DEF 14A 1 cvs3833491-def14a.htm DEFINITIVE PROXY STATEMENT

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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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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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Table of Contents

Notice of 2021 Annual Meeting of Stockholders and Proxy Statement

 

 

May 13, 2021

 

Virtual Meeting at 8:00 a.m., Eastern Time

 

www.virtualshareholdermeeting.com/CVS2021

CVS Health Corporation
One CVS Drive

Woonsocket, Rhode Island 02895

The Annual Meeting will be held solely by means of remote communication for the health and safety of our stockholders and employees. This Notice of 2021 Annual Meeting and Proxy Statement is being mailed or transmitted beginning on or about April 2, 2021 to stockholders of record at the close of business on March 17, 2021.  
 

Table of Contents

Transform Health 2030 charts our course
for the next decade in four key areas

 

 

For more information about our Corporate Social Responsibility strategy and achievements, see the back pages of this proxy statement.

 

Table of Contents

 
Message from
Our Chair and Chief
Executive Officer
      
 
   

Dear Fellow Stockholders:

 

In 2020, CVS Health made significant progress executing our long-term strategic plan by utilizing our powerful combination of diversified assets to make health care more accessible, affordable and simply better. We have executed our strategy to deliver strong 2020 results. We have also played an important role during these unprecedented times as a trusted health services provider, delivering care in local communities across the U.S. Our colleagues on the front lines have been administering essential COVID-19 tests and vaccinations to millions of Americans. At the same time, we are delivering personalized care in our CVS locations, virtually and in the home.

 

OVERALL 2020 FINANCIAL PERFORMANCE

 

CVS Health delivered strong total revenue growth of 4.6% in 2020, primarily driven by growth in the Health Care Benefits and Retail/LTC segments. We delivered GAAP diluted earnings per share of $5.47, with adjusted earnings per share that was above the high end of our guidance range, at $7.50*. We are pleased with the continued progress we made in 2020, building upon our foundation to accelerate future growth and expand our integrated offerings.

 

In addition, our significant cash flow generation has enabled us to delever in accordance with our plan. In 2020, we repaid $4.25 billion of net long-term debt, and $12.2 billion since the close of the Aetna transaction, which is expected to provide us with more flexibility to deliver enhanced value to our stockholders. We remain confident in our outlook for 2021 as we continue to execute our strategy to improve the way health care is delivered to consumers in the U.S.

 

HEALTH SERVICES AND INTEGRATED VALUE

 

We have made measurable progress with our strategy by integrating our assets to deliver a superior experience, while addressing the total cost of care. In 2020, we created health platforms that combine local points-of-care, remote monitoring, and access to health care professionals – all within a personalized consumer-centric model. We saw strong demand for our programs that better manage chronic conditions. We continued to expand access through our integrated care delivery approach with additional HealthHUB® locations. One new program combining CVS Health solutions included a first-of-its-kind health benefit that offers low- or no-copay MinuteClinic® services, virtual care and at home care, which will be expanded in 2021 based on strong market reaction. Importantly, all the care we deliver whether in-person, virtually or at home is being connected digitally to provide a seamless and integrated care experience.

 

 

CORPORATE SOCIAL RESPONSIBILITY

 

Our Corporate Social Responsibility strategy remains committed to sustainability, and diversity and inclusion across communities and our workforce. For the second straight year, CVS Health was named in the prestigious Dow Jones Sustainability World Index. We have renewed and strengthened our commitment to addressing the racial health disparities and social injustices that weaken our nation and affect health. Over the next five years, we are investing nearly $600 million to advance employee, community and public policy initiatives that address inequality with a focus in underserved communities. Diversity powers our ability to support patients and customers with empathy, respect and cultural sensitivity, helping to build healthier communities.

 

CORPORATE GOVERNANCE

 

Over the course of the year, management and the Board thoughtfully worked on the advancement of our strategic plan, the evolution of CVS Health as a diversified health services company and succession planning, with the appointment of Karen as CEO. We thank Larry Merlo for his years of strong leadership. We continued our long-standing practice of engaging with our stockholders and the feedback we received has driven some of the changes you’ll read about in this proxy statement. We pride ourselves on our strong governance practices and we thank you for your continued support. As always, we welcome your feedback.

 

ANNUAL MEETING OF STOCKHOLDERS

 

As we look to our 2021 Annual Meeting, we are working to vaccinate millions of Americans and help the communities we serve get access to the health services they need. In these unprecedented times, health care is top of mind and we are proud to deliver quality care to our local communities.

 

Our 2021 Annual Meeting of Stockholders will be held virtually on Thursday, May 13, 2021, at 8:00 a.m., Eastern Time. We ask you to please vote at your earliest convenience. Your vote is important.

 

Thank you for your continued interest and investment in CVS Health. We appreciate your support as we continue to reimagine health care, making it more accessible, affordable and simply better.

 

Sincerely,

 
 

David W. Dorman

 

Chair of the Board

Karen S. Lynch

 

President and Chief Executive Officer

   
* Adjusted earnings per share is a non-GAAP measure. See Annex A to this proxy statement.
   
2021 Proxy Statement i
 

Table of Contents

Table of Contents

 

Notice of Annual Meeting of Stockholders 1
   
Proxy Statement Highlights 4
   
Corporate Governance and Related Matters 12
Item 1: Election of Directors 12
   
The Board’s Role and Activities in 2020 22
   
Board Structure and Processes 27
   
Committees of the Board 28
   
Audit Committee Matters 37
 Item 2: Ratification of the Appointment of Our Independent Registered Public Accounting Firm for 2021 37
   
Executive Compensation and Related Matters 39
 Item 3: Say on Pay, a Proposal to Approve, on an Advisory Basis, the Company’s Executive Compensation 39
   
Letter from the Management Planning and Development Committee 42
   
Compensation Committee Report 43
   
Compensation Discussion and Analysis 44
Summary 46
   
2020 Business and Performance Highlights 49
   
Compensation Program Discussion 51
   
Compensation of Named Executive Officers 70
Summary Compensation Table 70
   
Grants of Plan-Based Awards 72
   
Outstanding Equity Awards at Fiscal Year-End 73
   
Option Exercises and Stock Vested 75
   
Pension Benefits 76
   
Nonqualified Deferred Compensation 77
Payments/(Forfeitures) Under Termination Scenarios 78
   
CEO Pay Ratio 82
   
Stockholder Proposals 83
 Item 4: Stockholder Proposal for Reducing the Threshold for Our Stockholder Right to Act by Written Consent 83
 Item 5: Stockholder Proposal Regarding Our Independent Board Chair 85
   
Ownership of and Trading in Our Stock 87
Executive Officer and Director Stock Ownership Requirements 87
   
Share Ownership of Directors and Certain Executive Officers 88
   
Share Ownership of Principal Stockholders 89
   
Other Information 90
Information About the Annual Meeting and Voting 90
   
Stockholder Proposals and Other Business for Our Annual Meeting in 2022 94
   
Other Matters 94
   
Annex A – Reconciliation of Certain Amounts to the Most Directly Comparable GAAP Measure A-1
   
ii CVS Health
 

Table of Contents

Notice of Annual Meeting of Stockholders

 

DATE AND TIME

 

May 13, 2021

8:00 a.m. Eastern Time

   

LOCATION

 

The Annual Meeting will be held exclusively online at
www.virtualshareholdermeeting.com/CVS2021

   

 

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 17, 2021. Even if you plan to attend the Annual 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
www.proxyvote.com
   
USE A MOBILE DEVICE
Scan this QR Code
   
CALL TOLL-FREE
1-800-690-6903
   
MAIL YOUR PROXY CARD
Follow the instructions on your voting form

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting to Be Held on May 13, 2021:

 

The proxy statement and 2020 Annual Report are available at www.cvshealthannualmeeting.com and at www.proxyvote.com.

 

The Annual Meeting will be accessible only at www.virtualshareholdermeeting.com/CVS2021 (the “Annual Meeting website”). We encourage you to access the Annual Meeting website prior to the start time and allow ample time to log into the Annual Meeting webcast and test your computer system. To be admitted to the Annual Meeting, you must enter the control number found on the proxy card or voting instruction form that accompanied your proxy materials when requested by the Annual Meeting website. You may vote during the Annual Meeting by following the instructions available on the Annual Meeting website.

 

Whether or not you plan to attend the virtual Annual Meeting, we urge you to vote and submit your proxy in advance of the meeting by one of the methods described in the proxy materials.

 

You are cordially invited to join our 2021 Annual Meeting of Stockholders, to be held on Thursday, May 13, 2021, at 8:00 a.m. Eastern Time. Our Annual Meeting will be conducted exclusively online.

 

 

Items to be Voted

 

Elect 13 director nominees named in this proxy statement;
Ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for 2021;
Say on pay, an advisory vote to approve the Company’s executive compensation;
Act on two stockholder proposals, if properly presented; and
Conduct any other business properly brought before the Annual Meeting.

 

Eligibility to Vote

 

Stockholders of record at the close of business on March 17, 2021 may vote at the Annual Meeting.

 

By Order of the Board of Directors,

 

 

Colleen M. McIntosh

Senior Vice President, Corporate Secretary and Chief Governance Officer
CVS Health Corporation
One CVS Drive
Woonsocket, Rhode Island 02895
(principal executive office)
April 2, 2021

 

Your vote is important.

 

Our proxy statement and proxy card are being mailed or transmitted to stockholders entitled to vote at the Annual Meeting beginning on or about April 2, 2021. Whether or not you plan to attend the Annual Meeting, please vote your shares. In addition to voting by mail or during the Annual Meeting by following the instructions available on the Annual Meeting website, 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 virtually, we encourage you to vote in advance by Internet, phone or mail.

 

We are pleased to take advantage of the U.S. Securities and Exchange Commission (the “SEC”) rules that allow issuers to furnish proxy materials to their stockholders on the Internet. As a result, beginning on or about April 2, 2021, we are mailing a notice of Internet availability to many of our stockholders instead of paper copies of our proxy statement and our 2020 Annual Report, which contains our Annual Report on Form 10-K for the year ended December 31, 2020, including our financial statements. The notice contains instructions on how to access those documents over the Internet. The notice also contains instructions on how stockholders can receive a paper copy of our proxy materials, including the proxy statement, our 2020 Annual Report and proxy card.


 

2021 Proxy Statement 1
 

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The Value We Create

 
Financials   2020 Highlights
     

 

* Adjusted EPS is a non-GAAP measure.

 

See Annex A to this proxy statement.

 

2020: Delivered strong performance during a challenging year

 

•   Delivered GAAP diluted EPS of $5.47 and Adjusted EPS of $7.50*

 

•   Achieved run-rate integration synergies of over $900 million

 

•   Generated strong cash flow from operations of $15.9 billion

 

•   On track to achieving our 2022 leverage ratio target

 

Enhancing the consumer experience through expansion of digital services and new approaches to meeting consumer needs

 

•   Delivering new market solutions in response to the COVID-19 pandemic, including testing and vaccines

 

•   Seamlessly connecting digital services and platforms with in-person, virtual and home care to create a holistic and personalized consumer experience at scale

 

•   Providing care in non-traditional settings with the ability to link to physical assets

 

•   Continuing HealthHUB expansion nationally with additional health services capabilities

 

•   Offering help with better management of chronic conditions through targeted care management programs, such as Transform Diabetes Care®, Transform Oncology Care® and the CVS Kidney Care® program

 

Achieving sustainable growth by demonstrating integrated value of unique portfolio of health products and services

 

•   Expanding new innovative, consumer-oriented solutions to improve health, lower medical costs and improve outcomes

•   Growing membership while also expanding health care services to existing customers

     
2 CVS Health
 

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Our COVID-19 Response

 

CVS Health is uniquely positioned to help the country through the COVID-19 pandemic. The Company has focused its resources on the well-being and safety of employees, consumers and the communities it serves. The following are key actions taken through mid-February 2021:

 

Employees
Providing regular supply of personal protective equipment and adding safety features to retail stores.
Provided enhanced benefits, including bonuses to frontline employees, dependent care, paid sick leave for part-time employees and paid time off to employees who test positive or are quarantined due to exposure.
Hired over 15,000 clinicians and pharmacy technicians in the fourth quarter of 2020 as part of our readiness investments.
   
Consumers and Members
Proactively reached out to over one million most at-risk members for COVID-19.
Opened crisis response line for members experiencing anxiety related to COVID-19 and expanded 24/7 access to Aetna Nurse Medical Line for Aetna and Caremark members.
Expanded telehealth options offered by MinuteClinic to help patients access safe, affordable and convenient non-emergency care.
Extended maintenance prescriptions and waived early refill limits to support medication adherence.
Waived fees associated with prescription home delivery and associated front store products.
   
   
Plan Sponsors
Launched Return Ready, a comprehensive configurable and integrated end-to-end COVID-19 testing solution to assist employers and universities with the return of their employees, students and staff.
Provided assistance through premium credits.
   
Providers
Waived advance approvals, streamlined credentialing process, relaxed telemedicine policies and removed prior authorization requirements. Offering flexible plan designs to help reduce financial burdens.
   
Communities
Administered more than three million COVID-19 vaccines in over 40,000 long-term care facilities across the country.
Selected as national partner of the Federal Retail Pharmacy Program and began in-store vaccinations at CVS Pharmacy locations.
Administered approximately 15 million COVID-19 tests nationwide at more than 4,800 CVS Pharmacy locations with over 50% located in communities with significant need for support according to the U.S. Centers For Disease Control and Prevention Social Vulnerability Index.
In coordination with the U.S. Department of Health and Human Services, opened 11 testing sites serving communities disproportionately impacted by COVID-19.
Launched critical diagnostic testing for the vulnerable senior population in long-term care facilities in partnership with three states.
Investing more than $50 million directly and through the Company’s foundations to address food insecurity, lack of access to telehealth services for the underserved, personal protective equipment, mental health support for front-line workers and community resilience.
Donating nearly $40 million in products to community organizations around the country.
Served over one million meals to vulnerable populations.
   


 

Our Strategic Imperatives

 
   
Be local   Lead the change   Make it simple
Engage people with the care they need where they need it   Challenge the status quo with new technologies, business models and partnerships   Make a complicated system easier for all
         
   
Attract and inspire   Improve health   Optimize performance and service
Unlock the power of our people to transform health care   Help people achieve better health at a lower cost   Ensure our people, processes and technology enable our strategy
   
2021 Proxy Statement 3
 

Table of Contents

Proxy Statement Highlights

 

This summary highlights selected information in this Proxy Statement – please review the entire document before voting.

 

All of our Annual Meeting materials are available at www.cvshealthannualmeeting.com. There, you can download electronic copies of our Annual Report and proxy statement and use the link to vote.

 

Voting Items

 

ITEM 1

Election of directors

Our 13 continuing directors are seasoned leaders who bring a mix of skills and qualifications to our Board of Directors

FOR

each director
nominee

12-36

   

ITEM 2

Ratify the appointment of the Company’s independent registered public accounting firm for 2021

Based on its recent evaluation, our Audit Committee believes that the retention of Ernst & Young LLP is in the best interests of the Company and its stockholders

FOR

37-38

   

ITEM 3

Say on pay - an advisory vote on the approval of the Company’s executive compensation

 

Our executive compensation program reflects our unwavering commitment to paying for performance and reflects feedback received from stockholder outreach

FOR

39-41

   

ITEMS 4 – 5

Stockholder proposals

See the Board’s statement of opposition AGAINST each stockholder proposal

AGAINST

83-86

   
4 CVS Health
 

Table of Contents

Proxy Statement Highlights

 

The CVS Health Board

 

You are asked to vote on the election of the following 13 nominees to serve on the Board of Directors (the “Board” or “our Board”) of CVS Health Corporation (“CVS Health” or the “Company”). All directors are elected by a majority of votes cast, and all presently serve on the Board. The information below reflects the expected membership and leadership of each of the Board’s committees after the Annual Meeting.

 

          Director       Other Public   Committees
  Name   Age   Since   Independent   Company Boards   A   I&F   MP&D   N&CG   MA   E
Fernando Aguirre
Former Chairman, President and CEO of
Chiquita Brands International, Inc.
  63   2018   YES   2                    
C. David Brown II
Partner and Member of Executive Committee
of Nelson Mullins Riley & Scarborough LLP
  69   2007   YES   None                  
Alecia A. DeCoudreaux
President Emerita of Mills College and
Former Executive at Eli Lilly and Company
  66   2015   YES   2                    
Nancy-Ann M. DeParle
Managing Partner and Co-Founder of
Consonance Capital Partners, LLC and
Former Director of White House Office of
Health Reform
  64   2013   YES   1                  
David W. Dorman
Chair of the Board of CVS Health Corporation and
Former Chairman and CEO of AT&T Corporation
  67   2006   YES   2                  
Roger N. Farah
Former Chairman of Tiffany & Co. and Former
Executive at Tory Burch and Ralph Lauren
  68   2018   YES   1                    
Anne M. Finucane
Vice Chairman and Member of the
Executive Management Team of
Bank of America Corporation
  68   2011   YES   None                  
Edward J. Ludwig
Former Chairman and CEO of
Becton, Dickinson and Company
  69   2018   YES   1                  
Karen S. Lynch
President and CEO of
CVS Health Corporation
  58   2021   NO   1                      
Jean-Pierre Millon
Former President and CEO of
PCS Health Systems, Inc.
  70   2007   YES   None                    
Mary L. Schapiro
Vice Chair of Public Policy and Special
Advisor to the Chairman of Bloomberg L.P.
and Former Chairman of the Securities and
Exchange Commission
  65   2017   YES   1                    
William C. Weldon
Former Chairman and CEO of
Johnson & Johnson
  72   2013   YES   1                    
Tony L. White
Former Chairman, President and CEO of
Applied Biosystems, Inc.
  74   2011   YES   2                  
             
Key            
Member A Audit MP&D Management Planning and Development MA Medical Affairs
Committee Chair I&F Investment and Finance N&CG Nominating and Corporate Governance E Executive
   
2021 Proxy Statement 5
 

Table of Contents

Proxy Statement Highlights

 

Our Directors Nominated for Election at the Annual Meeting

 

 

Director Nominee Expertise, Skills and Experience

 

Our director nominees possess relevant experience, skills and qualifications that allow the Board to effectively oversee the Company’s strategy and management. Our directors’ principal areas of expertise include:

 

 

6 CVS Health
 

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Proxy Statement Highlights

 

Board and Corporate Governance Highlights

 

The Board continues to evaluate the Company’s corporate governance policies and practices 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. We are committed to maintaining the highest standards of corporate governance and have established a strong and effective framework by which the Company is governed and reviewed.

 

    Further Information
2020-2021 Board and Corporate Governance Developments    
On February 1, 2021, Karen S. Lynch became President and Chief Executive Officer (“CEO”) and joined the Board of Directors, bringing a relentless focus on the customer, a strong track record of driving growth and innovation, and proven transformational leadership. Larry J. Merlo will continue to serve on the Board of Directors until the Annual Meeting, and as Strategic Advisor to assist with the CEO transition until his retirement on May 31, 2021. pages 23, 45
The Board believes that the Company is uniquely positioned to help the country through the ongoing COVID-19 pandemic, and is overseeing the Company’s efforts to focus its resources on the well-being and safety of its employees, consumers and the communities it serves. page 3
Our Board remains committed to ensuring that we are developing solutions to prescription opioid misuse and abuse through expanded education, safe prescription drug disposal, utilization management, funding for treatment and recovery programs and advocating for legislative and regulatory changes. Within the Board, the Audit Committee, the Medical Affairs Committee, the Nominating and Corporate Governance Committee (“N&CG Committee”) and the Management Planning and Development Committee (“MP&D Committee”) each play a significant role in the Board’s oversight efforts. Details on the Board’s Role in Our Opioid Action Plan are available on our website at https://cvshealth.com/ sites/default/files/cvs-health-boards-role-in-opioid-action-plan.pdf. pages 23, 25, 34
CVS Health announced that it will invest nearly $600 million over the next five years to advance employee, community and public policy initiatives that seek to address inequities faced by Black communities and other disenfranchised groups. The Board has been involved in our response and will provide oversight of the investments and programs. pages i, 10, 23
       
Board Communication and Stockholder Rights    
Our Board supports and participates in our stockholder outreach program and has responded to stockholder input with changes in our compensation program and other areas pages 8-11, 26, 47-48
Majority voting in director elections page 21
Proxy access by-law page 22
Annual election of all directors page 12
Annual say on pay vote pages 39-41
Right to act by written consent and to call special meetings See our Certificate of Incorporation and By-laws at https://investors. cvshealth.com under “Governance Documents”
   
2021 Proxy Statement 7
 

Table of Contents

Proxy Statement Highlights

 

    Further Information
Director Alignment with Stockholder Interests    
At least 75% of our directors’ annual retainer mix is paid in shares of CVS Health common stock pages 35-36
Directors must own at least 10,000 shares of CVS Health common stock page 87
Director meeting attendance averaged well over 95%, and each director nominee attended more than 90% of the meetings of the Board and the committees of which he or she was a member page 35
Diversity of Board and Board committee leadership page 20
Board Oversight of Risk    
Full Board and individual committees focus on understanding and assessing Company risks pages 24-26
Our independent Chair and our CEO are focused on the Company’s and the Board’s risk management efforts and ensure that enterprise risks are appropriately brought to the Board and/or its committees for review pages 24-26
At least 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 24-25, 29
The MP&D Committee is responsible for reviewing and assessing potential risks arising from the Company’s compensation policies and practices pages 25, 33
The N&CG Committee is responsible for oversight of our policies, practices and risks related to cybersecurity and data and information security governance pages 25, 31
The Medical Affairs Committee is responsible for reviewing and assessing risk arising from the Company’s provision of health care services across the enterprise. pages 25, 34
The Investment and Finance Committee (“I&F Committee”) is responsible for oversight of risks related to the Company’s investment portfolio and its capital and financial resources. pages 25, 30

 

Stockholder Outreach – Governance and Compensation Actions

 

Addressing the 2020 Say on Pay Vote

 

Our annual say on pay vote is one of our opportunities to receive feedback from stockholders regarding our executive compensation program, and the MP&D Committee takes the results of this vote into account when determining the compensation of the Company’s executive officers. We were disappointed to receive low support for our say on pay proposal at the 2020 Annual Meeting. Following the vote, we sought feedback from stockholders to better understand what motivated their votes and what actions we could take to address their concerns about our executive compensation program. Our MP&D Committee considered the vote result and the feedback we received as it evaluated the compensation opportunities provided to our executive officers. We carried out this review with the support of a new independent compensation consultant, retained by the MP&D Committee during 2020, Korn Ferry.

 

8 CVS Health
 

Table of Contents

Proxy Statement Highlights

 

Stockholder Engagement

 

In the latter part of 2020 and early 2021, management reached out to stockholders representing over 52% of our outstanding shares and engaged with holders of nearly 40% of our outstanding shares. We also held calls with both leading proxy advisory firms and the Chair of the MP&D Committee participated in those calls. In addition, the Chair of the MP&D Committee or the independent Chair of the Board, who is also a member of the MP&D Committee, participated in engagements with stockholders representing approximately 30% of our outstanding shares. During these engagements we specifically requested feedback regarding our executive compensation program given the low support received in 2020.

 

We contacted our 55 largest stockholders and other key stakeholders, representing approximately 52% of our shares outstanding, providing updates about our Company and invitations to meet with our management and/or independent directors.   In addition to investor relations meetings throughout the year, we held approximately 30 telephonic stockholder engagement meetings, representing nearly 40% of our shares outstanding, and the Chair of the MP&D Committee or the independent Chair of the Board were in attendance at approximately 30% of these telephonic meetings.

 

In our meetings with stockholders, we were pleased to hear that stockholders largely did not have concerns with the structure of our executive compensation program. Most stockholders we engaged who voted against the 2020 say on pay proposal indicated the acceleration of our timing of the granting of our 2020 performance stock unit (“PSU”) awards granted to our former CEO and current General Counsel in August 2019 was the basis of their decision to oppose the proposal. The decision to grant those 2020 PSU awards in 2019 was based on the unique circumstances at the time, including the integration of our transformational merger with Aetna Inc. (the “Aetna Transaction”), and we do not intend to continue this practice, nor is it one that we have undertaken in the past. Based on the feedback we heard from stockholders, we determined that for at least a five-year period beginning in 2020, we will not front-load or accelerate the timing of our normal course annual equity grants for executive officers.

 

Stockholders also expressed appreciation for changes we made to our annual PSU awards, including reducing the maximum PSU payout from 250% to 200%, providing that no upward modifier will be applied to the PSU awards if our absolute total shareholder return (“TSR”) is negative, and the strengthening of the forfeiture/clawback provisions in PSU award agreements to include detrimental conduct.

 

In addition to the feedback on our executive compensation program noted above, we also discussed the following topics:

 

Board oversight of response to COVID-19 pandemic;
   
Board oversight of strategy and risk management and cybersecurity;
   
Corporate governance and Board refreshment/succession planning, specifically the retirement of Mr. Merlo and the appointment of Ms. Lynch as President and CEO and as a member of the Board;
   
Diversity, equity and inclusion and human capital; and
   
Sustainability and corporate social responsibility initiatives, including the Company’s ongoing response to prescription opioid misuse and abuse.

