DEF 14A 1 cah-2016xdef14a.htm DEFINITIVE PROXY STATEMENT Document

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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Preliminary Proxy Statement
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to § 240.14a-12

CARDINAL HEALTH, INC.
 
(Name of Registrant as Specified In Its Charter)
 
N/A
 
(Names of Person(s) Filing Proxy Statement, if other than the Registrant)
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Notice of Annual Meeting of Shareholders
To Be Held November 3, 2016

Date and time:
Thursday, November 3, 2016, at 8:00 a.m., local time
Location:
Cardinal Health, Inc., 7000 Cardinal Place, Dublin, Ohio 43017
Purpose:
(1)
To elect the 11 director nominees named in the proxy statement;
 
(2)
To ratify the appointment of Ernst & Young LLP as our independent auditor for the fiscal year ending June 30, 2017;
 
(3)
To approve the Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan;
 
(4)
To approve, on a non-binding advisory basis, the compensation of our named executive officers; and
 
(5)
To transact such other business as may properly come before the meeting or any adjournment or postponement.
Who may vote:
Shareholders of record at the close of business on September 6, 2016 are entitled to notice of, and to vote at, the meeting or any adjournment or postponement.
By Order of the Board of Directors.
September 16, 2016
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JESSICA L. MAYER
 
Senior Vice President, Deputy General Counsel and
    Corporate Secretary
Important notice regarding the availability of proxy materials for the Annual Meeting of Shareholders to be held on November 3, 2016:
This Notice of Annual Meeting of Shareholders, the accompanying proxy statement and our fiscal 2016 Form 10-K all are available at www.edocumentview.com/cah.




Proxy Summary
This summary highlights information contained elsewhere in our proxy statement. This summary does not contain all of the information that you should consider, and you should read the entire proxy statement and our fiscal 2016 Form 10-K carefully before voting.
Performance Highlights
 
Fiscal 2016 was an outstanding year for us as we delivered excellent financial performance.
Increased revenue by 19% to a record $121.5 billion.
Grew GAAP operating earnings by 14% to a record $2.5 billion and non-GAAP operating earnings by 17% to a record $2.9 billion.*
Grew GAAP diluted earnings per share ("EPS") by 20% to $4.32 and non-GAAP diluted EPS by 20% to $5.24.*
Generated a record $3.0 billion in operating cash flow.
Deployed $3.6 billion for acquisitions and returned $1.2 billion to shareholders, including $650 million in share repurchases.
Increased quarterly dividend by 16% in accordance with our goal of an annual dividend payout ratio of 30% to 35% of non-GAAP diluted EPS.
Grew Pharmaceutical segment revenue by 20% and segment profit by 19% and grew Medical segment revenue by 9% and segment profit by 6%.
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___________
*
We provide the reasons we use non-GAAP financial measures and the reconciliations to their most directly comparable U.S. Generally Accepted Accounting Principles ("GAAP") financial measures on pages 23 through 25 of the Fiscal 2016 Form 10-K.


 
Cardinal Health | 2016 Proxy Statement
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Proxy Summary
 
 




CEO Compensation Highlights
 
Our Chairman and Chief Executive Officer George S. Barrett received an above-target annual incentive award, reflecting our record operating earnings and Mr. Barrett's strong individual contributions in fiscal 2016; his cash compensation (base salary and annual incentive) was down slightly on a year-over-year basis.
Mr. Barrett's total compensation was up slightly year-over-year reflecting an increase in his long-term incentive target provided for in the August 2015 extension of his employment agreement. We emphasize performance and retention through long-term incentive compensation, two-thirds of which is performance-based and the value of which is dependent on the company's future results.
Governance Highlights
 
ü
10 of our 11 director nominees are independent
ü
Regular executive sessions of independent directors
ü
Strong independent Lead Director with clearly defined duties
ü
Annual election of directors and majority voting
ü
Strong Board focus on long-term growth through strategy, capital deployment and risk oversight
ü
Gender and ethnic diversity represented in 45% of our director nominees
ü
Majority of directors have significant healthcare experience and nine directors have significant international experience
ü
Ongoing Board refreshment; balanced tenure with eight new directors since 2009
ü
Long-standing, proactive shareholder engagement program
ü
Recently adopted proxy access for shareholders
ü
Board focus on talent development and management succession planning
ü
Stock ownership guidelines for directors and executive officers
ü
Annual Board and individual director evaluations through interviews with outside facilitator
 
 


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Cardinal Health | 2016 Proxy Statement
 



Proxy Summary
 
 




Nominees for Director
 
Name
Age
Director
Since
Occupation
Independent
Committee Memberships
Audit
Human Resources and Compensation
Nominating and Governance
David J. Anderson
67
2014
Retired SVP and Chief Financial Officer, Honeywell International
ü
ü
 
 
Colleen F. Arnold
59
2007
Retired SVP, Sales and Distribution, IBM
ü
 
 
ü
George S. Barrett
61
2009
Chairman and CEO, Cardinal Health
 
 
 
 
Carrie S. Cox
59
2009
Chairman and CEO, Humacyte, Inc. and former EVP and President, Global Pharmaceuticals, Schering-Plough
ü

 
ü

 
Calvin Darden
66
2005
Retired SVP of U.S. Operations, UPS
ü
 
ü
 
Bruce L. Downey
68
2009
Partner, NewSpring Health Capital II, L.P. and retired Chairman and CEO, Barr Pharmaceuticals
ü
ü
 
 
Patricia A. Hemingway Hall
63
2013
Retired President and CEO, Health Care Service Corporation
ü
ü
 
ü
Clayton M. Jones
67
2012
Retired Chairman, President and CEO, Rockwell Collins
ü
Chair
 
 
Gregory B. Kenny
63
2007
Retired President and CEO, General Cable
Independent Lead Director
 
 
Chair
Nancy Killefer
63
2015
Retired Senior Partner, Public Sector Practice, McKinsey
ü
 
ü
 
David P. King
60
2011
Chairman, President and CEO, Laboratory Corporation of America Holdings
ü
 
Chair
 
Additional Information About Our Director Nominees
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Cardinal Health | 2016 Proxy Statement
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Table of Contents



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Cardinal Health | 2016 Proxy Statement
 



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2016 Proxy Statement
General Information
These proxy materials are being furnished to solicit proxies on behalf of the Board of Directors of Cardinal Health, Inc. for use at our Annual Meeting of Shareholders to be held on Thursday, November 3, 2016, and at any adjournment or postponement (the “Annual Meeting”). The meeting will take place at our principal executive office located at 7000 Cardinal Place, Dublin, Ohio 43017, at 8:00 a.m., local time.
These proxy materials include our Notice of Annual Meeting and Proxy Statement and our Annual Report on Form 10-K for the fiscal year ended June 30, 2016 (the "Fiscal 2016 Form 10-K"). In addition, these proxy materials may include a proxy card for the Annual Meeting. These proxy materials are first being sent or made available to our shareholders commencing on September 16, 2016.
References to our fiscal years in this proxy statement mean the fiscal year ended or ending on June 30 of such year. For example, “fiscal 2016” refers to the fiscal year ended June 30, 2016.
Notice of Internet Availability of Proxy Materials
As permitted by the SEC, we are providing proxy materials to some of our shareholders via the Internet. Commencing on September 16, 2016, we mailed a Notice of Internet Availability of Proxy Materials (the “Notice”) explaining how to access our proxy materials online. If you received the Notice, you will not receive a printed copy of our proxy materials by mail unless you request one by following the directions included on the Notice.
Transfer Agent
Shareholders of record should direct communications regarding change of address, transfer of share ownership, lost share certificates and other matters regarding their share ownership to Computershare Trust Company, N.A., P.O. Box 30170, College Station, TX 77842. Our transfer agent may also be contacted via the Internet at www.computershare.com/investor or by telephone at (877) 498-8861 or (781) 575-2879.
 
