015-2016 |
●In January 2016 we
adopted a proxy access by-law, allowing holders of at least 3% of our stock for a
period of three years the right to nominate candidates for up to 20% of
board seats, with a minimum of two seats |
page 22 | ||
Stockholder |
●Annual election of
all directors, annual Say on Pay vote |
pages 11, 33 | ||
●Stockholder outreach
program |
pages 9, 20, 33, 37 | |||
●Majority voting in
director elections |
page 17 | |||
●Right to act by
written consent and to call special meetings |
page 20 | |||
Committees |
●We have historically
had four Board Committees: Audit, Management Planning and Development,
Nominating and Corporate Governance and Executive |
page 22 | ||
●In March 2016 the
Board formed a new Committee, the Patient Safety and Clinical Quality
Committee, focused on the quality of pharmacy and medical care being
delivered by the Company |
page 28 | |||
●All members of
Audit, Management Planning and Development, Nominating and Corporate
Governance, and Patient Safety and Clinical Quality Committees are
independent of management |
pages 22-29 | |||
Board Oversight |
●Full Board and
individual Committee focus on understanding Company risks
|
page 20 | ||
●Annually, the Audit
Committee reviews our policies and practices with respect to risk
assessment and risk management, including discussing with management our
major risks and the steps that have been taken to monitor and mitigate
such risks |
pages 23-24 | |||
●Our independent
Chairman and our Chief Executive Officer (CEO) are focused on the
Companys risk management efforts and ensure that risk matters are
appropriately brought to the Board and/or its Committees for
review |
pages 20, 22 |
For more information on corporate governance at CVS Health, please refer to pages 11-30 of this proxy statement and to our website at http://investors.cvshealth.com/corporate-governance. |
CVSHealthannualmeeting.com |
7 |
Proxy Statement Highlights |
|
Performance Highlights
For
CVS Health, 2015 was a successful year. Here are some highlights:
Net Revenues ($
billions) 1 year growth of 10.0% |
Operating Profit ($ billions) 1 year growth of 7.4% |
Diluted Earnings Per Share from Continuing Operations ($) 1 year growth of 16.8% |
Total Shareholder Return (TSR) (%) Outperformed S&P 500 in all three periods |
Annual Cash Dividends ($ per share) 1 year increase of 27.3% |
For more information on our financial performance, please refer to page 35 of this proxy statement and to our Annual Report available at www.cvshealthannualmeeting.com. |
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2016 Proxy Statement |
|
Proxy Statement Highlights |
Leading
Practices in Compensation Programs
Our pay
practices align with our core compensation principles and facilitate our
implementation of those principles. They also demonstrate our commitment to
sound compensation and governance practices.
Our executive
compensation |
✓ |
Core Executive Compensation Principles Designed to Promote Company Growth | |
✓ |
Performance Measures Aligned with Stockholder Interests | ||
✓ |
Majority of the Total Compensation Opportunity is Performance-Based | ||
✓ |
LTIP Awards Settled in Stock that is Subject to Retention Requirement (Holding Period) | ||
✓ |
Stock Ownership Guidelines | ||
We apply leading
executive |
✓ |
No Excise Tax Gross-Ups | |
✓ |
No Option Repricing | ||
✓ |
No Recycling of Shares | ||
✓ |
Recoupment Policy | ||
✓ |
Broad Anti-Pledging and Hedging Policies | ||
✓ |
Executive Severance Policy | ||
✓ |
Limited Perquisites and Personal Benefits | ||
✓ |
SERP Closed to New Participants | ||
✓ |
Double Trigger Vesting of Equity Awards | ||
✓ |
Board Committee Oversight of Comprehensive Annual Compensation Program Risk Assessment |
Stockholder Outreach - Compensation and Governance
Actions
In 2015, following the redesign of
our proxy statement and enhanced disclosure regarding our prohibition
on tax
gross-ups, the modification of our peer group, and amendments of our stock
option grant policy to explicitly prohibit the re-pricing of stock options
without stockholder approval, we received a high level of stockholder support
for our executive compensation program, with a 94% vote in favor of our program.
During the fall of 2015, we reached out to our 50 largest stockholders, holders
of approximately 50% of our outstanding common stock in the aggregate, and
offered to discuss our compensation programs, corporate governance and any other
matters of interest. We had discussions with several stockholders and all were
generally pleased with our business results and the link between performance and
the compensation earned by key executives. During those discussions, however, we
heard several themes that caused us to take action:
WHAT WE HEARD | WHAT WE HAVE DONE IN RESPONSE |
INTENDED OUTCOME | WHEN EFFECTIVE | |||
You deliver a portion of performance-based long-term incentives in cash; the Company should consider settling future LTIP awards fully in common stock |
Shift to 100% common stock-settled awards starting with the 2016-2018 LTIP cycle |
Brings our practices into better alignment with the marketplace |
2016 awards vesting in 2018; outstanding awards vesting in 2016 and 2017 will continue to be paid in equal amounts of cash and common stock | |||
The Company should consider increasing the portion of long-term incentive pay that is based on awards considered to be performance-based |
Rebalanced the CEOs long-term incentive mix at target to be evenly split between performance-based LTIP and time-based RSU and stock option awards, versus current mix of 60% time-based and 40% performance-based |
Increases the portion of the CEOs compensation that is considered to be performance-based |
2016 | |||
Proxy access is a right that is important to stockholders |
Adopted a proxy access by-law |
Provides stockholders the right to nominate candidates for election to our Board and have their nominees included in our proxy statement |
2016 |
CVSHealthannualmeeting.com |
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Proxy Statement Highlights |
|
Our 2015
Executive Pay
The following shows the breakdown of
reported 2015 compensation for our CEO and our other named executive officers,
or NEOs.
CEO | All Other NEOs | |||
For more information on our executive compensation practices, please refer to Compensation Discussion and Analysis, beginning on page 35 of this proxy statement. |
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2016 Proxy Statement |
Corporate Governance and
Related Matters
ITEM 1:
ELECTION OF DIRECTORS
Our Board of
Directors has nominated 11 directors for election at the Annual Meeting. Each
nominee is currently serving as one of our directors. If you re-elect them, they
will hold office until the next annual meeting.
In recognition of the fact that the selection of qualified directors is complex and crucial to the long-term success of the Company, the Nominating and Corporate Governance Committee (for purposes of this Item 1, the Committee) has established guidelines for the identification and evaluation of candidates for membership on the Companys Board of Directors (the Board). Those guidelines are included in this proxy statement on page 18. When considering current directors for re-nomination to the Board, the Committee takes into account the performance of each director, which is part of the Committees annual Board evaluation process. That process consists of individual interviews of each director by our General Counsel, followed by a report summarizing his findings. The Committee then recommends actions for the Board to consider and adopt as it sees fit. The Committee also reviews the composition of the Board in light of the current challenges and needs of the Board and the Company, and determines whether it may be appropriate to add or remove individuals after considering, among other things, the need for audit committee expertise and issues of independence, diversity, judgment, character, reputation, age, skills, background and experience. The Committee believes that the Board, as currently constituted, is well-balanced and that it fully and effectively addresses the Companys needs. All of our nominees are seasoned leaders, the majority of whom are or were chief executive officers or other senior executives, who bring to the Board skills and qualifications gained during their tenure at a vast array of public companies, private companies, non-profits and other organizations. We have indicated below for each nominee certain of the experience, qualifications, attributes or skills that led the Committee and the Board to conclude that the nominee should continue to serve as a director.
Biographies of our Board Nominees
Independent Director Age 63 Director since January 2015 CVS Health
Board |
Richard M.
Bracken |
Director Qualification
Highlights
●Leadership Former
CEO
●Business Operations;
Consumer Products or Services
●Finance
●Health
Care/Regulated Industry
●Risk
Management
●Corporate
Governance |
Education B.A., San Diego State University; M.H.A., Medical College of Virginia Biography Skills and
Qualifications of Particular Relevance to CVS
Health |
CVSHealthannualmeeting.com |
11 |
Corporate Governance and Related Matters |
|
C. David
Brown II Independent
Director |
Alecia A.
DeCoudreaux Independent
Director | ||||||
Age 64 |
Age 61 |
||||||
Director
Qualification Highlights
●Real Estate
●Business Development and Corporate Transactions
●Finance
●Legal and Regulatory Compliance
●Risk Management
●Public Company Board Service Education B.S.B.A., University of Florida; J.D., University of Florida College of Law Biography Mr. Brown also previously served on the board of Caremark Rx, Inc. (Caremark) from March 2001 until the closing of the merger transaction involving CVS Health and Caremark, when he became a director of CVS Health. Mr. Brown has significant health care experience, including through his oversight of UF Health while serving as Chairman of the Board of Trustees for the University of Florida and as a member of the Board of Directors and Executive Committee of Orlando Health, a not-for-profit health care network. Skills and
Qualifications of Particular Relevance to CVS
Health |
Director Qualification
Highlights
●Business Development and Corporate Transactions
●Legal and Regulatory Compliance
●Health Care/Regulated Industry
●Corporate Governance
●Public Policy and Government Affairs Education B.A., Wellesley College; J.D., Indiana University School of Law Biography Skills and
Qualifications of Particular Relevance to CVS
Health |
12 |
2016 Proxy Statement |
|
Corporate Governance and Related Matters |
Nancy-Ann M.
DeParle Independent
Director |
David W.
Dorman Independent
Director | ||||||
Age 59 |
Age 62 |
||||||
Director
Qualification Highlights
●Business Development and Corporate Transactions
●Finance
●Legal and Regulatory Compliance
●Health Care Industry
●Public Policy and Government Affairs
●Public Company Board Service Education B.A., University of Tennessee; B.A. and M.A., Balliol College, Oxford University; J.D., Harvard Law School Biography Skills and
Qualifications of Particular Relevance to CVS
Health |
Director Qualification
Highlights
●Leadership Former CEO
●Finance
●International Business Operations; Consumer Products or
Services
●Technology and Innovation
●Risk Management
●Corporate Governance
●Public Company Board Service Education B.S., Georgia Tech University Biography Skills and
Qualifications of Particular Relevance to CVS
Health |
CVSHealthannualmeeting.com |
13 |
Corporate Governance and Related Matters |
|
Anne M. Finucane Independent
Director |
Larry J. Merlo Non-Independent
Director | ||||||
Age 63 |
Age 60 |
||||||
Director Qualification
Highlights
●Consumer Products or Services
●Corporate Strategy Development and
Oversight
●Marketing, Brand Management
●Public Policy
●Public Relations
●Regulated Industry Education B.A., University of New Hampshire Biography Skills and
Qualifications of Particular Relevance to CVS
Health |
Director Qualification
Highlights
●Leadership Current CEO
●Business Operations; Consumer Products or
Services
●Health Care/Regulated Industry
●Public Policy
●Retail, Retail Pharmacy and Pharmacy Benefit
Management Education B.S., Pharmacy, University of Pittsburgh Biography Skills and
Qualifications of Particular Relevance to CVS
Health |
14 |
2016 Proxy Statement |
|
Corporate Governance and Related Matters |
Jean-Pierre Millon Independent
Director |
Richard J.
Swift Independent
Director | ||||||
Age 65 |
Age 71 |
||||||
Director Qualification
Highlights
●Leadership Former CEO
●Finance
●Corporate Strategy Development and Oversight
●Health Care/Regulated Industry
●International Business Operations
●Pharmacy Benefit Management
●Public Company Board Service Education B.S., Ecole Centrale de Lyon (France); B.A., Université de Lyon (France); M.B.A., Kellogg School of Business, Northwestern University Biography Skills and
Qualifications of Particular Relevance to CVS
Health |
Director Qualification
Highlights
●Leadership Former CEO
●Finance
●International Business
Operations
●Risk Management
●Corporate Governance
●Public Company Board Service Education B.S., U.S. Military Academy at West Point; M.S., Purdue University; M.B.A., Fairleigh Dickinson University Biography Skills and
Qualifications of Particular Relevance to CVS
Health |
CVSHealthannualmeeting.com |
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Corporate Governance and Related Matters |
|
William C.
Weldon Independent
Director |
Tony L.
White Independent
Director | ||||||
Age 67 |
Age 69 |
||||||
Director Qualification
Highlights
●Leadership Former CEO
●Finance
●Health Care/Regulated Industry
●International Business Operations; Consumer Products or
Services
●Risk Management
●Corporate Governance
●Public Company Board Service Education B.S., Quinnipiac University Biography Skills and
Qualifications of Particular Relevance to CVS
Health |
Director Qualification
Highlights
●Leadership Former CEO
●Finance
●Health Care/Regulated Industry
●Technology and Innovation
●Risk Management
●Corporate Governance
●Public Company Board Service Education B.A., Western Carolina University Biography Skills and
Qualifications of Particular Relevance to CVS
Health |
The Board of Directors unanimously recommends a vote FOR the election of all nominees. |
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2016 Proxy Statement |
|
Corporate Governance and Related Matters |
Director Independence | Director Tenure | |
Independent: 10 Non-Independent: 1 |
0-3 Years: 4 4-7 Years: 3 >7 Years: 4 | |
10 CVS Health directors, including our Chairman, are independent of management. |
Our director nominees bring a balance of experience and fresh perspective to our boardroom. The average tenure of CVS Health directors is under six years. |
Director Gender |
Female: 3 Male: 8 |
Director Nominations
Under our Corporate Governance Guidelines, the Nominating and Corporate Governance Committee recommends to the Board criteria for Board membership and recommends individuals for membership on our Board of Directors. Director Qualification Criteria used by the Committee in nominating directors are found in the Committees charter and are presented below. Although there is no specific policy on diversity, the Committee values diversity, which it broadly views in terms of, among other things, gender, race, background and experience, as a factor in selecting members to serve on the Board. In addition, to ensure that it has access to a broad range of qualified, experienced and diverse candidates, the Nominating and Corporate Governance Committee uses the services of an independent search firm to help identify and assist in the evaluation of candidates.
The Committee will consider any director candidates proposed by stockholders who submit a written request to our Corporate Secretary (including via our proxy access by-law, described on page 22). All candidates should meet the Director Qualification Criteria. The Committee evaluates all director candidates and nominees in the same manner regardless of the source. If a stockholder would like to nominate a person for election or re-election to the Board, he or she must provide notice to the Company as provided in our by-laws and described in this proxy statement. The notice must include a written consent indicating that the candidate is willing to be named in the proxy statement as a nominee and to serve as a director if elected and any other information that the U.S. Securities and Exchange Commission (SEC) would require to be included in a proxy statement when a stockholder submits a proposal. See Other Information Stockholder Proposals and Other Business for our Annual Meeting in 2017 for additional information related to proposals, including any nominations, for our 2017 Annual Meeting.
In accordance with our by-laws, each nominee who is a current director must submit an irrevocable resignation, which resignation becomes effective upon (1) that person not receiving a majority of the votes cast in an uncontested election, and (2) acceptance by the Board of that resignation in accordance with the policies and procedures adopted by the Board. The Board, acting on the recommendation of the Nominating and Corporate Governance Committee, will no later than at its first regularly scheduled meeting following certification of the stockholder vote, determine whether to accept the resignation of the unsuccessful incumbent. Absent a determination by the Board that a compelling reason exists for concluding that it is in the best interests of the Company for an unsuccessful incumbent to remain as a director, the Board will accept that persons resignation.
CVSHealthannualmeeting.com |
17 |
Corporate Governance and Related Matters |
|
The retirement age for CVS Health directors is 74. Our Corporate Governance Guidelines provide that no director who is or would be over the age of 74 at the expiration of his or her current term may be nominated to a new term, unless the Board waives the retirement age for a specific director in exceptional circumstances. The Board increased the retirement age from 72 to 74 during 2015, because it believes that the Company will benefit from the increased pool of experienced candidates that will result.
Director Qualification Criteria
In recognition of the fact that the selection of qualified directors is complex and crucial to our long-term success, the Committee has established the following guidelines for the identification and evaluation of candidates for membership on our Board of Directors.
Candidates should be distinguished individuals who are prominent in their fields or otherwise possess exemplary qualities that will enable them to effectively function as directors. While the Committee does not believe it appropriate at this time to establish any specific minimum qualifications for candidates, it focuses on the following qualities in identifying and evaluating candidates for Board membership:
● |
Background, experience and skills |
● |
Character, reputation and personal integrity |
● |
Judgment |
● |
Independence |
● |
Diversity |
● |
Commitment to the Company and service on the Board |
● |
Any other factors that the Committee may determine to be relevant and appropriate |
Recognizing that the overall composition of the Board is essential to its effective functioning, the Committee makes these determinations in the context of the existing composition of the Board so as to achieve an appropriate mix of characteristics. In making its determinations, the Committee takes into account all applicable legal, regulatory and stock exchange requirements concerning the composition of the Board and its committees. The Committee reviews these guidelines from time to time as appropriate (and in any event at least annually) and modifies them as it deems appropriate.
Independence
Determinations for Directors
Under
our Corporate Governance Guidelines, a substantial majority of our Board must be
comprised of directors who meet the director independence requirements set forth
in the Corporate Governance Rules of the New York Stock Exchange (NYSE) applicable to listed companies.
Under the NYSE Corporate Governance Rules, no director qualifies as
independent unless the Board affirmatively determines that the director has no
material relationship with the Company.