 

The table below highlights how we responded to stockholder feedback in several key areas.

 

What we heard   Our response
     
How is CVS Health responding to COVID-19 and the impact of the pandemic?     With our presence in local communities and our commitment to health care transformation, CVS Health is uniquely positioned to respond to this pandemic. Our response to this major public health challenge has been swift, responsive and multidimensional, as our nearly 300,000 colleagues from across the business have joined forces to make a meaningful impact on the critical needs this pandemic has created. Please see our COVID-19 response page on our website at https://cvshealth. com/news-and-insights/articles/our-covid-19-response.
   
2021 Proxy Statement 9
 

Table of Contents

Proxy Statement Highlights

 

How is CVS Health addressing its low 2020 say on pay vote?   We were pleased to hear that our stockholders did not have concerns with the structure of our compensation program. Most stockholders we engaged who voted against the 2020 say on pay proposal indicated that the acceleration of the timing of the granting of our 2020 PSUs to our former CEO and current General Counsel in August 2019 was the basis of their decision to oppose the proposal. The decision to accelerate the grant of the PSU awards was based on the unique circumstances at the time involving the Aetna Transaction, and we do not intend to continue this practice, nor is it one that we have undertaken in the past. Based on the feedback we heard from stockholders, we determined that it would be beneficial to our stockholders for CVS Health to specifically commit that for at least a five-year period beginning in 2020, we will not front-load or accelerate the timing of our normal course annual equity grants for executive officers. In addition, the MP&D Committee engaged a new independent compensation consultant late in 2020, to gain further insight on pay practices and ensure that our program effectively balances competitive market practices, investor expectations, best-practice governance standards and our business strategy.
     
How are Board dynamics – is the size appropriate and do members have the right skill set?   We believe our Board is well-balanced, with the skills, qualifications and perspectives that allow it to fully and effectively address the Company’s needs. The Board has returned to its more typical size following an expansion of the Board in connection with the Aetna Transaction. Our individual directors, the Board and its committees are evaluated annually under a process established by the N&CG Committee and that the Committee believes that the Board is properly represented with a good mix of tenure and diversity. We believe the Board is well positioned as we move further into a transformational phase for the Company and that we are aligned with corporate governance best practices.
     
How are you addressing diversity and inclusion for your colleagues?  

Our stockholders inquired about our commitment to social justice and equity. We are focusing on three key areas that will serve as the pillars of our initiatives to address pressing social justice issues and systemic inequalities in our communities:

 

•   Fostering an environment of diversity and inclusion for our colleagues, with a focus on equitable access to growth and development;

 

•   Investing in the communities we serve to increase access to affordable, quality care with a focus on social determinants of health; and

 

•   Using our communications power, position and societal impact as a Fortune 5 company to influence public policy and to encourage an environment in which our values and commitments to diversity and inclusion, social justice and equity are shared with our colleagues, suppliers, customers and the communities which we serve.

    In support of our commitment, we have taken the following actions:
   

•   Beginning in 2021, we have committed to disclose on our website our Consolidated EEO-1 Report, a comprehensive breakdown of our workforce by race, ethnicity and gender that CVS Health is required to submit annually to the U.S. Equal Employment Opportunity Commission (“EEOC”). CVS Health will annually disclose its EEO-1 Report no later than 90 days after its submission to the EEOC. These reports will be in addition to the detailed disclosure CVS Health has already made available for several years in our Corporate Social Responsibility (“CSR”) Report and website.

   

•   Our strategic diversity management focuses on: Workforce Representation, Inclusion and Belonging, Talent Systems and Diverse Marketplace. The 2021 annual incentive plan includes a diversity metric relating to workforce for our most senior leaders who have the greatest ability to influence hiring, development and promotion of our colleagues.

   

•   We implemented enterprise-wide unconscious bias and active inclusion training.

   

•   We will continue to grow the proportion of our suppliers that are Minority Business Enterprises, as well as companies owned by women, people of color, LGBTQ+, veterans and people with disabilities.

   

•   We will invest nearly $600 million over the next five years to strengthen our community economic impact by investing in programs that address the social determinants of health and provide pathways to the workforce and sustainable careers.

   

•   We will continue to invest in and support policies designed to address the root causes of systemic inequalities and barriers in underrepresented communities.

   
10 CVS Health
 

Table of Contents

Proxy Statement Highlights

 

The entire Board appreciated the many positive comments from stockholders about the performance of the Company, the quality of our senior leadership, the fundamental design of our executive compensation program and the Company’s corporate governance practices. Our corporate governance and compensation practices are informed by ongoing dialogue with our stockholders and meets intended objectives.

 

 

   
  For more information on changes to our compensation program, see the letter from the MP&D Committee beginning on page 42, Stockholder Outreach and Consideration of the 2020 Say on Pay Vote, beginning on page 39 and Elements of Our Compensation Program beginning on page 53. For more information on corporate governance at CVS Health, please refer to pages 12-36 of this proxy statement and to our website at https://investors.cvshealth.com/investors/corporate-governance/default.aspx.
   
   
2021 Proxy Statement 11
 

Table of Contents

Corporate Governance and Related Matters

 
  Item 1
 

Election of Directors

 

Our Board of Directors has nominated 13 candidates for election as directors at the Annual Meeting. All 13 nominees currently serve as directors. If elected, each nominee will hold office until the next annual meeting and until their respective successors have been duly elected and have qualified. All of the nominees are expected to attend the Annual Meeting.

 

The Nominating and Corporate Governance Committee believes that the Board is well-balanced and that it fully and effectively addresses the Company’s needs. All of our nominees are seasoned leaders, all of whom hold or held senior executive leadership positions, who bring to the Board skills, qualifications and perspectives gained during their tenure at a wide array of public companies, private companies, non-profits, governmental and regulatory agencies and other organizations. We have indicated below for each nominee certain of the experience, qualifications, attributes and skills that led the N&CG Committee and the Board to conclude that the nominee should continue to serve as a director. We have also indicated the race/ethnicity and gender of each nominee, as self-identified.

 

Please note that for each director we have only listed the core attributes that the Board considered to be most relevant to each nominee. Each director nominee possesses qualifications in addition to those listed under his or her name.

 

  The Board of Directors unanimously recommends a vote FOR the election of all director nominees.

 

 

1   Nancy-Ann DeParle 2   Roger Farah 3   Anne Finucane 4   David Brown 5   Alecia DeCoudreaux
6   David Dorman 7   Karen Lynch 8   Fernando Aguirre 9   Mary Schapiro 10   Edward Ludwig
11   Jean-Pierre Millon 12   William Weldon 13   Tony White            
   
12 CVS Health
 

Table of Contents

Corporate Governance and Related Matters

 

Biographies of our Incumbent Board Nominees

 

 

Fernando Aguirre

 

INDEPENDENT DIRECTOR

 

Former Chairman, President and CEO of Chiquita Brands International, Inc.

 

Age: 63

 

Director since: November 2018

 

Race/Ethnicity and Gender
White, Hispanic/Latino Male

 

CVS Health Board
Committees

 

Audit; Nominating and
Corporate Governance

 

Other Public Boards

 

Barry Callebaut AG

 

Synchrony Financial

 

 

 

Biography

 

Mr. Aguirre is the former Chairman, President and Chief Executive Officer of Chiquita Brands International, Inc. (“Chiquita”), a global distributor of consumer products, having served as Chiquita’s President and Chief Executive Officer from January 2004 to October 2012 and its Chairman from May 2004 to October 2012. Prior to joining Chiquita, Mr. Aguirre worked for more than 23 years in brand management, general management and turnarounds at The Procter & Gamble Company (“P&G”), a manufacturer and distributor of consumer products. Mr. Aguirre began his P&G career in 1980, serving in various capacities including President and General Manager of P&G Brazil, President of P&G Mexico, Vice President of P&G’s global snacks and U.S. food products, and President of global feminine care. Mr. Aguirre was a member of the board of directors of Aetna from 2011 until the closing of the Aetna Transaction, when he became a director of CVS Health. He served as a director of Coveris (packaging) from 2014 to 2015, Levi Strauss (manufacturer of clothing) from 2010 to 2014, and Coca-Cola Enterprises Inc., a manufacturer and distributor of consumer products, from 2005 to 2010. Mr. Aguirre also serves as a director of Barry Callebaut AG, a manufacturer of high-quality chocolate and cocoa products, and Synchrony Financial, a consumer financial services company.

 

Director Qualification Highlights

 

 

•   Business Operations; Consumer Products and Services

•   International Business Operations

•   Corporate Governance and Sustainability

•   Business Development and Corporate Transactions

•   Finance

•   Public Company Board Service

 

 

Education B.S., Southern Illinois University, Edwardsville

 

Skills and Qualifications of Particular Relevance to CVS Health

 

Mr. Aguirre brings to the Board extensive consumer products, global business and executive leadership experience. As a former Chairman and CEO of a large public company that produces and distributes consumer products worldwide, he has significant brand management and international experience that is valuable to the Board’s strategic and operational understanding of global markets. Mr. Aguirre’s experience and service on other large public company boards, where he chaired various committees, positions him well as a member of our Audit and Nominating and Corporate Governance Committees.

 

C. David Brown II

 

INDEPENDENT DIRECTOR

 

Partner and Member of the Executive Committee of Nelson Mullins Riley & Scarborough LLP

 

Age: 69

 

Director since: March 2007

 

Race/Ethnicity and Gender
White Male

 

CVS Health Board
Committees

 

Management Planning and Development (Chair); Nominating and Corporate Governance; Executive

 

Other Public Board

 

None

 

 

 

Biography

 

Mr. Brown has been a partner and a member of the Executive Committee of Nelson Mullins Riley & Scarborough LLP (“Nelson Mullins”), a national law firm, since the August 2018 merger of Nelson Mullins and the Florida-based Broad and Cassel, of which Mr. Brown was Chairman from March 2000 through the time of the merger. He served as the lead director of Rayonier Advanced Materials Inc., a leading specialty cellulose production company, until his retirement from that board in May 2020. He also served as a director of ITT Educational Services, Inc., a national provider of technology-oriented degree programs, from April 2015 until September 2016. Mr. Brown previously served on the board of Caremark Rx, Inc. from March 2001 until the closing of the merger transaction involving CVS Health and Caremark, when he became a director of CVS Health.

 

Director Qualification Highlights

 

 

•   Business Operations; Real Estate

•   Business Development, Corporate Strategy and Transactions

•   Finance

•   Legal and Regulatory Compliance

•   Health Care/Regulated Industry

•   Risk Management

•   Public Company Board Service

 

 

Education B.S.B.A., University of Florida; J.D., University of Florida College of Law

 

Skills and Qualifications of Particular Relevance to CVS Health

 

Mr. Brown’s legal expertise and health care experience are highly valued by the Board, as is his ability to analyze and interpret complex issues and facilitate Board engagement. 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 former member of the board of directors and executive committee of Orlando Health, a not-for-profit health care network. The Board believes that Mr. Brown’s experience adds knowledge and leadership depth to the Board.

       
2021 Proxy Statement 13
 

Table of Contents

Corporate Governance and Related Matters

 

 

Alecia A. DeCoudreaux

 

INDEPENDENT DIRECTOR

 

President Emerita of Mills College and Former Executive at Eli Lilly and Company

 

Age: 66

 

Director since: March 2015

 

Race/Ethnicity and Gender
African-American Female

 

CVS Health Board
Committees

 

Audit; Medical Affairs

 

Other Public Boards

 

Parnassus Funds and Parnassus Income Funds

 

 

Biography

 

Ms. DeCoudreaux is President Emerita of Mills College, a liberal arts college for women with graduate programs for women and men, having served a five-year term as President from July 2011 through June 2016. Previously, Ms. DeCoudreaux served in a number of leadership roles at Eli Lilly and Company, a global pharmaceutical manufacturer (“Eli Lilly”), including as Vice President and Deputy General Counsel, Specialty Legal Team, from 2010-2011, Vice President and General Counsel, Lilly USA, from 2005-2009, and Secretary and Deputy General Counsel of Eli Lilly from 1999-2005. During her 30-year career with Eli Lilly, Ms. DeCoudreaux also previously served as Executive Director of Lilly Research Laboratories, Director of Federal Government Relations, Director of State Government Relations and Director of Community Relations. In addition, Ms. DeCoudreaux has served on a number of charitable, educational, for profit and nonprofit boards, including as both a trustee and board chair at Wellesley College. She currently serves as Chair of the Board of the Parnassus Funds trust and the Parnassus Income Funds trust, each a family of investment funds that integrates environmental, social and governance (“ESG”) factors and fundamental investment principles.

 

Director Qualification Highlights

 

 

•   Business Development, Corporate Strategy and Transactions

•   Legal and Regulatory Compliance

•   Health Care/Regulated Industry

•   Corporate Governance and Sustainability

•   Risk Management

•   Public Policy and Government Affairs

 

 

Education B.A., Wellesley College; J.D., Indiana University School of Law

 

Skills and Qualifications of Particular Relevance to CVS Health

 

Ms. DeCoudreaux has more than 30 years of experience in the pharmaceutical industry, and her experience as an attorney in that field and in the area of corporate governance makes her a great asset to our Board.

 

Nancy-Ann M. DeParle

 

INDEPENDENT DIRECTOR

 

Managing Partner and Co-Founder of Consonance Capital Partners, LLC and Former Director of the White House Office of Health Reform

 

Age: 64

 

Director since: September 2013

 

Race/Ethnicity and Gender
Eurasian Female

 

CVS Health Board
Committees

 

Nominating and Corporate Governance (Chair); Medical Affairs; Executive

 

Other Public Board

 

HCA Holdings, Inc.

 

 

Biography

 

Ms. DeParle has been a Managing Partner of Consonance Capital Partners, LLC, a private equity firm focused on investing in small and mid-size health care companies, since March 2020, and was a Partner from August 2013 until March 2020. She also is a Co-founder of the firm. From March 2009 to January 2013, Ms. DeParle served in the White House, first as Counselor to the President and Director of the White House Office of Health Reform, and later as Assistant to the President and Deputy Chief of Staff for Policy. In addition, from 1993 to 2000, Ms. DeParle served as the Associate Director for Health and Personnel for the White House Office of Management and Budget, and later as the Administrator of the Centers for Medicare & Medicaid Services (then known as the Health Care Financing Administration). From 2001 to March 2009, Ms. DeParle served as a Senior Advisor with JPMorgan Partners and as a Managing Director of its successor entity, CCMP Capital, L.L.C., focusing on private equity investments in health care companies. Ms. DeParle is also a director of HCA Holdings, Inc., a health care services company that owns, manages or operates hospitals and various other health care facilities.

 

Director Qualification Highlights

 

 

•   Business Development, Corporate Strategy and Transactions

•   Finance

•   Legal and Regulatory Compliance

•   Health Care/Regulated 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

 

Skills and Qualifications of Particular Relevance to CVS Health

 

Ms. DeParle has more than 25 years of experience in the health care arena. She is widely considered to be one of the nation’s leading experts in health care policy, management and financing, which makes her an excellent fit for our Board.

       
   
14 CVS Health
 

Table of Contents

Corporate Governance and Related Matters

 

 

David W. Dorman

 

INDEPENDENT DIRECTOR

 

Chair of the Board of CVS Health Corporation, Former Chairman and CEO of AT&T Corporation, and Founding Partner of Centerview Capital Technology Fund

 

Age: 67

 

Director since: March 2006

 

Race/Ethnicity and Gender
White Male

 

CVS Health Board
Committees

 

Management Planning and Development; Nominating and Corporate Governance; Executive (Chair)

 

Other Public Boards

 

Dell Technologies, Inc. PayPal Holdings, Inc.

 

 

 

Biography

 

Mr. Dorman has been the Chair of the Board of CVS Health Corporation since May 2011. He also has been a Founding Partner of Centerview Capital Technology Fund, a private investment firm, since July 2013. He served as Lead Director of Motorola Solutions, Inc. (formerly Motorola, Inc.), a communications products company, until his retirement from that board in May 2015, and was Non-Executive Chairman of the Board of Motorola from May 2008 through May 2011. From October 2006 through April 2008, he was a Managing Director and Senior Advisor with Warburg Pincus LLC, a global private equity firm. From November 2005 until January 2006, Mr. Dorman served as President and a director of AT&T Inc., a telecommunications company (formerly known as SBC Communications). From November 2002 until November 2005, Mr. Dorman was Chairman of the Board and Chief Executive Officer of AT&T Corporation. He was a director of Yum! Brands, Inc., a global quick service restaurant company, from 2005 until his retirement from that board in May 2017. Mr. Dorman is currently a director of PayPal Holdings, Inc., a leading digital and mobile payments company, as well as Dell Technologies, Inc., a leading global end-to-end technology provider.

 

Director Qualification Highlights

 

 

•   Finance

•   International Business Operations; Consumer Products or Services

•   Technology and Innovation

•   Risk Management

 

•   Corporate Governance and Sustainability

•   Business Development, Corporate Strategy and Transactions

•   Public Company Board Service

 

Education B.S., Georgia Institute of Technology

 

Skills and Qualifications of Particular Relevance to CVS Health

 

Mr. Dorman’s experience in leading large companies, beginning with Sprint and later Pacific Bell and AT&T, lends a perspective and skill set that is greatly valued by the Board. His business background of growing companies is in line with and useful to our business and strategy. In addition, Mr. Dorman’s experience investing in technology companies at Warburg Pincus and Centerview Capital and his service on the board of Dell Technologies provides an important perspective and expertise in innovation, technology and information security. The Board believes that Mr. Dorman’s experience leading the boards of AT&T and Motorola make him well-suited to serve as its independent Chair.

 

 

Roger N. Farah

 

INDEPENDENT DIRECTOR

 

Former Chairman of Tiffany & Co. and Former Executive at Tory Burch and Ralph Lauren

 

Age: 68

 

Director since: November 2018

 

Race/Ethnicity and Gender
White Male

 

CVS Health Board
Committees

 

Management Planning and Development; Medical Affairs

 

Other Public Board

 

The Progressive Corporation

 

 

Biography

 

Mr. Farah is former Chairman of the Board and a director of Tiffany & Co., a retailer of jewelry and specialty products. He served as Executive Director of Tory Burch LLC, a retailer of lifestyle products, from March 2017 to September 2017, having previously served as Co-Chief Executive Officer and director from September 2014 to February 2017. He is former Executive Vice Chairman of Ralph Lauren Corporation, a retailer of lifestyle products, having served in that position from November 2013 to May 2014, and previously served as President and Chief Operating Officer (“COO”) from April 2000 to October 2013, and Director from April 2000 to August 2014. During his 40-plus year career in retailing, Mr. Farah also held director and/or executive positions with Venator Group, Inc. (now Foot Locker, Inc.), R.H. Macy & Co., Inc., Federated Merchandising Services, the central buying and product development arm of Federated Department Stores, Inc., Rich’s/Goldsmith’s Department Stores, and Saks Fifth Avenue, Inc. Mr. Farah was a member of the board of directors of Aetna from 2007 until the closing of the Aetna Transaction, when he became a director of CVS Health. He was a director of Metro Bank PLC, a financial services company, until his retirement from that board in March 2020. He currently serves as a director of The Progressive Corporation, an auto insurance company.

 

Director Qualification Highlights

 

 

•   Business Operations

•   Business Development, Corporate Strategy and Transactions

•   Health Care/Regulated Industry

 

•   Public Policy and Government Affairs

•   Public Company Board Service

•   International Business Operations

 

Education B.S., University of Pennsylvania

 

Skills and Qualifications of Particular Relevance to CVS Health

 

Mr. Farah brings extensive business and leadership experience to our Board. He has strong marketing, brand management and consumer insights developed in his over 40 years of experience in the retail industry. His former positions as Executive Vice Chairman, President and COO of Ralph Lauren and Executive Director and Co-CEO of Tory Burch give Mr. Farah important perspectives on the complex financial and operational issues facing the Company.

       
   
2021 Proxy Statement 15
 

Table of Contents

Corporate Governance and Related Matters

 

 

Anne M. Finucane

 

INDEPENDENT DIRECTOR

 

Vice Chairman of Bank of America Corporation and Chairman of the Board of Bank of America Merrill Lynch Europe

 

Age: 68

 

Director since: January 2011

 

Race/Ethnicity and Gender
White Female

 

CVS Health Board
Committees

 

Investment and Finance (Chair); Management Planning and Development; Executive

 

Other Public Boards

 

None

 

 

 

Biography

 

Ms. Finucane has been Vice Chairman of Bank of America Corporation, an international financial services company, since July 2015 and Chairman of the Board of Bank of America Merrill Lynch Europe since July 2018. From 2006 through July 2015, Ms. Finucane served as Global Chief Strategy and Marketing Officer for Bank of America and served as Northeast Market President from 2004 through July 2015. During her 20-plus years as a senior leader at Bank of America and its legacy firms, Ms. Finucane has served as senior advisor to four chief executive officers and the Board of Directors. As a member of the executive management team, Ms. Finucane is responsible for the strategic positioning of Bank of America and leads the company’s environmental, social and governance, sustainable finance, capital deployment and public policy efforts. She is chair of Bank of America’s Environmental, Social and Governance Committee, which directs all of its ESG efforts, and the Capital Deployment Group, which collaborates across business lines to deliver innovative financing solutions to address global issues. Ms. Finucane stewards Bank of America’s $300 billion environmental business initiative, oversees the company’s $1.6 billion Community Development Financial Institution portfolio and chairs the Bank of America Charitable Foundation.

 

Director Qualification Highlights

 

 

•   Business Operations; Consumer Products or Services

•   Business Development, Corporate Strategy and Transactions

•   Public Policy and Government Affairs

 

•   Regulated Industry

•   Finance

•   Corporate Governance and Sustainability

•   Risk Management

 

 

Education B.A., University of New Hampshire

 

Skills and Qualifications of Particular Relevance to CVS Health

 

Ms. Finucane’s experience in the financial services industry, consumer policy, strategy, marketing, corporate social responsibility and government affairs provides our Board with valuable insight in those key areas. Her distinguished career in banking also makes her an excellent Chair of our Investment and Finance Committee.

 

 

Edward J. Ludwig

 

INDEPENDENT DIRECTOR

 

Former Chairman and Chief Executive Officer of Becton, Dickinson and Company

 

Age: 69

 

Director since: November 2018

 

Race/Ethnicity and Gender
White Male

 

CVS Health Board
Committees

 

Audit (Chair); Investment and Finance; Executive

 

Other Public Board

 

Boston Scientific Corporation 

 

 

Biography

 

Mr. Ludwig is the former Chairman of the board of directors of Becton, Dickinson and Company (“BD”) (a global medical technology company), having served in that position from February 2002 through June 2012. He also served as Chief Executive Officer of BD from January 2000 to September 2011, President of BD from May 1999 to December 2008 and Chief Financial Officer of BD from January 1995 to May 1999. Mr. Ludwig joined BD as a Senior Financial Analyst in 1979. Prior to joining BD, Mr. Ludwig was a senior auditor with Coopers and Lybrand (now PricewaterhouseCoopers) where he earned his CPA. Mr. Ludwig also served as a director of Xylem, Inc. (a water technology company) from 2011 to 2017, and Chairman of Advanced Medical Technology Association, or AdvaMed (a medical device trade association), from 2006 to 2008. Mr. Ludwig was lead director of the Aetna board of directors from 2003 until the closing of the Aetna Transaction, when he became a director of CVS Health. He currently serves as the lead independent director of Boston Scientific Corporation (medical devices) and as a director of POCARED Diagnostics Ltd. (a diagnostics technology manufacturer based in Israel).

 

Director Qualification Highlights

 

 

•   Business Operations

•   Business Development, Corporate Strategy and Transactions

•   Finance

•   Health Care/Regulated Industry

•   Public Company Board Service

•   Risk Management

•   International Business Operations

 

 

Education B.A., College of the Holy Cross; M.B.A., Columbia University

 

Skills and Qualifications of Particular Relevance to CVS Health

 

Mr. Ludwig’s more than 30 years of experience in the field of medical technology give him a unique perspective on the Company’s strategy. As the former Chairman and CEO of BD, Mr. Ludwig brings a thorough appreciation of the strategic and operational issues facing a large public company in the health care industry. As a former CFO and a CPA, Mr. Ludwig offers our Board a deep understanding of financial, accounting and audit-related issues. Mr. Ludwig’s experience positions him well to serve as Chair of our Audit Committee.