Record Date  
We have fixed the close of business on September 6, 2016 as the record date for determining our shareholders entitled to notice of and to vote at the Annual Meeting. On that date, we had 319,952,570 common shares outstanding. Shareholders as of the record date will have one vote per share for the election of each director nominee and on each other voting matter.
Quorum  
We will have a quorum to conduct business at the Annual Meeting if the holders of a majority of our common shares are present, either in person or by proxy.
Board Recommendation
The Board recommends that you vote FOR the election of the 11 director nominees and FOR Proposals 2, 3 and 4.
How to Vote
Shareholders of record. If you are a “shareholder of record” (meaning your shares are registered in your name with our transfer agent, Computershare Trust Company, N.A.), you may vote either in person at the Annual Meeting or by proxy. If you decide to vote by proxy, you may do so in any one of the following three ways:
By telephone.  You may vote your shares 24 hours a day by calling the toll free number 1-800-652-VOTE (8683) within the United States, U.S. territories or Canada, and following instructions provided by the recorded message. You will need to enter identifying information that appears on your proxy card or the Notice. The telephone voting system allows you to confirm that your votes were properly recorded.
By Internet.  You may vote your shares 24 hours a day by logging on to a secure website, www.envisionreports.com/CAH, and following the instructions provided. You will need to enter identifying information that appears on your proxy card or the Notice. As with the telephone voting system, you will be able to confirm that your votes were properly recorded.



 
Cardinal Health | 2016 Proxy Statement
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General Information
 
 


By mail.  If you received a proxy card, you may mark, sign and date your proxy card and return it by mail in the enclosed postage-paid envelope.
Telephone and Internet voting is available through 2:00 a.m. Eastern time on Thursday, November 3, 2016. If you vote by mail, your proxy card must be received before the Annual Meeting to assure that your vote is counted. We encourage you to vote promptly.
Beneficial owners. If, like most shareholders, you are a beneficial owner of shares held in “street name” (meaning a broker, trustee, bank or other nominee holds shares on your behalf), you may vote in person at the Annual Meeting only if you obtain a legal proxy from the nominee that holds your shares. Alternatively, you may vote by completing, signing and returning the voting instruction form that the nominee provides to you or by following any telephone or Internet voting instructions described on the voting instruction form, the Notice or other materials that the nominee provides to you. We encourage you to vote promptly.
Changing or Revoking Your Proxy  
Your attendance at the Annual Meeting will not automatically revoke your proxy. If you are a shareholder of record, you may change or revoke your proxy at any time before a vote is taken at the meeting by giving notice to us in writing or at the Annual Meeting, by executing and forwarding to us a later-dated proxy or by voting a later proxy over the telephone or the Internet. If you are a beneficial owner of shares, you should check with the broker, trustee, bank or other nominee that holds your shares to determine how to change or revoke your vote.
Shares Held Though Our Employee Plans  
If you hold shares through our 401(k) Savings Plans or Deferred Compensation Plan, you will receive voting instructions from Computershare Trust Company, N.A. and can vote through one of the three methods described above under "How to Vote." Please note that employee plan shares have an earlier voting deadline of 2:00 a.m. Eastern time on Tuesday, November 1, 2016.
Broker Non-Votes  
If you are a beneficial owner whose shares are held by a broker, as stated above you must instruct the broker how to vote your shares. If you do not provide voting instructions, your broker is not permitted to vote your shares on the election of directors, the Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan and the advisory vote to approve the compensation of our named executive officers. The inability of the broker to vote your shares on these proposals results in a “broker non-vote.” In the absence of voting instructions, the broker can only register your shares as being present at the Annual Meeting for purposes of determining a quorum and may vote your shares on ratification of the appointment of our auditor.
 
Voting
You may either vote FOR, AGAINST or ABSTAIN on each of the proposals. Votes will be tabulated by or under the direction of inspectors of election, who will certify the results following the Annual Meeting.
To elect directors under Proposal 1, our governing documents require that a director nominee be elected by a majority of votes cast in an uncontested election. Abstentions and broker non-votes are not considered as votes cast and are not counted in determining the outcome of the voting results. If a director nominee is not re-elected by a majority of votes cast, that individual is required to tender a resignation for the Board’s consideration. See “Resignation Policy for Incumbent Directors Not Receiving Majority Votes” on page 14. Proxies may not be voted for more than 11 director nominees, and shareholders may not cumulate their voting power.
Each of Proposals 2, 3 and 4 require approval by a majority of votes cast. Abstentions and broker non-votes are not considered as votes cast and will not be counted in determining the outcome of the voting results, except that for purposes of satisfying New York Stock Exchange ("NYSE") rules, abstentions are counted in the denominator for determining whether Proposal 3 is approved.
How Shares Will Be Voted  
The shares represented by all valid proxies received by telephone, by Internet or by mail will be voted in the manner specified. For shareholders of record who do not specify a choice for a proposal, proxies that are signed and returned will be voted FOR the election of all 11 director nominees, FOR the ratification of the appointment of Ernst & Young LLP as independent auditor, FOR approval of the Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan and FOR approval of the compensation of our named executive officers. If any other matters properly come before the Annual Meeting, the individuals named in your proxy, or their substitutes, will determine how to vote on those matters in their discretion. The Board of Directors does not know of any other matters that will be presented for action at the Annual Meeting.
Attending the Annual Meeting
To attend the Annual Meeting, you must have an admission ticket or satisfactory proof of share ownership and photo identification. If you are a shareholder of record, your admission ticket is attached to your proxy card or you may present the Notice. If you are a beneficial owner, your proof of share ownership can be the Notice or a photocopy of the voting instruction form that the nominee provided to you. You can call our Investor Relations department at (614) 757-4757 if you need directions to the Annual Meeting.
Even if you expect to attend the Annual Meeting in person, we urge you to vote your shares in advance.