CVS Healths Categorical Standards to Assist in Independence Determinations
Our Board has adopted the following categorical standards to assist in making director independence determinations. Any relationship that falls within the following standards or relationships will not, in itself, preclude a determination of independence:
(1) | Commercial banking or investment banking relationships |
A situation in which a director (or a member of his or her immediate family) is an employee of a commercial or investment bank that has relationships or dealings with or provides services to CVS Health that do not cross the bright-line tests referred to in paragraph (3) below. | |
(2) | Ordinary course commercial relationships |
A situation in which a director (or a member of his or her immediate family) is a director, officer, employee or significant stockholder of an entity with which CVS Health has ordinary course business dealings that do not cross the bright-line tests referred to in paragraph (3) below and where the director (or immediate family member) is not directly responsible for or involved in the entitys business dealings with CVS Health. | |
(3) | NYSE Listed Company Bright-Line Tests |
Any relationship or set of facts that falls within the standards permitted by the bright-line tests set forth in Section 303A.02(b)(i)-(v) of the NYSEs Listed Company Manual, which are summarized below. |
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NYSE Bright-Line Tests For Director Independence
The following summarizes the standards set forth in Section 303A.02(b)(i)-(v) of the NYSEs Listed Company Manual (excluding, for sake of brevity, the related Commentary):
(i) | Employees, or family members who are employees |
A director who is an employee, or whose immediate family member is an executive officer, of the company is not independent until three years after the end of such employment relationship. | |
(ii) |
Compensated professional services |
A director who receives, or whose immediate family member receives, more than $120,000 in any 12-month period in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service), is not independent until three years after he or she ceases to receive more than $120,000 in such compensation in any 12-month period. | |
(iii) |
Audit relationships |
A director who is a current partner or employee of a firm that is the companys internal or external auditor, or a director whose immediate family member is a current partner of such firm or is an employee of such firm who personally works on the listed companys audit, or a director who was, or whose immediate family member was, within the last three years (but is no longer) a partner or employee of such firm and personally worked on the listed companys audit within that time, is not independent. | |
(iv) |
Executive officer/ compensation committee relationships |
A director who is, or whose immediate family member is, or in the last three years has been, employed as an executive officer of another company where any of the listed companys executives at the same time serve or served on that companys compensation committee, is not independent. | |
(v) |
Significant commercial relationships |
A director who is an executive officer or an employee, or whose immediate family member is an executive officer, of a company that makes payments to, or receives payments from, the listed company for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million, or 2% of such other companys consolidated gross revenues, is not independent until three years after falling below such threshold. |
2016 Determinations
The Nominating and Corporate Governance Committee of the Board undertook its annual review of director independence in March 2016. The Committee recommended and the Board determined that each of Richard M. Bracken, C. David Brown II, Alecia A. DeCoudreaux, Nancy-Ann M. DeParle, David W. Dorman, Anne M. Finucane, Jean-Pierre Millon, Richard J. Swift, William C. Weldon and Tony L. White, is independent. Mr. Merlo is not an independent director because of his employment as President and CEO of the Company.
THE BOARDS ROLE AND
ACTIVITIES IN 2015
The
Board acts
as the ultimate decision-making body of the Company and advises and oversees
management, who are responsible for the day-to-day operations and management of
the Company. In carrying out its responsibilities, the Board reviews and
assesses CVS Healths long-term strategy and its strategic, competitive and
financial performance.
In 2015 the Board oversaw the return of more than $6 billion to our stockholders, through a combination of cash dividends and stock repurchases. The Board also guided the Company through two major acquisitions in 2015, of Omnicare, Inc., the leader in pharmacy long-term care, and the pharmacy and clinic businesses of Target Corporation, as well as the related financing transactions associated with those acquisitions. In addition, given the Companys expanded offerings throughout the spectrum of health care, the Board decided to form a new Committee that will be focused on the quality of pharmacy and medical care being delivered by the Company.
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The Boards Role in
Risk Oversight
The Boards role in
risk oversight involves both the full Board and its Committees. The Audit
Committee is charged with the primary role in carrying out risk oversight
responsibilities on behalf of the Board. Pursuant to its charter, the Audit
Committee annually reviews our policies and practices with respect to risk
assessment and risk management, including discussing with management the
Companys major risk exposures and the steps that have been taken to monitor and
mitigate such exposures. As part of CVS Healths ongoing Enterprise Risk
Management process, each of our major business units is responsible for
identifying risks that could affect achievement of business goals and
strategies, assessing the likelihood and potential impact of significant risks,
prioritizing risks and actions to be taken in mitigation and/or response, and
reporting to managements Executive Risk Steering Committee on actions to
monitor, manage and mitigate significant risks. Additionally, the Chief
Financial Officer (CFO), Chief Compliance Officer (CCO) and General Counsel
periodically report on the Companys risk management policies and practices to
relevant Board Committees and to the full Board. The Audit Committee reviews CVS
Healths major financial risk exposures as well as major operational,
compliance, reputational and strategic risks, including developing steps to
monitor, manage and mitigate those risks. In addition, each of the other Board
Committees is responsible for oversight of risk management practices for
categories of risks relevant to their functions. For example, the Management
Planning and Development Committee has oversight responsibility for our overall
compensation structure, including review of its compensation practices, with a
view to assessing associated risk. The Board is regularly updated on specific
risks in the course of its review of corporate strategy, business plans and
reports to the Board by its respective Committees.
The Board considers its role in risk oversight when evaluating our Corporate Governance Guidelines and its leadership structure. Both the Corporate Governance Guidelines and the Boards leadership structure facilitate the Boards oversight of risk and communication with management. Our independent Chairman and our CEO are focused on CVS Healths risk management efforts and ensure that risk matters are appropriately brought to the Board and/or its Committees for their review.
Stockholder
Outreach
Because the Company values
each of its stockholders and their opinions, we have regularly interacted with
our stockholders on a variety of matters. Again in 2015, at the direction of the
Board, the Company engaged in a robust stockholder outreach effort to best
understand and address any concerns stockholders might have. Details regarding
our outreach effort and the compensation-related actions taken are found on
pages 37-38 of this proxy statement.
In addition to compensation-related matters, a number of corporate governance matters were discussed with our stockholders during the outreach process, including proxy access, tenure, board composition and diversity. Stockholders were supportive of the Boards current tenure mix and appreciated the Companys continued attention to the breadth, depth and diversity of its Board of Directors. Additionally, with input from many of our stockholders, the Board adopted a proxy access by-law in January 2016.
We believe that taking the responsive actions summarized above will continue to strengthen our relationships with our stockholders and provide positive improvements in the areas identified.
Stockholder
Rights
Under our Amended and
Restated Certificate of Incorporation (the Charter) and our Amended and
Restated By-laws (the By-laws), our stockholders have the right to call a
special meeting of stockholders and to act by written consent that is less than
unanimous. Holders of at least 25% of our common stock can call a special
meeting or request an action by written consent by following the procedures
described in our Charter and By-laws. Our stockholders also have the right to
proxy access, as described below. Our Charter and By-laws are available to
stockholders at no charge upon request to our Corporate Secretary.
Contact with the
Board, the Chairman and Other Independent Directors
Stockholders and other parties interested in communicating
directly with the Board, the independent Chairman of the Board or with the
independent directors as a group may do so by writing to them care of CVS Health
Corporation, One CVS Drive, MC 1160, Woonsocket, RI 02895. The Nominating and
Corporate Governance Committee has approved a process for handling letters
received by the Company and addressed to the Board, the independent
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Chairman of the Board or to independent members of the Board. Under that process, our Corporate Secretary reviews all such correspondence and regularly forwards to the Board copies of all correspondence that, in her opinion, deals with the functions of the Board or its Committees or that she otherwise determines requires their attention.
Code of
Conduct
CVS Health has adopted a
Code of Conduct that applies to all of our directors, officers and employees,
including our CEO, CFO and Chief Accounting Officer. Our Code of Conduct is
available on our website at http://investors.cvshealth.com and will be provided
to stockholders without charge upon request to our Corporate Secretary. We
intend to post amendments to or waivers from our Code of Conduct (to the extent
applicable to our executive officers or directors) at that location on our
website within the timeframe required by SEC rules.
Certain
Transactions with Directors and Officers
In accordance with SEC rules, the Board has adopted a written Related
Person Transaction Policy (the Policy). The Audit Committee of the Board has
been designated as the Committee responsible for reviewing, approving or
ratifying any related person transactions under the Policy. The Committee
reviews the Policy on an annual basis and will amend the Policy as it deems
appropriate.
Pursuant to the Policy, all executive officers, directors and director nominees are required to notify our General Counsel or Corporate Secretary of any financial transaction, arrangement or relationship, or series of similar transactions, arrangements or relationships, involving the Company in which an executive officer, director, director nominee, five percent beneficial owner or any immediate family member of such a person has a direct or indirect material interest. Such officers, directors, nominees, five percent beneficial owners and their immediate family members are considered related persons under the Policy. For the above purposes, immediate family member includes a persons spouse, parents, siblings, children, in-laws, step-relatives and any other person sharing the household (other than a tenant or household employee).
The General Counsel or the Corporate Secretary presents any reported new related person transactions, and significant proposed transactions involving related persons that might be deemed to be related person transactions, to the Audit Committee at its next regular meeting, or earlier if appropriate. The Committee reviews these transactions to determine whether the related person involved has a direct or indirect material interest in the transaction. The Committee may conclude, upon review of all relevant information, that the transaction does not constitute a related person transaction, and thus that no further review is required under the Policy. On an annual basis, the Committee reviews previously approved related person transactions, under the standards described below, to determine whether such transactions should continue.
In reviewing a related person transaction or proposed transaction, the Committee considers all relevant facts and circumstances, including without limitation the commercial reasonableness of the terms, the benefit and perceived benefit, or lack thereof, to the Company, the availability and/or opportunity costs of alternate transactions, the materiality and character of the related persons direct or indirect interest, and the actual or apparent conflict of interest of the related person. The Committee does not approve or ratify a related person transaction unless it has determined that, upon consideration of all relevant information, the transaction is in, or is not inconsistent with, the best interests of the Company and its stockholders.
If after the review described above, the Committee determines not to approve or ratify a related person transaction (whether such transaction is being reviewed for the first time or has previously been approved and is being re-reviewed), the transaction will not be entered into or continued, as the Committee shall direct.
The Audit Committee reviewed certain transactions reported under the Policy and determined that no transactions constituted reportable related person transactions under the Policy.
Corporate
Governance Guidelines
The Board has
adopted Corporate Governance Guidelines, which are available on our investor
relations website at http://investors.cvshealth.com and are also available to
stockholders at no charge upon request to our Corporate Secretary. These
Guidelines meet the listing standards adopted by the NYSE, on which our common stock is listed.
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The Boards
Leadership Structure
David W.
Dorman is our independent Chairman of the Board. The independent Chairman
presides at all meetings of the Board, and works with our CEO to set Board
meeting agendas and the schedule of Board meetings. In addition, the independent
Chairman has the following duties and responsibilities: the authority to call,
and to lead, independent director sessions; the ability to retain independent
legal, accounting or other advisors in connection with these sessions; the
responsibility to facilitate communication and serve as a liaison between the
CEO and the other independent directors; and the duty to advise the CEO of the
informational needs of the Board. The Board believes that Board independence and
oversight of management will be maintained effectively through the independent
Chairman, the Boards composition and its Committee system.
Proxy
Access
In January 2016, following
the receipt of a stockholder proposal and extensive conversations with the
proponent and several other stockholders, the Nominating and Corporate
Governance Committee recommended and the Board adopted a proxy access by-law.
Under the by-law a stockholder, or a group of up to 20 stockholders, owning at
least three percent of the Companys outstanding common stock continuously for
at least three years, may nominate and include in the Companys proxy materials
director nominees constituting up to the greater of two nominees or 20% of the
Board, provided that the stockholders and the nominees satisfy the requirements
specified in the Companys by-laws.
2015 COMMITTEES OF THE
BOARD
In 2015, the Board utilized
four standing committees. The table below provides membership and meeting
information for each of the committees during 2015. In early 2016, the Board
established a fifth committee, the Patient Safety and Clinical Quality
Committee, and membership of most of the other committees changed. For details
regarding the newly established committee and current committee membership see
pages 23-29.
NAME | AUDIT COMMITTEE |
MANAGEMENT PLANNING & DEVELOPMENT COMMITTEE |
NOMINATING & CORPORATE GOVERNANCE COMMITTEE |
EXECUTIVE COMMITTEE | ||||
Richard M. Bracken | ● | |||||||
C. David Brown II | ● | ● | ● | |||||
Alecia A. DeCoudreaux | ● | |||||||
Nancy-Ann M. DeParle | ● | |||||||
David W. Dorman | ● | ● | ● | |||||
Anne M. Finucane | ● | |||||||
Larry J. Merlo | ● | |||||||
Jean-Pierre Millon | ● | |||||||
Richard J. Swift | ● | ● | ||||||
William C. Weldon | ● | ● | ||||||
Tony L. White | ● | ● | ||||||
2015 Meetings | 9 | 5 | 5 | 2 |
● | Committee Chair |
| Audit Committee Financial Expert |
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Meetings in 2015: 9 | * Audit Committee Financial Expert |
Each member of the Audit Committee is financially literate and independent of the Company and management under the standards set forth in applicable SEC rules and the Corporate Governance Rules of the NYSE. The Board designated each of Messrs. Swift, Bracken, Millon and White as an audit committee financial expert, as defined under applicable SEC rules. The Board has approved a charter for the Committee, which can be viewed on our website at http://investors.cvshealth.com and also is available to stockholders without charge upon request to our Corporate Secretary.
Mr. Richard Bracken joined the Committee in March 2015, shortly after joining the Board. In March 2016 Mr. Bracken rotated off the Committee when he became Chair of the newly formed Patient Safety and Clinical Quality Committee. Mr. White also rotated off of the Audit Committee and joined the new committee in March 2016, while Ms. DeCoudreaux joined the Audit Committee at that time.
Primary Responsibilities
Pursuant to its charter, the Committee assists the Board in its oversight of:
● | the integrity of our financial
statements; |
● | the qualifications,
independence and performance of our independent registered public
accounting firm, for whose appointment the
Committee bears principal responsibility; |
● | the performance of our
internal audit function; |
● | our policies and practices
with respect to risk assessment and risk management, including discussing
with management the Companys major
financial risk exposures and the steps that have been taken to monitor
and control such exposures;
|
● | compliance with our Code of
Conduct; |
● | the review of our information
governance framework, including its privacy and information security
programs, as well as the cybersecurity
aspects of the information security program;
|
● | the review of our business
continuity and disaster recovery program; |
● | the review of our
environmental, health and safety program; |
● | the review and ratification of
any related person transactions in accordance with our policy on such
matters; and |
● | our compliance with legal and regulatory requirements, including the review and oversight of matters related to compliance with Federal health care program requirements. |
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Audit Committee Activities in 2015
The Audit Committee met nine times in 2015 and, except for one absence, each member of the Committee attended all of its meetings while he or she was a member. Four of the Committees meetings were focused primarily on our quarterly financial reports, including our Form 10-K, Forms 10-Q and our related earnings releases. At each of these meetings the Committee reviews the documents in depth and also receives reports from our internal audit department and our independent outside audit firm, Ernst & Young. The Committee regularly meets with Ernst & Young outside the presence of management, and also meets individually with members of management, including the CCO and the head of Internal Audit. In addition to its responsibilities related to our financial statements, the Committee plays a primary role in risk oversight, including reviews of our enterprise risk management program, cybersecurity efforts, business continuity and disaster recovery program, privacy programs, and environmental, health and safety program. The Committee also reviews our legal and regulatory compliance program on a quarterly basis, and in 2014 it assumed responsibility for oversight of the Companys compliance with its Corporate Integrity Agreement, or CIA. During 2015 the Committee provided the required annual certification of compliance with the CIA. The Committee provided the report found on page 31 of this proxy statement, recommending the inclusion of the Companys audited financial statements in its Form 10-K.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
Meetings in 2015: 5 |
Each member of the Nominating and Corporate Governance Committee is independent of the Company and management under the standards set forth in the Corporate Governance Rules of the NYSE. The Board has approved a charter for the Committee, which can be viewed on our website at http://investors.cvshealth.com and also is available to stockholders without charge upon request to our Corporate Secretary.
Ms. DeCoudreaux joined the Committee in May 2015, following her election to the Board in March 2015. She then rotated off the Nominating and Corporate Governance Committee and joined the Audit Committee and the newly formed Patient Safety and Clinical Quality Committee in March 2016. Mr. Bracken also joined the Nominating and Corporate Governance Committee in March 2016
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Primary Responsibilities
Pursuant to its charter, the Committee has responsibility for:
● | identifying individuals
qualified to become Board members consistent with criteria approved by the
Board; |
● | recommending to the Board
director nominees for election at the next annual or special meeting
of stockholders at which directors are to be elected or to fill any
vacancies or newly-created directorships that may occur between
such meetings; |
● | recommending directors for
appointment to Board Committees; |
● | making recommendations to the
Board as to determinations of director independence; |
● | evaluating Board and Committee
performance; |
● | considering matters of
corporate governance and reviewing, at least annually, our Corporate
Governance Guidelines and overseeing compliance with such Guidelines;
and |
● | reviewing and considering our policies and practices on issues relating to corporate social responsibility, charitable contributions, political spending practices and other significant public policy issues. |
Nominating and Corporate Governance Committee Activities in 2015
The Nominating and Corporate Governance Committee met five times in 2015 and, except for one absence each for two different members of the Committee, each member of the Committee attended all of its meetings. The Committee continues to evaluate potential candidates for future election to the Board, which led to the election of Mr. Bracken in January 2015 and Ms. DeCoudreaux in March 2015. Both of those candidates were re-elected by our stockholders at the Companys 2015 Annual Meeting with votes in favor of approximately 99%. In addition, the Committee reviewed the Companys political activities and expenditures in depth during two of its meetings, and reviewed the Companys corporate social responsibility roadmap, Prescription for a Better World, as well as the corporate social responsibility report itself. The Committee also oversaw the evaluation process for the Board and its Committees in 2015, which consisted of an in-depth interview of each director by the Companys General Counsel. At the completion of the interview process, the General Counsel reviewed the results with the Committee and the Board, and a number of enhancements to the Board and Committee meeting process resulted, such as meetings with lower levels of management. The Committee also considered suggestions regarding the committee responsibilities and make-up, which resulted in the formation of a new Board committee in early 2016. In addition, the Committee received updates regarding legal and regulatory developments related to corporate governance, as well as updates on proxy season and stockholder communications. In this regard, during 2015 the Committee received several updates regarding proxy access, which culminated in the Committee recommending and the Board adopting a proxy access by-law in January 2016.
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MANAGEMENT PLANNING AND DEVELOPMENT COMMITTEE
Meetings in 2015: 5 |
Each member of the Management Planning and Development Committee is independent of the Company and management under the standards set forth in applicable SEC rules and the Corporate Governance Rules of the NYSE. No Committee member participates in any of our employee compensation programs and none is a current or former officer or employee of CVS Health or its subsidiaries. At its meetings, non-members, such as the CEO, the CFO, the Chief Human Resources Officer, the General Counsel, other senior human resources and legal officers, or external consultants, may be invited to provide information, respond to questions and provide general staff support. However, no CVS Health executive officer is permitted to be present during any discussion of his or her compensation or performance, and the Committee regularly exercises its prerogative to meet in executive session without management.
The Committees responsibilities are specified in its charter. The charter, as approved by the Board, may be viewed on our website at http://investors.cvshealth.com and also is available to stockholders without charge upon request to our Corporate Secretary.
In March 2016 Ms. Finucane was added as a member of the Committee.