       
   
16 CVS Health
 

Table of Contents

Corporate Governance and Related Matters

 

 

Karen S. Lynch

 

NON-INDEPENDENT DIRECTOR

 

President and Chief Executive Officer of CVS Health Corporation

 

Age: 58

 

Director since: February 2021

 

Race/Ethnicity and Gender
White Female

 

CVS Health Board
Committees

 

Executive

 

Other Public Board

 

U.S. Bancorp

 

 

 

Biography

 

Ms. Lynch became Chief Executive Officer and President of CVS Health on February 1, 2021. Prior to this appointment, Ms. Lynch served as an Executive Vice President of CVS Health and President of Aetna from November 2018 through January 2021. Ms. Lynch also served as President of Aetna Inc. from 2015 until January 2021. She previously served as Executive Vice President of Aetna’s Local and Regional Business from 2013 to 2014 and Executive Vice President of Aetna’s Specialty Products Business from 2012 to 2013. Before joining Aetna, Ms. Lynch held executive positions at Magellan Health Services, a health care management company, where she served as president, and at Cigna Corporation, a global health insurance company. Ms. Lynch began her career as a Certified Public Accountant at the auditing firm of Ernst & Young LLP. Ms. Lynch serves on the board of directors of U.S. Bancorp and is chair of its audit committee.

 

Director Qualification Highlights

 

 

•   Business Operations; Consumer Products or Services

•   Business Development, Corporate Strategy and Transactions

•   Health Care/Regulated Industry

 

•   Technology and Innovation

•   Public Policy and Government Affairs

•   Finance

•   Corporate Governance and Sustainability

 

 

Education B.S., Boston College, Executive M.B.A., Boston University

 

Skills and Qualifications of Particular Relevance to CVS Health

 

Ms. Lynch is a seasoned health care expert who has over three decades of experience in the industry. She is consistently rated as a top innovator and influencer in the health care space and has been recognized for her leadership in health care by numerous organizations and publications. She has been named to Fortune’s Most Powerful Women in Business list in each of the past five years. Ms. Lynch is the right leader to guide CVS Health into its next era of growth as the Company continues its transformation.

 

 

Jean-Pierre Millon

 

INDEPENDENT DIRECTOR

 

Former President and Chief Executive Officer of PCS Health Systems, Inc.

 

Age: 70

 

Director since: March 2007

 

Race/Ethnicity and Gender
White Male

 

CVS Health Board
Committees

 

Audit; Medical Affairs

 

Other Public Boards

 

None 

 

 

Biography

 

Mr. Millon is the former President and Chief Executive Officer of PCS Health Systems, Inc. (“PCS”). Mr. Millon joined PCS in 1995, where he served as President and Chief Executive Officer from June 1996 until his retirement in September 2000. Prior to that, Mr. Millon served as an executive of and held several global leadership positions with Eli Lilly and Company. Mr. Millon previously served on the board of Caremark from March 2004, upon Caremark’s acquisition of AdvancePCS, and as a director of AdvancePCS (which resulted from the merger of PCS and Advance Paradigm, Inc.) beginning in October 2000. He became a director of CVS Health upon the closing of the merger transaction involving CVS Health and Caremark. Mr. Millon has over ten years of financial management experience and 15 years of general functional management experience, including strategic planning experience specific to pharmacy benefit management companies as the former head of PCS. He also has extensive venture capital and public and private company board experience.

 

Director Qualification Highlights

 

 

•   Finance

•   Business Development, Corporate Strategy and Transactions

•   Health Care/Regulated Industry

 

•   International Business Operations

•   Pharmacy Benefit Management

•   Public Company Board Service

•   Technology and Innovation

 

 

Education B.S., Ecole Centrale de Lyon (France); B.A., Université de Lyon (France); M.B.A., Kellogg School of Business, Northwestern University

 

Skills and Qualifications of Particular Relevance to CVS Health

 

Mr. Millon’s extensive background and experience in the pharmacy benefit management, pharmaceutical and life sciences businesses, combined with his financial expertise, provide our Board with additional perspective across the enterprise.

       
   
2021 Proxy Statement 17
 

Table of Contents

Corporate Governance and Related Matters

 

 

Mary L. Schapiro

 

INDEPENDENT DIRECTOR

 

Vice Chair for Global Public Policy and Special Advisor to the Founder and Chairman of Bloomberg L.P., and former Chairman of the U.S. Securities and Exchange Commission

 

Age: 65

 

Director since: May 2017

 

Race/Ethnicity and Gender
White Female

 

CVS Health Board
Committees

 

Audit; Investment and Finance

 

Other Public Board

 

Morgan Stanley

 

 

 

Biography

 

Since October 2018, Ms. Schapiro has been Vice Chair for Public Policy and Special Advisor to the Founder and Chairman of Bloomberg L.P., a privately held financial, software, data and media company. Since January 2014, Ms. Schapiro has also served as Vice Chair of Promontory Advisory Board, part of Promontory Financial Group, a leading strategy, risk management and regulatory compliance firm. She is Vice Chair of the Board of the Sustainability Accounting Standards Board (“SASB”) Foundation, an independent, non-profit organization that sets standards to guide the disclosure of financially material sustainability information by companies and investors. From January 2009 through December 2012, Ms. Schapiro was Chairman of the U.S. Securities and Exchange Commission, becoming the first woman to serve as that agency’s Chairman. Ms. Schapiro was Chairman and CEO of the Financial Industry Regulatory Authority (“FINRA”) from 2006 through 2008, and held a number of key executive positions at FINRA and its predecessor from 1996 through 2006. She also served as Chairman of the Commodity Futures Trading Commission (“CFTC”) from 1994 to 1996. Ms. Schapiro is currently a director of Morgan Stanley, a global financial services company, and was a director of General Electric Company and of the London Stock Exchange Group PLC, until her retirement from those boards in April 2018 and October 2018, respectively.

 

Director Qualification Highlights

 

 

•   Corporate Governance and Sustainability

•   Public Policy and Government Affairs

•   Finance

 

•   Risk Management

•   Legal and Regulatory Compliance

•   Public Company Board Service

 

 

Education B.A., Franklin and Marshall College; J.D., George Washington University

 

Skills and Qualifications of Particular Relevance to CVS Health

 

Ms. Schapiro’s experience in leading the SEC, FINRA and the CFTC makes her extremely well qualified to serve on our Board. Ms. Schapiro’s leadership of the SEC during the turbulent period that followed the 2008 financial crisis, one of the busiest rulemaking periods in the agency’s history, demonstrates her ability to navigate through a difficult and complex regulatory and political environment. Our Board believes that her skills fill important needs in the areas of legal and regulatory compliance, finance, risk management and public policy and government affairs.

 

William C. Weldon

 

INDEPENDENT DIRECTOR

 

Former Chairman of the Board and Chief Executive Officer of Johnson & Johnson

 

Age: 72

 

Director since: March 2013

 

Race/Ethnicity and Gender
White Male

 

CVS Health Board
Committees

 

Management Planning and Development; Nominating and Corporate Governance

 

Other Public Board

 

Exxon Mobil Corporation 

 

 

Biography

 

Mr. Weldon is the former Chairman of the Board and Chief Executive Officer of Johnson & Johnson, a global developer and manufacturer of health care products, having served in those positions from 2002 until his retirement in 2012. Mr. Weldon previously served in a variety of senior executive positions during his 41-year career with Johnson & Johnson. Mr. Weldon also is a director of Exxon Mobil Corporation, an international energy provider and chemical manufacturing company, and Fairfax Financial Holdings Ltd., a property and casualty insurance and reinsurance company that is listed on the Toronto Stock Exchange. He was a director of JPMorgan Chase & Co., a global financial services company, until his retirement from that board in May 2019.

 

Director Qualification Highlights

 

 

•   Finance

•   Health Care/Regulated Industry

•   International Business Operations; Consumer Products or Services

 

•   Risk Management

•   Corporate Governance and Sustainability

•   Technology and Innovation

•   Public Company Board Service

 

 

Education B.S., Quinnipiac University

 

Skills and Qualifications of Particular Relevance to CVS Health

 

Mr. Weldon’s experience in managing a complex global health care company and his deep knowledge of the worldwide health care market across multiple sectors makes him extremely well suited to serve on our Board. His background in international business management and operating in the highly-regulated health care industry is also greatly valued by our Board.

       
   
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Tony L. White

 

INDEPENDENT DIRECTOR

 

Former Chairman of the Board, President and Chief Executive Officer of Applied Biosystems, Inc.

 

Age: 74

 

Director since: March 2011

 

Race/Ethnicity and Gender
White, Hispanic/Latino Male

 

CVS Health Board
Committees

 

Management Planning and Development; Medical Affairs (Chair); Executive

 

Other Public Boards

 

Ingersoll Rand Inc.
Trane Technologies plc

 

 

Biography

 

Mr. White is the former Chairman of the Board, President and Chief Executive Officer of Applied Biosystems, Inc. (formerly Applera Corporation), a developer, manufacturer and marketer of life science systems and genomic information products, having served in those positions from September 1995 until his retirement in November 2008. Mr. White is a director of Ingersoll Rand Inc., a diversified industrial company, and Trane Technologies plc, a climate technologies company. He was a director of C.R. Bard, Inc. (“Bard”), a company that designs, manufactures and sells medical, surgical, diagnostic and patient care devices, from 1996 until Bard was acquired by Becton, Dickinson and Company in December 2017.

 

Director Qualification Highlights

 

 

•   Finance

•   Health Care/Regulated Industry

•   Technology and Innovation

 

•   Risk Management

•   Corporate Governance and Sustainability

•   Public Company Board Service

 

 

Education B.A., Western Carolina University

 

Skills and Qualifications of Particular Relevance to CVS Health

 

Mr. White’s wealth of management experience in the life sciences and health care industries, including over 13 years as Chairman and CEO of an advanced-technology life sciences company and 26 years in various management positions at Baxter International, Inc., a provider of medical products and services, makes him well qualified to serve as a director of CVS Health and as the Chair of our Medical Affairs Committee.

       
   
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Director Qualification Criteria; Diversity

 

Recognizing that the selection of qualified directors is complex and crucial to the long-term success of the Company, the N&CG Committee has established in its charter guidelines for the identification and evaluation of candidates for membership on the Board. Under its charter, the N&CG Committee recommends to the Board criteria for Board membership and recommends individuals for membership on the Board. The criteria used by the N&CG Committee in nominating directors are found in the N&CG Committee’s charter and provide that 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. The N&CG Committee focuses on the following qualities in identifying and evaluating candidates for Board membership:

 

•  Diversity of background, experience and skills

•  Character, reputation and personal integrity

•  Judgment

•  Independence

•  Diversity of race, ethnicity and gender

 

•  Viewpoint

•  Commitment to the Company and service on the Board

•  Any other factors that the N&CG Committee may determine to be relevant and appropriate

 

The N&CG Committee makes these determinations in the context of the existing composition of the Board so as to achieve an appropriate mix of characteristics. Consistent with this philosophy, the N&CG Committee is committed to including in each search qualified candidates who reflect diverse backgrounds, including diversity of gender, race and ethnicity. The N&CG Committee also takes into account all applicable legal, regulatory and stock exchange requirements concerning the composition of the Board and its committees. The N&CG Committee reviews these guidelines from time to time as appropriate (and in any event at least annually) and modifies them as it deems appropriate.

 

The N&CG 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, viewpoint, reputation, age, skills, background, experience and corporate governance best practices.

 

The N&CG Committee values diversity, which it broadly views in terms of, among other things, gender, race, ethnicity, background and experience, as a factor in selecting members to serve on the Board. Our nominees reflect that diversity, including in terms of race, gender and ethnic background. In addition, to ensure that it has access to a broad range of qualified, experienced and diverse candidates, the N&CG Committee may use the services of an independent search firm to help identify and assist in the evaluation of candidates.

 

Board Evaluation Process

 

The Board recognizes that a robust and constructive evaluation process is an essential component of good corporate governance and Board effectiveness. The N&CG Committee oversees the Board’s annual evaluation process and periodically reviews the format of the evaluation process, including whether to utilize a third-party facilitator, to ensure that actionable feedback is solicited on the operation and effectiveness of the Board, Board committees and director performance.

 

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2020 MULTI-STEP EVALUATION PROCESS

 

                 
 

Questionnaire

 

Feedback sought from directors regarding:

 

•  Board composition and structure

 

•  Meetings and materials

 

•  Future agenda items

 

•  Board interaction with management

 

•  Effectiveness of the Board

 

•  Director education opportunities

 

Independent
Third Party

 

Conducted separate, one-on-one interviews with each director.

 

 

N&CG Committee

 

N&CG Committee met with the independent third-party facilitator to discuss and provide feedback and input prior to the annual Board closed self-evaluation session.

 

 

Committee/Board
Executive Sessions

 

Each committee and the full Board conducted separate closed self-evaluation sessions. The results of the questionnaire, feedback from third-party facilitator, the committees’ self-evaluations and other feedback were discussed by the Board in a session facilitated by the independent third party.

 

 
                 

 

When considering current directors for re-nomination to the Board, the N&CG Committee takes into account the performance of each director, which is part of the N&CG Committee’s annual Board evaluation process. In 2020, in order to enhance the process and as a corporate governance best practice, the Board engaged an independent third party, who was paid a fee, to conduct the interviews and summarize his findings. The independent third party and the N&CG Committee recommended actions for the Board to consider to maximize its effectiveness. The Board may also take action on its own accord. In 2021, the N&CG Committee added a comprehensive questionnaire to the process, and the interviews were conducted by the Chair of the N&CG Committee and the independent Chair of the Board, in order to gain additional and varying perspectives.

 

Board Refreshment; Retirement Age

 

The N&CG Committee and the Board believe that setting a retirement age for CVS Health directors is advisable to facilitate the addition of new directors. Accordingly, 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. In the event any waiver is provided, the Board will disclose the rationale for its decision.

 

In March 2021, the Board approved a waiver for this term of the retirement age for Mr. White, who is currently 74. The Board believes that Mr. White’s continued leadership as Chair of the Medical Affairs Committee is critically important during the COVID-19 pandemic and providing continuity for the Company’s continued response efforts, and that CVS Health will benefit from Mr. White’s extensive experience. In making its decision, the Board also considered the importance of continuity of committee leadership during the first year of our new CEO and President, Ms. Lynch.

 

Majority Voting

 

As discussed elsewhere in this proxy statement, directors are elected by a majority of the votes cast at the Annual Meeting (assuming that the election is uncontested). Under our by-laws, each nominee who is a current director is required to submit an irrevocable resignation, which resignation would become 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 N&CG Committee, will no later than at its first regularly scheduled meeting following certification of the stockholder vote, determine whether to accept the resignation of an 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 person’s resignation. In the event any resignation is not accepted, the Board will disclose the rationale for its determination.

 

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Stockholder Submission of Nominees

 

The N&CG 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 below) in accordance with the procedures set out in the Company’s by-laws. All candidates should meet the Director Qualification Criteria, discussed above. The N&CG 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 for the meeting as a director nominee and to serve a full term as a director of the Company if elected and any other information that the 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 2022” for additional information related to proposals, including any nominations, for our 2022 Annual Meeting.

 

Proxy Access

 

CVS Health has had a proxy access by-law since January 2016. The key terms of our proxy access by-law are:

 

         
A stockholder, or a group of up to 20 stockholders, owning at least 3% of the Company’s outstanding common stock continuously for at least 3 years   May nominate and include in the Company’s proxy materials director nominees constituting up to the greater of 2 nominees or 20% of the Board   Provided that the stockholders and the nominees satisfy the requirements specified in the Company’s by-laws  
         

 

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 (the “NYSE”) Listed Company Manual. Under NYSE Rules, no director qualifies as “independent” unless the Board affirmatively determines that the director has no material relationship with the Company.

 

Our Board has adopted 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. These categorical standards are set forth in Annex A to the Company’s Corporate Governance Guidelines, which are available on our website at https://investors.cvshealth.com/investors/corporate-governance/ documents/default.aspx or upon request to our Corporate Secretary.

 

2021 Determinations

The N&CG Committee undertook its annual review of director independence in March 2021. The N&CG Committee recommended that the Board determine, and the Board determined, that each of Mmes. DeCoudreaux, DeParle, Finucane and Schapiro, and each of Messrs. Aguirre, Brown, Dorman, Farah, Ludwig, Millon, Weldon and White is independent. Ms. Lynch is not an independent director because of her employment as President and CEO of the Company. Mr. Merlo is not standing for re-election as a director at the Annual Meeting and is not an independent director because of his former position of President and CEO of the Company.

 

The Board’s Role and Activities in 2020

 

The Board acts as the ultimate decision-making body of the Company and advises and oversees management, which is responsible for the day-to-day operations and management of the Company. In carrying out its responsibilities, the Board reviews and assesses CVS Health’s long-term strategy and its strategic, competitive and financial performance.

 

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The Board oversaw CVS Health’s 2020 performance that delivered results above our expectations for 2020, at a time of unprecedented challenges and uncertainty - a testament to our strategy and diversified health services model. The Board believes that the Company’s strategy to create an innovative health care model will address many of the issues facing the nation’s health care system and furthers the Company’s purpose of helping people on their path to better health. The Board also believes that the Company is uniquely positioned to help the country through the ongoing COVID-19 pandemic, and oversaw the Company’s efforts to focus its resources on the well-being and safety of its employees, consumers and the communities it serves. In 2020, the Board also oversaw the Company’s ongoing efforts to transform health care in the United States, including the continued rollout of the HealthHUB concept, opening approximately 600 HealthHUB locations despite construction challenges during the COVID-19 pandemic, as well as expansion of its Kidney Care business, including an ongoing clinical trial of a home hemodialysis machine. The Board oversaw the Company’s response to calls for racial justice, which included the Company’s announcement that it will invest nearly $600 million over the next five years to advance employee, community and public policy initiatives that address inequities faced by Black communities and other disenfranchised groups. The Board also continued its oversight of the Company’s efforts to seek to address prescription opioid misuse and abuse, issuing an updated report on the subject in October 2020.

 

CVS Health delivered total revenues of $268.7 billion, up 4.6% compared to 2019, and the Company continued to generate significant cash flow in 2020, with cash flow from operations totaling approximately $15.9 billion. During 2020, three capital management transactions were completed under the oversight of the Board and its I&F Committee, contributing to the repayment of $4.25 billion in net debt and significant savings in go-forward interest payments. The Board also returned approximately $2.6 billion to stockholders in 2020 based on a cash dividend of $2.00 per share.

 

The Board’s Role in Strategy and Succession Planning

 

The Board reviews the Company’s financial performance on a regular basis at Board meetings and through periodic updates, with a particular focus on peer and competitive comparisons. The Board also periodically reviews the Company’s long-term strategy, and assesses its strategic, competitive and financial performance, on both an absolute basis and in relation to the performance, practices and policies of its peers and competitors. While the Board receives updates regarding strategic matters throughout the year, at least one Board meeting per year is focused almost entirely on the Company’s short- and long-term strategic direction. The Board receives reports from management, and expert speakers often are invited to present to the Board. At this annual strategy-focused meeting, the Board provides input and oversight on short-term strategic goals and sets the long-term strategic direction of the Company.

 

The Board also reviews the Company’s succession planning, including succession planning in the case of the incapacitation, retirement or removal of the CEO. In that regard, the CEO provides an annual report to the Board recommending and evaluating potential successors, along with a review of any development plans recommended for such individuals. The CEO provides to the Board, on an ongoing basis, his or her recommendation as to a successor in the event of an unexpected emergency. The Board also reviews succession planning with respect to the Company’s other key executive officers and ensures that directors have substantial opportunities to engage with successor candidates, including emerging leaders. The Board has access to external consultants, as needed.

 

Leadership Transition in 2020

 

In November 2020, Larry J. Merlo announced his intention to retire from the Company and that he would step down from the offices of President and CEO effective February 1, 2021. Thereafter, Mr. Merlo would serve as a Strategic Advisor to CVS Health, to assist the new President and CEO on transition matters until his retirement from CVS Health on May 31, 2021. Mr. Merlo also informed the Company that he would not seek re-election to the Board at the Annual Meeting. Mr. Merlo’s retirement comes after a career of over 40 years with CVS Health, including serving as CEO since March 2011 and as President and a member of the Board since May 2010.

 

At the time of Mr. Merlo’s retirement announcement, the Board also announced the appointment of Karen S. Lynch to serve as President and CEO of CVS Health, and as a director, both effective February 1, 2021. Upon the effectiveness of her appointment to the Board, Ms. Lynch also joined the Executive Committee of the Board. In connection with Ms. Lynch’s appointment as a director, the Board also approved a temporary increase in the size of the Board from 13 to 14 directors effective on the date of her appointment. Prior to becoming President and CEO of the Company, Ms. Lynch served as Executive Vice President, CVS Health and President of Aetna, holding that position since 2018 following CVS Health’s acquisition of Aetna. The appointment of Ms. Lynch was the culmination of a thorough process by the Board that included the consideration of a diverse slate of internal and external candidates.

 

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The Board’s Role in Risk Oversight

 

The Board’s role in risk oversight involves both the full Board and its committees, as well as members of management.

 

Risk Oversight Framework

 

 

Board of Directors

 

•  Focuses on understanding Company-wide risks and ensuring that risk matters are appropriately brought to the Board and/or its committees for review.

 

•   Ensures that the Corporate Governance Guidelines, the Board’s leadership structure and the Board’s practices facilitate the effective oversight of risk and communication with management.

     
 

Board Committees

 

Each of the Board’s principal committees is responsible for oversight of risk management practices for categories of risks relevant to their functions.

 

Audit Committee

 

Primary committee charged with carrying out risk oversight responsibilities on behalf of the Board, including reviewing financial, operational, compliance, reputational and strategic risks.

 

Management Planning and Development Committee

 

Investment and Finance Committee

 

Nominating and Corporate Governance Committee

 

Medical Affairs Committee

         
       
 

Management

 

•  Each major business unit is responsible for identifying risks, assessing the likelihood and potential impact of significant risks, and reporting to the Executive Leadership Team (the “ELT”), CVS Health’s most senior executive group, on actions to monitor, manage and mitigate significant risks.

 

•  The Chief Financial Officer (“CFO”), Treasurer, Chief Compliance Officer, Chief Audit Executive, General Counsel, Chief People Officer and Corporate Secretary and Chief Governance Officer periodically report to relevant Board committees and to the full Board on the Company’s risk management policies and practices, including risk assessments and evaluation of compliance and legal risks.

 

 

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 corporate risk management culture begins from the top with the ELT setting the tone on the importance of risk management with the support of the Board and its committees. The ELT mandates the management of identified risks through Risk Champions with guidance and oversight by the Company’s Enterprise Risk Management (“ERM”) function and support by the Operational Risk Committee (the “ORC”), which includes the Risk Champions and the head of the Company’s internal audit function.
To ensure connections at all levels for identification of risks, CVS Health utilizes a Risk Committee structure comprised of the ORC working group, which supports the ELT. The Audit Committee provides overall ERM program oversight and reviews management’s progress in managing risks. This structure allows for effective communication and information flow throughout the risk framework.
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 the Company’s policies and practices with respect to risk assessment and risk management, including discussing with management, the Company’s independent registered public accounting firm and the Company’s internal auditors the Company’s major financial risk exposures and the steps that have been taken to monitor and mitigate such exposures. The Audit Committee reviews CVS Health’s major financial risk exposures as well as major operational, compliance, reputational

 

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  and strategic risks, including developing steps to monitor, manage and mitigate those risks. In 2019, principal responsibility for oversight of risks related to cybersecurity and data and information security governance was transferred from the Audit Committee to the N&CG Committee, whose members possess expertise regarding those subjects.
Each Board committee is responsible for oversight of risk management practices for categories of risks relevant to its function. For example, the MP&D Committee has oversight responsibility for the Company’s overall compensation structure, including review of its compensation practices, with a view to assessing associated risk. See “Compensation Risk Assessment” on page 33 for additional information. The Medical Affairs Committee reviews and assesses risks arising from the Company’s provision of health care services across the enterprise, including safety issues related to prescription opioid misuse and abuse, and the steps taken to monitor and mitigate those risks. The I&F Committee reviews risks related to the Company’s investment portfolio and its capital and financial resources.
The Board considers its role in risk oversight when evaluating the Company’s Corporate Governance Guidelines and the Board’s leadership structure. Both the Corporate Governance Guidelines and the Board’s leadership structure facilitate the Board’s oversight of risk and communication with management. Our independent Chair and our CEO are focused on CVS Health’s and the Board’s risk management efforts and ensure that risk matters are appropriately brought to the Board and/or its Committees for their review.

 

The Board’s Role in Oversight of Cybersecurity and Information Governance

 

The N&CG Committee, pursuant to its charter, is formally charged with oversight of the Company’s cybersecurity and information governance, including its privacy and information security programs. The Company maintains an ERM function that identifies, monitors and mitigates business risks, including information security risks. In addition, the Company’s Information Security Department conducts a thorough quarterly risk review, aimed specifically at identifying and mitigating information security risks. Identified information security and privacy risks are reported to the Audit Committee and the N&CG Committee in accordance with protocols.