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Cardinal Health | 2016 Proxy Statement
 



Proposal 1—Election of Directors
Our Board has nominated 11 directors for election at this Annual Meeting to serve until the next Annual Meeting of Shareholders and until his or her successor is duly elected and qualified. All of the nominees currently are directors of Cardinal Health. Each agreed to be named in this proxy statement and to serve if elected. If, due to death or other unexpected occurrence, one or more of the director nominees is not available for election, proxies will be voted for the election of all remaining nominees and any substitute nominee(s) the Board selects.
The Board, through the Nominating and Governance Committee, seeks a board that, as a whole, possesses the experience, skills and diversity of backgrounds to perform effectively in light of the
 
company's current and evolving business and strategic direction and to properly perform its oversight responsibilities. All of our director nominees bring to the Board a wealth of executive leadership experience derived from their professional backgrounds and areas of expertise. As a group, they provide extensive healthcare and global business experience, financial expertise, business acumen and diverse perspectives, as well as public company board experience. Each of our director nominees has sound judgment and integrity and is able to commit sufficient time and attention to the activities of the Board. All director nominees other than the Chairman and Chief Executive Officer are independent.

Biographies of our Director Nominees
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David J. Anderson
Age 67
Director since 2014
Senior Vice President and Chief Financial Officer of Honeywell International Inc. (retired)
Independent Director
Director Qualification Highlights
Other Public Boards: American Electric Power Company, Inc., a public utility holding company (since 2011); B/E Aerospace, Inc., a manufacturer of aircraft interior products (since 2014); Fifth Street Asset Management Inc., an alternative asset manager (2014 - 2015)
ü Financial Literacy / Expertise - Former CFO
ü International
ü Executive Leadership
ü Strategic Planning / Acquisitions
ü Technology
Mr. Anderson is the former Chief Financial Officer of Honeywell International Inc., a global diversified technology and manufacturing company, serving in that role from 2003 to 2014. While at Honeywell, Mr. Anderson was responsible for the company’s corporate finance activities including domestic and international tax, accounting, treasury, audit, investments, financial planning, acquisitions and real estate. Prior to joining Honeywell, Mr. Anderson held a number of other finance-related executive positions with ITT Corporation, Newport News Shipbuilding, RJR Nabisco and Quaker Oats Company.
Skills and Qualifications of Particular Relevance to Cardinal Health
Through his prior finance leadership positions as Chief Financial Officer at Honeywell and at other leading companies, Mr. Anderson brings to the Board relevant experience in the areas of global finance, management, executive leadership, strategic planning, acquisitions, information technology and international markets. His extensive finance expertise provides valuable insight in the areas of financial reporting and accounting and controls, as well as international tax and finance. He also brings to the Board valuable perspective and insights from his service on the boards of directors of American Electric Power, including its Audit and Finance Committees and B/E Aerospace, including its Audit Committee.


 
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Proposal 1—Election of Directors
 
 


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Colleen F. Arnold
Age 59
Director since 2007
Senior Vice President, Sales and Distribution, International Business Machines Corporation (retired)
Independent Director
Director Qualification Highlights
Other Public Boards: None
ü Technology
ü International and Global Leadership
ü Operations
ü Executive Leadership
ü Strategic Planning
Ms. Arnold was Senior Vice President, Sales and Distribution of International Business Machines Corporation ("IBM"), a provider of systems, financing, software and services, from 2014 until her retirement in March 2016. Prior to that, she held a number of senior positions with IBM from 1998 to 2014, including Senior Vice President, Application Management Services, IBM Global Business Services, General Manager of GBS Strategy, Global Consulting Services, Global Industries and Global Application Services, General Manager, Europe, and General Manager, Australia, Global Services.
Skills and Qualifications of Particular Relevance to Cardinal Health
A former senior executive of IBM for over 17 years, Ms. Arnold's significant experience in the areas of global business operations and information technology contributes to the Board's discussions regarding information technology in our business and global strategies. Her extensive international business experience, including leadership of international commercial operations at IBM, provides valuable insight for our growing presence in international markets. She also brings to the Board more than 30 years of relevant experience in the areas of operations, management, executive leadership and strategic planning.
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George S. Barrett
Age 61
Director since 2009
Chairman and Chief Executive Officer, Cardinal Health, Inc.
Other Public Boards: Eaton Corporation plc, a diversified power management company (2011 - 2015)
Director Qualification Highlights
ü Healthcare
ü Operations
ü Strategic Planning
ü Executive Leadership
ü International
ü Regulatory / Public Policy
ü Financial Expertise

Mr. Barrett has served as Chairman and Chief Executive Officer of Cardinal Health, Inc. since 2009. He joined Cardinal Health in 2008 as Vice Chairman and Chief Executive Officer of the company's Healthcare Supply Chain Services segment. Prior to joining Cardinal Health, Mr. Barrett held a number of executive positions with Teva Pharmaceutical Industries Ltd., a multinational generic and branded pharmaceutical manufacturer, from 1999 to 2007, including President and Chief Executive Officer of Teva North America.
Skills and Qualifications of Particular Relevance to Cardinal Health
Having served in leadership positions with companies in the pharmaceutical industry for over 30 years, Mr. Barrett has extensive healthcare experience in the areas of operations, management, regulatory compliance, finance, executive leadership, strategic planning, human resources, corporate governance and global markets. As a result, he provides the Board with unique perspective and insights regarding our businesses and our growing international presence, industry, challenges and opportunities. He also brings to the Board valuable perspective and insights from his service on other public and not-for-profit boards of directors, including his prior service on Eaton’s board of directors.


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Cardinal Health | 2016 Proxy Statement
 



Proposal 1—Election of Directors
 
 


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Carrie S. Cox
Age 59
Director since 2009
Chairman and Chief Executive Officer of Humacyte, Inc.; Executive Vice President and President of Global Pharmaceuticals, Schering-Plough Corporation (retired)
Independent Director
Director Qualification Highlights
Other Public Boards: Texas Instruments Incorporated, a developer, manufacturer and marketer of semiconductors (since 2004); Celgene Corporation, a biopharmaceutical company (since 2009)
ü Healthcare
ü International
ü Operations
ü Executive Leadership
ü Strategic Planning
ü Regulatory / Public Policy
Ms. Cox has served as Chief Executive Officer of Humacyte, Inc., a privately held, development stage company focused on regenerative medicine, since 2010 and as Chairman of Humacyte since 2013. From 2003 to 2009, she served as Executive Vice President and President of Global Pharmaceuticals at Schering-Plough Corporation, a multinational branded pharmaceutical manufacturer. Ms. Cox previously was Executive Vice President and President of Global Prescription Business of Pharmacia Corporation from 1997 to 2003.
Skills and Qualifications of Particular Relevance to Cardinal Health
Through her roles as a former executive officer of Schering-Plough, President of Pharmacia's Global Prescription business and a licensed pharmacist, and now with Humacyte, Ms. Cox brings to the Board substantial expertise in healthcare, particularly the pharmaceutical and international aspects of our business. She has worked in the global pharmaceutical industry for over 30 years, giving her relevant experience with large, multinational pharmaceutical companies in the areas of operations, management, regulatory compliance, executive leadership, strategic planning and global markets. She also brings to the Board valuable perspective and insights from her service on the boards of directors of Texas Instruments, including its Compensation Committee and service as its Lead Director, and Celgene.
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Calvin Darden
Age 66
Director since 2005
Senior Vice President of U.S. Operations of United Parcel Service, Inc. (retired)
Independent Director
Director Qualification Highlights
Other Public Boards: Target Corporation, an operator of large-format general merchandise discount stores (since 2003); Coca-Cola Enterprises, Inc., a marketer, manufacturer and distributor of nonalcoholic beverages in selected international markets (2004 - 2016)
ü Operations
ü Distribution / Supply Chain
ü Executive Leadership
ü Strategic Planning
ü Labor Relations
ü International