Primary Responsibilities
Pursuant to its charter, the Committee:
● | oversees our compensation and benefits
policies and programs generally; |
● | evaluates the performance of designated
senior executives, including the CEO; |
● | in consultation with our other
independent directors, oversees and sets compensation for the
CEO; |
● | oversees and sets compensation for our
designated senior executives; |
● | reviews and recommends to the Board
compensation (including cash and equity-based compensation) for our non-employee
directors; and |
● | prepares and recommends to the full Board the inclusion of Management Planning and Development Committee Report set forth below. The Committee may delegate its authority relating to employees other than executive officers and directors as it deems appropriate and may also delegate its authority relating to ministerial matters. |
Management Planning and Development Committee Activities in 2015
The Management Planning and Development Committee met five times in 2015 and each member of the Committee attended all of its meetings. In addition to reviewing the independence of its advisor as described below, the Committee devoted substantial time to its oversight of the Companys compensation and benefit programs as part of its annual governance process. This review is aimed at ensuring that the Company is providing its employees with compensation and benefit programs that are appropriate. The Committee received updates on compensation trends and legislative and regulatory developments. The Committee also reviewed the Companys compensation programs, retirement, health and welfare plans. In addition, the Committee devoted considerable time to CVS
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Healths stockholder outreach efforts and the feedback received from investors. The Committees review of executive compensation matters and its decisions, including changes made in response to input from our stockholders, is discussed in the Compensation Discussion and Analysis beginning on page 35 of this proxy statement.
Compensation Risk Assessment
The Committee is responsible for reviewing and assessing potential risk arising from the Companys compensation policies and practices. In 2015, the Company performed a comprehensive risk assessment of its compensation policies and practices to ascertain any potential material risks that may be created by the programs. Included in its assessment were all major components of the Companys compensation programs, including: the mix between annual and long-term compensation; short-term incentive program design; long-term incentive program performance measures; incentive plan performance criteria and corresponding objectives; a comparison of the Companys programs with those of its peer group; the Companys severance and change-in-control policies; its recoupment policy; its share retention requirements and ownership guidelines; and the Internal Audit Departments review of the controls regarding the Companys long-term incentive program. The Committee considered the findings of the assessment and concluded that the Companys compensation programs are aligned with the interests of its stockholders, appropriately reward pay for performance, and do not promote excessive risk-taking.
Independent Consultant
Exequity LLP is the Committees independent compensation consultant. Exequity provides no other services to the Company. Exequitys fees for executive compensation consulting to the Committee for 2015 were $310,709. During 2015, Exequity:
● | Collected, organized and presented
quantitative competitive market data for a relevant competitive peer
group with
respect to executive officers target, annual and long-term compensation
levels; |
● | Developed and delivered an annual Committee
briefing on legislative and regulatory developments and trends in executive
compensation and their implications for CVS Health; and
|
● | Analyzed market data and provided recommendations for non-employee director compensation to the Committee for approval by the Board. |
The Committee believes that the advice it receives from Exequity is objective and not influenced by any other business relationship. The Committee and Exequity have policies and procedures in place to preserve the objectivity and integrity of the executive compensation consulting advice, including:
● | The Committee has the sole authority to
retain and terminate the executive compensation consultant; |
● | The consultant reports to the Committee
Chair and has direct access to the Committee without management involvement; |
● | While it is necessary for the consultant to
interact with management to gather information, the Committee determines if and
how the consultants advice can be shared with management;
and |
● | The Committee regularly meets with the consultant in executive session, without management present, to discuss recommendations. |
The Committee conducts an annual review of the independence of its compensation consultant, taking into account the standards above, the items required to be considered under the NYSE listing standards and applicable rules and regulations. The Committee determined that its compensation consultant is independent and that its consultants work does not raise any conflicts.
Management Planning and Development Committee Report
The Management Planning and Development Committee has reviewed and discussed the Compensation Discussion and Analysis, which begins on page 35 of this proxy statement, with management and, based on that review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in our annual report on Form 10-K and this proxy statement.
C. David Brown II, Chair | David W. Dorman | William C. Weldon | Tony L. White |
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|
● |
David Brown |
● |
Richard Swift |
● |
Larry Merlo |
● |
David Dorman |
Meetings in 2015: 2
2016 FORMATION OF NEW COMMITTEE OF THE BOARD
PATIENT SAFETY AND CLINICAL QUALITY COMMITTEE
● |
Tony White |
● |
Alecia DeCoudreaux |
● |
Richard Bracken (Chair) |
● |
Nancy-Ann DeParle |
● |
Jean-Pierre Million |
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Primary Responsibilities
Pursuant to its charter, the Committee will:
● |
assist the Board in its oversight of the Companys policies and
procedures relating to the delivery of quality pharmacy and medical care
to its customers and patients, to patient safety, to the management of
health care claims against the enterprise and to clinical quality and
health affairs in general; |
● |
maintain communication between the
Board and the Companys General Counsel, CFO, pharmacy
and clinical operations and other areas of the Company that it deems
relevant to the quality performance of patient care, patient safety and
clinical quality; |
● |
receive reports concerning the
quality performance of the Companys mail, retail, long-term care, and
specialty dispensing and compounding operations, infusion and nursing
operations and its medical clinic services; and |
● |
review matters concerning the quality performance of pharmacy and medical care delivered to patients, efforts to improve the quality of such care, patient safety, health care claims against the enterprise and health affairs in general. |
MEETINGS AND
ATTENDANCE
During 2015, there were eight meetings of
the Board. Directors are expected to make every effort to attend the Annual
Meeting, all Board meetings and the meetings of the Committees on which they
serve. All of our directors at the time of our 2015 Annual Meeting of
Stockholders attended that Annual Meeting. In 2015, each director attended over
75% of the meetings of the Board and the Committees of which he or she was a
member.
One Board meeting was our annual meeting of independent directors. The independent directors also regularly hold executive sessions during regularly scheduled Board meetings in which our management does not participate.
NON-EMPLOYEE DIRECTOR
COMPENSATION
CVS Healths approach to compensating
non-employee directors for Board service is to provide directors with an annual
retainer comprised of a mandatory 75% paid in shares of our common stock and 25%
paid in cash (or 100% stock at the directors election). The payment of a
significant portion of the annual retainer, and additional retainers as outlined
below, in our common stock is consistent with our policy of using equity
compensation to better align directors interests with stockholders. This also
enhances the directors ability to meet and continue to comply with the stock
ownership guidelines described below.
For the 2015-2016 Board year, the total annual retainer for non-employee directors was $280,000, consisting of shares of our stock valued at $210,000 (the mandatory annual stock retainer) and a cash payment of $70,000 (unless the director elected to receive 100% of the annual retainer in shares of our common stock). The annual retainer was paid in two equal installments, in May and November of 2015. Directors may elect to defer receipt of shares; deferred shares are credited with dividend equivalents to the extent dividends are paid to stockholders. There are no meeting fees.
Non-Employee Director Retainer Mix
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29 |
Corporate Governance and Related Matters |
|
For the 2015-2016 Board year, additional retainers were paid as follows: Chair of the Nominating and Corporate Governance Committee, $15,000; Chair of the Management Planning and Development Committee, $20,000; Chair of the Audit Committee, $25,000; and independent Chairman of the Board, $275,000. Each of these additional retainers was paid in two equal installments, in May and November of 2015. The Chair of the new Patient Safety and Clinical Quality Committee received an annual retainer of $15,000, which was prorated for the 2015-2016 Board year and paid in March 2016, when that Committee was formally established. At least 75% of each additional retainer must be paid in shares of our common stock, with the remaining 25% paid in cash, unless the director elects to be paid an additional percentage in shares of common stock. As with the annual retainer, directors may elect to defer receipt of shares for additional retainers; any deferred shares are credited with dividend equivalents to the extent dividends are paid to stockholders.
All Other Compensation and Benefits
Directors are eligible to participate in the employee discount program and are subject to the same terms of the program as our employees. Directors are generally reimbursed for business expenses incurred directly in connection with their roles and duties on the Board, such as services provided by an executive assistant, travel, meals and lodging. We allow all directors to enroll themselves and their eligible dependents in our prescription drug benefit program, paying the same premium rates as employees. If a director retires from the Board with at least five years of service, we will allow continued participation in the prescription drug benefit plan for life, but the director must bear the full cost of the premium after retirement.
The following table shows amounts paid to each of our non-employee directors in 2015.
Non-Employee Director Compensation 2015
NAME | FEES
EARNED AND PAID IN CASH 1 ($) |
CASH
FEES ELECTED TO BE PAID IN STOCK 2 ($) |
STOCK AWARDS 2 ($) |
ALL
OTHER COMPENSATION 3 ($) |
TOTAL ($) |
|||||||
Richard M. Bracken 4 | 93,514 | | 279,819 | 1,500 | 374,833 | |||||||
C. David Brown II | | 75,000 | 225,000 | 1,866 | 301,866 | |||||||
Alecia A. DeCoudreaux 5 | | 81,667 | 245,000 | | 326,667 | |||||||
Nancy-Ann M. DeParle | 70,103 | | 209,897 | | 280,000 | |||||||
David W. Dorman | 66 | 142,434 | 427,500 | 1,500 | 571,500 | |||||||
Anne M. Finucane | 6 | 69,994 | 210,000 | 1,111 | 281,111 | |||||||
Jean-Pierre Millon | 70,129 | | 209,871 | 3,366 | 283,366 | |||||||
Richard J. Swift | 76,250 | | 228,750 | 3,366 | 308,366 | |||||||
William C. Weldon | | 70,000 | 210,000 | 1,500 | 281,500 | |||||||
Tony L. White | 70,129 | | 209,871 | 2,866 | 282,866 |
1 | The amounts shown include cash payments made in lieu of fractional shares to Mmes. DeParle and Finucane and Messrs. Bracken, Dorman, Millon and White. |
2 | These awards are fully vested at grant and the amounts shown represent both the fair market value and the full fair value at grant. During 2015, each director received 2,111 shares of stock with a total value of approximately $210,000 (the mandatory annual stock retainer) on the date of grant; each director electing to receive the remaining annual retainer in stock also received 704 shares valued at $70,000 on the date of grant. Two directors also elected to receive their additional chair retainers in stock in lieu of cash. As of December 31, 2015, our directors had deferred receipt of shares of common stock as follows: Mr. Brown, 43,833 shares; Ms. DeCoudreaux, 3,280 shares; Ms. DeParle, 3,223 shares; Mr. Dorman, 15,837 shares; Ms. Finucane, 2,629 shares; Mr. Swift, 50,287; and Mr. Weldon, 9,657 shares. |
3 | Represents Company costs for director prescription benefits for Ms. Finucane and Messrs, Brown, Millon and Swift. Also represents participation in our matching gifts program, under which director or employee contributors to the CVS Health Employee Political Action Committee may designate a charity to receive a matching contribution from the Company of up to $1,500. Messrs. Bracken, Dorman, Millon, Swift, Weldon and White participated in this program. |
4 | Mr. Bracken joined the Board in January 2015. His compensation includes a pro rata retainer for the portion of the 2014-2015 Board year that he served. |
5 | Ms. DeCoudreaux joined the Board in March 2015. Her compensation includes a pro rata retainer for the portion of the 2014-2015 Board year that she served. |
30 |
2016 Proxy Statement |
ITEM 2: RATIFICATION OF
APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Audit Committee of the Companys Board
of Directors (for purposes of this Item 2, the Committee) has appointed Ernst
& Young LLP (Ernst & Young), an independent registered public
accounting firm, to audit the financial statements of the Company for the fiscal
year ending December 31, 2016, and recommended to our full Board of Directors
that it approve that appointment. We are submitting the appointment by the
Committee to you for your ratification.
The Board of Directors unanimously recommends a vote FOR this proposal. |
Audit Committee
Report
During 2015, Committee was
composed of five independent directors. Set forth below is the report of the
Committee on its activities with respect to CVS Healths audited financial
statements for the fiscal year ended December 31, 2015 (the audited financial
statements).
● |
The
Committee has reviewed and discussed the audited financial statements with
management; |
● |
The
Committee has discussed with Ernst & Young, CVS Healths independent
registered public accounting firm, the matters required to be discussed
under applicable auditing standards; |
● |
The Committee has received the
written disclosures and the letter from Ernst & Young pursuant to
applicable requirements of the Public Company Accounting Oversight Board
regarding Ernst & Youngs communications with the Committee concerning
independence, and has discussed with Ernst & Young its independence
from the Company; and |
● |
Based on the review and discussions referred to above and relying thereon, the Committee recommended to the Board of Directors that the audited financial statements be included in CVS Healths Annual Report on Form 10-K for the fiscal year ended December 31, 2015, for filing with the SEC. |
Richard J. Swift, Chair | Richard M. Bracken | Nancy-Ann M. DeParle |
Jean-Pierre Millon | Tony L. White |
Independent
Accounting Firm Independence and Fee Approval Policy
The Committee is directly responsible for the appointment,
compensation, retention and oversight of the independent registered public
accounting firm. The Committee has retained Ernst & Young as CVS Healths
external audit firm since September 2007. In order to assure continuing external
auditor independence, the Committee periodically considers whether there should
be a rotation of the audit firm. Further, in conjunction with the mandated
rotation of the external audit firms lead engagement partner, the Committee and
its chair are directly involved in the selection of Ernst & Youngs new lead
engagement partner. Based on its most recent evaluation of Ernst & Young,
the members of the Committee believe that the continued retention of Ernst &
Young to serve as the Companys independent registered public accounting firm is
in the best interests of the Company and its stockholders.
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31 |
Audit Committee Matters |
|
All audit services, audit-related services and tax services were pre-approved by the Committee, and the Committee is ultimately responsible for audit fee negotiations associated with the retention of Ernst & Young. The Committee has considered whether Ernst & Youngs provision of services is compatible with maintaining Ernst & Youngs independence. The Committees audit approval policy provides for pre-approval of audit, audit-related and tax services that are specifically described on an annual basis to the Committee and, in addition, individual engagements anticipated to exceed pre-established thresholds must be separately approved. The policy also requires specific approval by the Committee if total fees for audit-related and tax services would exceed total fees for audit services in any fiscal year. The policy authorizes the Committee to delegate to one or more of its members pre-approval authority with respect to permitted services, so long as such pre-approvals are reported to the full Committee at its next scheduled meeting.
Representatives of Ernst & Young will be at the Annual Meeting to answer your questions and will have the opportunity to make a statement if they so desire.
If you do not ratify the appointment of Ernst & Young, the Committee will reconsider its appointment, although in the event of reconsideration the Committee may determine that Ernst & Young should continue in its role. Even if you do ratify the appointment, the Committee retains its discretion to reconsider its appointment if it believes that reconsideration is necessary in the best interest of the Company and the stockholders.
Fees of Independent
Accounting Firm
The following table
summarizes the fees paid to Ernst & Young for services rendered during
fiscal 2015 and 2014.
FISCAL YEAR ENDED 12/31/15 |
FISCAL YEAR ENDED 12/31/14 |
|||||
Audit Fees 1 | $10,680,969 | $8,846,157 | ||||
Audit Related Fees 2 | $228,564 | $709,335 | ||||
Tax Fees 3 | $2,001,278 | $1,800,550 | ||||
All Other Fees | | |
1 | Represents the aggregate fees and expenses billed for the audit of our consolidated financial statements and the audit of our internal control over financial reporting for the fiscal year, the reviews of the condensed consolidated financial statements included in our Quarterly Reports on Form 10-Q, audits of our insurance captives, services provided in connection with statutory and regulatory filings for the fiscal year, and consultations on technical matters. In 2015 and 2014, approximately $1.4 million and $0.6 million, respectively, relates to audit fees incurred in connection with the Companys acquisitions. |
2 | Represents the aggregate fees billed for audit and other services that are typically performed by auditors, including audits of our employee benefit plans and independent review organization services, compliance reporting, non-financial metric reporting and certain agreed upon procedures. |
3 | Represents the aggregate fees billed for tax compliance, consulting and related services. |
32 |
2016 Proxy Statement |
EXECUTIVE COMPENSATION AND RELATED MATTERS
ITEM 3: PROPOSAL TO APPROVE, ON AN ADVISORY BASIS, THE COMPANYS EXECUTIVE COMPENSATION AS DISCLOSED IN THIS PROXY STATEMENT
Background
We are
asking our stockholders to approve, on an advisory basis, the compensation paid
to our named executive officers, as described in the Compensation Discussion and
Analysis (CD&A) and the Executive Compensation section of this proxy
statement. Although the advisory vote is not binding upon the Company, the
Management Planning and Development Committee (for purposes of this Item 3, the
Committee), which is responsible for designing and administering our executive
compensation program, values our stockholders opinions and will continue to
consider the outcome of the vote in its ongoing evaluation of our executive
compensation program.
At CVS Health, our executive compensation philosophy and practice reflect our unwavering commitment to paying for performance both short- and long-term. We define performance as the achievement of results against challenging internal financial targets that take into account our results relative to that of our peer companies, as well as industry and market conditions. We believe that our multi-faceted executive compensation plans, with their integrated focus on short- and long-term metrics, provide an effective framework by which progress against our strategic goals may be appropriately measured and rewarded.
Our 2015 Vote;
Stockholder Outreach
During the
fall of 2014, we reached out to stockholders and offered to discuss our
compensation programs, corporate governance and any other matters. We also had
discussions with one of the leading proxy advisory firms, and obtained feedback
from our institutional investors by means of an independent, third-party
platform that provided collective data and comments. These conversations led us
to redesign our 2015 proxy statement, clarify the explanation regarding our
prohibition on tax gross-ups, modify our peer group and amend our stock option
grant policy to explicitly prohibit the re-pricing of stock options without stockholder
approval.
In 2015 we received a high level of stockholder support for our executive compensation program, with a 94% vote in favor. During the fall of 2015, we contacted our 50 largest stockholders, holders of approximately 50% of our outstanding common stock, and offered to discuss our compensation programs, corporate governance and any other matters. We had discussions with several stockholders and all were generally pleased with our business results and the link between performance and the compensation earned by key executives. Some key takeaways from our 2015 discussions were:
● |
The design of our long-term
incentive plan (LTIP). The current structure for this plan is for awards
that are subject to overlapping three-year cumulative performance periods,
earned based on a Return on Net Assets metric, with settlement being
equally divided between CVS Health common stock and cash. Several
stockholders expressed a preference for the settlement of LTIP awards
fully in common stock. The Committee discussed this matter in early 2016,
and decided that beginning with LTIP grants for the 2016-2018 performance
period, settlement will be made fully in common stock that will continue
to have a required two-year holding period following settlement
date. |
● |
CEO long-term incentive components. Some stockholders suggested that the components should be more heavily weighted towards performance-based awards rather than time-based awards. For 2015, the weighting was 60% time-based RSUs and stock options and 40% performance-based LTIP. Beginning with the 2016 long-term incentive grants, we provided our CEO with a target long-term incentive pay mix that is split evenly between the performance-based LTIP program, and time-based RSUs and stock options. The Committee believes that this combination of long-term elements provides appropriate balance in support of the long-term growth of the Company. |
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33 |
Executive Compensation and Related Matters |
|
Our 2015
Performance and Pay Actions
2015
was a successful year for the Company, with record net revenues of $153.3
billion and profitable growth in both of our main business segments. CVS Health
performed favorably against the S&P 500 and the Retail index on several
critical measures including net revenues, operating profit and operating income.