 

The Company’s Executive Vice President and Chief Information Officer (“CIO”), its Senior Vice President and Chief Information Security Officer (“CISO”) and its Vice President and Chief Privacy Officer (“CPO”) also regularly update the N&CG Committee (and, as needed, the Audit Committee or the full Board) on risks and opportunities in these areas. The CIO and CISO update the N&CG Committee at least twice annually, and the CPO updates the N&CG Committee at least annually. In addition to updates at Board or committee meetings, the CIO, CISO or the CPO periodically update the Board on important information security matters through memoranda. The N&CG Committee is advised regarding the Company’s robust information security training programs, including enhanced training for specialized personnel and training aimed at senior executives, as well as its external audits and certifications to top information security standards. The Company’s information technology systems are assessed by independent parties for the following on an enterprise basis: Payment Card Industry Data Security Standards (“PCI DSS”); HIPAA; SOC 1; and National Association of Insurance Commissioners (“NAIC”). Also, certain of the Company’s business units are assessed by independent parties for the following: SOC 2; SOC 2 Type 2; NIST 800-53; and HI-TRUST. As a backstop to its strong information security programs, policies and procedures, the Company annually purchases a cybersecurity risk insurance policy that would defray the costs of an information security breach.

 

The Board’s Role in Oversight of Corporate Social Responsibility

 

The N&CG Committee, pursuant to its charter, is formally charged with oversight of the Company’s CSR strategy and performance. The Company’s Senior Vice President of CSR and Philanthropy and Chief Sustainability Officer regularly updates the N&CG Committee on CSR risks and opportunities, and the N&CG Committee provides feedback and direction on the Company’s approach to key issues. The N&CG Committee also reviews the Company’s annual CSR Report prior to its publication. The 2020 CSR Report is available on the Company’s website at www.CVSHealth.com/CSR.

 

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The Board’s Role in Oversight of Human Capital and Culture

 

We believe engaged colleagues produce stronger business results and are more likely to build a career with CVS Health. Each year, under the oversight of our Board of Directors, we conduct an internal engagement survey that provides colleagues with an opportunity to share their opinions and experiences with respect to their role, their team and the enterprise to help the Board and our management identify areas where we can improve colleague experience. The survey covers a broad range of topics including development and opportunities, diversity management, recognition, performance, well-being and continuous improvement. In 2020, greater than 80% of our colleagues participated in the engagement survey, of which greater than 80% responded that they were actively engaged.

 

Our Board and CEO also play a leading role in overseeing our human capital strategy, which consists of the following categories: total rewards; diversity, equity and inclusion; colleague development; and health and safety. Our MP&D Committee also reviews our broad-based compensation and benefits programs.

 

The Board is also regularly updated on key talent metrics for the overall workforce, including metrics related to diversity and inclusion, recruiting and talent development programs. The Board is updated on our human capital development strategy on an annual basis. For more information on the Company’s approach to talent development and engagement, please see our CSR Report and our related Strategic Diversity Management Report at www.CVSHealth.com/CSR.

 

Stockholder Outreach

 

The Company values each of its stockholders and their opinions, and we regularly interact with our stockholders on a variety of matters. In the latter part of 2020 and early 2021, at the direction of the Board, the Company engaged in a proactive stockholder outreach effort to best understand and address any concerns stockholders might have. Additional details regarding our outreach effort and the actions taken are found on pages 8-11 and 47-48 of this proxy statement.

 

Much of our dialogue with stockholders was focused on executive compensation matters, corporate governance, financial results, the COVID-19 pandemic, social responsibility issues, such as the Company’s response to prescription opioid misuse and abuse and social justice, diversity and inclusion matters. Matters related to the integration of Aetna and the Company’s ongoing initiatives to transform health care were also discussed with our stockholders during the outreach process.

 

Contact with the Board, the Chair and Other Independent Directors

 

Stockholders and other parties interested in communicating directly with the Board, the independent Chair of the Board or with the independent directors as a group may do so by writing to CVS Health Corporation, One CVS Drive, MC 1160, Woonsocket, RI 02895. The N&CG Committee has approved a process for handling letters received by the Company and addressed to the Board, the independent Chair of the Board or to independent directors as a group. 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 https://investors. cvshealth.com/investors/corporate-governance/documents/default.aspx and will be provided to stockholders without charge upon request to our Corporate Secretary. We intend to post amendments to, or waivers of, 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.

 

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Related Person Transaction Policy

 

In accordance with SEC rules, the Board has adopted a written Related Person Transaction Policy (the “Policy”). The N&CG Committee has been designated as the Board committee responsible for reviewing, approving or ratifying any related person transactions under the Policy, since the N&CG Committee already has responsibility for evaluating the impact of conflicts involving directors on independence. The N&CG 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.

 

The General Counsel or the Corporate Secretary presents any reported new related person transactions, and proposed transactions involving related persons that might be deemed to be related person transactions, to the N&CG Committee at its next regular meeting, or earlier if appropriate. The General Counsel or Corporate Secretary provides the N&CG Committee with an analysis and recommendation regarding each reported transaction. The N&CG Committee reviews these transactions, including the analysis and recommendation. The N&CG 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. If after its review, the N&CG Committee determines not to approve or ratify a related person transaction, the transaction will not be entered into or continued, as the N&CG Committee shall direct. The N&CG Committee may ratify or approve a related person transaction if, upon consideration of all relevant information, the transaction is in, or not inconsistent with, the best interests of the Company and its stockholders.

 

In March 2021, the N&CG 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 https://investors.cvshealth.com/investors/corporate-governance/documents/default.aspx 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, the exchange on which our common stock is listed.

 

Board Structure and Processes

 

The Board’s Leadership Structure

 

David W. Dorman is the independent Chair of our Board. The independent Chair 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 Chair has the following duties and responsibilities:

 

the authority to call, and responsibility 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 Chair, the Board’s composition and its committee system.

 

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Director Education

 

CVS Health’s Corporate Governance Guidelines establish recommendations for director education. All new members of the Board are encouraged to participate in the Company’s orientation program for directors. Other directors may also attend the orientation program. All directors are encouraged to participate in continuing education programs, with any associated expenses to be reimbursed by the Company, in order to stay current and knowledgeable about the business of the Company. Such orientation and continuing education programs are overseen by the N&CG Committee.

 

Committees of the Board

 

CVS Health’s Board oversees and guides the Company’s management and its business. Committees support the role of the Board on issues that are better addressed by smaller, more focused subsets of directors.

 

For 2020, the Board utilized six committees. The table below presents for the 2020-2021 Board year, the committees of the Board, the membership of such committees and the number of times each such committee met in 2020. For further details regarding committee membership and activities, see pages 29-35. Mr. Merlo will not stand for re-election at the Annual Meeting.

 

Name Audit
Committee
Investment
and Finance
Committee
Management
Planning and
Development
Committee
Nominating
and Corporate
Governance
Committee
Medical
Affairs
Committee
Executive
Committee
Fernando Aguirre        
C. David Brown II      
Alecia A. DeCoudreaux        
Nancy-Ann M. DeParle      
David W. Dorman      
Roger N. Farah        
Anne M. Finucane      
Edward J. Ludwig      
Karen S. Lynch(1)          
Larry J. Merlo(1)          
Jean-Pierre Millon        
Mary L. Schapiro        
William C. Weldon        
Tony L. White      
2020 Meetings 9 4 6 5 4 0

 

Committee Chair
* Audit Committee Financial Expert
(1) As of February 1, 2021, Ms. Lynch joined the Executive Committee, replacing Mr. Merlo, who had served on that committee throughout 2020.

 

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Audit Committee

 

Each member of the Audit Committee is financially literate and independent of the Company and management under applicable SEC rules and the Corporate Governance Standards of the NYSE Listed Company Manual. The Board designated each of Messrs. Aguirre, Ludwig and Millon and Ms. Schapiro as an audit committee financial expert, as defined under applicable SEC rules. The Board has approved a charter for the Audit Committee, which can be viewed on our website at https://investors.cvshealth.com/investors/corporate-
governance/documents/default.aspx
and also is available to stockholders without charge upon request to our Corporate Secretary.

 

Meetings in 2020: 9

 

 

2020/2021 Committee Members

(all independent)

 

Mary Schapiro*

Alecia DeCoudreaux

Edward Ludwig (Chair)*

Jean-Pierre Millon*

Fernando Aguirre*

 

*   Audit Committee Financial Expert

Primary Responsibilities

 

Pursuant to its charter, the Audit 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 Audit 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 Company’s major financial risk exposures and the steps that have been taken to monitor and control such exposures;

•  compliance with, and approval of, our Code of Conduct;

•  the review of our business continuity and disaster recovery program;

•  the review of our environmental, health and safety program; and

•  our compliance with legal and regulatory requirements, including the review and oversight of matters related to compliance with Federal health care program requirements.

 

Audit Committee Activities in 2020

 

The Audit Committee met nine times in 2020. Each member of the Audit Committee attended all of its meetings while he or she was a member. Several of the Audit Committee’s meetings were focused primarily on our annual or quarterly financial reports, including our Form 10-K, Forms 10-Q and our related earnings releases. At each of these meetings, the Audit Committee reviewed the documents in depth with our CFO and our Chief Accounting Officer, as well as our Chief Compliance Officer (“CCO”), Chief Audit Executive, General Counsel and other key members of management. The Audit Committee also received reports from our internal audit department and our independent registered public accounting firm, Ernst & Young LLP (“Ernst & Young”). The Audit Committee regularly meets with Ernst & Young outside the presence of management, and also meets individually with members of management, including the CCO, the Chief Compliance Officer for Omnicare and the Chief Audit Executive. In addition to its responsibilities related to our financial statements, the Audit Committee plays a primary role in risk oversight, including reviews of our enterprise risk management program and our Own Risk Solvency Assessment (“ORSA”) report and in oversight of our anti-money laundering and sanction screening compliance programs, business continuity and disaster recovery programs, and environmental, health and safety program. The Audit Committee also reviews our legal and regulatory compliance program on a quarterly basis, including oversight of the Company’s compliance with its Corporate Integrity Agreement (“CIA”). During 2020, the Audit Committee provided the required annual certification of compliance with the Company’s 2016 CIA related to our institutional pharmacy services (long-term care) operations. The Audit Committee also provided the report found on page 37 of this proxy statement, and recommended the inclusion of the Company’s audited financial statements in its 2020 Form 10-K.

 

 

 

 

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Investment and Finance Committee

 

Each member of the I&F Committee is independent of the Company and management under applicable SEC rules and the Corporate Governance Standards of the NYSE Listed Company Manual. The Board has approved a charter for the I&F Committee, which can be viewed on our website at https://investors.cvshealth.com/investors/corporate-
governance/documents/default.aspx
and also is available to stockholders without charge upon request to our Corporate Secretary. At its meetings, various members of management provide the I&F Committee with updates on areas of its responsibility, including the CFO, Chief Investment Officer and Treasurer.

 

Meetings in 2020: 4

 

 

2020/2021 Committee Members

(all independent)

 

Mary Schapiro

Anne Finucane (Chair)

Edward Ludwig

Primary Responsibilities

 

Pursuant to its charter, the I&F Committee assists the Board in its oversight of:

 

•  the investment policies, strategies, programs and portfolio of CVS Health and its subsidiaries;

•  the approval of investment transactions on behalf of the Company that exceed any delegated authority;

•  investment portfolio transactions made on behalf of CVS Health and its subsidiaries;

•  the performance of the investment portfolios of CVS Health and its subsidiaries;

•  the Company’s processes for managing the finances of its employee pension and defined contribution benefit plans;

•  the Company’s capital plan, including the review of significant financial policies and matters of financial corporate governance, such as the Company’s dividend policy, share repurchase program and credit facilities and the issuance or retirement of debt and other securities;

•  significant multi-year strategic capital project expenditures and management;

•  the review and approval of the Company’s decision to enter into swap transactions that are not cleared and are not traded on a designated contract market or swap execution facility, including establishing policies governing the use of such swaps; and

•  the Company’s stock repurchase programs, including assessing whether to recommend modification to such programs to the Board.

 

Investment and Finance Committee Activities in 2020

 

The I&F Committee met four times in 2020. Except for one absence by one Committee member due to an unavoidable conflict, each member of the I&F Committee attended all of its meetings while he or she was a member. The I&F Committee spent significant time focused on investment management updates and our capital allocation plans, including three capital management transactions during 2020 contributing to the repayment of $4.25 billion in net debt and significant savings in go-forward interest payments. The I&F Committee reviewed the Company’s 2020 investment performance as well as an in-depth study of the Company’s investment assets. The I&F Committee also reviewed reports from our treasury department and regularly meets individually with members of management, including the Treasurer and Aetna’s Chief Investment Officer. The I&F Committee reviewed quarterly investment reports and capital allocation reports, as well as various finance programs of the Company, such as sale-leasebacks and certain reinsurance transactions, and made recommendations to authorize resolutions for the Company’s investment and finance activity. The I&F Committee also reviews reports on investments made by the Company’s pension plan and its 401(k) plans.

 

 

 

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Nominating and Corporate Governance Committee

 

Each member of the N&CG Committee is independent of the Company and management under applicable SEC rules and the Corporate Governance Standards of the NYSE Listed Company Manual. The Board has approved a charter for the N&CG Committee, which can be viewed on our website at https://investors.cvshealth.com/investors/corporate-governance/documents/default.aspx and also is available to stockholders without charge upon request to our Corporate Secretary. At its meetings, various members of management provide the N&CG Committee with updates on areas of its responsibility, including the General Counsel, the Corporate Secretary and Chief Governance Officer, the Senior Vice President of Government Affairs, the Senior Vice President of CSR and Philanthropy, and Chief Sustainability Officer, the CIO and the CISO.

 

Meetings in 2020: 5

 

 

2020/2021 Committee Members

(all independent)

 

David Dorman

William Weldon

3 Nancy-Ann DeParle (Chair)

Fernando Aguirre

5 David Brown

Primary Responsibilities

 

Pursuant to its charter, the N&CG 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;

•  the oversight of our information governance framework, including our privacy and information security programs, as well as the cybersecurity aspects of our information security program and cybersecurity risk exposures;

•  the review and ratification of any related person transactions in accordance with our policy on such matters;

•  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 2020

 

The N&CG Committee met five times in 2020. Except for one absence by one Committee member due to an unavoidable conflict, each member of the N&CG Committee attended all of its meetings while he or she was a member. Throughout the year, the N&CG Committee evaluated, and continues to evaluate, potential candidates for future election to the Board. In addition, the N&CG Committee reviewed the Company’s political activities and expenditures in depth, considered significant public policy issues and government affairs’ priorities and activities, reviewed the Company’s corporate social responsibility framework and the Company’s charitable contribution budget. The N&CG Committee also oversaw the evaluation process for the Board and its Committees in 2020, which consisted of an in-depth interview of each director by an independent third party. At the completion of the interview process, the third party reviewed the results with the Committee and the Board, which resulted in a number of enhancements to the Board and Committee meeting processes. In addition, the N&CG Committee received updates about legal and regulatory developments concerning corporate governance and business and trends in the health care industry, stockholder engagement strategy, as well as updates on the proxy season and stockholder communications. The N&CG Committee also has responsibility for oversight of cybersecurity and information governance, including privacy and information security, an area which several Committee members have expertise, and receives regular updates from the CIO and CISO. The N&CG Committee reviewed and approved our Related Person Transaction Policy, made recommendations regarding the director slate, Committee composition, independence determinations and Audit Committee financial experts. In early 2020, the N&CG Committee made recommendations regarding a reduction in the size of the Board, in response to stockholder feedback and in furtherance of corporate governance best practices.

 

 

 

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Management Planning and Development Committee

 

Each member of the MP&D Committee is independent of the Company and management under applicable SEC rules and the Corporate Governance Standards of the NYSE Listed Company Manual. The Board has approved a charter for the MP&D Committee, which can be viewed on our website at https://investors.cvshealth.com/investors/corporate-
governance/documents/default.aspx
and also is available to stockholders without charge upon request to our Corporate Secretary. No MP&D 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 MP&D Committee meetings, non-members, such as the CEO, the CFO, the Chief Accounting Officer, the CPO, the Corporate Secretary and Chief Governance Officer, 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 MP&D Committee regularly exercises its prerogative to meet in executive session without management.

 

Meetings in 2020: 6

 

 

2020/2021 Committee Members

(all independent)

 

Roger Farah

Tony White

David Brown (Chair)

William Weldon

Anne Finucane

David Dorman

 

Primary Responsibilities

 

Pursuant to its charter, the MP&D 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 for inclusion in this and each other applicable proxy statement a compensation committee report. The Compensation Committee Report for this proxy statement is on page 43.

 

The MP&D 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 2020

 

The MP&D Committee met six times in 2020. Except for one absence each by two members of the MP&D Committee due to unavoidable conflicts, each member of the MP&D Committee attended all of its meetings while he or she was a member. In addition to reviewing the independence of its advisor as described below, the MP&D Committee devoted substantial time to its oversight of the Company’s 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 MP&D Committee received updates on compensation trends and legislative and regulatory developments. The MP&D Committee devoted considerable time to CVS Health’s stockholder outreach efforts and the feedback received from investors. The MP&D Committee also reviewed director compensation. The MP&D Committee’s 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 (“CD&A”) beginning on page 44 of this proxy statement.

 

 

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Compensation Risk Assessment

 

The MP&D Committee is responsible for reviewing and assessing potential risk arising from the Company’s compensation policies and practices. In 2020, the Company performed a comprehensive risk assessment of its compensation policies and practices to ascertain any potential material risks that may be created by its compensation programs. The Company’s assessment included all major components of the Company’s 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 Company’s programs with those of its peers; the Company’s severance and change-in-control policies; its recoupment policy; its share retention requirements and ownership guidelines; and the Internal Audit Department’s review of the controls regarding the Company’s long-term incentive program. The MP&D Committee considered the findings of the assessment and concluded that the Company’s compensation programs are aligned with the interests of its stockholders, appropriately reward pay for performance, and do not promote excessive risk-taking.

 

Independent Compensation Consultant

 

Under its charter, the MP&D Committee has the authority to retain outside consultants or advisors it deems necessary to provide desired expertise and counsel. Exequity LLP served as the independent compensation consultant through August 2020. Exequity provided no other services to the Company and was paid $217,136 for services in 2020. The MP&D Committee determined during its annual evaluation that Exequity is independent and that the consultant’s work does not raise any conflicts of interest.

 

During the summer of 2020, the MP&D Committee initiated a request-for-proposal process with multiple firms to select its next independent compensation consultant. The MP&D Committee, along with representatives from management, conducted interviews with several firms before ultimately retaining Korn Ferry as its independent compensation consultant effective October 2020. As part of its analysis, the MP&D Committee considered that Korn Ferry provides services to management, including leadership development, executive searches and assessments. The Company also uses a proprietary Korn Ferry licensed competency product. Fees paid to Korn Ferry in 2020 for these other services, the majority of which were performed before the MP&D Committee retained Korn Ferry, were $4,452,981. The MP&D Committee has determined that Korn Ferry is independent and its work for the Company does not raise any conflicts of interest. The MP&D Committee reached this determination by reviewing the fees paid to Korn Ferry and evaluating its work under applicable SEC and NYSE rules on conflicts of interest and independence. This evaluation included considering all of the services provided to the Company, the amount of fees received as a percentage of Korn Ferry’s annual revenue, its policies and procedures designed to prevent conflicts of interest and maintain independence, any business or personal relationships between Korn Ferry and the members of our MP&D Committee or executive officers and any ownership of our stock by Korn Ferry’s team that provided any executive and director compensation services. The MP&D Committee has implemented a process to approve fees for any non-compensation consulting in advance to insure that Korn Ferry remains independent. Fees paid for services in 2020 to Korn Ferry for compensation consulting to the MP&D Committee, which commenced in October 2020, were $93,250.

 

During 2020, the MP&D Committee’s independent compensation consultants:

 

Collected, organized and presented quantitative competitive market data for relevant competitive peer groups with respect to executive officers’ target, annual and long-term compensation levels;
Developed and delivered to the MP&D Committee an annual briefing on legislative and regulatory developments and trends in executive compensation and their implications for CVS Health;
Provided guidance, including relevant competitive market data, in support of discussions related to the design of the Company’s long-term incentive program; and
Analyzed market data and provided recommendations for non-employee director compensation to the MP&D Committee for approval by the Board.

 

The MP&D Committee believes that the advice it received from its independent compensation consultants is objective and not influenced by any other business relationship. The MP&D Committee and its independent compensation consultant have policies and procedures in place to preserve the objectivity and integrity of the compensation consulting advice, including:

 

The MP&D Committee has the sole authority to retain and terminate the compensation consultant;
The compensation consultant reports to the MP&D Committee Chair and has direct access to the MP&D Committee without management involvement;
While it is necessary for the compensation consultant to interact with management to gather information, the MP&D Committee determines if and how the compensation consultant’s advice can be shared with management; and
The MP&D Committee regularly meets with the compensation consultant in executive session, without management present, to discuss recommendations.

 

Compensation Committee Interlocks and Insider Participation

 

As of March 17, 2021, the members of the MP&D Committee are Mr. Brown (Chair), Ms. Finucane and Messrs. Dorman, Farah, Weldon and White. None of the members of the MP&D Committee has ever been an officer or employee of the Company. There are no interlocking relationships between any of our executive officers and any MP&D Committee member.

 

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Medical Affairs Committee

 

Each member of the Medical Affairs Committee is independent of the Company and management under applicable SEC rules and the Corporate Governance Standards of the NYSE Listed Company Manual. The Board has approved a charter for the Medical Affairs Committee, which can be viewed on our website at https://investors.cvshealth.com/investors/
corporate-governance/documents/default.aspx
and also is available to stockholders without charge upon request to our Corporate Secretary.

 

In light of the Company’s expanded offerings throughout the spectrum of health care, the Medical Affairs Committee was formed in March 2016 and renamed in November 2018. The Medical Affairs Committee focuses on oversight of the Company’s medical- and pharmacy-related strategies and initiatives, matters relating to the advancement of quality of pharmacy and medical care, patient safety and patient experience, the enhancement of access to cost-effective quality health care and the promotion of member health.

 

Meetings in 2020: 4

 

 

2020/2021 Committee Members

(all independent)

 

Roger Farah

Nancy-Ann DeParle

Tony White (Chair)

Alecia DeCoudreaux

Jean-Pierre Millon

Primary Responsibilities

 

Pursuant to its charter, the Medical Affairs Committee:

 

•  reviews significant medical, pharmacy and other health-related strategies and initiatives of the Company, and matters concerning efforts to (1) advance the quality of pharmacy and medical care, patient safety and experience, (2) enhance access to cost-effective quality health care and (3) promote member health;

•  reviews the Company’s medical, pharmacy and other strategies and initiatives designed to foster health care innovation, lower patient costs and improve the delivery of clinic, in-home and other health care solutions;

•  reviews matters and receives reports concerning the quality performance of the Company’s (1) pharmacy and medical care activity, such as (a) dispensing, compounding and infusion services and (b) nursing and medical clinic operations; (2) patient safety and experience; (3) management of claims against the Company related to pharmacy services and health care provided by the Company; and (4) management of regulatory activity related to pharmacy and health care; and

•  takes such other actions and performs such services as may be referred to it from time to time by the Board, including the conduct of special reviews as it may deem necessary or appropriate to fulfill its responsibilities.

 

Medical Affairs Committee Activities in 2020

 

The Medical Affairs Committee met four times in 2020. Except for one absence by one Committee member due to an illness, each member of the Medical Affairs Committee attended all of its meetings while he or she was a member. The Medical Affairs Committee’s meetings focused on a wide variety of matters related to the Company’s provision of health care services across the enterprise, including retail, mail, specialty and long-term care pharmacy, retail clinic services provided by MinuteClinic and complex medical claims issues concerning Aetna. The Medical Affairs Committee reviewed various issues related to patient safety, including matters related to the Company’s efforts to address prescription opioid misuse and abuse. The Medical Affairs Committee also received updates on claims against the Company related to pharmacy services and health care provided by the Company, as well as the steps being taken to minimize and mitigate those claims. In light of the COVID-19 pandemic, the Medical Affairs Committee was updated on the Company’s COVID-19 testing programs and its plans for COVID-19 vaccine administration. The Medical Affairs Committee also was briefed on quality and safety matters regarding physician utilization management decisions. The Medical Affairs Committee received reports regarding various lines of business across the enterprise and other efforts to measure and improve patient safety and clinical effectiveness.

 

 

 

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Executive Committee

 

At all times when the Board is not in session, the Executive Committee may exercise many of the powers of the Board, as permitted by applicable law.

 

The Executive Committee did not meet during 2020.

 

Ms. Lynch joined the Executive Committee in February 2021, when she became President and CEO and joined the Board, replacing Mr. Merlo.

 

Meetings in 2020: None

 

2021 Committee 2020 Committee
Members Members
1 Edward Ludwig Edward Ludwig
2 Anne Finucane Anne Finucane
3 Karen Lynch Larry Merlo
4 David Dorman (Chair) David Dorman (Chair)
5 Nancy-Ann DeParle Nancy-Ann DeParle
6 Tony White Tony White
7 David Brown David Brown

 

 


 

 

Board Meetings and Attendance

 

During 2020, 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 2020 Annual Meeting of Stockholders attended the Annual Meeting. In 2020, all director nominees attended more than 90% of the meetings of the Board and the committees of which he or she was a member, with attendance averaging well over 95%.