Mr. Darden was Senior Vice President of U.S. Operations of United Parcel Service, Inc. ("UPS"), an express carrier and package delivery company, from January 2000 until his retirement in 2005. During his 33-year career with UPS, he served in a number of senior leadership positions, including developing the corporate quality strategy for UPS and leading the business and logistics operations for its Pacific Region, the largest region of UPS at that time.
Skills and Qualifications of Particular Relevance to Cardinal Health
A former executive officer of UPS, Mr. Darden has expertise in supply chain networks and logistics that contributes to the Board’s understanding of this important aspect of our business. He has over 30 years of relevant experience in the areas of operations, distribution and supply chain, executive leadership, efficiency and quality control, strategic planning and labor relations. As a former member of Coca-Cola Enterprises' board of directors, Mr. Darden provides the Board with a valuable understanding of distribution operations in international markets. He also brings to the Board valuable perspective and insights from his service on Target’s board of directors, including its Compensation Committee, and his prior service on Coca-Cola Enterprises’ Human Resources and Compensation Committee.


 
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Proposal 1—Election of Directors
 
 


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Bruce L. Downey
Age 68
Director since 2009
Chairman and Chief Executive Officer of Barr Pharmaceuticals, Inc. (retired); Partner of NewSpring Health Capital II, L.P.
Independent Director
Director Qualification Highlights
Other Public Boards: Momenta Pharmaceuticals, Inc., a biotechnology company (since 2009)
ü Healthcare
ü Regulatory / Public Policy
ü Operations
ü International
ü Financial Expertise
ü Executive Leadership
ü Strategic Planning
Mr. Downey was Chairman and Chief Executive Officer of Barr Pharmaceuticals, Inc., a global generic pharmaceutical manufacturer, from 1994 to 2008. Mr. Downey has served on a part-time basis as a Partner of NewSpring Health Capital II, L.P., a venture capital firm, since 2009.
Skills and Qualifications of Particular Relevance to Cardinal Health
Having spent 14 years as Chairman and Chief Executive Officer of Barr Pharmaceuticals, Mr. Downey brings to the Board substantial global healthcare experience in the areas of operations, management, regulatory compliance, finance, executive leadership, strategic planning, human resources and corporate governance. He also offers valuable experience in the pharmaceutical and growing international aspects of our businesses, having served as Chief Executive Officer of Barr Pharmaceuticals. Mr. Downey brings to the Board valuable perspective and insights from his service on Momenta Pharmaceuticals’ board of directors, including its Audit Committee, and from his prior service as Chairman of Barr Pharmaceutical's board of directors. Before his career at Barr Pharmaceuticals, Mr. Downey was a practicing attorney for 20 years, having worked in both private practice and with the U.S. Department of Justice.
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Patricia A. Hemingway Hall
Age 63
Director since 2013
President and Chief Executive Officer of Health Care Service Corporation (retired)
Independent Director
Director Qualification Highlights
Other Public Boards: ManpowerGroup, Inc., a workforce solutions company (since 2011)
ü Healthcare
ü Regulatory / Public Policy / Government
ü Operations
ü Financial Expertise
ü Executive Leadership
ü Strategic Planning
ü Technology

Ms. Hemingway Hall served as President and Chief Executive Officer of Health Care Service Corporation, a mutual health insurer ("HCSC"), from 2008 until her retirement in 2015. Previously, she held several leadership positions at HCSC, including President and Chief Operating Officer from 2007 to 2008 and Executive Vice President of Internal Operations from 2006 to 2007.
Skills and Qualifications of Particular Relevance to Cardinal Health
As retired President and Chief Executive Officer of HCSC, the largest customer-owned health insurer in the United States and fourth largest overall operating through Blue Cross and Blue Shield Plans in Texas, Illinois, Montana, New Mexico and Oklahoma, Ms. Hemingway Hall brings to the Board valuable experience regarding evolving healthcare payment models at a time of change and reform in the healthcare industry. She has worked in the healthcare industry for over 30 years, first as a registered nurse and most recently in health insurance, and has relevant experience in the areas of healthcare reform, operations, management, regulatory compliance, government relations, finance, executive leadership, strategic planning, technology and human resources. In addition, Ms. Hemingway Hall provides the Board with a deep understanding of operations, management and technology from her experience in previous roles at HCSC. She also brings to the Board valuable perspective and insights from her service on ManpowerGroup's board of directors, including its Audit Committee.


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Cardinal Health | 2016 Proxy Statement
 



Proposal 1—Election of Directors
 
 


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Clayton M. Jones
Age 67
Director since 2012
Chairman, President and Chief Executive Officer of Rockwell Collins, Inc. (retired)
Independent Director
Director Qualification Highlights
Other Public Boards: Deere & Company, an agricultural and construction machinery manufacturer (since 2007); Motorola Solutions, Inc., a data communications and telecommunications equipment provider (since 2015); Rockwell Collins, Inc. (2001 - 2014)
ü Operations
ü Executive Leadership
ü Strategic Planning
ü Technology
ü Financial Expertise
ü International
ü Regulatory / Public Policy / Government

Mr. Jones served as Chairman of the Board of Rockwell Collins, Inc. ("Rockwell Collins"), a multinational aviation electronics and communications equipment company, from 2002 through 2014, and as Chief Executive Officer from 2001 until his retirement in 2013. He previously served as president of Rockwell Collins and corporate officer and senior vice president of Rockwell International, which he joined in 1979.
Skills and Qualifications of Particular Relevance to Cardinal Health
As retired Chairman, President and Chief Executive Officer of Rockwell Collins, Mr. Jones brings to the Board relevant experience in highly regulated industries as well as in the areas of operations, management, finance, executive leadership, strategic planning, information technology, human resources, corporate governance, international markets and government contracting. He provides the Board with a valuable understanding of commercial operations in international markets. As a former member of the President's National Security Telecommunications Advisory Committee and a current member of The Business Council, Mr. Jones provides insights in regulatory affairs, government and public policy matters. He also brings to the Board valuable perspective and insights from his service on Motorola Solutions' board of directors, including its Audit Committee, and Deere & Company's board of directors, as well as from his previous service as Chairman of Rockwell Collins' board of directors.
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Gregory B. Kenny
Age 63
Director since 2007
President and Chief Executive Officer of General Cable Corporation (retired)
Independent Lead Director
Director Qualification Highlights
Other Public Boards: Ingredion Incorporated, a corn refining and ingredient company (since 2005); AK Steel Holding Corporation, an integrated producer of flat-rolled, carbon and electrical stainless steels and tubular products (since January 2016); General Cable Corporation (1997 - 2015)
ü Executive Leadership
ü Operations
ü Strategic Planning
ü International
ü Financial Expertise