Our positive 2015 results are reflected in the 2015 Executive Incentive Plan
payouts to our named executive officers, or NEOs; similarly, the positive
performance from 2013-2015 to improve Return on Net Assets is reflected in the
LTIP payouts to our NEOs.
The Committee approved the following changes that became effective in 2015:
● |
We
modified our peer group to more closely align it with the Companys retail
and health care businesses; and |
● |
We affirmed our existing commitment to our broad policy against tax gross-ups, particularly as it pertains to our executive officers. |
Conclusion;
Resolution
We urge stockholders to
read the CD&A beginning on page 35 of this proxy statement, which describes
in more detail how our executive compensation policies and procedures operate
and are designed to achieve our compensation objectives, as well as the Summary
Compensation Table and other related compensation tables and
narrative appearing on pages 53 through 63, which provide detailed information on
the compensation of our NEOs. The Committee and the Board of Directors believe
that the policies and procedures articulated in the CD&A are effective in
achieving our goals and that the compensation of our NEOs reported in this proxy
statement has contributed to CVS Healths long-term success.
Stockholders are being asked to vote on the following resolution:
RESOLVED, that the stockholders approve, on an advisory basis, the compensation of the CVS Health executive officers named in the Summary Compensation Table, as disclosed pursuant to the SECs compensation disclosure rules (which disclosure includes the Compensation Discussion and Analysis, the compensation tables and other narrative executive compensation disclosures).
The Board of Directors unanimously recommends a vote FOR this proposal. |
34 |
2016 Proxy Statement |
|
Executive Compensation and Related Matters |
Compensation Discussion And Analysis Overview
Our Performance
For CVS Health, 2015 was a successful year. Here are some
highlights:
Financial highlights
● |
We generated record revenues and
healthy profit growth across the enterprise. |
● |
Year-over-year, our pharmacy
services segment revenues were up 13.5% and our retail/long-term care
segment revenues rose 6.2%. |
● |
We had a successful 2016 PBM selling
season, with gross client wins of $14.8 billion and net new client
business of $12.7 billion. |
● |
Operating Profit, a component of our
management incentive plan, increased by 7.4%
year-over-year. |
● |
Return on Net Assets (RoNA), the
performance measure for our three-year long-term incentive plan, exceeded
its target for the 2013-2015 performance period by
1.9%. |
● |
Total shareholder return (TSR) for
2015 was 2.9%, outpacing both the retail sector index and the S&P 500
index as a whole. |
● |
The Company generated free cash flow of $6.5 billion and returned more than $6 billion to stockholders through dividends and share buybacks. |
Net Revenues ($ billions) |
Operating
Profit |
2013-2015
Return on |
||||||
1 year growth of 10.0% |
1 year growth of 7.4% |
Exceeded target by 1.9% |
||||||
Total
Shareholder |
Annual Cash
Dividends |
||||
Outperformed S&P 500 |
1 year increase of 27.3% |
||||
For more information on our financial performance and strategy, please refer to our Annual Report available at www.cvshealthannualmeeting.com. |
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35 |
Executive Compensation and Related Matters |
|
Our Compensation
Core Principles
Our executive compensation program has
five core principles that drive our executive compensation philosophy.
Management and the Committee believe these principles motivate our executive
officers to take personal responsibility for the performance of the business and
deliver long-term stockholder value, consistent with CVS Healths core values of
Innovation, Collaboration, Caring, Integrity and Accountability:
Support, Communicate and Drive Achievement |
Of our business strategies and goals. | |||
Attract and Retain | The highest-caliber executive officers by providing compensation opportunities comparable to those offered by other companies with which we compete for business and talent. | |||
Motivate
High Performance |
From executive officers in an incentive-driven culture by delivering greater rewards for superior performance and reduced awards for underperformance. | |||
Align Interests | Of our executive officers and our stockholders, and foster an equity ownership environment. | |||
Reward Achievement | Of short-term results as well as long-term stockholder value creation. |
How We Pay Our Executives | Our 2015 Executive Pay | ||
We achieve these objectives by employing the following elements of pay for our executives: ●Base
salary
●Annual cash
incentives
●Annual equity incentives,
generally vesting over three to five years, in the form of RSUs and stock
options
●Long-term performance-based
incentives to reward achievement over a three-year period, generally
payable in cash and common stock; beginning with the 2016 grant (to be
reported in our 2017 proxy statement), long-term incentive plan awards
will be settled 100% in common stock that will remain subject to a
two-year holding period
●Retirement and health
benefits
●Limited
perquisites
|
The following shows the breakdown of reported 2015 compensation for our CEO and our other named executive officers. | ||
For more information on our compensation core principles, and how we pay our executives, please refer to pages 39-40 of this proxy statement. | For more information on reported 2015 compensation for our CEO and our other named executive officers, please refer to the Summary Compensation Table on page 53 of this proxy statement. |
36 |
2016 Proxy Statement |
|
Executive Compensation and Related Matters |
Leading Practices
in Compensation Programs
Our pay practices align with our core
compensation principles and facilitate our implementation of those principles.
They also demonstrate our commitment to sound compensation and governance
practices.
Our executive compensation program motivates executive officers to take personal responsibility for the performance of CVS Health |
✓ | Core Executive
Compensation Principles Designed to Promote Company Growth | |
✓ | Performance Measures Aligned with Stockholder
Interests | ||
✓ | Majority of the Total Compensation Opportunity is
Performance-Based | ||
✓ | LTIP
Awards Settled in Common Stock that is Subject to Retention Requirement
(Holding Period) | ||
✓ | Stock Ownership Guidelines | ||
We apply leading
executive |
✓ | No Excise Tax Gross-Ups | |
✓ |
No Option
Repricing | ||
✓ | No
Recycling of Shares | ||
✓ |
Recoupment
Policy | ||
✓ | Broad
Anti-Pledging and Hedging Policies | ||
✓ | Executive Severance Policy | ||
✓ | Limited Perquisites and Personal Benefits | ||
✓ | SERP
Closed to New Participants | ||
✓ | Double Trigger Vesting of Equity Awards | ||
✓ | Board Committee Oversight of Comprehensive Annual Compensation Program Risk Assessment |
For more information on our compensation practices, please refer to pages 39-52 of this proxy statement. |
Stockholder
Outreach - Compensation Actions
During the fall of 2014, we reached out to stockholders and offered to
discuss our compensation programs, corporate governance and any other matters.
We also had discussions with one of the leading proxy advisory firms, and
obtained feedback from our institutional investors by means of an independent,
third-party platform that provided collective data and comments. These
conversations led us to redesign our 2015 proxy statement, clarify the
explanation regarding our prohibition on tax gross-ups, modify our peer group
and amend our stock option grant policy to explicitly prohibit the re-pricing of stock
options without stockholder approval.
In 2015 we received a high level of stockholder support for our executive compensation program, with a 94% vote in favor. During the fall of 2015, we contacted our 50 largest stockholders, holders of approximately 50% of our common stock, and offered to discuss our compensation programs, corporate governance and any other matters. We had discussions with several stockholders and all were generally pleased with our business results and the link between performance and the compensation earned by key executives.
The design of our long-term incentive plan (LTIP) was a common discussion point. The current structure for this plan is for awards that are subject to overlapping three-year cumulative performance periods, earned based on a Return on Net Assets metric, with settlement being equally divided between CVS Health common stock and cash. Several stockholders expressed a preference for the settlement of LTIP awards fully in common stock. The Committee discussed this matter in early 2016, and decided that beginning with LTIP grants for the 2016-2018 performance period, settlement will be made fully in common stock that will continue to have a required two-year holding period following settlement date.
Also during our 2015 outreach program, several stockholders suggested that the CEO long-term incentive components should be more heavily weighted towards performance-based awards rather than time-based awards. For 2015, the weighting was 60% time-based RSUs and stock options and 40% performance-based LTIP. Beginning with the 2016 long-term incentive grants, we provided our CEO with a target long-term incentive pay mix that is split evenly between the performance-based LTIP program, and time-based RSUs and stock options. The Committee believes that this combination of long-term elements provides appropriate balance in support of the long-term growth of the Company.
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37 |
Executive Compensation and Related Matters |
|
WHAT WE HEARD | WHAT WE HAVE DONE IN RESPONSE |
INTENDED OUTCOME | WHEN EFFECTIVE | |||
You deliver a portion of performance-based long-term incentives in cash; the Company should consider settling future LTIP awards fully in common stock | ➔ | Shift to 100% common stock-settled awards starting with the 2016-2018 LTIP cycle | ➔ | Brings our practices into better alignment with the marketplace | ➔ | 2016 awards vesting in 2018; outstanding awards vesting in 2016 and 2017 will continue to be paid in equal amounts of cash and common stock |
The Company should consider increasing the portion of CEO long-term incentive pay that is based on awards considered to be performance-based | ➔ | Rebalanced the CEOs long-term incentive mix at target to be evenly split between performance-based LTIP and time-based RSU and stock option awards, versus current mix of 60% time-based and 40% performance-based | ➔ | Increases the portion of the CEOs compensation that is considered to be performance-based | ➔ | 2016 awards |
Supporting our Executive Compensation Program
We believe that our executive compensation program is consistent with our core compensation principles and is structured to assure that those principles are implemented. Through our stockholder outreach program, we have obtained helpful feedback on the program and have made certain modifications to implement our stockholders suggestions. With those changes, we believe that our major stockholders generally approve of our core compensation principles and our executive compensation program, and we believe our stockholders as a whole should support them as well. |
38 |
2016 Proxy Statement |
|
Executive Compensation and Related Matters |
Compensation Discussion and Analysis
Introduction
This
section explains how our executive compensation programs are designed and
operate with respect to our named executive officers, who for 2015
are:
● |
Larry J. Merlo, President and Chief
Executive Officer (CEO); |
● |
David M. Denton, Executive Vice
President (EVP) and Chief Financial Officer
(CFO); |
● |
Helena B. Foulkes, EVP and President
CVS Pharmacy; |
● |
Jonathan C. Roberts, EVP and
President CVS Caremark; and |
● |
Thomas M. Moriarty, EVP, Chief Health Strategy Officer and General Counsel. |
CVS Health
Values
When determining compensation awards and
incentive payments, the Committee validates that results were achieved in line
with the Companys five core values:
● |
Innovation: Demonstrating openness, curiosity and
creativity in the relentless pursuit of delivering
excellence. |
● |
Collaboration: Sharing and partnering with people to
explore and create things that we could not do on our
own. |
● |
Caring:
Treating people with respect and compassion so they feel valued and
appreciated. |
● |
Integrity: Delivering on our promises; doing what we
say and what is right. |
● |
Accountability: Taking personal ownership for our actions and their results. |
Executive
Compensation Philosophy and Core Principles
The Committee establishes our executive compensation
philosophy and oversees its implementation. The Committee has identified five
core principles that drive our philosophy and that management and the Committee
believe motivate our executive officers to continually improve our performance
and operations, encourage personal responsibility for performance and deliver
long-term stockholder value.
Support, Communicate and Drive Achievement |
Of our business strategies and goals. | |||
Attract and Retain | The highest-caliber executive officers by providing compensation opportunities comparable to those offered by other companies with which we compete for business and talent. | |||
Motivate
High Performance |
From executive officers in an incentive-driven culture by delivering greater rewards for superior performance and reduced awards for underperformance. | |||
Align Interests | Of our executive officers and our stockholders, and foster an equity ownership environment. | |||
Reward Achievement | Of short-term results as well as long-term stockholder value creation. |
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39 |
Executive Compensation and Related Matters |
|
Elements of
Compensation
The Committee believes each component of our executive compensation program furthers one or more of our five core principles, as outlined in the following chart:
PRINCIPLES SUPPORTED | |||||
COMPENSATION ELEMENT AND KEY FEATURES | SUPPORT, COMMUNICATE AND DRIVE ACHIEVEMENT |
ATTRACT
AND RETAIN |
MOTIVATE
HIGH PERFORMANCE |
ALIGN INTERESTS |
REWARD ACHIEVEMENT |
Base Salary
●Provides minimum, fixed level of cash compensation
commensurate with experience, role and responsibility
●Reviewed annually and adjusted periodically based on
comparability to market peers, position responsibility, individual
qualifications, Company and individual performance and corporate
profitability |
|||||
Annual Cash Incentive
●Rewards near-term value-added decisions
●Targets are set as percentage of base
salary
●Payments reflect performance against operating profit
target
●Maximum pool based on small percentage of Adjusted Net
Income and maximum payouts are capped as a percentage of base
salary |
|||||
Long-Term Incentive Plan (LTIP)
●Rewards multi-year financial success
●Target awards are established at start of cycle based on
competitive pay information, level of responsibility, and desired mix of
long-term incentive pay relative to other pay components
●Historically have been paid equally in cash and common
stock based on meeting pre-established performance goals during
performance cycles; starting with the 2016-2018 performance cycle, awards
will be settled 100% in common stock
●Minimum performance threshold (below which no payment
will be made) and capped maximum payouts
●Executive prohibited from selling or trading shares for
two years following payment date |
|||||
Stock Options and Restricted Stock Units
(RSUs)
●Rewards creation of long-term value by encouraging
executives to focus on long-term financial progress
●Annual nonqualified stock option grants with seven-year
terms that vest in four equal installments on first, second, third and
fourth anniversaries of the grant date and return value only to extent
that stock price appreciates
●Annual RSU awards vest upon continued employment; annual
RSU awards for named executive officers vest in two equal installments, on
third and fifth anniversaries of grant date
●Target awards established based on competitive pay
information, level of responsibility and emphasis on long-term incentive
pay as key component of the executive pay program |
|||||
Deferred Compensation Plan and Deferred Stock
Compensation Plan (DSP)
●Provide savings in a tax-efficient manner and enhance
focus on stock ownership
●Offers variety of investment choices, none of which
represents an above-market return, with up to a 5% match on eligible
deferred compensation, offset by match under qualified defined
contribution plan
●DSP units fluctuate in value based on the performance of
common stock |
40 |
2016 Proxy Statement |
|
Executive Compensation and Related Matters |
Linking Pay to
Performance
For 2015, as in
previous years, the Committee reviewed an historical assessment of the
relationship between CVS Healths performance and executive pay relative to our
2015 Peer Group (as described below). The following graphs illustrate the
results of the Committees core assessment and illustrate the relationship
between:
(1) | our CEOs real compensation (base salary earned, incentives earned, value of restricted shares or RSUs that vest during the period, value of stock options exercised during the period, and changes in value of unvested restricted shares/RSUs and unexercised options held during the period); and | |
(2) | CVS Healths performance as measured by total shareholder return (TSR) over one-year (2014) and three-year (2012 2014) periods (the most recent periods for which financial and compensation data were available at the time). |
In the following graphs, data points that are within the shaded area designate ideal pay-performance relationships. Data points below the shaded area identify peer companies where pay was lower than expected given the organizations performance, and those data points above the shaded area suggest the opposite.
1-Year CEO Compensation Realized Percentile vs. Total Shareholder Return Percentile |
3-Year CEO Compensation Realized Percentile vs. Total Shareholder Return Percentile | ||
|
|||
In the graph above, compensation realized by CVS Healths CEO in 2014 ranked at the 84th percentile, our TSR ranked at the 89th percentile, indicating that our CEOs realized compensation was in the range that characterizes an ideal pay-for-performance alignment. | Similarly, the graph above illustrates the relationship between CEO pay rank and the relative return to stockholders for CVS Health and the 2015 Peer Group over the 3-year period 2012 to 2014. Relative compensation rests just outside of the range that characterizes ideal pay-for-performance alignment. |
These assessments demonstrate the Committees commitment to maintaining practices that ensure our executive compensation aligns with results in a manner that benefits our investors.
Annual
Decision-Making Process
Pay
Positioning. Each year, our management
recommends for Committee approval financial performance targets that are
challenging and, if achieved, would deliver superior value to stockholders.
Consistent with these ambitious performance targets, CVS Health positions its
aggregate target total direct compensation (base salary plus annual and
long-term incentives) for its executive officers at competitive pay levels using
the median of our peer group for reference. Positioning varies by job and the
Committee considers a number of factors including market competitiveness,
specific duties and responsibilities of the executive versus those of peers and
succession planning. The Committee believes it is appropriate to reward the
executive management team with compensation above the competitive median if the
ambitious financial targets associated with the variable pay programs are
exceeded in a way that is consistent with the Companys core values. Conversely,
if the financial targets are not met, awards are reduced to levels that rest
below the median.
Benchmarking. Each year, the Committee reviews the peer group against which financial performance and compensation competitiveness are assessed. The 2015 Peer Group was constructed to recognize that CVS Health competes for talent outside of its specific industry segments. The 2015 Peer Group consisted of the following
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companies from across general industry that are similar to CVS Health in terms of industry affiliation, labor market, and operating and character image:
2015 PEER GROUP MEMBERS | REVENUES FOR 12 MONTHS ENDED DECEMBER 31, 2015 ($B) |
MARKET CAPITALIZATION AS OF DECEMBER 31, 2015 ($B) | ||
AmerisourceBergen Corp. | $139.1 | $21.5 | ||
The Boeing Company | 96.1 | 97.0 | ||
Comcast Corporation | 74.5 | 138.7 | ||
Costco Wholesale Corporation | 116.6 | 71.0 | ||
Express Scripts Holding Company | 101.8 | 59.1 | ||
The Home Depot, Inc. | 86.7 | 167.7 | ||
Johnson & Johnson | 70.1 | 284.3 | ||
The Kroger Co. | 108.9 | 40.4 | ||
Lowes Companies, Inc. | 58.4 | 69.7 | ||
McKesson Corporation | 189.1 | 45.4 | ||
Merck & Co., Inc. | 39.5 | 148.0 | ||
PepsiCo, Inc. | 63.1 | 146.1 | ||
Pfizer Inc. | 48.9 | 199.3 | ||
The Procter & Gamble Company | 69.4 | 216.0 | ||
Target Corporation | 73.9 | 44.9 | ||
UnitedHealth Group Incorporated | 157.1 | 112.1 | ||
Walgreens Boots Alliance, Inc. | 112.9 | 92.4 | ||
Wal-Mart Stores, Inc. | 484.0 | 196.8 | ||
The Walt Disney Company | 54.3 | 178.6 | ||
CVS Health Corporation | $153.3 | $107.6 | ||
Percentile, Relative to 2015 Peer Group | 88% | 48% |
2016 Peer Group
In late 2015, the Committee approved a new peer group to be used to make award recommendations and set target compensation levels for 2016. In consultation with its independent compensation consultant, the Committee removed Lowes Companies, Inc. from the peer group, as there was a lower level of overall comparability to CVS Health than the other peer group companies. No other changes were made. The Committee believes that the peer group is a good representation of the market in which CVS Health competes for talent, when taking into consideration CVS Healths size, industry affiliation, and operating model.