 

One Board meeting was our annual meeting of independent directors, with all independent Board members in attendance. 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 Health’s 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 up to 100% stock at the director’s 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 our stock ownership guidelines, which are described below.

 

For the 2020-2021 Board year, the total annual retainer for non-employee directors was $310,000, consisting of shares of our stock valued at $232,500 (the mandatory annual stock retainer) and a cash payment of $77,500 (unless the director elected to receive up to 100% of the annual retainer in shares of our common stock).

 

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Additional retainers were paid to the Chairs of the committees and the Board as follows: Audit, $25,000; I&F, $15,000; MP&D, $20,000; Medical Affairs, $15,000; N&CG, $15,000; and independent Chair of the Board, $275,000. No additional compensation is paid for service on the Executive Committee.

 

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. Each retainer was paid in two equal installments, in May and November of 2020. Directors may elect to defer receipt of shares, and deferred shares are credited with dividend reinvestment shares to the extent dividends are paid to stockholders. There are no meeting fees.

 

Ad hoc committees may be established from time to time and members may receive additional compensation for their services as approved by the Board; such compensation, if paid, will be reported in the proxy statement in the applicable year.

 

In November 2020, the MP&D Committee and Korn Ferry reviewed a director compensation study prepared by Korn Ferry, and the Board approved the compensation package for non-employee Directors for the 2021-2022 Board year. The Board annual retainer will remain at $310,000, with at least 75% paid in stock, and all of the Chair retainers will remain the same as the current Board year.

 

Non-Employee Director Retainer Mix

 

 

All Other Non-Employee Director Compensation and Benefits

 

Directors are eligible to participate in the employee discount program in the Company’s stores 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 travel, meals, lodging and executive support.

 

The following table shows amounts paid to each of our non-employee directors in 2020.

 

Non-Employee Director Compensation – 2020

 

Name  Fees Earned
and Paid
in Cash(1)
($)
  Cash Fees
Elected to be
Paid in Stock(1)
($)
  Stock
Awards(2)
($)
  All Other
Compensation
($)
  Total
($)
 
Fernando Aguirre  77,547    232,453    310,000  
C. David Brown II  82,572    247,428    330,000  
Alecia A. DeCoudreaux  77,500    232,500    310,000  
Nancy-Ann M. DeParle  81,365    243,635    325,000  
David W. Dorman  108  146,142  438,750    585,000  
Roger N. Farah    77,500  232,500    310,000  
Anne M. Finucane  81,250    243,750    325,000  
Edward J. Ludwig  83,750    251,250    335,000  
Jean-Pierre Millon  77,547    232,453    310,000  
Mary L. Schapiro  41  77,459  232,500    310,000  
William C. Weldon    77,500  232,500    310,000  
Tony L. White  81,365    243,635    325,000  

 

(1) The amounts shown include cash payments made in lieu of fractional shares to Mmes. DeParle and Schapiro, and Messrs. Aguirre, Brown, 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 2020, each director receiving a 12-month retainer received 3,617 shares of stock with a total value of $232,500 (the mandatory annual stock retainer) on the date of grant; each director electing to receive the remaining annual retainer in stock also received 1,206 shares valued at $77,500 on the date of grant. As of December 31, 2020, our directors had deferred receipt of shares of Company common stock as follows: Mr. Brown, 63,059 shares; Ms. DeCoudreaux, 18,964 shares; Ms. DeParle, 3,215 shares; Mr. Dorman, 18,187 shares; Mr. Farah, 10,112 shares; Ms. Finucane, 9,960 shares; Mr. Ludwig, 3,943 shares; Ms. Schapiro, 11,694 shares; and Mr. Weldon, 33,075 shares.

 

36 CVS Health
 

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Audit Committee Matters

 

 

 

  Item 2
 

Ratification of the Appointment of Our Independent Registered Public Accounting Firm for 2021

 

The Audit Committee of the Company’s Board of Directors 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, 2021 and recommended to our full Board that it approve that appointment. We are submitting the appointment by the Audit Committee to you for your ratification.

 

  The Board of Directors unanimously recommends a vote FOR this proposal.

 

Audit Committee Report

 

During the 2020-2021 Board year, the Audit Committee was composed of five independent directors. Set forth below is the report of the Audit Committee on its activities with respect to CVS Health’s audited financial statements for the fiscal year ended December 31, 2020 (the audited financial statements).

 

The Audit Committee has reviewed and discussed the audited financial statements with management;
The Audit Committee has discussed with Ernst & Young, CVS Health’s independent registered public accounting firm, the matters required to be discussed under the applicable requirements of the Public Company Accounting Oversight Board (“PCAOB”) and the SEC:
The Audit Committee has received the written disclosures and the letter from Ernst & Young pursuant to applicable requirements of the PCAOB regarding Ernst & Young’s communications with the Audit 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 Audit Committee recommended to the Board of Directors that the audited financial statements be included in CVS Health’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, for filing with the SEC.

 

 
         
Edward J.
Ludwig (Chair)
Fernando
Aguirre
Alecia A.
DeCoudreaux
Jean-Pierre
Millon
Mary L. Schapiro

 

Independent Registered Public Accounting Firm Independence and Fee Approval Policy

 

The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the independent registered public accounting firm. The Audit Committee has retained Ernst & Young as CVS Health’s external audit firm since September 2007. In order to assure continuing external auditor independence, the Audit Committee periodically considers whether there should be a rotation of the audit firm. Further, in conjunction with the mandated rotation of the external audit firm’s lead engagement partner, the Audit Committee and its Chair are directly involved in the selection of Ernst & Young’s new lead engagement partner. Based on its most recent evaluation of Ernst & Young, the members of the Audit Committee believe that the continued retention of Ernst & Young to serve as the Company’s independent registered public accounting firm is in the best interests

 

2021 Proxy Statement 37
 

Table of Contents

Audit Committee Matters

 

of the Company and its stockholders. Among the factors considered by the Audit Committee in reaching this recommendation are the following: the quality of Ernst & Young’s staff, work and quality control; its capability and technical expertise, given the complexity of the Company’s business; its independence from the Company; the quality and candor of its communications with the Company and the Audit Committee; and the benefits of its tenure as auditors, including enhanced audit quality and competitive fees.

 

All audit services, audit-related services, tax services and other services provided to the Company by Ernst & Young were pre-approved by the Audit Committee, and the Audit Committee is ultimately responsible for audit fee negotiations associated with the retention of Ernst & Young. The Audit Committee has considered whether Ernst & Young’s provision of services is compatible with maintaining Ernst & Young’s independence. The Audit Committee’s charter requires pre-approval of the audit and non-audit services to be provided by the Company’s independent registered public accounting firm. The Audit Committee reviews and approves Ernst & Young’s services on an annual basis. During the year, Ernst & Young also may request pre-approval of additional services, and the Audit Committee considers such requests for approval and approves them as circumstances warrant. The Audit Committee charter authorizes the Audit Committee to delegate to one or more of its members authority to pre-approve permitted services, as long as such pre-approvals are reported to the full Audit Committee at its next 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 Audit Committee will reconsider the appointment of Ernst & Young, although in the event of reconsideration the Audit Committee may determine that Ernst & Young should continue in its role. Even if you ratify the appointment of Ernst & Young, the Audit Committee retains its discretion to reconsider Ernst & Young’s appointment if it believes that reconsideration is necessary in the best interest of the Company and its stockholders.

 

Fees of Independent Accounting Firm

 

The following table summarizes the fees paid to Ernst & Young for services rendered during fiscal 2020 and 2019.

 

   Fiscal Year
Ended
12/31/20
($)
  Fiscal Year
Ended
12/31/19
($)
 
Audit Fees(1)  24,552,400  25,105,000  
Audit-Related Fees(2)  6,760,846  6,167,537  
Tax Fees(3)  2,777,006  2,191,851  
All Other Fees(4)    75,000  

 

(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, the reviews of the condensed consolidated financial statements included in our Quarterly Reports on Form 10-Q, services provided in connection with statutory audits, regulatory filings and other audits for the year, and consultations on technical matters.
(2) Represents the aggregate fees billed for audit and other services that are typically performed by auditors, including audits of our employee benefit plans, services provided related to reports on the processing of transactions by servicing organizations, attest services related to financial reporting and compliance, controls assessments, due diligence related to mergers and acquisitions and certain agreed upon procedures reports.
(3) Includes $0 and $150,000 for the years ended December 31, 2020 and 2019, respectively, related to tax compliance and preparation services.
(4) Represents fees related to cybersecurity assessments and simulation exercises.

 

38 CVS Health
 

Table of Contents

Executive Compensation and Related Matters

 

 

  Item 3
 

Say on Pay, a Proposal to Approve, on an Advisory Basis, the Company’s Executive Compensation

 

  The Board of Directors unanimously recommends a vote FOR this proposal.

 

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 and the Executive Compensation sections of this proxy statement. Although the advisory vote is not binding upon the Company, the MP&D Committee (referred to in this Item 3 as the “Committee”), which is responsible for designing and administering our executive compensation program, values our stockholders’ views 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 measured 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 2020 Vote; Stockholder Outreach

 

Following our 2020 Annual Meeting of Stockholders, the Committee considered the result of our stockholders’ vote and dedicated significant time and effort to its regular, comprehensive review of the Company’s executive compensation program. We were disappointed to receive low support and sought feedback from stockholders to better understand what motivated their votes and what actions we could take to address their concerns. In the latter part of 2020 and early 2021, management reached out to stockholders representing approximately 52% of our outstanding shares and held calls with holders of nearly 40% of our outstanding shares. The Chair of the Committee or the Independent Chair of the Board, who is also a member of the Committee, participated in engagements with stockholders representing approximately 30% of our outstanding shares. We also held calls with both leading proxy advisory firms and the Chair of the Committee participated in these calls.

 

During our calls with stockholders, we specifically requested feedback on our executive compensation program given the low support received in 2020, and solicited perspectives on a range of other relevant topics. While stockholders were generally supportive of our executive compensation program and approved our 2020 proposals to increase the number of shares for issuance under our 2017 Incentive Compensation Plan and our 2007 Employee Stock Purchase Plan, they also expressed concern over the one-time acceleration of the annual PSU awards granted to our then CEO and current General Counsel in August 2019, which were expected to be granted in 2020. That decision was based on the unique circumstances at the time and we did not intend to continue this practice, nor is it one that we have undertaken in the past. However, based on the feedback we heard from stockholders, we determined that it would be beneficial to our stockholders for CVS Health to specifically commit that for at least a five-year period beginning in 2020, we will not front-load or accelerate the timing of our normal course annual equity grants for executive officers.

 

 

2021 Proxy Statement 39
 

Table of Contents

Executive Compensation and Related Matters

 

The Board and Committee continue to strongly believe that our compensation program’s design is a significant contributor to the Company’s success and is highly aligned with stockholder interests. The Committee implemented several changes to our 2020 compensation plan design aimed principally at enhancing the design of the Company’s performance-based equity awards and increasing overall transparency, including:

 

For at least a five-year period beginning in 2020, we will not front-load or accelerate the timing of our normal course annual equity grants for executive officers;
Maximum payout under the PSUs was reduced from 250% to 200%;
No upward modifier will be applied to the PSUs if our absolute TSR is negative; and
PSU award agreements were modified to include forfeiture/clawback provisions in the event of detrimental conduct.

 

It remains critical that the Company has an executive compensation program that appropriately attracts, retains and incents management while aligning pay with performance, driving long-term value creation and reflecting the views of stockholders. We will continue to explore ways that we can implement changes to the program desired by stockholders while preserving the program’s general design and value to CVS Health and our stockholders.

 

Our 2020 Performance and Pay Actions

 

The Company delivered results above our expectations for 2020 at a time of unprecedented challenges and uncertainty - a testament to our strategy and diversified health services model. Revenues grew 4.6% and GAAP diluted earnings per share and adjusted earnings per share were $5.47 and $7.50(1), respectively. We returned more than $2.6 billion to stockholders through cash dividends during 2020. We remained focused on achieving our target debt leverage ratio through disciplined capital allocation and repaid $4.25 billion in net debt in 2020.

 

With respect to 2020 pay actions, the Committee took the following actions:

 

COVID-19

 

•  Made no changes to performance metrics approved in February 2020 or targets approved in March 2020.

 

•  Kept performance targets consistent with corporate goals communicated to investors in February 2020.

 

 

Payouts for the 2018-2020 Long-Term Performance awards

 

•  EBITDA PSU Awards – 0% payout because the Company did not meet the PSU Adjusted EBITDA threshold set at the time of the grant. The 2018 EBITDA PSUs included a 50% floor for recipients who were not members of the executive leadership team at the time of grant, including Dr. Lotvin. The floor, which was intended to support retention as we transitioned from RSUs to PSUs, was not provided to our most senior leaders including NEOs. Vesting of Dr. Lotvin’s 1,506 PSUs occurred on April 1, 2021 and will settle in shares of CVS Health common stock, net of taxes. None of the other NEOs received a payment in respect of the 2018 EBITDA PSUs.

 

•  Transaction-related synergies PSU Awards – 150% based on delivering above target synergies of more than $900 million and application of relative TSR modifier, which resulted in a 25% reduction in payout level.

   

2020 Management Incentive Plan (“MIP”)

 

•  Reduced the formulaic result of MIP payouts from 134.7% to 120% to offset favorability due to COVID-19 that was unrelated to management’s actions to launch new products and services, including testing and vaccinations.

 

 

 

(1) Adjusted earnings per share is a non-GAAP financial measure. For more information, see Annex A to this proxy statement.

 

40 CVS Health
 

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Executive Compensation and Related Matters

 

Conclusion; Resolution

 

We urge stockholders to read the letter from the Committee found on page 42 and the CD&A beginning on page 44 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 disclosures appearing on pages 70-82, which provide detailed information on the compensation of our Named Executive Officers.

 

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 Named Executive Officers reported in this proxy statement has contributed to CVS Health’s long-term success. Additionally, we believe the 2020 pay outcomes demonstrate alignment between pay and performance and that the changes we made to our compensation program are consistent with your input and aligned to the Company’s growth strategy.

 

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 SEC’s compensation disclosure rules (which disclosure includes the Compensation Discussion and Analysis, the compensation tables and other narrative executive compensation disclosures).”

 

2021 Proxy Statement 41
 

Table of Contents

Letter from the Management Planning and Development Committee

 

 

 

 

Dear CVS Health Corporation Stockholder,

 

As the members of the Board’s Management Planning and Development Committee (for purposes of this letter, the “Committee”), we endeavor to design and implement a competitive compensation program that aligns pay and performance, supports our long-term strategic goals and drives stockholder value. This framework was of particular importance in 2020, an unparalleled year in which the Company navigated the health, social and economic impacts of the COVID-19 pandemic. It was also a year of transition and transformation for the Company with the announcement that Karen Lynch would succeed Larry Merlo as President and CEO. As CVS Health continues into its next era of growth, our executive compensation program will remain essential to accelerating the value we bring to all of our stakeholders.

 

The outcome of our 2020 say on pay vote was disappointing and signaled that our stockholders had concerns with certain aspects of our executive compensation program. Over the past year, we dedicated significant time and effort to our regular, comprehensive process of reviewing the executive compensation program. In the course of evaluating the program, we sought to understand stockholders’ perspectives and motivations for their votes in order to constructively respond. We gathered feedback through an extensive outreach effort, which included stockholders who voted against our say on pay proposal. Our Board Chair and Committee Chair participated in many of these meetings, and found the thoughtful feedback shared by investors helpful as we seek to maintain an executive compensation program that incents management to remain focused on drivers of sustainable performance over the long-term.

 

42 CVS Health
 

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Letter from the Management Planning and Development Committee

 

While many stockholders indicated they supported the overall structure of our compensation program, a large number reiterated their views that we should not accelerate the timing of grants of normal course annual equity awards in the future. Although there was no intention to continue that practice, based on that feedback, we determined that it would be beneficial to our stockholders for CVS Health to specifically commit that for at least the five-year period beginning in 2020, we will not front-load or accelerate the timing of our normal course annual equity grants for executive officers. We also heard appreciation for changes we made to our PSUs, including reducing the maximum payout from 250% to 200%, providing that no positive adjustment will be made under the relative TSR modifier in the event absolute TSR is negative and strengthening the forfeiture provisions in our PSU award agreements to include detrimental conduct. In addition, despite the business and financial impact caused by the COVID-19 pandemic, the Committee did not make any changes to previously approved metrics and kept 2020 performance year targets consistent with those set in the beginning of the year which were consistent with the goals we communicated to our investors in February 2020 prior to the onset of the COVID-19 pandemic. Lastly, the Committee adjusted the payout of the 2020 Management Incentive Plan downward to offset for favorability due to the COVID-19 pandemic that was unrelated to management’s actions to launch new products and services, including in-store testing and vaccinations.

 

Our compensation program reflects a number of substantive enhancements that were made over the past several years based on stockholder feedback and in support of CVS Health’s core compensation principles, including linking pay to performance. This evolution has allowed the compensation program to remain effectively aligned with our long-term strategy, and we have tremendous confidence in the abilities of our leadership team to execute that strategy as it transforms the consumer health care experience.

 

Our Committee is and will remain firmly committed to the ongoing evaluation and improvement of our executive compensation program, informed by an ongoing discussion with our stockholders. We look forward to this dialogue and encourage you to reach out with any questions or concerns related to our program before making your voting decision. Thank you again for your continued support and investment in CVS Health.

 

Compensation Committee Report

 

 

 

We met with management to review and discuss the Compensation Discussion and Analysis (the “CD&A”). Based on that review and discussion, we recommended to the Board that the CD&A be included in this proxy statement.

 

     
Roger N. Farah Tony L. White C. David Brown II
    (Chair)

 

     
William C. Weldon Anne M. Finucane David W. Dorman

 

2021 Proxy Statement 43
 

Table of Contents

Compensation Discussion and Analysis

 

 

 

The Compensation Discussion and Analysis explains how our executive compensation programs are designed and operate with respect to our named executive officers (“NEOs” or “Named Executive Officers”), who for 2020 are:

 

           
    

Larry J. Merlo

President and Chief Executive Officer through January 31, 2021

      
 

Prior Roles Mr. Merlo served as President and Chief Executive Officer of CVS Health from 2011–2021. Mr. Merlo’s career spanned over 40 years and included a number of senior executive positions with the Company including President and Chief Operating Officer, President of CVS Pharmacy and Executive Vice President – Stores.

 

Mr. Merlo’s at-risk compensation was lower than other NEOs because Mr. Merlo did not receive a PSU award in 2020. Mr. Merlo’s at-risk compensation at target is ~90% and has averaged ~92% during his tenure as CEO.

   
           
           
           
 

Eva C. Boratto

EVP and Chief Financial Officer

   
  Current and Prior Roles Ms. Boratto serves as Executive Vice President and Chief Financial Officer of CVS Health and is responsible for all aspects of the Company’s financial strategy and operations, including accounting and financial reporting, investor relations, mergers and acquisitions, treasury and capital planning, investments, risk management, tax, budgeting and planning, and procurement. Ms. Boratto has an extensive financial background that spans more than 20 years and includes senior positions in both the pharmaceutical manufacturing and pharmacy benefit management (“PBM”) industries, along with other health care finance roles.    
           
           
           
 

Karen S. Lynch

EVP and President of Aetna through January 31, 2021 and CVS Health President and CEO as of February 1, 2021

   
  Current and Prior Roles Ms. Lynch has over three decades of experience in the health care industry. Under her leadership, CVS Health touches the lives of more than 100 million people each year through its unique combination of assets. Prior to becoming President and Chief Executive Officer, she was Executive Vice President, CVS Health and President of Aetna and responsible for driving the strategy to deliver consumer-focused, high-value health care to the millions of people Aetna serves.    
           

 

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Compensation Discussion and Analysis

 

           
    

Alan M. Lotvin, M.D.

EVP and President of CVS Caremark

      
  Current and Prior Roles Dr. Lotvin is Executive Vice President of CVS Health and President of Pharmacy Services, which includes the Company’s PBM and specialty pharmacy businesses. Dr. Lotvin has extensive experience in the PBM and specialty pharmacy industries. Before joining the Company, Dr. Lotvin was President and Chief Executive Officer of ICORE Healthcare, a Magellan Health Services company, and prior to that, Dr. Lotvin held senior positions in the PBM industry.    
           
           
           
 

Jonathan C. Roberts

EVP and Chief Operating Officer

   
  Current and Prior Roles Mr. Roberts serves as Executive Vice President and Chief Operating Officer of CVS Health. In this role, Mr. Roberts has responsibility for our new vaccine and testing business, information technology and the long-term care business. Mr. Roberts has over 40 years of pharmacy health care experience. Prior to assuming the Chief Operating Officer role for CVS Health in March 2017, Mr. Roberts served as President of CVS Caremark.    
           

 

Leadership Transition

 

After more than 40 years of service with the Company, Larry J. Merlo stepped down from his role as President and CEO on January 31, 2021 and will not stand for re-election to the Board of Directors at the Annual Meeting. Mr. Merlo will continue as a Strategic Advisor through his retirement date on May 31, 2021.

 

Karen S. Lynch succeeded Mr. Merlo as President and CEO on February 1, 2021. This leadership change was the result of a thorough, multi-year succession process led by the Board of Directors.

 

The MP&D Committee did not award Ms. Lynch any special or additional equity grants or bonuses in connection with her promotion. Ms. Lynch’s compensation arrangement is described beginning on page 64. Similarly, Mr. Merlo did not receive any additional compensation upon his change in role or in connection with his retirement. With respect to Mr. Merlo, the announcement of his retirement resulted in a required change to the actuarial assumptions used for the supplemental executive retirement plan (“SERP”), a legacy program that was closed to new participants in 2010, resulting in an increase in the reported value. The underlying value of Mr. Merlo’s benefit did not change, Mr. Merlo did not accrue any additional benefits under the SERP in 2020, and his lump sum benefit projection includes a decrease from the prior year as a result of the application of mortality table assumptions.

 

2021 Proxy Statement 45
 

Table of Contents

Compensation Discussion and Analysis

 

The CD&A is organized into the following sections:

 

     
Summary page 46
     
Our Executive Compensation Core Principles page 46
     
Stockholder Outreach and Consideration of 2020 Say On Pay Vote page 47
     
Leading Practices In Compensation Programs page 49
     
2020 Business and Performance Highlights page 49
     
2020 Business and Performance Results page 50
     
Impact of COVID-19 on Executive Compensation page 50
     
Decisions Consistent with Our Executive Compensation Philosophy page 51
     
Compensation Program Discussion page 51
     
Executive Compensation 2020 Planning and Review Process page 51
     
Elements of Our Compensation Program page 53
     
2020 Compensation Peer Groups page 62
     
Other Compensation Arrangements and Benefits page 63
     
Key Policies Related to Compensation page 66
     
Compliance with Provisions of the Internal Revenue Code page 67
     
Non-GAAP Financial Measures Used in Compensation Discussion and Analysis page 68
     
Relative TSR Peer Group for 2020 – 2022 PSU Awards page 69
     

 

Summary

 

Our Executive Compensation Core Principles

 

Although we consider a number of factors in our pay decisions, five core principles drive our executive compensation philosophy:

 

   
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   Reward Achievement of short-term results as well as long-term stockholder value creation

 

 
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  

 

Management and the MP&D 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 Health’s values of Innovation, Collaboration, Caring, Integrity and Accountability.

 

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Compensation Discussion and Analysis

 

Stockholder Outreach and Consideration of 2020 Say On Pay Vote

 

Addressing the 2020 Say on Pay Vote

 

Our annual say on pay vote is one of our opportunities to receive feedback from stockholders regarding our executive compensation program, and the MP&D Committee takes the result of this vote into account when determining the compensation of the Company’s executive officers. We were disappointed to receive low support for our say on pay proposal at the 2020 Annual Meeting. Following the vote, we sought feedback from stockholders to better understand what motivated their votes and what actions we could take to address their concerns related to our executive compensation program. Our MP&D Committee considered the 2020 vote result and the feedback we received as it evaluated the compensation opportunities provided to our executive officers.

 

Stockholder Engagement

 

We value an open dialogue with our stockholders, and we believe that regular communication with our stockholders and other stakeholders is a critical part of enabling our long-term success. In the latter part of 2020 and early 2021, at the Board’s direction, management reached out to 55 stockholders representing over 52% of our outstanding stock and engaged with 30 holders representing nearly 40% of our outstanding stock. The Chair of the MP&D Committee or the Independent Chair of the Board, who is also a member of the MP&D Committee, participated in engagements with stockholders representing approximately 30% of our outstanding stock. We also held calls with both leading proxy advisory firms and the Chair of the MP&D Committee participated in those calls. During these engagements, we specifically requested feedback regarding our executive compensation program given the low support received in 2020.