Mr. Kenny served as President and Chief Executive Officer of General Cable Corporation, a global manufacturer of aluminum, copper and fiber-optic wire and cable products from 2001 until his retirement in 2015. Prior to that, he was President and Chief Operating Officer of General Cable from 1999 to 2001 and Executive Vice President and Chief Operating Officer from 1997 to 1999. Mr. Kenny previously also served in executive level positions at Penn Central Corporation, where he was responsible for corporate business strategy, and in diplomatic service as a Foreign Service Officer with the United States Department of State.
Skills and Qualifications of Particular Relevance to Cardinal Health
As retired Chief Executive Officer of General Cable, Mr. Kenny brings to the Board substantial experience in the areas of executive leadership, operations, management, finance, strategic planning, human resources, corporate governance and international markets. He provides the Board with a deep understanding of strategic and financial implications impacting a global business with manufacturing and distribution operations. Mr. Kenny also brings to the Board valuable perspective and insights from his service on Ingredion's board of directors and from his prior service on General Cable's board of directors. As our independent Lead Director, Mr. Kenny also draws upon his governance and leadership experience as Chair of our Human Resources and Compensation Committee from 2008 to 2014 and current Chair of our Nominating and Governance Committee, Chair of Ingredion's Corporate Governance and Nominating Committee since 2014 and Chair of the Compensation Committee of IDEX Corporation from 2003 to 2007.


 
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Proposal 1—Election of Directors
 
 


nancykilleferkcp2244final.jpg
Nancy Killefer
Age 63
Director since 2015
Senior Partner, Public Sector Practice, McKinsey & Company, Inc. (retired)
Independent Director
Director Qualification Highlights
Other Public Boards: The Advisory Board Company, a provider of software and solutions to the healthcare and education industries (since 2013); Avon Products, Inc., a global manufacturer and marketer of beauty products (since 2013); CSRA, Inc., a provider of information technology services to the U.S. federal government (since 2015); Computer Sciences Corporation, a global provider of information technology services (2013 - 2015)
ü Strategic Planning
ü Healthcare
ü Regulatory / Public Policy / Government
ü Technology
ü Executive Leadership
ü Financial Expertise
Ms. Killefer served as Senior Partner of McKinsey & Company, Inc., a global management consulting firm, from 1992 until her retirement in 2013. She joined McKinsey in 1979 and held a number of key leadership roles, including serving as a member of the firm's governing board. Ms. Killefer founded McKinsey's Public Sector Practice in 2007 and served as its managing partner until her retirement. She also served as Assistant Secretary for Management, Chief Financial Officer and Chief Operating Officer for the United States Department of Treasury from 1997 to 2000.
Skills and Qualifications of Particular Relevance to Cardinal Health
Having served in key leadership positions in both the public and private sectors and provided strategic counsel to healthcare and consumer-based companies during her 30 years with McKinsey, Ms. Killefer brings to the Board substantial experience in the areas of strategic planning, including healthcare strategy, marketing and brand building, executive leadership and information technology. Her extensive experience as a partner of a global consulting firm and as a chief financial officer of a government agency provides valuable insight in these areas as well as in government relations and public policy. Ms. Killefer also brings to the Board valuable perspective and insights from her service on the boards of directors of The Advisory Board, Avon Products, including its Compensation and Management Development Committee, and CSRA, Inc., including her service as independent Chairman since August 2016.
davidkingkcp2248final.jpg
David P. King
Age 60
Director since 2011
Chairman, President and Chief Executive of Laboratory Corporation of America Holdings
Independent Director
Director Qualification Highlights
Other Public Boards: Laboratory Corporation of America Holdings (since 2007)
ü Healthcare
ü Regulatory / Public Policy
ü Strategic Planning
ü Operations
ü Executive Leadership
ü Financial Expertise
ü International
Mr. King has served as President and Chief Executive Officer of Laboratory Corporation of America Holdings, a global healthcare diagnostics company ("LabCorp"), since 2007, and as Chairman of LabCorp since 2009. Previously he held other senior positions with LabCorp, including Executive Vice President and Chief Operating Officer, Executive Vice President, Strategic Planning and Corporate Development, and Senior Vice President, General Counsel and Chief Compliance Officer.
Skills and Qualifications of Particular Relevance to Cardinal Health
Having spent 15 years in senior executive roles with LabCorp, including the past nine years as its Chief Executive Officer, Mr. King brings to the Board substantial experience in the areas of healthcare, operations, management, regulatory compliance, finance, executive leadership, strategic planning, human resources, corporate governance and global healthcare markets. He also brings to the Board valuable perspective and insights from his position as Chairman of LabCorp’s board of directors. Before his career at LabCorp, Mr. King was a practicing attorney for 17 years, having worked in both private practice focusing on healthcare and with the U.S. Department of Justice.
The Board recommends that you vote FOR the election of these director nominees.


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Proposal 1—Election of Directors
 
 


Our director nominees possess relevant experience, skills and qualifications that contribute to a well-functioning Board to effectively oversee the Company's strategy and management. A chart of director skills and expertise is provided below:
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genderandethnicdiversityaug3.jpg         yearsofservice002.jpg


 
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Corporate Governance
Board of Directors
 
Our Board of Directors currently consists of 11 members.
The Board held six meetings during fiscal 2016. During fiscal 2016 each director attended 75% or more of the meetings of the Board and Board committees on which he or she served. Ten of our
 
directors attended the 2015 Annual Meeting of Shareholders. Absent unusual circumstances, each director is expected to attend the Annual Meeting of Shareholders.