Annual Decision-Making
Preliminary financial results and total compensation market data for our executives are reviewed in November of each year, together with any stockholder comments received on our executive compensation program.
The following January, the Committee reviews preliminary financial results with respect to TSR, growth in revenue, GAAP operating income growth, and diluted GAAP EPS growth and considers incentive award payouts for the completed fiscal year. For named executive officers other than the CEO, final decisions on actual incentive awards for the prior year are made in February after Committee review of the CEOs assessment of individual executive contribution and performance.
The CEOs performance is reviewed separately. In January, the CEO presents to the independent directors a self-assessment of his performance against his Board-approved strategic, operational and financial goals. The Chairman of the Board and the Committee Chair then meet privately with all of the independent directors to consider the CEOs performance. Committee members consult with their independent compensation consultant and consider the independent directors assessments in reviewing the CEOs total compensation and determining his annual incentive compensation award and equity compensation grants.
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Executive Compensation and Related Matters |
The final step in the annual planning and decision making process occurs in the February March timeframe, when the Committee establishes financial targets and approves any base salary changes and individual target incentive award levels for the current year. The annual cycle of reviewing and developing the Companys executive compensation programs and pay levels is a multi-step process that incorporates input from management, peer group information, consideration of say-on-pay results, and both short- and long-term Company results compared to objectives, as well as consultation with an independent compensation consultant.
Throughout the annual compensation cycle, Committee decisions incorporate and reflect our deep commitment to the Companys five core values: Innovation, Collaboration, Caring, Integrity, and Accountability.
Pay
Mix
Cash
versus Non-Cash Compensation
The Committee recognizes the competitive need for an appropriate amount of cash compensation, comprised of base salary, annual incentive pay and the cash portion of a long-term target incentive award. As part of its annual review of the competitiveness and effectiveness of our compensation program, the Committee monitors the relative levels of cash and non-cash compensation to ensure that the mix includes appropriate amounts of both components.
Fixed versus Variable Compensation | ||||
The annual incentive program, long-term target incentive plans and service-based equity award program tie a significant amount of variable compensation to an executives continued employment (subject to the vesting and forfeiture provisions of our incentive plan and individual equity grant agreements) and the performance of CVS Health common stock over the vesting and option exercise periods. For fiscal year 2015, the percentage of target total direct compensation represented by at-risk pay (target annual incentives and long-term incentives consisting of stock options, RSUs and long-term performance incentive awards) for CVS Healths named executive officers was as set forth in the table to the right: |
Target Total
Direct Compensation Mix (%) |
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Components of
Executive Compensation Program and 2015 Compensation
Decisions
The Committee recognizes
that while stock prices are generally a good indicator of corporate performance
over time, external factors that are beyond CVS Healths influence may impact
its stock price. Consequently, in addition to stock price, the Committee
believes that other performance indicators, including profitability and sound
financial management of our working capital, should also be factored into our
executive compensation program. The Committee has designed its executive
compensation program in a manner intended to achieve these objectives by
balancing fixed and variable pay, as well as long- and short-term
incentives.
Base Salary
The Committee annually reviews the base salaries of all senior officers, including the named executive officers, and adjusts them as needed to maintain competitiveness and consistency with evolving responsibilities. The process includes an analysis by our independent compensation consultant of the responsibilities and associated total compensation of each executive as related to the total compensation of comparable executives in our peer group. Upon consideration of this competitive market analysis as well as consideration of contributions and results, the base salaries for our named executive officers were increased in April 1, 2015 as illustrated below. The primary factors for the salary increases for Messrs. Denton and Roberts and Ms. Foulkes were market adjustments, in conjunction with their ongoing contributions and performance. Other considerations in addition to the market review that were incorporated into the changes include: for Mr. Merlo, his critical role in rebranding our company to CVS Health, enhancing our focus towards a greater commitment to improving consumer health care experiences, and for driving related innovations; and for Mr. Moriarty, expansion of his responsibilities to include health care strategy, enterprise business development, pharmaceutical purchasing and retail network contracting.
EXECUTIVE NAME AND 2015 TITLE(S) | 2014 SALARY | 2015 SALARY | PERCENTAGE INCREASE | |||
Larry J. Merlo, President and CEO | $1,350,000 | $1,630,000 | 21% | |||
David M. Denton, EVP and CFO | $825,000 | $850,000 | 3% | |||
Helena B. Foulkes, EVP and | $850,000 | $950,000 | 12% | |||
President CVS Pharmacy | ||||||
Jonathan C. Roberts, EVP and | $900,000 | $950,000 | 6% | |||
President CVS Caremark | ||||||
Thomas M. Moriarty, EVP, Chief Health | $670,000 | $750,000 | 12% | |||
Strategy Officer and General Counsel |
Annual Incentive Awards
The Executive Incentive Plan (the EIP) was originally established in 2014 and is designed to provide flexibility around incentive payouts to named executive officers by rewarding achievement of certain objectives and strategic growth initiatives while preserving the tax deductibility of those payments under Internal Revenue Code Section 162(m) (IRC 162(m)). Under the EIP, a maximum pool is created that can be used to pay annual incentives to named executive officers. For 2015, the pool formula was 0.5% of Adjusted Income from Continuing Operations Attributable to CVS Health. At the beginning of 2015, the Committee established a target for each named executive officer as a reference point to determine actual payouts. The target award opportunity is expressed as a percentage of base salary and is determined using a variety of factors, including CVS Healths 2015 Peer Group practices and the desired ratios of cash to non-cash and fixed to variable compensation for each named executive officer. The Committee also set individual limits on awards, expressed as a percentage of the pool and salary.
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Since market compensation practices, including incentive opportunity, differ by job, our target bonus opportunities as a percentage of base salary vary for our named executive officers, as follows:
EXECUTIVE NAME | TARGET OPPORTUNITY AS A PERCENTAGE OF SALARY |
MAXIMUM PORTION OF POOL |
MAXIMUM PAYOUT AS A PERCENTAGE OF SALARY | |||
Larry J. Merlo | 200% | 30.0% | 500% | |||
David M. Denton | 150% | 15.0% | 400% | |||
Helena B. Foulkes | 150% | 15.0% | 400% | |||
Jonathan C. Roberts | 150% | 15.0% | 400% | |||
Thomas M. Moriarty | 150% | 15.0% | 400% |
2015 Management Incentive Plan Funding
As a starting point for evaluating annual EIP awards, the Committee considered performance results under our Management Incentive Plan (the MIP), a program maintained for a broad portion of the employee population, and for our named executive officers prior to the establishment of the EIP.
The 2015 performance targets under the MIP were as follows:
OPERATING PROFIT (80% WEIGHTING) |
RETAIL CUSTOMER SERVICE/PBM CLIENT SATISFACTION (20% WEIGHTING) | |||||
LEVEL OF PERFORMANCE ACHIEVED |
LEVEL OF PAYOUT % OF TARGET |
|||||
Below Minimum | <96.9% of Target | 0% | 0% | |||
Threshold | 96.9% of Target | 30% | 25% | |||
Target | $9,563.0 million | 100% | 100% | |||
Maximum | >102.5% of Target | 200% | 100% | |||
Actual | $9,586.0 million | 100% | 96.5% | |||
Funding (adjusted for Retail Customer Service/PBM Client Satisfaction) | 99.3% |
The Committee used MIP funding of 99.3% as its starting point for evaluating actual payments under the EIP because it believes that Operating Profit, Retail Service and PBM Client Satisfaction are appropriate performance metrics for annual incentives and that each named executive officer is responsible for delivering on those metrics. The Committee also believed that these metrics were challenging and would serve as an appropriate measure of managements success in delivering short-term stockholder value while maintaining momentum toward the achievement of longer-term financial progress.
The Committee exercises judgment in determining individual EIP awards and does not assign specific weights to the factors it considers. Mr. Merlos annual incentive award for 2015 was modestly above his applicable reference point and significantly below his maximum payout allowed under the EIP, as shown in the table on page 46. His award was determined based on his overall contributions to enterprise performance, including leadership during the acquisitions of Omnicare, Inc. and the pharmacy and clinic businesses of Target Corporation (the Target transaction), while positioning the Company for further growth and improvements in the consumer health care business. Specifically, Mr. Merlo expanded the breadth of the Companys leading assets by adding the long-term pharmacy care channel and expanding the retail outlet through the Target transaction. The addition of these integrated assets enables the Company to partner more broadly across the health care landscape with payors, patients and providers. In making its incentive award decision, the Committee acknowledged that Mr. Merlo provided outstanding leadership in driving the growth of the Company. The primary factors in determining the 2015 annual incentive awards for the remaining named executive officers were: for Mr. Denton, his efforts to generate free cash flow, strengthen our balance sheet and improve our working capital position, in addition to providing critical leadership with the financing transactions associated with acquisitions; for Ms. Foulkes, continued strong performance in the retail/long-term care segment with year-over-year revenue growth of 6.2% and the successful consummation of the Target transaction; for
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Mr. Roberts, significant contributions to the Company and continued strong performance in the pharmacy services business, including the successful 2016 PBM selling season with gross client wins of $14.8 billion and net new client business of $12.7 billion, in addition to year-over-year pharmacy services segment revenue growth of 13.5%; and for Mr. Moriarty, significant achievement in advancing our position on strategic matters including health care strategy, enterprise business development, and oversight of our leading generic sourcing venture, Red Oak, as well as providing substantial leadership related to our acquisitions.
The following table shows the actual annual incentive award payouts earned based on the factors outlined above:
2015 Executive Incentive Plan Awards
RANGE OF POTENTIAL PAYMENTS | ||||||||||
EXECUTIVE NAME | BASE SALARY |
MINIMUM | 99.3% OF REFERENCE TARGET BASED ON MIP RESULTS |
MAXIMUM PERMITTED UNDER CAP AS A % OF SALARY |
ACTUAL EIP AWARD FOR 2015 | |||||
Larry J. Merlo | $1,630,000 | $0 | $3,237,180 | $8,150,000 | $3,725,000 | |||||
David M. Denton | $850,000 | $0 | $1,266,075 | $3,400,000 | $1,450,000 | |||||
Helena B. Foulkes | $950,000 | $0 | $1,415,025 | $3,800,000 | $1,415,000 | |||||
Jonathan C. Roberts | $950,000 | $0 | $1,415,025 | $3,800,000 | $1,770,000 | |||||
Thomas M. Moriarty | $750,000 | $0 | $1,117,125 | $3,000,000 | $1,300,000 | |||||
Long-Term Incentive Compensation
The Committee believes strongly in the use of long-term incentive compensation for executives to reinforce four strategic objectives: |
● | Focus on the importance of
returns to stockholders; |
● | Promote the achievement of
long-term performance goals; |
● | Encourage executive retention;
and |
● | Promote meaningful levels of Company stock ownership by executives. |
The key elements of the Companys long-term incentive compensation plans (the LTI plans) are:
(1) | an annual stock option and RSU grant, which vest upon continued employment with the Company, and | |
(2) | long-term performance incentive awards under our long-term incentive plan (LTIP), generally paid equally in cash and Company common stock, to reward financial success over periods greater than one year. |
The Committee believes that the LTI plans properly balance the incentives required to drive achievement of the four strategic objectives above, with the amount and timing of the rewards dependent on the successful achievement of Company objectives. The structure also reinforces the alignment between executive and stockholder interests. All three of these long-term compensation elements are delivered under the provisions of our 2010 Incentive Compensation Plan (ICP).
On the following pages we discuss targets set for long-term performance incentive awards for the 2015-2017 performance period, as well as payouts for the 2013-2015 performance period. Payouts for these cycles, as well as for the 2014-2016 performance period, will be paid equally in cash and Company common stock. Starting with the 2016-2018 performance cycle, awards will be settled 100% in Company common stock. Executives will be permitted to have the Company withhold shares to satisfy tax withholding obligations. Shares issued will continue to be subject to a two-year holding requirement.
As described above, this modification is responsive to suggestions received from our stockholders during our 2015 stockholder outreach effort. Settling the long-term performance incentive awards in this way will result in a change to our Summary Compensation Table disclosure methodology starting with the 2017 proxy statement because future awards will be reported entirely in the non-equity incentive plan column in the year of payment, following the three-year performance cycle.
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To determine the overall opportunity and appropriate mix of equity instruments, the Committee considers a variety of factors, including competitive market positioning against comparable executives of the companies in the 2015 Peer Group, potential economic value realized, timing of vesting and taxation. Along with a review of 2015 Peer Group long-term incentive award practices, the Committee considers the retentive value of the unvested equity awards held by each executive officer to determine whether additional awards to secure continued employment with the Company are warranted. For named executive officers other than the CEO, the Committee also considers the CEOs recommendations.
2015 Long-Term Incentive Opportunities and Awards |
||||
The Committee reviewed all aspects of our LTI plans, including competitiveness of the executives target award opportunities, the impact on shares outstanding and the timing and potential economic impact offered by future vesting of RSU grants and vesting and exercise of stock option grants. Based on this review, the Committee adopted the target mixes for long-term incentives for named executive officers in 2015 set forth in the table to the right. The target for LTIP reflects awards granted in 2015 for the 2015-2017 performance period. Payment, if any, with respect to the award depends on performance against long-term goals and would not be made until 2018. The targets for options and RSUs reflect targets for awards that will be granted in 2016 based on 2015 performance. Actual awards vary based on individual performance. The Committee annually reviews the weighting and components of our long-term incentive (LTI) compensation programs. The structure currently in place provides for an equal weighting of performance-based LTI (LTIP) and time-based LTI (RSUs and stock options) for NEOs other than the CEO. During our 2015 outreach program, several stockholders suggested that the CEO LTI weighting should also be equally split, rather than the current weighting of 60% time-based and 40% performance-based. Beginning with the 2016 LTI grants, we will align the CEO with the other NEOs by providing our CEO with an LTI pay mix that is split evenly between the LTIP program on one hand, and RSUs and stock options on the other hand. |
Long-Term
Incentive Target Mix (%) |
As in the past, each of our performance- and equity-based long-term incentives will continue to be earned independently, meaning that successful achievement of any of the financial goals established for any of the LTI plans will not trigger or accelerate vesting of the RSU or stock option grants; similarly, any awards payable under the LTIP will be based solely on results as measured against the relevant performance metric and will not be affected by any value realized by the RSU or stock option grants.
2015 Option and RSU Grants. Equity grants are made on a predetermined date consistent with the Committees equity grant practices. For fiscal 2015, the grant date was April 1, the first business day of the second quarter. The full grant date fair value of stock options and RSUs granted to each named executive officer during fiscal 2015 is shown in the Summary Compensation Table on page 53. Options have a term of seven years and typically vest in four equal annual installments. The annual RSU grants to our named executive officers vest in two equal installments: 50% on the third anniversary of the grant date and 50% on the fifth anniversary of the grant date.
Additional information about the 2015 awards to each of our named executive officers, including stock option exercise price and the number of shares subject to each award, is shown in the Grants of Plan-Based Awards Table on page 55.
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2015-2017 LTIP Awards. The LTIP focuses on sustainable financial progress and optimal use of the Companys assets, to improve our working capital and free cash flow, modified by the markets view of the Companys achievements through TSR. The LTIP for the three-year performance period from 2015-2017 is based on performance against our three-year return on net assets goal. The Committee included a relative shareholder return modifier to the LTIP awards. As a result, LTIP awards will be reduced or increased if total shareholder return over the three-year performance period relative to the S&P 500 falls outside of a defined range. Specifically, after the return on net assets performance results are certified, the award will be modified up or down as follows:
IF TOTAL SHAREHOLDER RETURN OVER THE THREE-YEAR PERFORMANCE PERIOD IS: | THEN THE MULTIPLIER IS: | |
At or above 66th percentile | 125% | |
At or above the 33rd percentile and below the 66th percentile | 100% | |
Below the 33rd percentile | 75% |
The Committee believes that the modifier is designed to result in meaningful adjustments to awards based on relative total shareholder return, rewarding performance in the top third of the S&P 500 and penalizing performance in the bottom third, and further believes that this is a common approach used in the market.
LTIP awards for the 2015-2017 performance period are paid in a combination of common stock and cash. Beginning with awards granted in 2016 for the 2016-2018 performance period, awards will be settled only in common stock. In either case, all common stock awarded is subject to a mandatory two-year holding period, which further reinforces an alignment of executives interests with that of our stockholders. The cash portion of LTIP awards prior to 2016 is consistent with the overall pay mix determined by the Committee, and participants may elect to use some or all of the cash portion for payment of withholding taxes. The target cash portion of the long-term incentive compensation component generally will not exceed 25% of the total target long-term compensation.
2015-2017 Performance Period Target Awards
EXECUTIVE NAME | TARGET LTI PLAN AWARD FOR 2015-2017 PERFORMANCE PERIOD | |
Larry J. Merlo | $5,500,000 | |
David M. Denton | $2,000,000 | |
Helena B. Foulkes | $1,750,000 | |
Jonathan C. Roberts | $2,250,000 | |
Thomas M. Moriarty | $1,750,000 |
2013-2015 LTIP Awards Payments. All of the executive officers listed in the Summary Compensation Table received payments in 2015 for awards granted in 2013 for the 2013-2015 LTIP performance period. The target performance goal was Return on Net Assets (RoNA) of 36.42%. The following table sets forth minimum, threshold and maximum goals, the range of potential payouts as a percent of target and the actual results for the 2013-2015 performance period:
% OF RoNA TARGET |
PAYOUT LEVEL AS A % OF TARGET | |||
Minimum | <98.2% | 0% | ||
Threshold | 98.5% | 40% | ||
Target (36.42%) | 100.0% | 100% | ||
Maximum | 102.6% | 200% | ||
Actual (37.11%) | 101.9% | 173% |
Relative total shareholder return vs. the S&P 500 over the three-year period was at the 84th percentile. When the 125% multiplier was applied, the resulting payout percentage for the 2013-2015 LTIP was 217%.