 

In our meetings with stockholders, we were pleased to hear that most stockholders did not have concerns with the structure of our compensation program. Most stockholders we engaged who voted against the 2020 say on pay proposal indicated that the acceleration of the grant timing of our 2020 PSUs to our former CEO and current General Counsel in August 2019 was the basis of their decision to oppose the proposal. The decision to accelerate the grant of the PSU awards was based on the unique circumstances at the time, including the integration of our transformational merger with Aetna. We do not intend to continue this practice, nor is it one that we have undertaken in the past. However, based on the feedback we heard from stockholders, we determined that it would be beneficial to our stockholders to specifically commit that for at least a five-year period beginning in 2020, we will not front-load or accelerate the timing of our normal course annual equity grants for executive officers.

 

In our meetings with stockholders, we proactively addressed our 2020 compensation program and stockholders expressed appreciation for the changes we made to our PSUs (described in the table below). We also discussed a range of corporate governance and other relevant topics, including those described below.

 

How We Responded to Stockholder Feedback in 2020

 

         
 

2019
Acceleration of
PSU Awards

  See pages 9,
10, 39, 40 for
details  

 

The MP&D Committee’s decision in 2019 to accelerate the grant of certain 2020 annual PSUs to most effectively align long-term incentives to our integration and other stated initiatives was based on unique circumstances at the time. We do not intend to continue this practice, nor is it one that we have undertaken in the past.

No awards were made outside of our annual compensation program in 2020.

For at least a five-year period beginning in 2020, we will not front-load or accelerate the timing of our normal course annual equity grants for executive officers.

 
 

Long-Term Equity (PSUs) Design

  See pages
59-62 for
details    

 

The MP&D Committee approved several enhancements to the design of our PSU awards in 2020:

  Maximum payout under the PSUs was reduced from 250% to 200%;

  No upward modifier will be applied to the PSUs if our absolute TSR is negative;

  The two-year post-vesting holding period for PSUs applies during, and now after, separation of employment; and

  PSU award agreements were modified to include forfeiture/clawback provisions in the event of detrimental conduct.

 

 

2021 Proxy Statement 47
 

Table of Contents

Compensation Discussion and Analysis

 

         
 

Compensation
Peer Groups

  See pages
62-63; 69 for
details

 

Certain stockholders had questions about our use and the construct of two peer groups as reference points for executive compensation, including a Health Care and Retail Group and a General Industry Group.

 

The MP&D Committee intends to undertake a holistic review of the compensation peer groups in consultation with its new independent compensation consultant and will discuss the results of this review and any corresponding changes to our peer groups in the proxy statement for our 2022 Annual Meeting.

 
 

Impact of COVID-19

  See pages
50-51 for
details

 

Amid the unprecedented environment of the COVID-19 pandemic, several stockholders sought to understand how we were responding and encouraged us to be transparent with regard to compensation design and decisions. We focused our resources on the wellbeing and safety of employees, consumers and the communities we serve, and are uniquely positioned to support community health going forward.

Despite the challenges presented by the COVID-19 pandemic, the MP&D Committee made 2020 NEO compensation decisions consistent with our executive compensation philosophy:

 

  No changes were made to performance metrics or award values approved in February or targets approved in March 2020;

  Performance targets remained consistent with corporate goals communicated to investors in February 2020;

  Delayed timing of annual PSU grant from April 2020 to August 2020:

  Given the uncertainty caused by COVID-19, the MP&D Committee decided that a delayed PSU grant date would ensure better visibility and clarity around the Company’s longer-term direction;

  Award values (approved in February) were not adjusted for the higher stock price at the time of the grant;

  To mitigate market volatility, we used a 30-day trailing average stock price for the calculation of the number of shares subject to the stock options that were granted to the NEOs on April 1, 2020, resulting in a small reduction in the number of stock options granted; and

  Reduced the payout under our 2020 Management Incentive Plan (“MIP”) by nearly 15 percentage points to offset for favorability of overall financial results due to the COVID-19 pandemic that was unrelated to management’s actions to launch new products and services, including testing and vaccinations.

 
 

Diversity and
Inclusion

  See pages
10, 23 for

details

 

Our stockholders inquired about our commitment to social justice and equity, including the diversity of our workforce, disclosure of diversity data, targets and progress towards our targets. For CVS Health to thrive, it is important to have a workforce that reflects not only our customers, but also the communities in which they live. In addition to the diversity and inclusion actions discussed on page 10, in further support of our commitment to these important issues, we have linked senior executive pay to our diversity commitment to further reinforce its importance and to hold executives accountable for making progress.

 

The 2021 MIP approved by the MP&D Committee includes a diversity metric for our most senior leaders who have the greatest ability to influence the overall hiring, development and promotion of our colleagues. The metric, which will be applied as a modifier (downward only, by as much as negative 10%) to the formulaic results of the MIP, will assess our progress in achieving greater diverse leadership representation during the year as compared to an external benchmark.

 

 

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Compensation Discussion and Analysis

 

Leading Practices In Compensation Programs

 

The Board is committed to continuing its long-standing practice of soliciting feedback to incorporate stockholder perspectives into our compensation program. Our stockholder outreach provides the Board with valuable insights into our stockholders’ perspectives on our executive compensation program and other matters of importance to them. 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 and reflect enhancements made to our compensation program in prior years as a result of stockholder input that currently remain in effect.

 

We apply leading executive compensation practices

 

  Core Executive Compensation Principles Designed to Promote Company Growth

  Performance Measures Aligned with Stockholder Interests

  Majority of the Total Compensation Opportunity is Performance-Based

  No Excise Tax Gross-Ups

  No Option Repricing

  No Recycling of Shares

  Recoupment Policy and Commitment to Disclose any Recoupment

  Broad Anti-Pledging and Anti-Hedging Policy

  Broad-Based Severance Plan for Executives

  Limited Perquisites and Personal Benefits

  SERP Closed to New Participants

  Reconciliation in Proxy Statement of any Non-GAAP Performance Metric to the Most Directly Comparable GAAP Financial Measure

  Double Trigger Vesting of Equity Awards

  Robust Stock Ownership Guidelines

  Replaced RSUs with PSUs for Our Most Senior Leaders

  Two-year Post-vesting Holding Period on Net Shares Resulting from PSUs for NEOs

  No Upward Modifier to the 2020 and 2021 PSUs if Our Absolute TSR is Negative

  Dividend Equivalents on RSUs Paid Only When Awards Vest

  Board Committee Oversight of Comprehensive Annual Compensation Program Risk Assessment

  Cap on Annual Cash Incentive Awards for NEOs

  Simplified and Improved Disclosure for Annual Cash Incentive Program

  Diversity Metric Added to the 2021 MIP for Senior Executives


 

2020 Business and Performance Highlights

 

Our transformation over the last decade has enabled us to become the nation’s leading diversified health services company. As one of the most trusted brands in America, our presence in communities across the country allows us to meet consumers where they are and become a bigger part of their everyday health. Our unparalleled capabilities and relationship with over 100 million people uniquely positions us to support them for every meaningful moment of health throughout their lifetime.

 

These are unprecedented times and our Purpose to help people on their path to better health has never been more important. During the last year, we delivered new market solutions and strengthened our role as a personal and trusted health care partner in response to COVID-19, pivoting and rapidly innovating to meet customer needs for COVID-19 testing in the community. We also advanced our digital capabilities to create a seamless experience across CVS Health touchpoints.

 

We have made measurable and important progress with our strategy as a health services company that utilizes all our assets, integrates them for a superior customer experience, and firmly addresses the total cost of care. We have executed on the priorities we set out at our June 2019 Investor Day, including targets for Adjusted EPS growth, integration synergies, enterprise modernization, transformation, leverage ratio and cash available for enhancing stockholder value.

 

We are accelerating our pace of progress to drive our consumer-centric strategy—a strategy built upon the fundamental belief that solving consumer health needs will create “value for all: our customers, our communities, our people, and our stockholders.”

 

2021 Proxy Statement 49
 

Table of Contents

Compensation Discussion and Analysis

 

2020 Business and Performance Results

 

 

* Adjusted EPS is a non-GAAP measure. See Annex A to this proxy statement for a reconciliation of this and other non-GAAP financial measures to the most directly comparable GAAP measures.

 

For more information on our financial performance and strategy, please refer to our 2020 Annual Report on Form 10-K mailed with this proxy statement and available at www.cvshealthannualmeeting.com.

 

Impact of COVID-19 on Executive Compensation

 

Amid the unprecedented challenges of the COVID-19 pandemic on our Company’s business and the nation in general, a number of stockholders sought to understand how we were responding. We focused our resources on the wellbeing and safety of employees, consumers and the communities we serve, and are uniquely positioned to support community health going forward.

 

In response to the COVID-19 pandemic, we provided enhanced benefits, including bonuses to frontline colleagues, dependent care financial assistance, paid sick leave for part-time colleagues and paid time off to colleagues who test positive or are quarantined due to exposure. We made investments in our locations for the safety of our colleagues and customers. Throughout the pandemic, our facilities remained open for business. We continued hiring throughout the pandemic, often partnering with clients who were forced to furlough to get their employees jobs at CVS locations. CVS Health supported local community health and provided leadership in diagnostic testing and vaccination with a focus on disadvantaged communities. We provided more than one million meals and $40 million in products to support those communities. We administered more than three million COVID-19 vaccines in over 40,000 long term care facilities and our program to vaccinate communities across the country is well underway.

 

Despite the business and financial impact caused by the COVID-19 pandemic, the MP&D Committee made 2020 NEO compensation decisions consistent with our executive compensation philosophy. The MP&D Committee determined to reduce the payout under the annual incentive plan to offset for favorability in our overall financial performance resulting from COVID-19 that was unrelated to management’s actions to launch new products and services, including in-store testing and vaccinations. For more detail, see “Actual Performance” on page 55.

 

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Decisions Consistent with Our Executive Compensation Philosophy

 

No changes were made to metrics or award values approved in February or targets approved in March 2020;
Performance targets remained consistent with corporate goals communicated to investors in February 2020;
Delayed timing of annual PSU grant from April 2020 to August 2020:
  Given the uncertainty caused by COVID-19, the MP&D Committee decided that a delayed PSU grant date would ensure better visibility and clarity around our longer-term direction;
Award values (approved in February 2020) were not adjusted for the higher stock price at the time of the delayed grant;
To mitigate market volatility, we used a 30-day trailing average stock price for the calculation of the number of shares subject to stock options that were granted to the NEOs on April 1, 2020, resulting in a small reduction in the number of stock options granted; and
Reduced payout under our 2020 MIP by nearly 15 percentage points to offset for favorability in our overall financial performance due to the COVID-19 pandemic that was unrelated to management’s actions to launch new products and services, including testing and vaccinations.

 

Compensation Program Discussion

 

Our compensation program supports our long-term strategy by tying the vast majority of pay for executives to performance-based metrics aligned to the Company’s growth strategy. We provide three elements of total direct compensation: base salary, annual cash incentive and long-term incentives in the form of stock options and PSUs, which are all described in detail beginning on page 53.

 

Executive Compensation 2020 Planning and Review Process

 

The annual cycle of reviewing and developing the Company’s executive compensation program and pay levels is a multi-step process that includes year-round engagement with our stockholders. It also incorporates consideration of our say on pay results, compensation and rTSR peer group information, both short- and long-term Company results compared to objectives, as well as input and guidance from the MP&D Committee’s independent compensation consultant.

 

In 2020, the MP&D Committee followed the standard annual cycle, but added meetings and discussions to account for the uncertainty created by the COVID-19 pandemic. In addition, the MP&D Committee, along with representatives from management, conducted interviews with several firms before ultimately retaining Korn Ferry as its independent compensation consultant effective October 2020.

 

When evaluating pay reported in the 2020 Summary Compensation Table (“SCT”), it is important to consider the timing of the compensation decisions and the periods in which they are reported.

 

Annual cash incentive awards were decided and approved by the MP&D Committee in February 2021 and reflect Company and individual performance in 2020 against performance goals that were established in February 2020;
Long-term incentive awards reported for 2020 were granted in April 2020 (stock options) and August 2020 (PSUs for all NEOs except Mr. Merlo) and reflect individual performance in 2019 and future potential to drive our corporate strategy and growth.

 

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Compensation Discussion and Analysis

 

Below are highlights of the MP&D Committee’s review and decision-making process for 2020 executive compensation.

 

 

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Elements of Our Compensation Program

 

Our pay-for-performance philosophy places the vast majority of an executive officer’s compensation at risk and emphasizes long-term incentives tied to individual and Company performance as well as continued service. As a result, the only fixed compensation is base salary. The fixed compensation represents approximately 9% to 13% for the NEO’s total target compensation in 2020. No awards were made outside of our annual compensation program in 2020.

 

The MP&D Committee believes that performance indicators, including profitability, debt reduction, customer and client satisfaction, market comparability and stock price should be factored into our executive compensation program. By using a variety of pay vehicles and balancing short- and long-term awards, the MP&D Committee believes our compensation program supports retention and long-term growth creation because the metrics are measured independently, and no single factor impacts all elements of performance. For 2021, the MIP plan design includes a diversity metric for senior executives because the Committee believes that our Company should reflect the customers and communities we serve. The metric will be a modifier (downward only, by as much as negative 10%) to the formulaic results of the MIP.

 

The table below outlines each element of our executive compensation program for 2020.

 

2020 Target Compensation

 

  Base Salary Annual Cash
Incentive
PSUs Stock Options
    Performance-based or performance-aligned – ~90%
  Near-term Long-Term
Performance Period Ongoing Annual 3-year performance period 2-year holding period post vesting 4-year ratable vest
Performance Metrics  

   MIP Adjusted Operating Income (80%)

   Retail Customer Service, PBM Client Satisfaction and Health Care Benefits Member Satisfaction Results (20%)

   Individual Performance Modifier (0-120%)

   2022 Adjusted EPS (100%)

   Leverage Ratio Modifier (+/- 25%)

   rTSR Modifier (+/- 25%); upward adjustment only if TSR is positive

 

   Stock price appreciation
NEO Target Pay Mix

 

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Base Salary

 

The MP&D Committee annually reviews the base salaries of all executive officers, including the NEOs, and adjusts them periodically as needed by evaluating the evolving responsibilities of the position, the experience of the individual and the marketplace in which we compete for executive talent as defined by our compensation peer groups. Upon consideration of the latest competitive market analysis of our compensation peer groups and input from its independent compensation consultant, the MP&D Committee increased the salary for Ms. Boratto in 2020 by 18% to reflect a market adjustment in conjunction with her ongoing contributions and performance. The MP&D Committee did not raise base salaries for Messrs. Merlo and Roberts, who were also NEOs in 2019.

 

   FY 2020 Annual Base Salary   Percentage 
   ($)   Increase 
Larry J. Merlo   1,630,000    0%
Karen S. Lynch(1)   1,200,000     
Eva C. Boratto   1,000,000    18%
Alan M. Lotvin, M.D.(1)   850,000     
Jonathan C. Roberts   1,200,000    0%

 

(1) Ms. Lynch and Dr. Lotvin were not Named Executive Officers in 2019.

 

Annual Cash Incentive

 

Our NEOs participate in our annual cash incentive program, the MIP, under which they are eligible for a cash award based on the achievement of pre-established financial, operating and individual performance objectives. Awards are paid out, if earned, in the first quarter of the following year based on the following formula:

 

NEO
Base Salary
Paid in
Performance Year
X NEO Target
Annual
Incentive %
X Corporate
Performance %
X Individual
Performance
Modifier %
= Final Award

 

NEO Target Annual Incentive

 

In the first quarter of each year, the MP&D Committee approves for each NEO, an annual target bonus amount expressed as a percentage of the NEO’s base salary and individual performance goals and objectives. The current targets are set forth in the 2020 Annual Cash Incentive Award table below. The final award is calculated based on the actual base salary paid during the calendar year, which we call “eligible earnings.”

 

Corporate Performance

 

For 2020, the MP&D Committee measured Company performance using 2020 MIP Adjusted Operating Income (80% weighting) and retail customer service, PBM client satisfaction and health care benefits member satisfaction results (20% weighting), which emphasizes and reinforces the business objectives of the enterprise. The MP&D Committee established a challenging MIP Adjusted Operating Income target that is consistent with the earnings guidance provided to investors and requires year-over-year growth. Our customer service and client/member satisfaction metrics ensure that we are providing excellent service and position us to retain and win new business. Customer service and client/member satisfaction performance targets were set based on previous year’s results with the expectation of continuous improvement in all areas of measurement. Targets were set to maintain or improve actual 2019 results by one hundred basis points.

 

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Individual Performance

 

Each NEO’s individual performance was evaluated against his or her goals and assigned a value between 0% and 120%. The MP&D Committee did not assign specific weightings to any NEO’s goals. The individual performance modifier cannot exceed 120%, or 20% above what would have been earned based solely on corporate performance. An individual performance modifier of less than 100% will reduce payouts below what would have been earned based solely on Company performance. In all cases, total payouts cannot exceed 200% of target when including both Company and individual performance.

 

Actual Performance

 

The Company performance result was 134.7% for 2020 — based on 2020 MIP Adjusted Operating Income (performance of 102.8% of target, resulting in funding of 132.1%, weighted at 80%) and customer service and client/ member satisfaction aggregate results (performance of 102.3% of target, resulting in funding of 145.2%, weighted at 20%). Customer and client satisfaction results for each business line exceeded the prior year’s results by at least two hundred basis points.

 

COVID-19 affected each of the CVS Health businesses differently. For example, the Retail/LTC segment incurred additional costs to provide for the health and safety of our colleagues and customers. At the same time, leaders quickly mobilized testing sites and launched a national testing and vaccine business. The Health Care Benefits segment also made investments to benefit customers and members, but experienced lower medical costs as members deferred care during the pandemic. The MP&D Committee reduced the actual enterprise results for the 2020 MIP by nearly 15 percentage points to offset favorability resulting from COVID-19 that was unrelated to management’s actions, such as those taken to launch new products and services, including the Return Ready program for COVID-19 testing at companies and universities, store-based COVID-19 testing and vaccinations. As a result, the corporate performance was reduced from 134.7% to 120%.

 

 

  * Dollars in millions. 2020 MIP Adjusted Operating Income, both Target and Actual, are net of the bonus-related expense.

 

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Compensation Discussion and Analysis

 

The MP&D Committee evaluates each NEO’s performance and considers the CEO’s input on the performance of the other NEOs. In determining the annual cash incentive for Mr. Merlo, the MP&D Committee consulted with the other independent members of the Board. For 2020, the MP&D Committee assigned a numeric performance result for each NEO’s individual performance against his or her pre-established goals. The MP&D Committee used its judgment in evaluating each NEO’s performance, which resulted in modifiers ranging from 5% to 20% above what was earned based on Company performance.

 

With respect to financial performance, the MP&D Committee considered the following results for the NEOs as more fully set forth below. GAAP EPS of $5.47 and Adjusted EPS of $7.50; consolidated operating income of $13.9 billion and consolidated adjusted operating income of $16.0 billion; and segment adjusted operating income which is the principal measure of segment performance. Adjusted EPS and consolidated adjusted operating income are non-GAAP measures. See Annex A to this proxy statement.

 

Larry J. Merlo   Fiscal 2020 Individual Performance Assessment
     
Leadership  

  Advanced the ongoing evolution of the organization to be the nation’s most consumer-centric diversified health care services company.

  Led the successful completion of the integration of Aetna and advanced our transformational activities through the launch of new products and services, reflecting the enhanced capabilities of the combined organization, including 600 additional HealthHUB locations, Pharmacy Panel, Transform Oncology Care and the CVS Kidney Care program.

  Led the Company through unprecedented business and environmental challenges related to the COVID-19 pandemic; put in the place the strategic actions necessary for the Company to successfully navigate the accompanying and unanticipated opportunities and amplify the ability to improve the accessibility of health services to all Americans.

  Managed a smooth and flawless transition process with Ms. Lynch in anticipation of her assumption of the President and CEO role on February 1, 2021.

     
     
Financial Results     Adjusted EPS of $7.50, exceeding prior year by 5.9%. The strength of our business model, notwithstanding the unprecedented impacts arising from COVID-19, was demonstrated as we achieved $16.0 billion of consolidated adjusted operating income which exceeded the prior year.
     
     
Operating Results  

  Ensured that CVS Health continued to provide direct health care services during the pandemic through our MinuteClinic and Coram clinicians; offered support and care to our millions of Aetna and CVS Caremark members; and maintained our nationwide pharmacy delivery and distribution service.

  Oversaw the launch of new national initiatives in COVID-19 testing for both the general population and our clients and a partnership with the federal government to distribute COVID-19 vaccine to residents of long-term care facilities. These initiatives fulfilled critical national needs to stem the spread of the virus.

     
     
People  

  Drove record levels of customer and client satisfaction across all three business segments.

  Led our nearly 300,000 colleagues to highest ever levels of engagement and alignment with the Company’s Purpose.

     


 

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Karen S. Lynch   Fiscal 2020 Individual Performance Assessment
Leadership  

  Led the Health Care Benefits (“HCB”) segment which offers a full range of insured and self-insured medical, pharmacy, dental and behavioral health products and services. Successfully navigated the segment through the challenges presented by the COVID-19 pandemic while concurrently co-leading the enterprise task force charged with addressing and managing the impact of COVID-19 on all aspects of the Company’s operations.

  Collaborated with Mr. Merlo to chart a seamless transition as she assumed the role of CEO of the Company on February 1, 2021, while also ensuring an uninterrupted transition of the Aetna business to a new EVP and President of Health Care Benefits.

     
     
Financial Results  

  The HCB segment recorded over $75 billion in revenue in 2020, growing 8% over the prior year.

  The HCB segment contributed $6.2 billion in adjusted operating income, representing an increase over the prior year.

  Medical membership as of year-end was 23.4 million, growing over half a million lives compared to prior year, primarily reflecting increases in Medicaid and Medicare products.

     
     
Operating Results     Directed and coordinated the Company’s internal business continuity efforts, including employee concerns, as well as the external-facing initiatives, which enabled CVS Health to fully deploy its national health care assets and reach to play an industry-leading role in identifying solutions to challenges presented by the COVID-19 pandemic.
     
     
People  

  Member and client satisfaction with Aetna exceeded targets, in acknowledgement of the extraordinary support and services provided by the Company during the COVID-19 pandemic.

  Employee engagement exceeded prior year’s levels, indicating strong alignment with the Company’s values and purpose and reflecting appreciation of the efforts made by the Company to prioritize their health and safety and enable them to work productively at home.

     

 

Eva C. Boratto   Fiscal 2020 Individual Performance Assessment
     
Leadership     Demonstrated strong, consistent and disciplined financial leadership over the course of 2020, ensuring focus on the achievement of our committed financial targets for our core businesses while capturing additional benefits from opportunities presented by the COVID-19 pandemic.
     
     
Financial Results  

  Adjusted EPS of $7.50, exceeding prior year by 5.9%.

  Generated cash from operations of $15.9 billion, reflecting enterprise performance, working capital improvements and timing.

  Since the close of the Aetna Transaction, net debt has been decreased by $12.2 billion, with $4.25 billion repaid in 2020.

     
     
Operating Results  

  Led comprehensive stockholder outreach and engagement activities throughout the year, including meeting with 77% of our top 50 active investors.

  Led the Company to deliver above-goal synergies from the Aetna Transaction, reaching over $900 million in total.

     
     
People  

  Continued the advancement of our Finance Transformation program to simplify and automate our financial processes, harness the power of data to enhance business insights and reduce our transaction costs.

  Overall employee engagement improved significantly driven by multi-dimensional communications and information dissemination, leadership training and focused career mobility opportunities.

     


 

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Alan M. Lotvin, M.D.           Fiscal 2020 Individual Performance Assessment
     
Leadership  

  Appointed President of the Pharmacy Services segment in first quarter 2020, responsible for providing a full range of pharmacy benefit management and specialty pharmacy services to employers, health plans, government employee groups and government sponsored programs.

  Brought his comprehensive executive and clinical experience to this leadership role, articulating the long-term growth strategy for our pharmacy benefit management and specialty pharmacy businesses and delivering results that exceeded established targets in new business, continuing operations and client satisfaction.

     
     
Financial Results  

  In our Pharmacy Services segment, revenues were $141.9 billion, exceeding expectations and reflecting growth in specialty pharmacy.

  Adjusted operating income for the Pharmacy Services segment reached nearly $5.7 billion, exceeding the prior year, driven by improved purchasing economics and growth in specialty pharmacy.

     
     
Operating   Results  

  Caremark’s specialty pharmacy continued its double-digit growth powered by products like PrudentRx and Specialty Expedite, and digital engagement with patients and providers. 80% of CVS Specialty’s members engage with us through electronic channels.

  Brought forward the Company’s Return Ready program, providing essential virus testing services for employer and health-plan clients to enable them to continue their operations during the pandemic.