Board Leadership Structure
 
Under our Corporate Governance Guidelines, the Board is responsible for selecting the Chairman of the Board and the Chief Executive Officer. The Board, through the Nominating and Governance Committee, periodically reviews and assesses its leadership structure to ensure it is appropriate for the circumstances. The Board has determined that combining these roles, together with a strong independent Lead Director role, provides the most effective leadership structure for the Company at this time. This structure has allowed the Board to function effectively in fulfilling its responsibility for overseeing and providing appropriate input to management while fostering clear accountability and maintaining the Board's independence from management.
The Board has also determined that our Chief Executive Officer is best situated to serve as Chairman because of his unique knowledge of our business, industry and shareholders. By serving as both Chairman of the Board and Chief Executive Officer, Mr. Barrett has been able to draw on his knowledge of our daily operations, his knowledge of the healthcare industry and the developments within it, and his knowledge of our customers, vendors, employees, shareholders and other business partners to provide our Board with leadership in setting its agendas and focusing its discussions. This structure fosters effective decision-making and alignment between the Board and management, and allows a single person to speak on behalf of the Board and the company to our customers, vendors, employees, shareholders and regulators. After considering these factors and Mr. Barrett's strong and effective leadership of the Board, in August 2015 the Board renewed his employment agreement to continue to serve in the combined role of Chairman and Chief Executive Officer for an additional three years.
The Board ensures strong independent leadership through an active and engaged independent Lead Director with clearly defined responsibilities. The independent directors annually elect an independent director to serve as Lead Director. In selecting a Lead Director, the independent directors consider the skills and characteristics necessary to carry out the leadership
 
responsibilities assigned to the position, including promoting strong governance, open dialogue and engagement among all directors, and an understanding of the company's strategy, business and operations. The independent directors hold executive sessions during in-person board meetings in which Mr. Barrett and other members of management do not participate. The independent Lead Director:
presides at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors;
has authority to call additional executive sessions of the independent directors;
serves as a liaison between the Chairman and the independent directors;
approves the information sent to the Board and approves the agenda and schedule for Board meetings;
coordinates the Board's annual self-evaluation and reviews the results of the evaluation of individual directors with those directors;
contributes to the annual performance review of the Chief Executive Officer; and
participates in engagement with major shareholders.
Mr. Kenny has served as Lead Director since November 2014. During his time serving in this role he has been actively engaged in Board leadership. He has chaired executive sessions of the independent directors, which were held at each of the five in-person Board meetings during fiscal 2016. Mr. Kenny also serves as Chair of the Nominating and Governance Committee and coordinates the annual evaluation of the Board and the individual evaluation of each director, including discussing with each Board member the results of his or her individual evaluation. Over the past year, Mr. Kenny has met regularly with Mr. Barrett and worked closely with him in developing Board agendas, schedules and topics, including discussions regarding long-term strategy and



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Corporate Governance
 
 


capital deployment. In addition, Mr. Kenny participated in the Compensation Committee discussions relating to the annual performance evaluation of, and compensation decisions regarding, Mr. Barrett. Finally, during the year, Mr. Kenny held
 
governance discussions with several large investors and attended a major healthcare investor conference with management, where he met with a large number of our investors.

Committees of the Board of Directors
 
The Board has established four committees: the Audit Committee, the Nominating and Governance Committee, the Human Resources and Compensation Committee and the Executive Committee. The charter for each committee is available on our website at www.cardinalhealth.com under “About Us — Corporate — Investor Relations — Corporate Governance — Board Committees and Charters.” This information also is available in print (free of charge) to any shareholder who requests it from our Investor Relations department.
 
For fiscal 2016, each member of the Audit, Nominating and Governance and Compensation Committees was determined by the Board to be independent as defined by the rules of the NYSE and in accordance with our Corporate Governance Guidelines. The chart below identifies the current committee members and the number of meetings held during fiscal 2016.

Audit Committee
 
Human Resources and Compensation Committee*
 
Nominating and Governance Committee*
 
Executive Committee*
Meetings in Fiscal 2016: 9
 
Meetings in Fiscal 2016: 6
 
Meetings in Fiscal 2016: 4
 
Meetings in Fiscal 2016: 0
Members:
 
Members:
 
Members:
 
Members:
Clayton M. Jones (Chair)
 
David P. King (Chair)
 
Gregory B. Kenny (Chair)
 
George S. Barrett (Chair)
David J. Anderson
 
Carrie S. Cox
 
Colleen F. Arnold
 
Clayton M. Jones
Bruce L. Downey
 
Calvin Darden
 
Patricia A. Hemingway Hall
 
Gregory B. Kenny
Patricia A. Hemingway Hall
 
Nancy Killefer
 
 
 
David P. King
*
Richard C. Notebaert served on the Human Resources and Compensation, Nominating and Governance and Executive Committees until his term as a director expired at the 2015 Annual Meeting of Shareholders.
 
The Board appointed Ms. Killefer to the Compensation Committee effective November 2015.
Audit Committee
The Audit Committee's primary duties are to assist the Board in overseeing:
the integrity of our financial statements;
the independent auditor’s qualifications, independence and performance;
our internal audit function;
the ethics and compliance program and our compliance with legal and regulatory requirements; and
our process for assessing and managing risk.

The Audit Committee reviews quarterly and annual financial statements, including earnings releases, before they are filed or announced. It also reviews matters such as the significant financial reporting issues and judgments made in connection with the preparation of our financial statements, the effect of regulatory and
 
accounting initiatives and the adequacy and effectiveness of our internal controls and disclosure controls and procedures.
The Audit Committee reviews quarterly reports from our Chief Legal and Compliance Officer regarding our ethics and compliance program, including compliance by Cardinal Health with applicable legal requirements and the Standards of Business Conduct described below. The Audit Committee discusses with management our major financial and information technology risk exposures and the steps management has taken to monitor and control these exposures, including our financial risk assessment and financial risk management policies. It also discusses with management and oversees our process for assessing and managing risk through our enterprise risk management process (see "Board's Role in Risk Oversight" on page 15 below).
The Audit Committee appoints, compensates and oversees the independent auditor, including resolution of any disagreements with management regarding financial reporting and overseeing the rotation of the lead audit partner as required by law. The Audit



 
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Corporate Governance
 
 


Committee also pre-approves all services provided by the independent auditor and reviews our internal audit plan and the functions as well as the structure of our internal audit department.
The Board has determined that each member of the Audit Committee is an “audit committee financial expert” for purposes of the SEC rules and is independent, including under the heightened independence requirements applicable for audit committee members as set forth in the NYSE rules.
Nominating and Governance Committee
The Nominating and Governance Committee’s primary duties are to:
identify, review the qualifications of, and recruit candidates for the Board (consistent with criteria approved by the Board);
annually review our Corporate Governance Guidelines and recommend changes to these Guidelines, as appropriate;
make recommendations to the Board concerning the structure, composition and functions of the Board and its committees;
review the Board's leadership and leadership structure and recommend changes to the Board as appropriate;
perform a leadership role in shaping and overseeing our corporate governance practices;
conduct the annual evaluation of the Board’s effectiveness and performance;
oversee the orientation process for new directors and ongoing education for directors; and
oversee our policies and practices regarding political expenditures and review corporate political contributions.
In fulfilling the above duties, the Nominating and Governance Committee also considers and recommends criteria to the Board for identifying and evaluating potential Board candidates; reviews and considers any Board candidates recommended by shareholders; assesses the qualifications, attributes, skills, contributions and independence of individual directors; and considers and makes recommendations to the Board regarding any resignations tendered by a director.
Human Resources and Compensation Committee
The Compensation Committee’s primary duties are to:
develop an executive compensation program to support overall business strategies and objectives, attract and retain executives, link compensation with business objectives and organizational performance and provide competitive compensation programs;
 