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2013 2015 LTI Plan Opportunities and Actual Award Payments
EXECUTIVE NAME | MINIMUM AWARD (% OF TARGET) |
THRESHOLD AWARD (% OF TARGET) |
TARGET AWARD (% OF TARGET) |
MAXIMUM AWARD (% OF TARGET) |
MAXIMUM AWARD AFTER TSR MULTIPLIER (% OF TARGET) |
ACTUAL TOTAL AWARD AT 217% |
ACTUAL CASH PORTION OF AWARD ($) |
ACTUAL STOCK PORTION OF AWARD (# OF SHARES) |
|||||||||
Larry J. Merlo | 0% | 40% | 100% | 200% | 250% | $11,935,000 | $5,967,596 | 61,412 | |||||||||
David M. Denton | 0% | 40% | 100% | 200% | 250% | $3,255,000 | $1,627,597 | 16,748 | |||||||||
Helena B. Foulkes | 0% | 40% | 100% | 200% | 250% | $1,736,000 | $868,078 | 8,932 | |||||||||
Jonathan C. Roberts | 0% | 40% | 100% | 200% | 250% | $3,255,000 | $1,627,597 | 16,748 | |||||||||
Thomas M. Moriarty | 0% | 40% | 100% | 200% | 250% | $2,712,500 | $1,356,298 | 13,957 |
Supplemental
Executive Retirement Plan
We
maintain an unfunded supplemental retirement plan (the SERP), which is
designed to supplement the retirement benefits of selected executive officers.
The SERP is a legacy plan in which participation has decreased over the years as
individuals have retired, and we have not provided SERP benefits to new
participants since 2010. Mr. Merlo is the only active executive officer in the
SERP. Mr. Merlo has reached the maximum amount of service under the SERP based
on his more than 30 years with the Company. As a result, any increase to his
benefit would be primarily as a result of performance-based bonuses. See the
Pension Benefits Table on page 59 for more information.
Other
Benefits
The Company maintains
medical and dental benefits, life insurance and short- and long-term disability
insurance programs for all of its employees. Executive officers are eligible to
participate in these programs on the same basis and with the same level of
financial subsidy as our other salaried employees.
Executive officers may participate in the CVS Future Fund, which is our qualified defined contribution, or 401(k), plan. An eligible CVS Health employee may defer up to 85% of his or her total eligible compensation, defined as salary plus annual incentive, to a maximum defined by the IRS; in 2015, that maximum was $18,000 plus an additional $6,000 for those age 50 and above. After the first full year of employment, CVS Health will match the employees deferral dollar-for-dollar up to a maximum equaling 5% of total eligible compensation. CVS Healths matching cash contributions into the CVS Health Future Fund for the named executive officers who participated are a component of the All Other Compensation Table on page 54.
We offer other benefits that are available to eligible employees, including executive officers, as follows.
Deferred Compensation Plan and Deferred Stock Plan
Eligible executive officers may choose to defer earned and vested compensation into the CVS Health Deferred Compensation Plan (the DCP) and the CVS Health Deferred Stock Compensation Plan (the DSP), which are available to any U.S. employees meeting the Plans eligibility criteria. The plans are intended to provide retirement savings in a tax-efficient manner and to enhance stock ownership. The DCP offers a variety of investment crediting choices, none of which represents an above-market return. The individual contributions of each of the named executive officers during fiscal 2015 to the DCP and the DSP, including earnings on those contributions, any distributions during 2015 and total account balances as of the end of 2015, are shown in the Nonqualified Deferred Compensation Table on page 60.
Perquisites and Other Personal Benefits
We provide the following personal benefits to our named executive officers:
● |
Financial planning: An allowance to cover the cost of a Company-provided financial planner to assist with personal financial and estate planning. We believe it is important to provide to our executives the professional expertise required to ensure that they maximize the efficiencies of our compensation and benefit programs and are able to devote their full attention to the management of the Company. |
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● |
Limited personal use of corporate aircraft: We maintain corporate
aircraft that may be used by our employees to conduct Company business.
Pursuant to an executive security program established by the Board upon
the Committees recommendation, the CEO is required to use our aircraft
for all travel needs, including personal travel, in order to minimize and
more efficiently use his travel time, protect the confidentiality of his
travel and our business, and enhance his personal security. Certain other
named executive officers were also permitted to use our corporate aircraft
for personal travel on a very limited basis during fiscal
2015. |
● |
Home security: An allowance to the named executive officers to cover the costs of the installation and maintenance of home security monitoring systems. While the Committee believes these security costs are business expenses, disclosure of these costs as personal benefits is required. |
The value of all of these items is treated as income taxable to the executives. We provide no reimbursement nor do we pay the taxes or any other expenses associated with these costs on behalf of the executives.
The aggregate incremental cost to the Company of providing these personal benefits to each of the named executive officers during fiscal 2015 is shown in the Summary Compensation Table on page 53.
Key Policies Related to Compensation
Recoupment
Effective with performance cycles beginning in 2009, we have maintained a recoupment policy that applies to all annual and long-term incentive awards granted to executive officers. The policy applies in cases where financial or operational results used to determine an award amount are meaningfully altered based on fraud or material financial misconduct (collectively, Misconduct), as determined by the Board, and apply to any executive officer determined to have been involved in the Misconduct.
The policy applies to Misconduct committed during the performance period that is discovered during the performance period or the three-year period following the performance period. The policy allows us to recoup the entire award, not only excess amounts generated by the Misconduct, subject to the determination of the Board, and the policy may apply even where there is no financial restatement.
CVS Healths Anti-Gross-Up Policy
CVS Health adopted a broad policy against tax gross-ups several years ago. It is notable that when the policy was first adopted, there was an exception for gross-ups payable pursuant to pre-existing agreements. However, in 2012 our executives amended their existing employment and change in control agreements to eliminate any tax gross-ups potentially payable in connection with a change in control. This was done voluntarily, and without any additional compensation. The only current exception to our anti-gross-up policy is for tax payments that may be due under our broad-based relocation policy, which is applicable to a large number of employees (i.e., those who must relocate upon hire, transfer or promotion).
Insider Trading Policy, Including Anti-Pledging and Hedging
A significant percentage of executive compensation is payable in CVS Health common stock, in the form of RSUs and stock options. The Board and executive management of CVS Health take seriously their responsibilities and obligations to exhibit the highest standards of behavior relative to selling and trading our stock. All transactions in our stock contemplated by any director, executive officer or designated employee who has a significant role in, or access to, our financial reporting process (collectively lnsiders), must be pre-cleared by either the General Counsel or the Corporate Secretary. Insiders are generally prohibited from trading in any of our securities except during periods of varying length beginning shortly after the release of our financial results for each quarter, and Insiders and other employees may be required to refrain from trading during other designated periods when significant developments or announcements are anticipated. In addition, it is our policy that Insiders and other employees may not engage in any of the following activities with respect to our securities:
● |
Trading in our securities on a short-term basis (stock purchased in
the open market must be held for at least six
months); |
● |
Purchasing stock on margin or pledging our stock or any stock incentive award as collateral for a loan or margin account; |
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● |
Engaging in short sales or purchases of our
stock; |
● |
Buying or selling puts, calls, exchange traded options or other
derivative securities; or |
● |
Engaging in any other hedging transactions, which includes transactions designed to offset any decrease in the market value of equity securities. |
Our most senior executives and Board members are generally required to transact in our stock pursuant to a 10b5-1 trading plan, and our other executives are encouraged to use trading plans. A trading plan is a contract that allows the individual to sell a pre-determined number of shares at a time in the future when conditions in the plan are met. However, there are extensive guidelines that govern the use of 10b5-1 trading plans including the timing of entry or modification of a plan, the price at which shares will be traded, a cooling off period during which no trades can take place, minimum and maximum terms, restrictions on the number of plans an individual can maintain, a prohibition on trading outside of the plan, and pre-approval of plans (and any modification of plans) by the General Counsel or Corporate Secretary.
Agreements with
Executive Officers
As previously
disclosed, we have an employment agreement (the Employment Agreement) with Mr.
Merlo and change in control agreements (the CIC Agreements, and together with
the Employment Agreement, the Agreements) with Messrs. Denton, Roberts and
Moriarty and Ms. Foulkes.
The Committee believes that the interests of stockholders are best served by ensuring that the interests of our senior management are aligned with our stockholders. The change-in-control provisions of the Agreements are intended to eliminate, or at least reduce, the reluctance of senior management to pursue potential change-incontrol transactions that may be in stockholders best interests. The Agreements serve to eliminate distraction caused by uncertainty about personal financial circumstances during a period in which CVS Health requires focused and thoughtful leadership to ensure a successful outcome. Accordingly, the Agreements provide certain specified double trigger severance benefits to the covered executives in the event of their termination under certain circumstances following a change in control. The Committee believes a double trigger severance benefit provision is more appropriate, as it provides an incentive for greater continuity in management following a change in control. Double trigger benefits require that two events occur in order for severance to be paid, typically a change in control followed by the executives involuntary termination of employment. The 2010 ICP was also amended in 2012 to require a double trigger equity vesting of change in control benefits.
The Committee reviews the severance benefits annually with the assistance of its compensation consultant to evaluate both their effectiveness and competitiveness. The review for fiscal 2015 found the current level of benefits to be within competitive norms for design. Details of payments made to the executives upon a change in control and various termination scenarios; provisions for the treatment of equity awards, SERP and other benefits; and estimated payments that would be made to the executives whose employment terminates following a change in control may be found in Payments/(Forfeitures) Under Termination Scenarios beginning on page 60.
Compliance with IRC
162(m)
IRC 162(m) generally
disallows a tax deduction to public companies for compensation over $1 million
paid to a companys chief executive officer and the three other most highly
compensated executive officers at year end, other than the chief financial
officer. However, qualifying performance-based compensation is not subject to
the deduction limit if certain requirements are met.
The Committee considers the deductibility of executive compensation under IRC 162(m), but may authorize certain non-deductible payments in excess of $1 million. As a matter of compensation design, the Board adopted and stockholders approved the 2010 ICP, under which the Committee may grant annual equity awards, stock options and certain other LTI plan awards to senior executives, including the named executive officers. Certain of the awards granted thereunder are intended to qualify as performance-based compensation and therefore are not subject to the $1 million limitation on deductibility. Awards under the EIP, which are earned based on performance relative to predetermined financial and operating targets, are designed with the intention that amounts paid to the named executive officers will qualify as performance-based compensation and therefore be deductible by CVS Health. However, it is possible that payments under the LTI plans and/or the EIP could be non-deductible.
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The Committee generally intends to design certain portions of named executive officer compensation that are over $1 million in order to qualify such compensation as performance-based compensation under IRC 162(m). The Committee believes it is important to retain flexibility to structure the Companys executive compensation program and practices in a manner that the Committee determines is in the best interests of the Company and its stockholders. The Committee retains discretion to operate the Companys executive compensation programs in a manner designed to promote varying company goals. As a result, the Committee may from time to time conclude that certain compensation arrangements are in the best interest of CVS Health and its stockholders and consistent with its compensation philosophy and strategy despite the fact that the arrangements might not qualify for tax deductibility. Elements of the executive compensation program that do not comply with the deduction rules of IRC 162(m) include base salaries above $1 million and time-vested RSU awards.
Non-GAAP Financial
Measures Used in Compensation Discussion and Analysis
Throughout this Compensation Discussion and Analysis, we refer
to various financial measures. The majority of these financial measures are
calculated in accordance with U.S. generally accepted accounting principles
(GAAP). However, there are some financial measures that management adjusts in
order to assess our year-over-year performance. These adjusted financial
measures are commonly referred to as non-GAAP. An explanation of how we
calculate these non-GAAP financial measures is included below.
Adjusted Income from continuing operations attributable to CVS Health is defined as follows:
● |
Income before income tax provision |
● |
Plus
(minus): Non-GAAP adjustments not part of the underlying business
performance |
● |
Less:
Adjusted income tax provision (using the adjusted effective tax rate,
adjusted for the items above) |
● |
Plus (minus): Net loss (income)
attributable to noncontrolling interest |
● |
Less: Earnings allocated to participating securities |
EBIT or Operating Profit
EBIT or Operating Profit is defined as earnings before interest and taxes adjusted for certain items. For the purposes of measuring performance against established targets in any period, when applicable those excluded items comprise certain legal settlements and activity related to newly acquired or divested businesses.
Free Cash Flow
We define free cash flow as net cash provided by operating activities less net additions to property and equipment (i.e., additions to property and equipment plus proceeds from sale-leaseback transactions).
RoNA or Return on Net Assets
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Summary
Compensation Table
The following
Summary Compensation Table shows information about the compensation received by
our CEO, CFO and each of our three other most highly compensated executive
officers for services rendered in all capacities during the 2015 fiscal
year.
Summary Compensation Table
NAME & PRINCIPAL 2015 POSITIONS 1 |
YEAR | SALARY ($) |
BONUS ($) |
STOCK AWARDS ($) 2 3 |
OPTION AWARDS ($) 3 |
NON-EQUITY INCENTIVE PLAN COMPENSATION ($) 4 |
CHANGE IN PENSION VALUE AND NONQUALIFIED DEFERRED COMPENSATION EARNINGS ($) 5 |
ALL OTHER COMPENSATION ($) 6 |
TOTAL ($) |
|||||||||||
Larry J.
Merlo President and Chief Executive Officer |
2015 | 1,560,000 | | 6,749,900 | 3,999,993 | 9,692,596 | 6,087,680 | 852,885 | 28,943,054 | |||||||||||
2014 | 1,350,000 | | 6,749,996 | 3,999,998 | 11,465,052 | 8,065,273 | 720,414 | 32,350,733 | ||||||||||||
2013 | 1,337,500 | | 6,750,048 | 4,000,002 | 8,501,412 | 8,467,509 | 2,273,691 | 31,330,162 | ||||||||||||
David M.
Denton Executive Vice President and Chief Financial Officer |
2015 | 843,750 | | 1,874,937 | 874,999 | 3,077,597 | | 289,298 | 6,960,581 | |||||||||||
2014 | 825,000 | | 8,928,958 | 749,997 | 3,975,043 | | 205,582 | 14,684,580 | ||||||||||||
2013 | 793,750 | | 2,125,028 | 1,375,006 | 3,430,504 | | 1,004,604 | 8,728,892 | ||||||||||||
Helena
B. Foulkes Executive Vice President and President CVS Pharmacy |
2015 | 925,000 | | 1,749,937 | 874,999 | 2,283,078 | | 232,314 | 6,065,328 | |||||||||||
2014 | 850,000 | | 1,249,927 | 624,992 | 3,165,044 | | 174,119 | 6,064,082 | ||||||||||||
Jonathan
C. Roberts Executive Vice President and President CVS Caremark |
2015 | 937,500 | | 2,124,898 | 999,995 | 3,397,597 | | 280,559 | 7,740,549 | |||||||||||
2014 | 900,000 | | 1,749,988 | 874,991 | 3,915,058 | | 246,386 | 7,686,423 | ||||||||||||
2013 | 900,000 | | 1,625,043 | 875,007 | 3,037,514 | | 1,623,783 | 8,061,347 | ||||||||||||
Thomas
M. Moriarty Executive Vice President, Chief Health Strategy Officer and General Counsel |
2015 | 730,000 | | 1,624,975 | 749,989 | 2,656,298 | | 163,131 | 5,924,393 | |||||||||||
2014 | 670,000 | | 1,374,958 | 749,997 | 2,412,573 | | 208,194 | 5,415,722 | ||||||||||||
1 | Ms. Foulkes became President CVS Pharmacy effective January 1, 2014; she was previously Chief Health Care Strategy and Marketing Officer. Mr. Moriarty was given the additional title of Chief Health Strategy Officer in March 2014; he was previously, and remains, Executive Vice President and General Counsel. |
2 | Included in the stock award column is the full grant date fair value of all RSU awards made to the executive in 2015. Also included is the portion of the LTIP award for performance years 2015 2017 that would be made in non-transferable shares at the target level of performance at the completion of the performance cycles. The amount of the 2015 2017 LTIP award that is payable in cash at the completion of the performance cycles will be reported in the 2018 proxy statement. For 2015, the amounts reported with respect to 2015 RSUs and the LTIP award, respectively, for each of the named executive officers are as follows: for Mr. Merlo, $3,999,900 and $2,750,000; for Mr. Denton, $874,937 and $1,000,000; for Ms. Foulkes, $874,937 and $875,000; for Mr. Roberts, $999,898 and $1,125,000; and for Mr. Moriarty, $749,975 and $875,000. |
3 | The figures shown are the full fair value on the date of grant. For a discussion of the assumptions and methodologies used to value the stock and option awards, please see the discussion of stock awards and option awards contained in our 2015 Annual Report to Stockholders, Notes to Consolidated Financial Statements at Note 10, Stock Incentive Plans. |
4 | The figures shown include amounts earned in 2015 as annual cash incentive awards (see page 46) and the cash portion of the 2013 2015 LTIP cycle (see page 49). |
5 | The amounts reported in this column represent only changes in pension value, as the Company does not pay above-market earnings on deferred compensation. The Company adopted a policy in 2010 stating that it will not offer SERP benefits to new participants. Mr. Merlo is the only executive participant in the SERP. For additional information on the SERP, see Pension Benefits beginning on page 58. |
6 | Set forth below is additional information regarding the amounts disclosed in the All Other Compensation column for 2015. |
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All Other Compensation 2015
NAME & PRINCIPAL 2015 POSITIONS | PERQUISITES & OTHER PERSONAL BENEFITS A ($) |
COMPANY CONTRIBUTIONS TO DEFINED CONTRIBUTION PLANS B ($) |
OTHER C ($) |
|||||
Larry J. Merlo | 82,592 | 307,500 | 462,793 | |||||
President and | ||||||||
Chief Executive Officer | ||||||||
David M. Denton | 16,548 | 24,000 | 248,750 | |||||
Executive Vice President and | ||||||||
Chief Financial Officer | ||||||||
Helena B. Foulkes | 19,347 | 154,500 | 58,467 | |||||
Executive Vice President and | ||||||||
President CVS Pharmacy | ||||||||
Jonathan C. Roberts | 27,832 | 161,375 | 91,352 | |||||
Executive Vice President and | ||||||||
President CVS Caremark | ||||||||
Thomas M. Moriarty | 15,000 | 110,250 | 37,881 | |||||
Executive Vice President, | ||||||||
Chief Health Strategy Officer | ||||||||
and General Counsel |
A | The amounts above reflect the following: for Mr. Merlo, $15,000 for financial planning services, $11,141 for home security, $51,201 associated with personal use of company aircraft and $5,250 associated with the CVS Health Charity Classic; for Mr. Denton, $15,000 for financial planning services and $1,548 for home security; for Ms. Foulkes, $15,000 for financial planning services, $2,397 for home security and $1,950 associated with the CVS Health Charity Classic; for Mr. Roberts, $15,000 for financial planning services, $1,171 for home security, $6,411 associated with personal use of company aircraft and $5,250 associated with the CVS Health Charity Classic; for Mr. Moriarty, $15,000 for financial planning services. The Company determines the amount associated with personal use of Company aircraft by calculating the incremental cost to the Company based on the cost of fuel, trip-related maintenance, deadhead flights, crew travel expenses, landing fees, trip-related hangar costs and smaller variable expenses. |
B | For 2015, this amount includes Company matching contributions to the CVS Health Future Fund of $13,250 for each of Messrs. Merlo, Denton, Roberts and Moriarty and Ms. Foulkes. It also includes Company matching contributions credited to notional accounts in the unfunded Deferred Compensation Plan equal to: for Mr. Merlo $294,250; for Mr. Denton, $10,750; for Ms. Foulkes, $141,250; for Mr. Roberts, $148,125; and for Mr. Moriarty, $97,000. |
C | This amount includes cash dividend equivalents paid by the Company on unvested RSUs as follows: for Mr. Merlo, $344,249; for Mr. Denton, $248,750; for Ms. Foulkes, $58,467; for Mr. Roberts, $83,196; and for Mr. Moriarty, $37,881. Also includes cash dividend equivalents paid by the Company on deferred RSUs, as noted in the Nonqualified Deferred Compensation table, equal to: for Mr. Merlo, $118,544 and for Mr. Roberts, $8,156. |
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Grants of
Plan-Based Awards
This table reflects awards granted under our annual cash incentive
plan for 2015, the 2015 2017 LTIP cycle, and the
annual equity awards for 2015, which include stock options and RSUs.