  Launched Caremark’s Service Excellence program, designed to establish and reinforce a culture of quality in client and member operations. Kidney Care program continued to progress with 4,000 patients in our care management program. Despite COVID-19, our home dialysis clinical trial advanced, with new sites recruited to accelerate enrollment as the pandemic is controlled.

     
     
People  

  Client satisfaction metrics surpassed prior year’s results by 200 bps, evidence of the team’s dedication to exceeding member expectations during a difficult year.

  Colleague engagement remained high, demonstrating alignment to purpose and values.

     

 

Jonathan C. Roberts           Fiscal 2020 Individual Performance Assessment
Leadership  

  Oversaw the creation, launch and administration of our COVID-19 testing and vaccination programs, firmly positioning CVS Health as a leader in the solution to the national response to COVID-19.

  Led the Retail/LTC segment, fulfilling prescriptions for medications, providing patient care programs, selling a wide assortment of health and wellness products and general merchandise, providing health care services through walk-in medical clinics, medical diagnostic testing and pharmacy services to long-term care facilities.

     
     
Financial Results  

  The Retail/LTC segment posted $91.2 billion in revenue in 2020, a $4.6 billion or a 5.3% improvement over the prior year.

  The Retail/LTC segment delivered adjusted operating income of $6.1 billion in 2020.

     
     
Operating   Results  

  Through our national testing service, CVS Health administered 10 million COVID-19 tests in 2020 through the establishment of an accessible and convenient network of delivery locations in our stores and community sites throughout the country.

  Oversaw the launch of our Return Ready program, a unique service to our clients to facilitate business continuity through on-site testing of their employees.

  Engaged with Operation Warp Speed to develop and support our nation’s largest-ever vaccination campaign, mobilizing more than 9,000 colleagues as immunizers at vaccination clinics at more than 40,000 long-term care facilities.

  Drove the prompt operating changes necessary to safely serve our Retail customers and protect our employees during the COVID-19 pandemic.

     
     
People  

  Customers of our Retail business reported record levels of satisfaction with our customer service across our store network.

  Employees in our stores showed strong appreciation and acknowledgement of our successful efforts to maintain their jobs and protect their health with increased levels of engagement and alignment with our Purpose.

     


 

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The actual payout of each NEO’s 2020 annual cash incentive award, as approved by the MP&D Committee, is set forth in the table below:

 

2020 Annual Cash Incentive Award

 

   2020
Eligible
Earnings
   Target
Annual
Incentive
  Company
Performance
After Reduction
  Individual
Performance
Modifier
  Final
Award
   Final
Payout as a
% of Target
Larry J. Merlo  $1,630,000       200%                 120%           120%  $4,694,000        144%
Karen S. Lynch  $1,175,000    150%   120%   120%  $2,538,000    144%
Eva C. Boratto  $962,500    150%   120%   105%  $1,819,000    126%
Alan M. Lotvin, M.D.  $831,250    150%(1)   120%   110%  $1,577,000    132%
Jonathan C. Roberts  $1,200,000    175%   120%   120%  $3,024,000    144%

 

(1) Dr. Lotvin’s bonus target was pro-rated to 143.7% reflecting a mid-year increase to his annual target bonus opportunity and increase to his base salary in February 2020 as a result of his promotion to his current position. Dr. Lotvin’s 2021 full year target bonus opportunity is 150% of eligible earnings.

 

Long-Term Incentive Compensation

 

Each year the MP&D Committee approves long-term incentive compensation awards for employees, including the NEOs. Following the MP&D Committee’s comprehensive review of our compensation program, and considering input from our stockholders, it decided to maintain the mix of PSUs and stock options for 2020, as illustrated below.

 

2020 Long-Term Incentive Target Mix

 

 

2020 PSU and Stock Options

 

The PSU portion of our long-term incentive program features formulaically determined payouts based on performance goals established at the beginning of a three-year performance period. The MP&D Committee approved 2022 Adjusted EPS as the core performance measure for the 2020 PSUs, adjusted by leverage ratio and rTSR modifiers as described below. These metrics were selected as they align with our communication to investors broadly, are consistent with the guidance we provided at Investor Day in June 2019 and are key to driving long-term, sustained growth.

 

2020 Long-Term Incentive Decisions   PSU Program Changes

  The MP&D Committee delayed granting PSUs from April to August due to market volatility caused by the COVID-19 pandemic

  Performance metrics were approved in February and the targets were approved in early March 2020 and no changes were made at the time of grant

  Performance targets remained consistent with previously communicated long-term corporate goals

  Award values, approved in February, were not adjusted for the higher stock price at the time of the grant in August 2020

  Mr. Merlo, our CEO through January 31, 2021, was not granted PSUs in 2020

  To mitigate market volatility, a 30-day trailing average price was used for the calculation of the number of shares subject to the stock options granted to the NEOs on April 1, 2020, resulting in a small reduction in the number of stock options granted

 

  Maximum PSU payout (including application of modifier) was reduced from 250% to 200%

  No upward modifier is applied to the PSUs if our absolute TSR is negative

  PSU award agreements were modified to include forfeiture/ clawback provisions in the event of detrimental conduct

  The two-year post-vesting holding period for PSUs applies during, and now after, separation of employment

 

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2020 PSUs (75% of long-term equity)

 

  Core Metric: 2022 Adjusted EPS

 

  The target, threshold and maximum Adjusted EPS goals are aligned with the Company’s long-term targets communicated to investors and were set at a level expected to generate strong profitability over the next three years

  The 2022 Adjusted EPS goal is consistent with our external growth goals as presented in our June 2019 Investor Day and on an absolute dollar basis is on a higher trajectory than last year’s PSU cycle ending 2021

 

   

Modifiers: two modifiers are applied that may increase or decrease the percent of payout determined by the 2022 Adjusted EPS performance result, capped at 200%

  Leverage ratio (Adjusted Debt to Adjusted EBITDA) (+/-25%)

  Measures achievement of our goal of debt reduction at the end of the performance period

  The modifier is applied in terciles providing for a reduced or increased payout for above or below the target ratio range

  rTSR (+/-25%)

  Measures our share price performance relative to the broad market with which we compete for talent and capital over the three-year performance period (see “Relative TSR Peer Group for 2020-2022 PSU Awards” on page 69)

  The modifier is applied in quartiles on a pro rata basis providing for a reduced or increased payout for below or above median performance, respectively

  No upward modifier is applied if our absolute TSR is negative over the performance period

  Net shares earned after the three-year performance period are subject to an additional 2-year holding period No adjustments were made to performance metrics or targets due to COVID-19  
     

 

2020 PSU Summary

 

   
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2021 PSU and Stock Options

 

Following the MP&D Committee’s annual review of our compensation program, and considering input from our stockholders, it decided to continue with the same mix of PSUs and stock options for 2021. Considering stockholder feedback and a desire for year-over-year consistency, the MP&D Committee decided that the structure of PSUs will remain the same; however, the leverage ratio modifier will be removed as we expect to achieve our target debt leverage ratio in 2022.

 

Status of Prior PSU Performance Programs

 

The following summarizes the final payout results and settlement of the 2018 PSU awards granted to the NEOs:

 

2018 EBITDA PSUs  

  Performance period 2018-2020

  Based on 2020 PSU Adjusted EBITDA, with target set at $20,892 million

 

STATUS:

Company did not meet 2020 PSU Adjusted EBITDA threshold of $19,852 million

        PAYOUT = 0%
        See below for information on the 2018 EBITDA PSU payout for Dr. Lotvin, who was not an executive officer at the time of grant.
2018 LTIP PSUs  

  Performance period 2018-2020

  Based on achievement of Aetna Transaction-related synergies in 2020:

  Threshold - $637.5 million

  Target - $750 million

  Maximum - $900 million

  Development of a pipeline of integrated program offerings by December 31, 2020

  Launch one or more integrated programs by December 31, 2020

  Subject to rTSR modifier (+/-25%)

 

STATUS:

Synergies – achieved more than $900 million  

Pipeline and Launched Products – Launched new products, including Kidney Care Health Services, Aetna Connected, Health Advisor, Transform Oncology Care, Pharmacist Panels, as well as plan designs to encourage use of CVS Health assets.

  200% payout level prior to applying rTSR modifier;

  rTSR performance in the bottom quartile reduced the payout level by 25%

        PAYOUT = 150%
        Net shares issued upon settlement remain subject to a two-year holding period.
         

 

The 2018 EBITDA PSUs included a 50% floor for recipients who were not members of the executive leadership team at the time of grant, including Dr. Lotvin. The floor, which was intended to support retention as we transitioned from options to PSUs, was not provided to our most senior leaders including NEOs. Vesting of Dr. Lotvin’s 1,506 PSUs occurred on April 1, 2021 and will settle in shares of CVS Health common stock, net of taxes. None of the other NEOs received a payment in respect of the 2018 EBITDA PSUs. No other PSUs have a floor.

 

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2019 PSUs – Performance will be certified in February 2022, following the three-year performance period. Net shares issued upon settlement, if any, are subject to a two-year holding period. Maximum payout after calculation (including application of modifiers) cannot exceed 250% of the PSUs awarded.

 

2019 PSU Summary

 

 

2020 Compensation Peer Groups

 

2020 Selection Process: The MP&D Committee uses various data sources, including peer groups, to assess financial performance and compensation competitiveness. While the peer groups represent a broad group of potential competitors for executive talent across various industries, peer group data serves as only one reference point for the MP&D Committee in evaluating our compensation program.

 

For 2020, the MP&D Committee used two compensation peer groups to account for our evolving business, including our size, our diverse business segments and our international presence, which results in our NEOs’ jobs having a greater level of complexity than similar roles at certain of our health care and retail comparator companies. The MP&D Committee continues to believe that utilizing both the Health Care Group and Retail and the General Industry Group is the most effective way to assess competitiveness given the breadth of the Company’s operations. Minor changes were made to the compensation peer groups for 2020 to better align from a size perspective and to reflect applicable acquisition activity and changes in the membership of the 30 largest U.S. companies, irrespective of industry, but excluding banks. As a result, the MP&D Committee reviewed pay data from two compensation peer groups (the “2020 Compensation Peer Groups”) when reviewing and setting 2020 compensation levels:

 

Health Care and Retail Group— 20 companies with operations comparable to CVS Health’s, 13 of which are health care organizations and 7 of which are retailers. Full-year 2019 median revenues for the Health Care and Retail Group were $108 billion. CVS Health’s full-year 2020 total revenues of $268.7 billion rank at the 94th percentile relative to the Health Care and Retail Group.
   
General Industry Group— 30 largest U.S. companies, irrespective of industry, but excluding banks (where compensation frameworks tend to be industry-specific). Full-year 2019 median revenues for the General Industry Group were $129 billion. CVS Health’s full-year 2020 total revenues of $268.7 billion rank at the 96th percentile relative to the General Industry Group.

 

The MP&D Committee intends to undertake a holistic review of the compensation peer groups in consultation with its new independent compensation consultant and will discuss the results of this review and any corresponding changes to our peer groups in the proxy statement for our 2022 Annual Meeting.

 

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Health Care and Retail Comparator Companies    
     

  Aflac Incorporated

  AmerisourceBergen Corporation

  Anthem, Inc.

  Cardinal Health, Inc.

  Centene Corporation(1)

  Cigna Corporation

  Costco Wholesale Corporation

 

 

  HCA Healthcare, Inc.

   The Home Depot, Inc.

  Humana Inc.

  The Kroger Co.

  Kaiser Permanente

  Lowe’s Companies, Inc.

  McKesson Corporation

 

 

  MetLife, Inc.

  Target Corporation

  UnitedHealth Group Incorporated

  Walgreens Boots Alliance, Inc.

  Walmart Inc.

  Wellcare Health Plans, Inc.(1)

 

General Industry Comparator Companies    
     

  AmerisourceBergen Corporation

  Anthem, Inc.

  Apple Inc.

  AT&T Inc.

  The Boeing Company

  Cardinal Health, Inc.

  Chevron Corporation

  Cigna Corporation

  Comcast Corporation

  Costco Wholesale Corporation

 

 

  DuPont de Nemours, Inc.

  Exxon Mobil Corporation

  Ford Motor Company

  General Electric Company

  General Motors Company

•   The Home Depot, Inc.

•   International Business Machines Corporation

•   Johnson & Johnson

•   The Kroger Co.

•   Marathon Petroleum Corporation

 

  McKesson Corporation

•   Microsoft Corporation

•   Phillips 66

•   Target Corporation

•   United Parcel Service, Inc.

•   UnitedHealth Group Incorporated

•   Valero Energy Corporation

•   Verizon Communications Inc.

•   Walgreens Boots Alliance, Inc.

•   Walmart Inc.

 

(1) Centene Corporation acquired Wellcare Health Plans, Inc. on January 23, 2020  
     

 

Pay Positioning

 

The MP&D Committee does not target NEOs’ pay to a specified percentile relative to the 2020 Compensation Peer Groups, but rather reviews peer group compensation data at the 50th and 75th percentile for each element of compensation, including base salary, target total cash (base salary plus target bonus) and target total compensation (target total cash plus long-term incentive compensation). Individual compensation positioning relative to comparable positions in the 2020 Compensation Peer Groups varies by job, and the MP&D Committee considers a number of factors, including market competitiveness, specific duties and responsibilities of the NEO versus those in similar positions at the peer group companies, and succession planning. In addition to this assessment, the MP&D Committee considers Company and individual performance and internal pay equity among the Company’s executive officers in evaluating and determining executive compensation. The MP&D Committee believes it is appropriate to reward the Company’s executive officers with compensation above the competitive median if the rigorous financial targets associated with the Company’s variable pay programs are exceeded in a way that is consistent with the Company’s core values.

 

Other Compensation Arrangements and 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. The Company also maintains a broad-based severance plan that covers Ms. Boratto, Dr. Lotvin and Mr. Roberts. Details of potential payments under that plan can be found in the tables beginning on page 78.

 

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Compensation Discussion and Analysis

 

Executive officers may participate in the CVS Health Future Fund, which is our qualified defined contribution, or 401(k), plan. An eligible CVS Health employee may defer up to 75% of his or her total eligible compensation, defined as salary plus annual cash incentive, to a maximum defined by the IRS. In 2020, that maximum was $19,500, plus an additional $6,500 for those age 50 and above. After the first full year of employment, CVS Health will match the employee’s deferral dollar-for-dollar up to a maximum equaling 5% of total eligible compensation. CVS Health’s matching cash contributions into the CVS Health Future Fund for the NEOs who participated are included in the “All Other Compensation” column of the SCT and described in the note 7 following the SCT on page 71.

 

Deferred Compensation Plan and Deferred Stock Plan

 

Eligible executive officers may choose to defer earned and vested compensation into the Deferred Compensation Plan (the “DCP”) and the Deferred Stock Compensation Plan (the “DSP”), which are available to any U.S. employee 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 NEOs during fiscal 2020 to the DCP and the DSP, including earnings on those contributions, any distributions during 2020 and their respective total account balances as of the end of 2020, are shown in the Nonqualified Deferred Compensation table on page 77.

 

Perquisites and Other Personal Benefits

 

We provide the following personal benefits to our NEOs:

 

Financial planning: A benefit of up to $15,000 to cover the cost of a financial planner to assist with personal financial and estate planning. We provided this benefit to our executives so they received the professional expertise required to ensure that they maximized the efficiencies of our compensation and benefit programs and were able to devote their full attention to the management of the Company.
   
Home security: An allowance to the NEOs to cover the costs of the installation and maintenance of home security monitoring systems. While the MP&D Committee believes these security costs are business expenses, disclosure of these costs as personal benefits is required.
   
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 MP&D Committee’s recommendation, the CEO is required to use our aircraft for all travel needs, including personal travel, in order to minimize and more efficiently use travel time, protect the confidentiality of travel and our business, and enhance the CEO’s personal security. Certain other NEOs were also permitted to use our corporate aircraft for personal travel on a very limited basis during fiscal 2020. The cost of such personal use is included in “All Other Compensation” and described in the notes following the SCT.

 

The value of these items is treated as income taxable to the NEOs. The aggregate incremental cost to the Company of providing these personal benefits to each of the NEOs during fiscal 2020 is shown in the SCT beginning on page 70.

 

Agreements with Named Executive Officers

 

As previously disclosed, we have employment agreements with Mr. Merlo and Ms. Lynch and change in control agreements (collectively, the “CIC Agreements”) with Ms. Boratto, Dr. Lotvin and Mr. Roberts.

 

In connection with Ms. Lynch’s appointment as President and Chief Executive Officer of CVS Health, CVS Health entered into an amended and restated employment agreement with Ms. Lynch, effective February 1, 2021 (the “Karen Lynch Agreement”). The Karen Lynch Agreement sets forth, among other things, the terms of her employment as President and Chief Executive Officer of CVS Health. The Karen Lynch Agreement has no specified term and provides that Ms. Lynch’s employment with CVS Health will be on an at-will basis. Further, pursuant to the Karen Lynch Agreement, Ms. Lynch will receive an annualized base salary of $1.45 million and will be eligible to participate in CVS Health’s annual bonus plan with a target annual cash bonus opportunity of 200% of her base

 

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Compensation Discussion and Analysis

 

salary, effective February 1, 2021. Upon a qualifying termination of employment, Ms. Lynch would be entitled to a cash severance payment equal to two times (which is increased to two-and-a-half times if the qualifying termination of employment occurs within two years following a change in control) the sum of her highest base salary in effect during the six-month period immediately prior to the date of her termination of employment and her target annual bonus opportunity for the year of her termination of employment. Ms. Lynch would also be entitled to a prorated annual bonus for the year of her termination of employment and up to 18 months of continued health and benefit plan participation at the same benefit and cost sharing level at which Ms. Lynch and her eligible dependents were participating on the date of her termination of employment. Ms. Lynch will also be treated as retirement eligible under the terms of her equity awards.

 

The MP&D 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 CIC Agreements with NEOs (other than Mr. Merlo and Ms. Lynch) are intended to eliminate, or at least reduce, the reluctance of senior management to pursue potential change-in-control transactions that may be in stockholders’ best interests. The CIC 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 CIC 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 MP&D 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 of the Company followed by the executive’s involuntary termination of employment. The 2010 and 2017 Incentive Compensation Plans that govern the terms of outstanding equity awards to all NEOs also require a “double trigger” for vesting of equity change in control benefits.

 

The MP&D Committee reviews the Company’s severance benefits annually with the assistance of its independent compensation consultant to evaluate both their effectiveness and competitiveness. The review for fiscal 2020 found the current level of benefits to be within competitive norms for design. Details of hypothetical payments that would have been made to the NEOs upon a change in control on December 31, 2020 and under various termination scenarios; provisions for the treatment of equity awards, supplemental executive retirement plan 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 78.

 

Supplemental Executive Retirement Plan

 

Mr. Merlo is the last active executive officer in the CVS Health SERP, a legacy program that was closed to new participants in 2010. Mr. Merlo reached the maximum amount of service (30 years) under the SERP in 2010 and has not accrued additional benefits based on service since that date. Based on Mr. Merlo’s announced retirement, the Company was required to use a current discount rate in this 2020 Summary Compensation Table as opposed to the longer term rate that was utilized in prior years when his retirement date was not known; this change to the actuarial assumptions resulted in an increase to the reported SERP benefit. The MP&D Committee did not take any action to increase Mr. Merlo’s SERP benefit and, in fact, the actual value of his lump sum benefit declined year over year due to application of the mortality assumptions.

 

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Compensation Discussion and Analysis

 

Key Policies Related to Compensation

 

Forfeiture and Recoupment

 

The table below summarizes our forfeiture and recoupment policies.

 

    Who   When   What
Misconduct Cancellation/ Forfeiture   

  Applies to all employees who receive equity-based awards as part of their incentive compensation

 

  An employee is terminated for “cause”:

  willfully and materially breaches any of his or her obligations to the Company with respect to confidentiality, cooperation with regard to litigation, non-disparagement and non-solicitation;

•   is convicted of a felony involving moral turpitude; or

•   engages in conduct that constitutes willful gross neglect or willful gross misconduct in carrying out his or her duties to the Company, resulting, in either case, in material harm to the financial condition or reputation of the Company.

  •   All unvested equity awards will be cancelled/forfeited.
             
Detrimental Conduct     Applies to all employees who receive PSU awards as part of their incentive compensation  

•   Detrimental Conduct. During any period in which PSUs (and any related dividend equivalents) remain outstanding and payable, including the holding period, a participant may not engage in Detrimental Conduct. “Detrimental Conduct” means any one of the following:

•   any conduct that would constitute Cause;

•   the commission of a criminal act by the participant, whether or not performed in the workplace, that subjects, or if generally known, would subject the Company or its subsidiaries to public ridicule or embarrassment;

•   intentional misconduct or conduct not taken in good faith and causing significant reputational harm to the Company or its subsidiaries;

•   intentional violation, or negligent disregard, of the Company’s or its subsidiaries’ policies, rules and procedures, specifically including, but not limited to any of the participant’s obligations under the Company’s Code of Conduct and workplace policies; or

•   any violation of the participant’s restrictive covenant agreement.

 

•   Payment of PSUs is specifically conditioned on the requirement that at all times prior to the settlement date, the participant does not engage in Detrimental Conduct.

•   Releasing shares delivered after the holding period is also specifically conditioned on the requirement that at all times prior to such release, the participant does not engage in Detrimental Conduct.

•   If the MP&D Committee determines in its reasonable business judgment that the participant has failed to satisfy such requirements, then all or a portion of the PSUs, or all or a portion of any shares delivered in settlement thereof that are subject to the holding period, as of the date of such determination, shall be canceled and forfeited as of such date of determination. All such determinations by the MP&D Committee will be final and binding.

             

Incentive Compensation

Recoupment Policy

 

•   Applies to all of our employees who receive annual cash incentive or long-term incentive awards, including equity-based awards

 

•   When fraud or material financial misconduct by an employee meaningfully alters financial or operational results used to determine an award amount, as determined by our Board.

•   Applies to fraud or material financial misconduct committed during the performance period for the award amount that is discovered during the performance period or the three-year period following the performance period.

 

•   Applies to all annual and long-term incentive awards.

•   Allows for recoupment of the entire award, not only excess amounts generated by the executive officer’s fraud or material financial misconduct.

•   Amended in March 2019 to require public disclosure of the circumstances of any recoupment from any executive officer (to the extent doing so would not violate any law or contractual obligations).

 

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Anti-Gross-Up Policy

 

CVS Health maintains a broad policy against tax gross ups. 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; Anti-Pledging and Anti-Hedging Policy

 

A significant percentage of executive compensation has been and continues to be payable in CVS Health common stock. The Board and executive management of CVS Health take seriously their responsibilities and obligations to exhibit the highest standards of behavior relative to trading our stock. All transactions in our stock 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, the Corporate Secretary or their designee. 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 all 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;

•   Engaging in short sales of our stock;

 

•   Buying or selling puts, calls, exchange traded options or other derivative securities based on our stock; or

•   Engaging in any other hedging transactions with respect to our stock, 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 use a 10b5-1 trading plan to sell our stock, and our other executives are encouraged to use 10b5-1 trading plans. A 10b5-1 trading plan is a contract that allows the individual to sell a pre-determined number of shares at a time in the future when pre-determined conditions in the plan are met. However, the Company has 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 after the plan is entered into 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.

 

Stock Ownership Guidelines

 

The MP&D Committee oversees the Company’s stock ownership guidelines, which require the Company’s directors and executive officers to maintain ownership of a minimum number of shares, in the case of directors, or stock valued at a multiple of annual salary, in the case of executive officers. For additional details, see “Executive Officer and Director Stock Ownership Requirements” on page 87.

 

Compliance with Provisions of the Internal Revenue Code

 

Starting in 2018, with exceptions only for compensation paid pursuant to certain binding contracts as described in Section 162(m) (“Section 162(m)”) of the Internal Revenue Code of 1986, as amended (the “Code”), the tax deduction for annual compensation of each of our NEOs is limited to $1 million. Certain previously-available exceptions to the $1 million limitation for “performance-based pay” were eliminated for years after 2017. In addition, beginning in 2019, CVS Health is considered a “covered health insurance provider” as defined in the Code and, as such, the annual limitation on the deductibility of compensation paid to any of our employees, including our NEOs, as well as certain service providers, generally is limited to $500,000 per person. Although the MP&D Committee considers the impact of Section 162(m) and “covered health insurance provider” status, it believes that stockholder interests are best served by not restricting the MP&D Committee’s discretion and flexibility in crafting the Company’s executive compensation program, even if non-deductible compensation expenses could result.

 

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Compensation Discussion and Analysis

 

Non-GAAP Financial Measures Used In Compensation Discussion And Analysis

 

Throughout this CD&A, we refer to various financial measures. Certain of these financial measures are calculated in accordance with U.S. generally accepted accounting principles, or GAAP. However, there are some financial measures that management adjusts and uses 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. See Annex A to this proxy statement for reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures.