approve compensation for the Chief Executive Officer, including relevant performance goals, and evaluate his performance;
approve compensation for our other executive officers and oversee their evaluations;
make recommendations to the Board with respect to the adoption of equity-based compensation plans and incentive compensation plans;
review the outside directors’ compensation program and recommend any changes to the Board;
oversee the management succession process for the Chief Executive Officer and senior executives;
oversee workplace diversity initiatives and progress;
oversee and assess the appropriateness of any material risks related to compensation arrangements; and
assess the independence of compensation consultants or other outside advisors who provide advice to the Compensation Committee.
The Compensation Discussion and Analysis, which begins on page 34, discusses how the Compensation Committee makes compensation-related decisions regarding our executive officers. The Compensation Committee acts as the administrator of our equity and non-equity incentive plans covering executive officers and other senior management. Generally, the Compensation Committee delegates to our officers authority to administer the plans, including selecting participants and determining award levels within plan parameters, but may not delegate any such responsibility with respect to our officers subject to Section 16 of the Exchange Act.
The Board has determined that each member of the Compensation Committee is independent, including under the heightened independence requirements applicable for compensation committee members as set forth in the NYSE rules.
Executive Committee
The Executive Committee is comprised of the Chairman and Chief Executive Officer, the chairpersons of each of the Audit, Nominating and Governance and Compensation Committees, and the independent Lead Director. The Committee acts from time to time on behalf of the Board when specific authority is delegated to it by the Board or to consider or act upon a matter promptly in intervals between meetings of the Board.



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Corporate Governance
 
 


Director Independence
 
The Board has established standards to assist it in determining director independence. These standards can be found within our Corporate Governance Guidelines on our website at www.cardinalhealth.com under “About Us — Corporate — Investor Relations — Corporate Governance — Corporate Governance Documents." They address, among other things, employment and compensation relationships, relationships with our auditor and customer and business relationships.
The Board assesses at least annually the independence of directors and, based on the recommendation of the Nominating and Governance Committee, determines which directors are independent. The Board has determined that each of Messrs. Anderson, Darden, Downey, Jones, Kenny and King, and each of Mmes. Arnold, Cox, Hemingway Hall and Killefer, is independent under the listing standards of the NYSE and our Corporate Governance Guidelines. The Board also previously determined that Mr. Notebaert, a director who served during fiscal 2016 through the date of our 2015 Annual Meeting of Shareholders, was independent.
In determining that Mr. Downey is independent, the Nominating and Governance Committee considered that he holds partnership
 
interests of less than 2% in NewSpring Health Capital II, L.P., which in turn held a minority interest in a small company that we acquired during fiscal 2016.
In determining that Mr. King is independent, the Nominating and Governance Committee considered that he is Chairman, President and Chief Executive Officer of LabCorp. We receive payments from LabCorp for medical and laboratory products that it purchases from us in the ordinary course of business. LabCorp's payments to us were less than 1% of our and less than 2% of LabCorp's revenue for each of the last three years.
The Board previously determined that each of Ms. Arnold, who retired as an executive officer of IBM in March 2016, and Ms. Hemingway Hall, who retired as Chief Executive Officer of HCSC in December 2015, was independent at the time each of them served as executives of those entities. The Nominating and Governance Committee considered that our relationships with both IBM and HCSC are in the ordinary course of business. For each of the last three years, our business with IBM was less than 1% of our and IBM's revenue, and our business with HCSC was less than 1% of our and HCSC's revenue.

Director Qualification Standards
 
The Nominating and Governance Committee reviews with the Board the appropriate skills and characteristics required of Board members and develops criteria for identifying and evaluating qualified Board candidates. These criteria, as described in our Corporate Governance Guidelines, include business experience, qualifications, attributes and skills, such as relevant industry knowledge, independence (including independence from the interests of a particular group of shareholders), judgment, integrity, ability to commit sufficient time and attention to the activities of the Board and the absence of potential conflicts with our interests.
The Nominating and Governance Committee considers the foregoing criteria when assessing the operation and goals of the Board as a whole and seeks to achieve diversity of skills, experience and backgrounds on the Board, including ethnic and gender diversity. The Nominating and Governance Committee assesses the effectiveness of this process by gathering data and discussing the diversity of the Board in the annual self-assessments of the Nominating and Governance Committee and the Board.
 
If the Nominating and Governance Committee believes that a potential candidate may be appropriate for the Board, the committee takes time to learn more about the candidate and gives the candidate an opportunity to learn more about Cardinal Health, the Board and its governance practices. Ultimately, the Board is responsible for selecting candidates for election as directors based on the recommendation of the Nominating and Governance Committee.
Shareholders also may nominate directors and request proxy access under which director nominees may be included in our proxy materials by satisfying the applicable provisions in the Code of Regulations. See "Submitting Proxy Proposals and Director Nominations for the Next Annual Meeting of Shareholders" on page 58.



 
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Corporate Governance
 
 


Board Performance Assessment
 
The Board, through the Nominating and Governance Committee, assesses its performance by conducting an annual evaluation. Each of the Audit, Nominating and Governance and Compensation Committees also conducts an annual self-evaluation. To facilitate this process, a third party experienced in corporate governance matters interviews each director to obtain his or her feedback regarding the effectiveness of the Board, which is compiled anonymously.
The Board evaluation process includes an assessment of both Board process and substance, including:
the Board's effectiveness, structure, composition and culture;
the Board's performance in key areas, including oversight of strategy, succession planning, regulatory compliance and risk management;
specific agenda items which should be discussed in the future;
 
quality of board discussions and the amount of time devoted to discussion; and
overall Board dynamics.
The Chair of the Nominating and Governance Committee leads a discussion with the Board in executive session based on feedback gathered by the outside facilitator. The Board identifies items for additional consideration, which are addressed at subsequent Board and committee meetings and reported back to full Board, where appropriate.
As part of the interview process, each director is also asked to provide feedback with respect to the performance of each other director. The Lead Director provides each director with feedback on his or her individual contribution to the Board and its committees. We believe this approach supports the Board's effectiveness and continuous improvement.

Resignation Policy for Incumbent Directors Not Receiving Majority Votes
 
Our Corporate Governance Guidelines require any incumbent director who is not re-elected by shareholders in an uncontested election to promptly tender a resignation to the Chairman of the Board. Within 90 days following the certification of the shareholder
 
vote, the Nominating and Governance Committee will recommend to the Board whether to accept the resignation. Thereafter, the Board will promptly act and publicly disclose its decision and the rationale behind the decision.