Grants of Plan-Based Awards 2015
NAME & PRINCIPAL 2015 POSITIONS |
AWARD TYPE | DATE OF COMMITTEE ACTION |
GRANT DATE |
EST. FUTURE PAYOUTS UNDER NON-EQUITY INCENTIVE PLAN AWARDS |
EST. FUTURE PAYOUTS UNDER EQUITY INCENTIVE PLAN AWARDS 1 |
ALL OTHER STOCK AWARDS: NUMBER OF SHARES OF STOCK OR UNITS (#) |
ALL OTHER OPTION AWARDS: NUMBER OF SECURITIES UNDERLYING OPTIONS (#) |
EXERCISE OR BASE PRICE OF OPTION AWARDS ($ / SH) |
GRANT DATE FAIR VALUE OF STOCK AND OPTION AWARDS ($) |
|||||||||||||||||||
THRESHOLD ($) |
TARGET ($) |
MAXIMUM ($) |
THRESHOLD (#) |
TARGET (#) |
MAXIMUM (#) | |||||||||||||||||||||||
Larry J.
Merlo President and Chief Executive Officer |
Stock Options | 2/18/2015 | 4/1/2015 | 273,929 | 102.26 | 3,999,993 | ||||||||||||||||||||||
Annual RSUs | 2/18/2015 | 4/1/2015 | 39,115 | 3,999,900 | ||||||||||||||||||||||||
Annual Cash | 0 | 3,260,000 | 8,150,000 | |||||||||||||||||||||||||
LTIP (15-17) | 2/18/2015 | 2/18/2015 | 1,100,000 | 2,750,000 | 5,500,000 | 10,566 | 26,416 | 52,832 | 2,750,000 | |||||||||||||||||||
David M.
Denton Executive Vice President and Chief Financial Officer |
Stock Options | 2/18/2015 | 4/1/2015 | 59,922 | 102.26 | 874,999 | ||||||||||||||||||||||
Annual RSUs | 2/18/2015 | 4/1/2015 | 8,556 | 874,937 | ||||||||||||||||||||||||
Annual Cash | 0 | 1,275,000 | 3,400,000 | |||||||||||||||||||||||||
LTIP (15-17) | 2/18/2015 | 2/18/2015 | 400,000 | 1,000,000 | 2,000,000 | 3,842 | 9,606 | 19,212 | 1,000,000 | |||||||||||||||||||
Helena B.
Foulkes Executive Vice President and President CVS Pharmacy |
Stock Options | 2/18/2015 | 4/1/2015 | 59,922 | 102.26 | 874,999 | ||||||||||||||||||||||
Annual RSUs | 2/18/2015 | 4/1/2015 | 8,556 | 874,937 | ||||||||||||||||||||||||
Annual Cash | 0 | 1,425,000 | 3,800,000 | |||||||||||||||||||||||||
LTIP (15-17) | 2/18/2015 | 2/18/2015 | 350,000 | 875,000 | 1,750,000 | 3,362 | 8,405 | 16,810 | 875,000 | |||||||||||||||||||
Jonathan C.
Roberts Executive Vice President and President CVS Caremark |
Stock Options | 2/18/2015 | 4/1/2015 | 68,482 | 102.26 | 999,995 | ||||||||||||||||||||||
Annual RSUs | 2/18/2015 | 4/1/2015 | 9,778 | 999,898 | ||||||||||||||||||||||||
Annual Cash | 0 | 1,425,000 | 3,800,000 | |||||||||||||||||||||||||
LTIP (15-17) | 2/18/2015 | 2/18/2015 | 450,000 | 1,125,000 | 2,500,000 | 4,322 | 10,806 | 21,612 | 1,125,000 | |||||||||||||||||||
Thomas M.
Moriarty Executive Vice President, Chief Health Strategy Officer and General Counsel |
Stock Options | 2/18/2015 | 4/1/2015 | 51,361 | 102.26 | 749,989 | ||||||||||||||||||||||
Annual RSUs | 2/18/2015 | 4/1/2015 | 7,334 | 749,975 | ||||||||||||||||||||||||
Annual Cash | 0 | 1,125,000 | 3,000,000 | |||||||||||||||||||||||||
LTIP (15-17) | 2/18/2015 | 2/18/2015 | 350,000 | 875,000 | 1,750,000 | 3,362 | 8,405 | 16,810 | 875,000 |
1 | Share numbers determined based on the closing price of our stock on the applicable grant date. |
The stock option awards shown above vest in equal installments on the first, second, third and fourth anniversaries of the date of grant and expire in seven years from the date of grant. As described above, our policy is to establish the exercise price for stock options as the closing price of our common stock on the grant date. Annual RSU grants typically vest in increments of 50% on the third anniversary of the grant and 50% on the fifth anniversary of the grant. If earned, a portion of the 2015 2017 LTIP cycle awards will be reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table for the relevant year in which payment may be made.
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Outstanding Equity
Awards at Fiscal Year-End
This table
reflects stock option and RSU awards granted to our named executive officers
under our 1997 and 2010 ICPs that were outstanding as of December 31,
2015.
Outstanding Equity Awards at 2015 Year-End
STOCK OPTION AWARDS | STOCK AWARDS | |||||||||||||||||||
NUMBER OF | EQUITY INCENTIVE | EQUITY INCENTIVE | ||||||||||||||||||
NUMBER OF | NUMBER OF | SHARES OR | PLAN AWARDS: | PLAN AWARDS: | ||||||||||||||||
SECURITIES | SECURITIES | UNITS OF | MARKET VALUE OF | NUMBER OF | MARKET VALUE OF | |||||||||||||||
UNDERLYING | UNDERLYING | OPTION | STOCK THAT | SHARES OR UNITS | SHARES OR UNITS | SHARES OR UNITS | ||||||||||||||
UNEXERCISED | UNEXERCISED | EXERCISE | OPTION | HAVE NOT | OF STOCK THAT | OF STOCK THAT | OF STOCK THAT | |||||||||||||
NAME & PRINCIPAL | GRANT | OPTIONS (#) | OPTIONS (#) | PRICE | EXPIRATION | GRANT | VESTED | HAVE NOT | HAVE NOT | HAVE NOT | ||||||||||
2015 POSITIONS | DATE | EXERCISABLE | UNEXERCISABLE | ($) | DATE | DATE | (#) | VESTED ($) 1 | VESTED (#) | VESTED ($) 1 | ||||||||||
Larry J. Merlo | 4/1/2009 | 92,786 | 2 | 28.10 | 4/1/2016 | 4/1/2011 | 32,180 5 | 3,146,239 | ||||||||||||
President and | 4/1/2010 | 152,988 | 2 | 36.23 | 4/1/2017 | 4/2/2012 | 41,602 6 | 4,067,428 | ||||||||||||
Chief Executive Officer | 4/1/2011 | 241,150 | 3 | 34.96 | 4/1/2018 | 4/1/2013 | 73,355 6 | 7,171,918 | ||||||||||||
4/2/2012 | 249,552 | 83,184 3 | 45.07 | 4/2/2019 | 4/1/2014 | 53,843 6 | 5,264,230 | |||||||||||||
4/1/2013 | 157,356 | 157,357 3 | 54.53 | 4/1/2020 | 4/1/2015 | 39,115 6 | 3,824,274 | |||||||||||||
4/1/2014 | 83,924 | 251,773 3 | 74.29 | 4/1/2021 | 2/18/2014 | 39,106 9 | 3,823,394 | |||||||||||||
4/1/2015 | | 273,929 3 | 102.26 | 4/1/2022 | 2/18/2015 | 26,416 9 | 2,582,692 | |||||||||||||
David M. Denton | 3/5/2008 | 12,420 | 4 | 40.28 | 3/5/2018 | 4/1/2010 | 4,313 7 | 421,682 | ||||||||||||
Executive Vice President | 4/1/2010 | 95,618 | 2 | 36.23 | 4/1/2017 | 4/1/2011 | 14,303 5 | 1,398,404 | ||||||||||||
and Chief Financial Officer | 4/1/2011 | 107,178 | 3 | 34.96 | 4/1/2018 | 4/2/2012 | 13,868 6 | 1,355,874 | ||||||||||||
4/2/2012 | 83,184 | 27,728 3 | 45.07 | 4/2/2019 | 4/1/2013 | 25,216 6 | 2,465,368 | |||||||||||||
4/1/2013 | 54,091 | 54,092 3 | 54.53 | 4/1/2020 | 4/1/2014 | 10,095 6 | 986,988 | |||||||||||||
4/1/2014 | 15,735 | 47,208 3 | 74.29 | 4/1/2021 | 4/1/2014 | 100,000 8 | 9,777,000 | |||||||||||||
4/1/2015 | | 59,922 3 | 102.26 | 4/1/2022 | 4/1/2015 | 8,556 6 | 836,520 | |||||||||||||
2/18/2014 | 10,665 9 | 1,042,717 | ||||||||||||||||||
2/18/2015 | 9,606 9 | 939,179 | ||||||||||||||||||
Helena B. Foulkes | 4/1/2011 | 12,058 | 3 | 34.96 | 4/1/2018 | 4/1/2009 | 2,670 7 | 261,046 | ||||||||||||
Executive Vice President | 4/1/2011 | 14,303 | 14,304 4 | 34.96 | 4/1/2021 | 4/1/2010 | 2,416 7 | 236,212 | ||||||||||||
and | 4/2/2012 | 9,982 | 9,983 3 | 45.07 | 4/2/2019 | 4/1/2011 | 4,595 5 | 449,278 | ||||||||||||
President CVS | 4/1/2013 | 19,670 | 19,670 3 | 54.53 | 4/1/2020 | 4/1/2011 | 6,436 5 | 629,248 | ||||||||||||
Pharmacy | 4/1/2014 | 13,113 | 39,339 3 | 74.29 | 4/1/2021 | 4/2/2012 | 4,993 6 | 488,166 | ||||||||||||
4/1/2015 | | 59,922 3 | 102.26 | 4/1/2022 | 4/1/2013 | 9,170 6 | 896,551 | |||||||||||||
4/1/2014 | 8,412 6 | 822,441 | ||||||||||||||||||
4/1/2015 | 8,556 6 | 836,520 | ||||||||||||||||||
2/18/2014 | 8,887 9 | 868,882 | ||||||||||||||||||
2/18/2015 | 8,405 9 | 821,757 |
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STOCK OPTION AWARDS | STOCK AWARDS | |||||||||||||||||||
NUMBER OF | EQUITY INCENTIVE | EQUITY INCENTIVE | ||||||||||||||||||
NUMBER OF | NUMBER OF | SHARES OR | PLAN AWARDS: | PLAN AWARDS: | ||||||||||||||||
SECURITIES | SECURITIES | UNITS OF | MARKET VALUE OF | NUMBER OF | MARKET VALUE OF | |||||||||||||||
UNDERLYING | UNDERLYING | OPTION | STOCK THAT | SHARES OR UNITS | SHARES OR UNITS | SHARES OR UNITS | ||||||||||||||
UNEXERCISED | UNEXERCISED | EXERCISE | OPTION | HAVE NOT | OF STOCK THAT | OF STOCK THAT | OF STOCK THAT | |||||||||||||
NAME & PRINCIPAL | GRANT | OPTIONS (#) | OPTIONS (#) | PRICE | EXPIRATION | GRANT | VESTED | HAVE NOT | HAVE NOT | HAVE NOT | ||||||||||
2015 POSITIONS | DATE | EXERCISABLE | UNEXERCISABLE | ($) | DATE | DATE | (#) | VESTED ($) 1 | VESTED (#) | VESTED ($) 1 | ||||||||||
Jonathan C. Roberts | 4/1/2010 | 61,196 | 2 | 36.23 | 4/1/2017 | 4/1/2011 | 11,442 5 | 1,118,684 | ||||||||||||
Executive Vice President | 4/1/2011 | 85,743 | 3 | 34.96 | 4/1/2018 | 4/2/2012 | 9,708 6 | 949,151 | ||||||||||||
and | 4/2/2012 | 58,229 | 19,410 3 | 45.07 | 4/2/2019 | 9/4/2012 | 11,413 5 | 1,115,859 | ||||||||||||
President CVS | 9/4/2012 | 36,290 | 72,580 4 | 45.93 | 9/4/2022 | 4/1/2013 | 16,047 6 | 1,568,915 | ||||||||||||
Caremark | 4/1/2013 | 34,422 | 34,422 3 | 54.53 | 4/1/2020 | 4/1/2014 | 11,778 6 | 1,151,535 | ||||||||||||
4/1/2014 | 18,358 | 55,075 3 | 74.29 | 4/1/2021 | 4/1/2015 | 9,778 6 | 955,995 | |||||||||||||
4/1/2015 | | 68,482 3 | 102.26 | 4/1/2022 | 2/18/2014 | 12,443 9 | 1,216,552 | |||||||||||||
2/18/2015 | 10,806 9 | 1,056,503 | ||||||||||||||||||
Thomas M. Moriarty | 10/1/2012 | 20,456 | 41,094 4 | 48.67 | 10/1/2022 | 10/1/2012 | 6,462 5 | 631,777 | ||||||||||||
Executive Vice President | 4/1/2013 | 24,586 | 24,588 3 | 54.53 | 4/1/2020 | 4/1/2013 | 11,462 6 | 1,120,640 | ||||||||||||
Chief Health Strategy | 4/1/2014 | 15,735 | 47,208 3 | 74.29 | 4/1/2021 | 4/1/2014 | 10,095 6 | 968,988 | ||||||||||||
Officer and General | 4/1/2015 | | 51,361 3 | 102.26 | 4/1/2022 | 4/1/2015 | 7,334 6 | 717,045 | ||||||||||||
Counsel | 2/18/2014 | 8,887 9 | 868,882 | |||||||||||||||||
2/18/2015 | 8,405 9 | 821,757 |
1 | The value of the RSUs is based on $97.77, which was the closing price of our stock on December 31, 2015, the last trading day of our fiscal year. |
2 | The stock options vest in one-third increments on each of the first, second and third anniversaries of the date of grant. |
3 | The stock options vest in one-quarter increments on each of the first, second, third and fourth anniversaries of the date of grant. |
4 | The stock options vest in one-third increments on each of the third, fourth and fifth anniversaries of the date of grant and expire ten years from the date of grant. |
5 | RSUs vest on the fifth anniversary of the date of grant. |
6 | RSUs vest in increments of 50% on the third anniversary of the grant date and on the fifth anniversary of the grant date. |
7 | RSUs vest on the executives 55th birthday. |
8 | RSUs vest on the seventh anniversary of the date of grant. |
9 | Represents non-transferable shares to be delivered to each of the executives for outstanding LTIP performance cycles in effect for 2014-2016 cycle and 2015-2017 cycle, assuming in each case that the target level of performance will be achieved. |
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Executive Compensation and Related Matters |
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Option
Exercises and Stock Vested
The table below
reflects information for the fiscal year ended December 31, 2015 concerning
options exercised and the vesting of previously granted RSUs and
non-transferable shares for each of the executive officers specified in the
table. The value of the shares acquired upon exercise of the options and the
shares represented by the vesting of RSUs is based on the closing price of our
stock on the date of exercise and the date of vesting, respectively.
Option Exercises and Stock Vested 2015
OPTION AWARDS | STOCK AWARDS | |||||||
NUMBER OF | NUMBER OF | |||||||
SHARES | VALUE | SHARES | VALUE | |||||
ACQUIRED | REALIZED | ACQUIRED | REALIZED | |||||
ON EXERCISE | ON EXERCISE | ON VESTING | ON VESTING | |||||
NAME & PRINCIPAL 2015 POSITIONS | (#) | ($) | (#) 1 | ($) 2 | ||||
Larry J. Merlo | 144,144 | 7,658,537 | 123,716 | 12,357,332 | ||||
President and Chief Executive Officer | ||||||||
David M. Denton | | | 30,615 | 3,051,683 | ||||
Executive Vice President and Chief Financial Officer | ||||||||
Helena B. Foulkes | | | 13,924 | 1,380,651 | ||||
Executive Vice President and President CVS Pharmacy | ||||||||
Jonathan C. Roberts | 86,487 | 4,682,064 | 29,216 | 2,906,749 | ||||
Executive Vice President and President CVS Caremark | ||||||||
Thomas M. Moriarty | | | 13,957 | 1,356,202 | ||||
Executive Vice President, Chief Health Strategy Officer | ||||||||
and General Counsel |
1 | Includes RSUs vested and deferred during 2015: for Mr. Merlo, 20,702; and for Mr. Roberts, 2,761. |
2 | Includes the value of RSUs vested and deferred during 2015 as of respective deferral dates also shown in the Nonqualified Deferred Compensation Table: for Mr. Merlo, $2,116,987; and for Mr. Roberts, $282,340. |
Pension
Benefits
We maintain an unfunded
supplemental retirement plan (the SERP), which is designed to supplement the
retirement benefits of select executives in lieu of a qualified defined benefit
plan. The SERP is a legacy plan in which participation has decreased over the
years as participants have retired, and the Company has not provided SERP
benefits to new participants since 2010. Mr. Merlo is the only active executive
officer participating in the SERP.