 

Adjusted EPS

 

Adjusted EPS is calculated by dividing adjusted income from continuing operations attributable to CVS Health by the Company’s weighted average diluted shares outstanding. The Company defines adjusted income from continuing operations attributable to CVS Health as income from continuing operations attributable to CVS Health (GAAP measure) excluding the impact of amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance, such as acquisition-related integration costs, gains/losses on divestitures, income associated with the receipt of fully reserved amounts owed to the Company under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”) risk corridor program, store rationalization charges, losses on early extinguishment of debt, the corresponding income tax benefit or expense related to the items excluded from adjusted income from continuing operations attributable to CVS Health, the corresponding impact to income allocable to participating securities, net of tax, related to the items excluded from income from continuing operations attributable to CVS Health in determining adjusted income from continuing operations attributable to CVS Health, and any other items specifically identified.

 

2020 MIP Adjusted Operating Income

 

MIP Adjusted Operating Income is defined as operating income (GAAP measure) excluding certain financial items. For the purposes of measuring performance against established targets in any period, when applicable those excluded items include amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance, such as acquisition-related integration costs, gains/losses on divestitures, foregone budgeted adjusted operating income associated with divested businesses, income associated with the receipt of fully reserved amounts owed to the Company under the ACA risk corridor program and any other items specifically identified.

 

Adjusted Operating Income

 

Adjusted Operating Income is defined as operating income (GAAP measure) excluding the impact of amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance, such as acquisition-related integration costs, gains/losses on divestitures, income associated with the receipt of fully reserved amounts owed to the Company under the ACA risk corridor program and any other items specifically identified.

 

PSU Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“PSU Adjusted EBITDA”)

 

PSU Adjusted EBITDA is defined as income from continuing operations (GAAP measure) before income tax provision, interest expense, depreciation and amortization and excluding the impact of other items, if any, that neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance, such as acquisition-related integration costs, gains/losses on divestitures, foregone budgeted adjusted operating income associated with divested businesses, income associated with the receipt of fully reserved amounts owed to the Company under the ACA risk corridor program and any other items specifically identified.

 

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Relative TSR Peer Group for 2020-2022 PSU Awards

 

S&P 500 Health Care    

•   Abbott Laboratories

•   AbbVie Inc.

•   ABIOMED, Inc.

•   Agilent Technologies, Inc.

•   Alexion Pharmaceuticals, Inc.

•   Align Technology, Inc.

•   AmerisourceBergen Corporation

•   Amgen Inc.

•   Anthem, Inc.

•   Baxter International Inc.

•   Becton, Dickinson and Company

•   Biogen Inc.

•   Boston Scientific Corporation

•   Bristol-Myers Squibb Company

•   Cardinal Health, Inc.

•   Centene Corporation

•   Cerner Corporation

•   Cigna Corporation

•   The Cooper Companies, Inc.

•   Danaher Corporation

•   DaVita Inc.

•   DENTSPLY SIRONA Inc.

•   Edwards Lifesciences Corporation

•   Eli Lilly and Company

•   Gilead Sciences, Inc.

•   HCA Healthcare, Inc.

•   Henry Schein, Inc.

•   Hologic, Inc.

•   Humana Inc.

•   IDEXX Laboratories, Inc.

•   Illumina, Inc.

•   Incyte Corporation

•   Intuitive Surgical, Inc.

•   IQVIA Holdings Inc.

•   Johnson & Johnson

•   Laboratory Corp of America Holdings

•   McKesson Corporation

•   Medtronic Public Limited Company

•   Merck & Co., Inc.

•   Mettler-Toledo International Inc.

•   Mylan N.V.

•   PerkinElmer, Inc.

•   Perrigo Company plc

•   Pfizer Inc.

•   Quest Diagnostics Incorporated

•   Regeneron Pharmaceuticals, Inc.

•   ResMed Inc.

•   STERIS Public Limited Company

•   Stryker Corporation

•   Teleflex Incorporated

•   Thermo Fisher Scientific Inc.

•   UnitedHealth Group Incorporated

•   Universal Health Services, Inc.

•   Varian Medical Systems, Inc.

•   Vertex Pharmaceuticals Incorporated

•   Waters Corporation

•   Zimmer Biomet Holdings, Inc.

•   Zoetis Inc.

     
S&P 500 Consumer Staples    

•   Altria Group, Inc.

•   Archer-Daniels-Midland Company

•   Brown-Forman Corporation

•   Campbell Soup Company

•   Church & Dwight Co., Inc.

•   The Clorox Company

•   The Coca-Cola Company

•   Colgate-Palmolive Company

•   Conagra Brands, Inc.

•   Constellation Brands, Inc.

•   Costco Wholesale Corporation

•   Coty Inc.

•   The Estée Lauder Companies Inc

•   General Mills, Inc.

•   The Hershey Company

•   Hormel Foods Corporation

•   The J. M. Smucker Company

•   Kellogg Company

•   Kimberly-Clark Corporation

•   The Kraft Heinz Company

•   The Kroger Co.

•   Lamb Weston Holdings, Inc.

•   McCormick & Company, Incorporated

•   Molson Coors Beverage Company

•   Mondelēz International, Inc.

•   Monster Beverage Corporation

•   PepsiCo, Inc.

•   Philip Morris International Inc.

•   The Procter & Gamble Company

•   Sysco Corporation

•   Tyson Foods, Inc.

•   Walgreens Boots Alliance, Inc.

•   Walmart Inc.

 

2021 Proxy Statement 69
 

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Compensation of Named Executive Officers

 

 

 

Summary Compensation Table

 

The following Summary Compensation Table shows information about the compensation received by our CEO, our CFO and each of our three other most highly compensated executive officers for services rendered in all capacities during the 2020 fiscal year and the applicable comparable data for the 2019 and 2018 fiscal years. Neither Ms. Lynch nor Dr. Lotvin was a named executive officer in 2019 or 2018.

 

Name & Principal 2020
Positions(1)
  Year   Salary
($)(2)
  Stock
Awards
($)(3)
  Option
Awards
($)(4)
  Non-Equity
Incentive Plan
Compensation
($)(5)
  Change In
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)(6)
  All Other
Compensation
($)(7)
  Total
($)
Larry J. Merlo   2020   1,630,000     4,185,131   4,694,000   11,875,749   658,942   23,043,822
President and Chief   2019   1,630,000   20,249,968   3,374,998   10,625,000     571,783   36,451,749
Executive Officer   2018   1,630,000   10,124,947   3,374,995   6,142,000     667,156   21,939,098
Karen S. Lynch   2020   1,214,615   5,624,957   1,846,381   2,538,000     83,963   11,307,916
Executive Vice
President and
President of Aetna
                               
Eva C. Boratto   2020   962,500   4,499,966   1,477,098   1,819,000     162,589   8,921,153
Executive Vice   2019   850,000   3,749,981   1,249,999   3,588,000     126,243   9,564,223
President and Chief
Financial Officer
  2018   630,303   4,799,831   299,997   1,164,200     78,090   6,972,421
Alan M. Lotvin, M.D.   2020   831,250   3,749,972   1,230,918   1,577,000     83,035   7,472,175
Executive Vice
President and
President of
CVS Caremark
                               
Jonathan C. Roberts   2020   1,200,000   6,374,952   2,092,561   3,024,000     309,699   13,001,212
Executive Vice   2019   1,200,000   5,624,971   1,874,996   6,127,000     221,413   15,048,380
President and Chief
Operating Officer
  2018   1,162,500   9,624,917   2,124,994   2,927,000     227,557   16,066,968

 

(1) Principal position at December 31, 2020. Ms. Lynch and Dr. Lotvin were not Named Executive Officers in 2019 or 2018. On February 1, 2021, Ms. Lynch became President and CEO of CVS Health, and Mr. Merlo became a Strategic Advisor to the Company, in anticipation of his retirement on May 31, 2021.
(2) Amount of salary actually received in any year may differ from the annual base salary amount reported due to the timing of payroll periods and the timing of changes in base salary, which typically occur in April or following a mid-year promotion.
(3) Included in this column is the full grant date fair value of all PSU awards made to each NEO in the applicable year. The grant date fair value of each grant is computed in accordance with Financial Accounting Standards Board Accounting Standards Codification, Compensation – Stock Compensation, Topic 718 (“FASB ASC Topic 718”), excluding forfeiture estimates. The grant date fair values for PSU awards granted in 2020 are based upon the probable outcome of the performance conditions associated with these PSU awards as of the grant date and is calculated using a Monte Carlo simulation in accordance with FASB ASC Topic 718. Additional details regarding the grants of stock awards can be found in the Grants of Plan-Based Awards table. Each PSU represents one share of our common stock and upon vesting, will settle in shares, if earned, of CVS Health common stock, net of applicable withholding taxes, and subject to a two-year post-vesting holding period. Vesting of the PSU awards granted to the applicable NEOs on August 31, 2020 will occur, if at all, on April 1, 2023, and full vesting generally is subject to continued employment of the applicable NEO through April 1, 2023. As previously disclosed, Mr. Merlo did not receive a PSU award during 2020.

 

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The grant date fair value of the PSU awards granted to the NEOs in 2020, assuming the highest level of performance conditions associated with these PSUs occurs and each of the leverage ratio modifier and the rTSR modifier is +25%, is as follows:

 

          Grant Date Fair Value Assuming Highest
Level of Performance Conditions Achieved
  Name   Grant Date   ($)
  Karen S. Lynch   August 31, 2020   11,249,915
  Eva C. Boratto   August 31, 2020   8,999,932
  Alan M. Lotvin, M.D.   August 31, 2020   7,499,943
  Jonathan C. Roberts   August 31, 2020   12,749,903

 

(4) The amounts reported in the Option Awards column represent the grant date fair value of stock option awards granted to each of the NEOs on April 1, 2020, calculated in accordance with FASB ASC Topic 718. Due to market volatility, a 30-day trailing average stock price was used for the calculation of the number of shares subject to the stock options that were granted to the NEOs on April 1, 2020, resulting in a small reduction in the number of stock options granted. These options have an exercise price of $58.34 (the closing price of our stock on April 1, 2020) and will vest in equal installments on the first, second, third and fourth anniversaries of the grant date and expire ten years from the grant date. The option values were calculated using a modified Black-Scholes Model for pricing options. Refer to our 2020 Annual Report, Notes to Consolidated Financial Statements at Note 11, “Stock Incentive Plans,” for all relevant valuation assumptions used to determine the grant date fair value of these options. Additional details regarding the grants of stock option awards can be found under ”2020 PSU and Stock Options” on page 59 and in the Grants of Plan-Based Awards table.
(5) The figures shown include amounts earned in 2020 as annual cash incentive awards (see page 54).
(6) 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 value of Mr. Merlo’s pension benefit increased by $11,875,749 in 2020 from the prior year’s valuation and reflects the estimated present value of his SERP benefit resulting from the required use of the current plan discount rate following his retirement announcement, rather than the long-term rate previously used. 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 executive participant in the SERP. For additional information on the SERP, see “Pension Benefits” beginning on page 76.
(7) Set forth below is additional information regarding the amounts disclosed in the “All Other Compensation” column for 2020.

 

All Other Compensation – 2020

 

Name   Perquisites &
Other Personal
Benefits(A)
($)
  Company
Contributions
to Defined
Contribution
Plans(B)
($)
  Other(C)
($)
Larry J. Merlo   36,685   275,250   347,007
Karen S. Lynch   69,713   14,250  
Eva C. Boratto   15,000   127,525   20,064
Alan M. Lotvin, M.D.     76,563   6,472
Jonathan C. Roberts   18,414   178,850   112,435

 

(A) The amounts above reflect the following: for Mr. Merlo, $13,500 for financial planning services, $4,969 for home security and $18,216 associated with personal use of company aircraft; for Ms. Lynch $36,557 associated with personal use of Company car, $23,156 for legal fees and $10,000 for financial planning services; for Ms. Boratto, $15,000 for financial planning services; and for Mr. Roberts, $15,000 for financial planning services, $203 for home security and $3,211 associated with personal use of Company aircraft. 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. The Company determines the amount associated with personal use of Company car by calculating the incremental cost to the Company based on mileage, car fees, and driver salary.
(B) The amounts in this column include Company matching contributions to the CVS Health Future Fund 401(k) Plan (the “401(k) Plan”) of $14,250 for each of Messrs. Merlo and Roberts, Mmes. Lynch and Boratto and Dr. Lotvin. It also includes Company matching contributions credited to notional accounts in the unfunded Deferred Compensation Plan equal to: for Mr. Merlo $261,000; for Ms. Boratto, $113,275; for Dr. Lotvin, $62,313; and for Mr. Roberts, $164,600. The Company matching contributions also are reported in the “Cash” lines of the “Registrant Contributions in Last FY” column of the Nonqualified Deferred Compensation table on page 77.
(C) The amounts in this column consist of cash dividend equivalents paid by the Company on certain unvested RSUs and distributions of cash dividend equivalent payments from the Deferred Stock Plan (the “DSP”). The cash dividend equivalent payments from the DSP also are reported in the “Stock” lines of the “Aggregate Withdrawals/Distributions” column of the Nonqualified Deferred Compensation table.

 

2021 Proxy Statement 71
 

Table of Contents

Compensation of Named Executive Officers

 

Grants of Plan-Based Awards

 

This table reflects awards granted during 2020 under the CVS Health Corporation Amended 2017 Incentive Compensation Plan in the respective amounts listed. The MP&D Committee approved all of the 2020 awards.

 

Grants of Plan-Based Awards – 2020

 

      Date of     Est. Future Payouts
Under Non-Equity
Incentive Plan Award
  Est. Future Payouts
Under Equity
Incentive Plan Awards
  All Other
Option
Awards:
Number of
Securities
Underlying
  Exercise
or Base
Price of
Option
  Grant Date
Fair Value
of Stock
and Option
Name  Award
Type
  Committee
Action(1)
  Grant
Date
  Threshold
($)(2)
   Target
($)
   Maximum
($)
   Threshold
(#)(2)
  Target
(#)
  Maximum
(#)
   Options
(#)(3)
   Awards
($ / Sh)(3)
   Awards
($)(4)
Larry J. Merlo  Stock Options  2/20/2020  4/1/2020                      478,711  58.34  4,185,131
   Annual Cash        1,630,000   3,260,000   6,520,000               
Karen S. Lynch  Stock Options  2/20/2020  4/1/2020                      211,196  58.34  1,846,381
   PSUs(5)  2/20/2020  8/31/2020             41,322  103,305  206,610        5,624,957
   Annual Cash        881,250   1,762,500   3,525,000               
Eva C. Boratto  Stock Options  2/20/2020  4/1/2020                      168,956  58.34  1,477,098
   PSUs(5)  2/20/2020  8/31/2020             33,058  82,644  165,288        4,499,966
   Annual Cash        721,875   1,443,750   2,887,500                  
Alan M. Lotvin, M.D.  Stock Options  2/20/2020  4/1/2020                      140,797  58.34  1,230,918
   PSUs(5)  2/20/2020  8/31/2020             27,548  68,870  137,740        3,749,972
   Annual Cash        597,170   1,194,340(6)   2,388,680               
Jonathan C. Roberts  Stock Options  2/20/2020  4/1/2020                      239,355  58.34  2,092,561
   PSUs(5)  2/20/2020  8/31/2020             46,832  117,079  234,158        6,374,952
   Annual Cash        1,050,000   2,100,000   4,200,000               

 

(1) Represents the date the MP&D Committee approved the 2020 grant values for stock options and PSU awards. Due to the subsequent volatility associated with the COVID-19 pandemic, the PSU award grant date was delayed until August 31, 2020. On August 11, 2020, the MP&D Committee affirmed and did not change the performance metrics approved in February 2020 and targets approved in March 2020 for the PSU awards. Refer to “2020 PSU and Stock Options” beginning on page 59 for a detailed discussion of the PSU awards.
(2) Represents the threshold achievement in order to receive a payout for the applicable award. Performance below the threshold results in no payout. Refer to “2020 PSU and Stock Options” beginning on page 59 for a detailed discussion.
(3) Due to market volatility, a 30-day trailing average stock price was used for the calculation of the number of shares subject to the stock options that were granted to the NEOs on April 1, 2020, resulting in a small reduction in the number of stock options granted. The stock option awards shown above vest in equal installments on the first, second, third and fourth anniversaries of the grant date and expire ten years from the grant date. The Company’s policy is to establish the exercise price for stock options as the closing price of CVS Health’s common stock on the grant date, April 1, 2020.
(4) The stock options granted on April 1, 2020 are valued based on the grant date fair market value and were calculated using a modified Black-Scholes Model for pricing options.
(5) For the 2020-2022 cycle, these PSU awards are included in the SCT in the “Stock Awards” column. The PSU award, if earned, is based on the Company’s 2022 Adjusted EPS and will be modified by up to +/- 25% based on each of (a) CVS Health’s leverage ratio and (b) CVS Health’s performance as measured by rTSR. The maximum number of PSUs disclosed under “Est. Future Payouts Under Equity Incentive Plan Awards” assumes the maximum leverage ratio modifier of +25% and the maximum rTSR modifier of +25%. Each vested PSU represents one share of CVS Health common stock and will settle in shares, if earned, of CVS Health common stock, net of taxes, as a result of a determination by the MP&D Committee. The PSU awards do not earn dividend equivalents and have no voting rights. See the discussion of long-term incentive equity awards in “2020 Long-Term Incentive Decisions” under “2020 PSU and Stock Options” beginning on page 59 for a discussion of the vesting and payout of these awards based on the MP&D Committee’s determination that the Company has achieved the applicable performance result. Refer to footnote 3 beginning on page 70 for a discussion of how the number of vested PSUs will be determined.
(6) Dr. Lotvin’s bonus target was pro-rated to reflect an increase to his target bonus opportunity and increase to his base salary in February 2020. Dr. Lotvin’s 2021 full year target bonus opportunity is 150% of base salary.

 

72 CVS Health
 

Table of Contents

Compensation of Named Executive Officers

 

Outstanding Equity Awards at Fiscal Year-End

 

This table shows information regarding the outstanding equity awards held by each of our Named Executive Officers under the applicable plan that were outstanding as of December 31, 2020. The unearned PSU awards granted in 2020 and 2019 are shown at target performance, with no adjustment for leverage ratio modifier performance or rTSR modifier performance. The LTIP PSU awards and Supplemental LTIP PSU awards granted in 2018 are both shown at maximum performance (200%) and EBITDA PSU awards granted in 2018 are shown at threshold performance (50%), with no adjustment for rTSR modifier performance, but actual performance for these awards are explained in the footnotes below.

 

Outstanding Equity Awards at 2020 Year-End

 

    Stock Option Awards(1)   Stock Awards
Name  Grant Date  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
   Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
   Option
Exercise
Price
($)
  Option
Expiration
Date
   Number
of Shares
or Units of
Stock That
Have Not
Vested
(#)
   Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)(2)
   Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares or
Units of
Stock that
Have Not
Vested
(#)
   Equity
Incentive
Plan Awards:
Market Value
of Unearned
Shares or
Units of
Stock that
Have Not
Vested
($)(2)
Larry J. Merlo  4/1/2014  335,697   (3)  74.29  4/1/2021                
   4/1/2015  273,929   (3)  102.26  4/1/2022                
   4/1/2016  286,787   (3)  104.82  4/1/2023   19,080(7)  1,303,164        
   4/3/2017  253,578   84,527(3)  78.05  4/3/2024   21,621(7)  1,476,714        
   4/1/2018  197,045   197,046(3)  62.21  4/1/2025           27,125(11)  1,852,638
   4/1/2018                         240,256(12)  16,409,485
   4/1/2019  136,354   409,065(4)  54.19  4/1/2029                
   6/5/2019                         234,755(13)  16,033,767
   8/30/2019                         189,500(14)  12,942,850
   4/1/2020      478,711(4)  58.34  4/1/2030                
Karen S. Lynch  2/19/2016  93,989   (5)  37.91  2/18/2026                
   2/17/2017  192,741   (5)  45.91  2/16/2027                
   11/28/2018                 31,144(8)  2,127,135        
   11/28/2018                         72,612(12)  4,959,400
   11/28/2018                         54,458(15)  3,719,481
   4/1/2019  60,602   181,806(4)  54.19  4/1/2029                
   6/5/2019                         104,335(13)  7,126,081
   4/1/2020      211,196(4)  58.34  4/1/2030                
   8/31/2020                         103,305(16)  7,055,732
Eva C. Boratto  4/1/2014  18,882   (3)  74.29  4/1/2021                
   4/1/2015  27,392   (3)  102.26  4/1/2022                
   4/1/2016  21,509   (3)  104.82  4/1/2023   1,431(7)  97,737        
   4/3/2017  26,296   8,766(3)  78.05  4/3/2024   2,242(7)  153,129        
   4/1/2018  17,514   17,516(3)  62.21  4/1/2025           2,411(11)  164,671
   4/1/2018                         17,796(12)  1,215,467
   8/31/2018                         33,646(15)  2,298,022
   11/28/2018                         36,306(12)  2,479,700
   11/28/2018                         30,254(15)  2,066,348
   4/1/2019  50,501   151,506(4)  54.19  4/1/2029                
   6/5/2019                         86,946(13)  5,938,412
   4/1/2020      168,956(4)  58.34  4/1/2030                
   8/31/2020                         82,644(16)  5,644,585

 

2021 Proxy Statement 73
 

Table of Contents

Compensation of Named Executive Officers

 

    Stock Option Awards(1)  Stock Awards
Name  Grant Date  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
   Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
   Option
Exercise
Price
($)
  Option
Expiration
Date
   Number
of Shares
or Units of
Stock That
Have Not
Vested
(#)
   Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)(2)
   Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares or
Units of
Stock that
Have Not
Vested
(#)
   Equity
Incentive
Plan Awards:
Market Value
of Unearned
Shares or
Units of
Stock that
Have Not
Vested
($)(2)
Alan M. Lotvin, M.D.  4/1/2014  15,736   (3)  74.29  4/1/2021                
   4/1/2015  21,386   (3)  102.26  4/1/2022                
   4/1/2016  27,395   (3)  104.82  4/1/2023                
   4/3/2017  24,683   8,228(3)  78.05  4/3/2024   3,843(9)  262,477        
   2/28/2018                 476(10)  32,511        
   4/1/2018  11,270   11,271(3)  62.21  4/1/2025   6,027(9)  411,644   1,506(17)  102,860
   4/1/2018                         24,914(12)  1,701,626
   8/31/2018                         53,834(15)  3,676,862
   4/1/2019  20,200   60,602(4)  54.19  4/1/2029                
   5/31/2019                         46,804(12)  3,196,713
   6/5/2019                         34,778(13)  2,375,337
   4/1/2020      140,797(4)  58.34  4/1/2030                
   8/31/2020                         68,870(16)  4,703,821
Jonathan C. Roberts  9/4/2012  108,870   (6)  45.93  9/4/2022                
   4/1/2014  73,433   (3)  74.29  4/1/2021                
   4/1/2015  68,482   (3)  102.26  4/1/2022                
   4/1/2016  161,318   (3)  104.82  4/1/2023   10,733(7)  733,064        
   4/3/2017  150,268   50,090(3)  78.05  4/3/2024   12,812(7)  875,060        
   4/1/2018  124,065   124,066(3)  62.21  4/1/2025           17,079(11)  1,166,496
   4/1/2018                         133,474(12)  9,116,274
   8/31/2018                         100,942(15)  6,894,339
   4/1/2019  75,752   227,258(4)  54.19  4/1/2029                
   6/5/2019                         130,419(13)  8,907,618
   4/1/2020      239,355(4)  58.34  4/1/2030                
   8/31/2020                         117,079(16)  7,996,496

 

(1) The Company had no equity incentive plan awards that were securities underlying unexercised, unearned options at fiscal year-end, so that column is intentionally omitted from this table.
(2) The value of the RSUs and PSUs is based on a price of $68.30 per share, which was the closing price of the Company’s stock on December 31, 2020, the last trading day of the Company’s fiscal year. Each vested RSU and PSU represents one share of Company’s common stock and will settle in shares, if earned (for PSUs), of Company common stock, net of taxes.
(3) These stock options vest in one-quarter increments on each of the first, second, third and fourth anniversaries of the grant date and expire seven years from the date of the grant.
(4) These stock options vest in one-quarter increments on each of the first, second, third and fourth anniversaries of the grant date and expire ten years from the date of the grant.
(5) Represents stock appreciation rights ("SARs") that were granted prior to the Aetna Transaction and expire ten years from the date of grant.
(6) The stock options vest in one-third increments on each of the third, fourth and fifth anniversaries of the date of the grant and expire ten years from the date of the grant.
(7) RSUs vest in increments of 50% on the third anniversary of the grant date and 50% on the fifth anniversary of the grant date.
(8) RSUs cliff vest on the third anniversary of the grant date.
(9) RSUs cliff vest on the fourth anniversary of the grant date.
(10) Consists of the unvested portion of a RSU grant that vests on the third anniversary of the grant date.

 

74 CVS Health
 

Table of Contents

Compensation of Named Executive Officers