Under the SERPs benefit formula, participants (including Mr. Merlo and certain retired executives) will receive an annual benefit commencing on the later of age 55 or retirement, equal to 1.6% of a three-year average of final compensation (as defined in the SERP) for each year of service up to 30 years, with no offset for any amounts provided by our qualified plans, Social Security or other retirement benefits. Final compensation for purposes of the SERP benefit formula is the average of the executives three highest years of annual salary and annual cash bonus during the last ten years of service. The estimated credited years of benefit service for Mr. Merlo as of the measurement date of December 31, 2015 was 30 years (Mr. Merlos years of service are capped at 30, in accordance with the terms of the SERP). Benefits under the SERP formula are payable in annual installments for the life of the executive, unless the executive has made an advance election in accordance with plan and IRS rules to have the benefit paid in the form of a lump sum or joint and survivor annuity of equivalent actuarial value. Mr. Merlo has made an election to receive his entire benefit payable on account of termination of employment in the form of a lump sum.
No benefits are payable to an eligible executive until he terminates employment. As of the measurement date, Mr. Merlo was eligible for an immediate benefit.
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As Mr. Merlo has reached the maximum amount of service under the plan based on his more than 30 years with the Company, his benefit increases are primarily as a result of performance-based bonuses. In addition, because the plan is a defined benefit plan, it is subject to certain actuarial variations including discount rates and mortality table assumptions. This means that if interest rates increase, Mr. Merlos benefit will decrease and if interest rates decrease, Mr. Merlos benefit will increase.
The accumulated value in the Pension Benefits Table and Summary Compensation Table is based on the benefit accrued as of the measurement date payable as a lump sum commencing on the earliest unreduced retirement age (55) using assumptions which include a 2.50% discount rate as of December 31, 2015. Mr. Merlo is fully vested in his accrued benefit. For further information regarding pension assumptions, please see the Notes to the Consolidated Financial Statements in our Annual Report to Stockholders for the fiscal year ended December 31, 2015.
Pension Benefits 2015
NAME & PRINCIPAL 2015 POSITIONS | PLAN NAME | NUMBER OF YEARS OF CREDITED SERVICE (#) |
PRESENT VALUE OF ACCUMULATED BENEFIT ($) |
PAYMENTS | ||||
Larry J. Merlo | SERP | 30 | 44,412,985 | | ||||
President and Chief Executive Officer | ||||||||
David M. Denton | N/A | | | | ||||
Executive Vice President and Chief Financial Officer | ||||||||
Helena B. Foulkes | N/A | | | | ||||
Executive Vice President and President CVS Pharmacy | ||||||||
Jonathan C. Roberts | N/A | | | | ||||
Executive Vice President and President CVS Caremark | ||||||||
Thomas M. Moriarty | N/A | | | | ||||
Executive Vice President, Chief Health Strategy Officer | ||||||||
and General Counsel |
Nonqualified Deferred
Compensation
Executive officers and selected members of
senior management may participate in the CVS Health Deferred Compensation Plan
(the DCP) and the CVS Health Deferred Stock Plan (the DSP). The DCP allows
participants to defer payment of a portion of their salary and all or a portion
of their annual cash incentive (and in the case of executive officers, all or a
portion of any LTI plan cash award) to facilitate their personal retirement or
financial planning. For participants in the DCP, we provide a maximum match of
up to 5% of the salary and annual cash incentive deferred, plus an additional
match for matching contributions only on amounts that cannot be deferred into
qualified 401(k) plans due to IRS plan limits.
The investment crediting options for the DCP mirror those offered for the CVS Health Future Fund. Each year, the amount of a participants deferred compensation account increases or decreases based on the appreciation and/ or depreciation in the value of the investment crediting alternatives selected by the participant. There are no vesting requirements on deferred compensation accounts.
Executive officers and selected members of management are eligible to participate in the DSP, in which they may elect to defer settlement of RSUs beyond the scheduled vesting date. Dividend equivalents are reinvested during the deferral period. Messrs. Merlo, Roberts and Moriarty deferred portions of their equity-based compensation in the DSP. Executive officers are not permitted to defer proceeds of stock option exercises.
The amounts shown in the table below for Cash and Stock were deferred pursuant to the DCP and the DSP, respectively.
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Executive Compensation and Related Matters |
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Nonqualified Deferred Compensation 2015
NAME &
PRINCIPAL 2015 POSITIONS |
TYPE | EXECUTIVE CONTRIBUTIONS IN LAST FY ($) 1 |
REGISTRANT CONTRIBUTIONS IN LAST FY ($) 2 |
AGGREGATE EARNINGS IN LAST FY ($) 3 |
AGGREGATE WITHDRAWALS/ DISTRIBUTIONS ($) 4 |
AGGREGATE BALANCE AT LAST FYE ($) 5 | ||||||
Larry J. Merlo | Cash | 307,500 | 294,250 | (2,807) | | 4,381,759 | ||||||
President and Chief | Stock | 2,116,987 | | 2,399,460 | 118,544 | 89,242,840 | ||||||
Executive Officer | ||||||||||||
David M. Denton | Cash | | 10,750 | (135) | | 14,515 | ||||||
Executive Vice President | Stock | | | | | | ||||||
and Chief Financial Officer | ||||||||||||
Helena B. Foulkes | Cash | 154,500 | 141,250 | 4,061 | | 1,632,554 | ||||||
Executive Vice President and | Stock | | | 72,864 | | 2,580,978 | ||||||
President CVS Pharmacy | ||||||||||||
Jonathan C. Roberts | Cash | 729,014 | 148,125 | (26,557) | | 3,233,537 | ||||||
Executive Vice President and | Stock | 282,340 | | 190,245 | 8,156 | 7,333,283 | ||||||
President CVS Caremark | ||||||||||||
Thomas M. Moriarty | Cash | 1,475,000 | 97,000 | 6,833 | | 3,731,695 | ||||||
Executive Vice President, | Stock | 702,992 | | (34,590) | | 668,402 | ||||||
Chief Health Strategy Officer | ||||||||||||
and General Counsel |
1 | The cash contributions include amounts shown for 2015 in the Salary column of the Summary Compensation Table as follows: for Mr. Merlo, $78,000; for Ms. Foulkes, $46,250; and for Mr. Roberts, $93,750. All other amounts represent non-equity incentive compensation deferred during 2015. The stock contributions for Messrs. Merlo and Roberts represent deferred settlement under the DSP of RSUs granted in prior years that vested in 2015. The stock contribution for Mr. Moriarty represents deferred settlement under the DSP of shares granted under the LTIP for the 2012-2014 cycle that were credited to his account in 2015. |
2 | All amounts shown are also disclosed in the Summary Compensation Table under All Other Compensation and reflect amounts credited and/or earned in 2015. |
3 | All earnings shown on the Stock line are attributable to dividend equivalents credited as additional deferred RSUs and an increase in our common stock price. |
4 | All amounts distributed from the DSP include cash dividend equivalent payments. |
5 | The following amounts included in this column have been previously reported in the Summary Compensation Tables of our annual proxy statement since 2007: |
CASH | STOCK | ||||
Mr. Merlo | $ | 2,690,423 | $ | 18,736,334 | |
Mr. Denton | 20,925 | | |||
Ms. Foulkes | 393,551 | | |||
Mr. Roberts | 1,347,539 | | |||
Mr. Moriarty | 1,600,750 | |
Payments/(Forfeitures) Under
Termination Scenarios
The tables below
show the amounts that would be received or forfeited by each named executive
officer under various termination scenarios, assuming (1) that the termination
occurred on December 31, 2015 and (2) that amounts that have been paid or are
payable in all events, such as the non-equity incentive amounts earned with
respect to fiscal year 2015 and disclosed in the Non-Equity Incentive Plan
Compensation column of the Summary Compensation Table on page 53, the amounts
payable under the pension plans discussed beginning on page 58, and the amounts
in the nonqualified deferred compensation plans discussed beginning on page 59,
are not included in the tables below, nor is any amount for stock options that
are vested and exercisable as of December 31, 2015.
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2016 Proxy Statement |
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With respect to the tables below:
● | Messrs. Denton and
Moriarty and Ms. Foulkes were not eligible for retirement benefits as of
December 31, 2015. | |
● | The amounts paid as
base salary upon voluntary termination for Mr. Merlo reflects the
Companys option to continue to pay 50% of his salary for 18 months in
consideration for compliance with a non-competition
provision. | |
● | The option value is
determined by multiplying the number of unvested options outstanding as of
December 31, 2015 by the difference between the exercise price and $97.77,
the closing price on December 31, 2015, the last trading day of the
Companys fiscal year. Generally, the option grant agreements provide for
the following post-termination exercise periods, but in no case will the
post-termination exercise period be longer than the original option
term: | |
● | In the case of termination due
to death, during the one-year period following
termination; | |
● | In the case of constructive
termination without cause prior to a change in control of the Company (a
CIC), during the severance period; | |
● | In the case of constructive
termination without cause after a CIC, during the remainder of the option
term; and | |
● | In the cases of termination
for cause or voluntary termination, generally there is no post-termination
exercise period. | |
● | The value of the
RSUs is determined by multiplying the number of RSUs as of December 31,
2015 by the closing price on that date, $97.77, which was the last trading
day of our fiscal year. | |
● | Upon a CIC and
subsequent termination of employment, all outstanding unvested stock
options will vest in full and restrictions will lapse on all
RSUs. | |
● | The value of LTIP cycles assumes that pro-rated payments are made for the outstanding 2014 2016 LTIP cycle (two-thirds) and 2015 2017 LTIP cycle (one-third); all outstanding performance cycles are assumed to be achieved at target and the value of payments are made at target. |
In the event of his covered termination prior to a CIC, Mr. Merlo would receive a cash severance payment equal to two times the sum of his annual base salary and his then-current annual cash incentive at target. In the event of a covered termination following a CIC, Mr. Merlo would receive a cash severance payment equal to three times the sum of his annual base salary and his then-current annual cash incentive at target, but under his amended employment contract such cash severance would be reduced to avoid the excise tax under IRC Section 280G if that would give Mr. Merlo a better after-tax result. Early retirement is defined in Mr. Merlos Employment Agreement and in his various stock option and RSU agreements. See Agreements with Executive Officers on page 51 for additional information.
LARRY J.
MERLO PRESIDENT AND CHIEF EXECUTIVE OFFICER |
DEATH ($) |
TERMINATION FOR CAUSE ($) |
VOLUNTARY TERMINATION ($) |
TERMINATION W/O CAUSE OR CONSTRUCTIVE TERMINATION W/O CAUSE PRIOR TO CIC ($) |
TERMINATION W/O CAUSE OR CONSTRUCTIVE TERMINATION W/O CAUSE AFTER CIC ($) |
APPROVED EARLY RETIREMENT ($) | ||||||
Cash Severance Value | ||||||||||||
Base Salary | | | 1,222,500 | 3,260,000 | 4,890,000 | | ||||||
Bonus | | | | 6,520,000 | 9,780,000 | | ||||||
Immediate Vesting of Equity | ||||||||||||
Value of Options | 17,099,544 | (17,099,544) | (17,099,544) | 17,099,544 | 17,099,544 | 17,099,544 | ||||||
Value of RSUs | 23,474,088 | (23,474,088) | (23,474,088) | 23,474,088 | 23,474,088 | 16,797,767 | ||||||
Value of LTIP Cycles | 5,500,000 | (5,500,000) | (5,500,000) | 5,500,000 | 11,000,000 | 5,500,000 | ||||||
Benefits and Other | ||||||||||||
Health Insurance | | | | 35,820 | 53,729 | | ||||||
SERP | | | | | | | ||||||
Excise Tax Gross-Up | | | | | | | ||||||
Total | 46,073,632 | (46,073,632) | (44,851,132) | 55,889,452 | 66,297,361 | 39,397,311 |
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Executive Compensation and Related Matters |
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With respect to each of the remaining named executive officers, in the event of his or her termination without cause or constructive termination prior to a CIC, pursuant to a restrictive covenant agreement and the Companys Severance Plan for Non-Store Employees, the named executive officer is eligible for severance payments, provided that he or she executes a separation agreement with CVS Health that includes, among other things, standard restrictive covenants regarding non-competition and non-solicitation of customers and employees. In the event the named executive officer is terminated by the Company without cause or experiences a constructive termination prior to a CIC, he or she is eligible to receive 18 months of base salary as severance, paid in equal monthly installments, in consideration for a general release of claims and compliance with various restrictive covenants, including non-competition and non-solicitation provisions. Each of the remaining named executive officers has entered into a CIC Agreement with CVS Health that specifies payments that would be made to him or her in the event of a CIC. In the event of a covered termination, the named executive officer would receive a cash severance payment equal to one and one-half times the sum of annual base salary and then-current annual cash incentive at target, but under the amended CIC Agreement such cash severance would be reduced to avoid the excise tax under IRC Section 280G if that would give the named executive officer a better after-tax result. Tables for each of the remaining named executive officers are set forth below.
DAVID M.
DENTON EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER |
DEATH ($) |
TERMINATION FOR CAUSE ($) |
VOLUNTARY TERMINATION ($) |
TERMINATION W/O CAUSE OR CONSTRUCTIVE TERMINATION W/O CAUSE PRIOR TO CIC ($) |
TERMINATION W/O CAUSE OR CONSTRUCTIVE TERMINATION W/O CAUSE AFTER CIC ($) | |||||
Cash Severance Value | ||||||||||
Base Salary | | | | 1,275,000 | 1,275,000 | |||||
Bonus | | | | | 1,912,500 | |||||
Immediate Vesting of Equity | ||||||||||
Value of Options | 4,908,648 | (4,908,648) | (4,908,648) | 4,539,166 | 4,908,648 | |||||
Value of RSUs | 17,241,837 | (17,241,837) | (17,241,837) | 4,480,408 | 17,241,837 | |||||
Value of LTIP Cycles | 1,666,667 | (1,666,667) | (1,666,667) | 1,666,667 | 3,500,000 | |||||
Benefits and Other | ||||||||||
Health Insurance | | | | 28,925 | 28,925 | |||||
SERP | | | | | | |||||
Excise Tax Gross-Up | | | | | | |||||
Total | 23,817,152 | (23,817,152) | (23,817,152) | 11,990,166 | 28,866,910 | |||||
HELENA B.
FOULKES EXECUTIVE VICE PRESIDENT AND PRESIDENT CVS PHARMACY |
DEATH ($) |
TERMINATION FOR CAUSE ($) |
VOLUNTARY TERMINATION ($) |
TERMINATION W/O CAUSE OR CONSTRUCTIVE TERMINATION W/O CAUSE PRIOR TO CIC ($) |
TERMINATION W/O CAUSE OR CONSTRUCTIVE TERMINATION W/O CAUSE AFTER CIC ($) | |||||
Cash Severance Value | ||||||||||
Base Salary | | | | 1,425,000 | 1,425,000 | |||||
Bonus | | | | | 2,137,500 | |||||
Immediate Vesting of Equity | ||||||||||
Value of Options | 3,198,749 | (3,198,749) | (3,198,749) | 2,890,856 | 3,198,749 | |||||
Value of RSUs | 4,619,462 | (4,619,462) | (4,619,462) | 2,426,188 | 4,619,462 | |||||
Value of LTIP Cycles | 1,416,667 | (1,416,667) | (1,416,667) | 1,416,667 | 3,000,000 | |||||
Benefits and Other | ||||||||||
Health Insurance | | | | 28,260 | 28,260 | |||||
SERP | | | | | | |||||
Excise Tax Gross-Up | | | | | | |||||
Total | 9,234,878 | (9,234,878) | (9,234,878) | 8,186,971 | 14,408,971 |
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JONATHAN C. ROBERTS EXECUTIVE VICE PRESIDENT AND PRESIDENT CVS CAREMARK |
DEATH ($) |
TERMINATION FOR CAUSE ($) |
VOLUNTARY TERMINATION ($) |
TERMINATION W/O CAUSE OR CONSTRUCTIVE TERMINATION W/O CAUSE PRIOR TO CIC ($) |
TERMINATION W/O CAUSE OR CONSTRUCTIVE TERMINATION W/O CAUSE AFTER CIC ($) |
APPROVED RETIREMENT ($) |
Cash Severance Value | ||||||
Base Salary | | | | 1,425,000 | 1,425,000 | |
Bonus | | | | | 2,137,500 | |
Immediate Vesting of Equity | ||||||
Value of Options | 7,567,022 | (7,567,022) | (7,567,022) | 5,254,680 | 7,567,022 | 3,804,475 |
Value of RSUs | 6,860,139 | (6,860,139) | (6,860,139) | 3,428,012 | 6,860,139 | 5,365,715 |
Value of LTIP Cycles | 1,916,667 | (1,916,667) | (1,916,667) | 1,916,667 | 4,000,000 | 1,916,667 |
Benefits and Other | ||||||
Health Insurance | | | | 29,072 | 29,072 | |
SERP | | | | | | |
Excise Tax Gross-Up | | | | | | |
Total | 16,343,828 | (16,343,828) | (16,343,828) | 12,053,431 | 22,018,733 | 11,086,857 |
THOMAS M.
MORIARTY EXECUTIVE VICE PRESIDENT, CHIEF HEALTH STRATEGY OFFICER AND GENERAL COUNSEL |
DEATH ($) |
TERMINATION FOR CAUSE ($) |
VOLUNTARY TERMINATION ($) |
TERMINATION W/O CAUSE OR CONSTRUCTIVE TERMINATION W/O CAUSE PRIOR TO CIC ($) |
TERMINATION W/O CAUSE OR CONSTRUCTIVE TERMINATION W/O CAUSE AFTER CIC ($) |
Cash Severance Value | |||||
Base Salary | | | | 1,125,000 | 1,125,000 |
Bonus | | | | | 1,687,500 |
Immediate Vesting of Equity | |||||
Value of Options | 4,189,344 | (4,189,344) | (4,189,344) | 2,811,005 | 4,189,344 |
Value of RSUs | 3,456,450 | (3,456,450) | (3,456,450) | 1,053,765 | 3,456,450 |
Value of LTIP Cycles | 1,416,667 | (1,416,667) | (1,416,667) | 1,416,667 | 3,000,000 |
Benefits and Other | |||||
Health Insurance | | | | 26,502 | 26,502 |
SERP | | | | | |
Excise Tax Gross-Up | | | | | |
Total |