Communicating with the Board
 
Shareholders and other interested parties may communicate with the Board, any committee of the Board, any individual director or the independent directors as a group, by writing to the Office of the Corporate Secretary, Cardinal Health, Inc., 7000 Cardinal Place, Dublin, Ohio 43017 or sending an e-mail to bod@cardinalhealth.com. Communications from shareholders
 
will be distributed to the entire Board unless addressed to a particular committee, director or group of directors. The Corporate Secretary will not distribute communications that are unrelated to the duties of the Board, such as spam, junk mail, mass mailings, business solicitations and advertisements.

Shareholder Recommendations for Director Nominees
 
The Nominating and Governance Committee will consider candidates recommended by shareholders for election as director. Shareholder recommendations will be evaluated against the same criteria used to evaluate other director nominees, which criteria are discussed above under “Director Qualification Standards.” Shareholders who wish to recommend a candidate may do so by writing to the Nominating and Governance Committee in care of the Office of the Corporate Secretary, Cardinal Health, Inc., 7000 Cardinal Place, Dublin, Ohio 43017. To be considered by the Committee for consideration at the 2017 Annual Meeting of
 
Shareholders, a shareholder recommendation must be received no later than April 1, 2017.
Recommendations must include, at a minimum, the following information:
the name and address of the shareholder making the recommendation;
the name and address of the person recommended for nomination;



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Corporate Governance
 
 


if the shareholder is not a shareholder of record, a representation and satisfactory proof of share ownership;
a statement in support of the shareholder’s recommendation, including sufficient information to permit the Nominating and Governance Committee to evaluate the candidate’s qualifications, skills and experience;
a description of all direct or indirect arrangements or understandings between the shareholder and the candidate recommended by the shareholder;
information regarding the candidate as would be required to be included in a proxy statement filed in accordance with SEC rules; and
 
the candidate’s written, signed consent to serve if elected.
Shareholders who wish to nominate directors directly for election at an Annual Meeting of Shareholders in accordance with the procedures in our Code of Regulations, including under our proxy access provision, should follow the instructions under “Submitting Proxy Proposals and Director Nominations for the Next Annual Meeting of Shareholders" on page 58 and the details contained in our Code of Regulations.

Strategy and Risk Oversight
 
Board’s Oversight of Strategy
The Board regularly discusses the strategic direction and opportunities for the company in light of company performance, developments and trends in the healthcare industry and the general business and economic environment. Throughout the year, the Board in its oversight capacity provides guidance to management on strategy and business plans and reviews and approves capital deployment, including dividends, share repurchase plans and large acquisitions. In addition, at two regular meetings each year, the Board holds in-depth strategy sessions with senior management to discuss external environmental factors and review specific businesses and new business opportunities. In the last three years, these strategy sessions have included external speakers such as business partners and advisors, as well as off-site visits to company facilities and customer locations. The Board also discusses risks related to our strategies, including those resulting from the changing U.S. healthcare environment. The full Board is supported in its strategic planning and risk oversight function through the collective backgrounds, skills and experiences of our directors.
Board’s Role in Risk Oversight
The Board is responsible for overseeing our policies and programs for assessing and managing risk. Management is responsible for assessing and managing our exposures to risk on a day-to-day basis, including the creation of appropriate risk management policies and procedures. Management also is responsible for reviewing with the Board our most significant risks and plans for managing those risks.
 
To assist the Board and management in exercising their respective responsibilities, we have developed an enterprise risk management process that our Audit Committee oversees and our Chief Legal and Compliance Officer administers. Under this process, management identifies and prioritizes enterprise risks and develops systems to assess, monitor and mitigate those risks. Management reviews and discusses with the Board significant risks identified through the process. The Audit Committee also is responsible for discussing with management our major financial risk exposures, as well as our ethics and compliance program, compliance with legal and regulatory requirements and associated risks. In connection with its risk oversight role, the Audit Committee regularly meets with representatives from our independent registered public accounting firm and our Chief Financial Officer, Chief Legal and Compliance Officer and the head of our internal audit function. In addition, the Board and Audit Committee receive regular updates on business information systems risks and cyber security risks and mitigation strategies.
Risk Assessment of Compensation Programs
Management has assessed our compensation programs and concluded that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on Cardinal Health. This risk assessment included reviewing the design and operation of our compensation programs, identifying and evaluating situations or compensation elements that could raise more significant risks and evaluating other controls and processes designed to identify and manage risk. The Compensation Committee reviewed and discussed the risk assessment and the Committee's independent compensation consultant reviewed the risk assessment and concurred with management's conclusion.



 
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Corporate Governance
 
 


Ethics and Compliance Program
 
The Board has adopted written Standards of Business Conduct that outline our corporate values and standards of integrity and behavior. The Standards of Business Conduct are designed to foster a culture of integrity, drive compliance with legal and regulatory requirements and protect and promote the reputation of our company. The full text of the Standards of Business Conduct is posted on our website at www.cardinalhealth.com under “About Us — Our Business — Ethics and Compliance.” This information also is available in print (free of charge) to any shareholder who requests it from our Investor Relations department.
 
Our Chief Legal and Compliance Officer has responsibility to implement and maintain an effective ethics and compliance program. He also has responsibility to provide quarterly updates on our ethics and compliance program to the Audit Committee and an update to the full Board at least once a year. He reports to the Chair of the Audit Committee and to the Chief Executive Officer and meets in separate executive sessions quarterly with the Audit Committee.

Management Succession Planning
 
The Board is actively engaged in our talent management program. The Compensation Committee oversees the process for succession planning for the Chief Executive Officer and senior executives, and management provides an organizational update at each quarterly Compensation Committee meeting. The Board maintains an emergency succession plan as well as a long-term succession plan for the position of Chief Executive Officer. The Board holds a formal succession planning and talent review
 
session annually which includes succession planning for other senior management positions. These talent review and succession planning discussions take into account desired leadership skills, key capabilities and experience in light of our current and evolving business and strategic direction. Directors also have exposure to leaders through Board presentations and discussions, as well as informal events and interactions with key talent throughout the year.

Shareholder Engagement
 
Recognizing the benefits that come from dialogue with our shareholders, we have had a proactive, extensive shareholder engagement program for many years. We engage with shareholders throughout each year in order for management and the Board to better understand shareholder views and perspectives on governance, executive compensation and other topics that are important to them. During the past two years, our
 
independent Lead Director participated in outreach discussions with several of our largest shareholders. In addition, as in past years, we contacted governance professionals from our largest shareholders collectively owning more than 50% of our outstanding shares during fiscal 2016. An overview of our engagement process is below.

shareholderengagementhalf.jpgshareholderengagement5.jpg


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Corporate Governance
 
 


After considering feedback received from shareholders in recent years, we have:
adopted a proxy access right for shareholders;
enhanced our disclosures regarding the Board's role in strategy and risk oversight;
formalized additional responsibilities for the independent Lead Director and enhanced our disclosure about the Lead Director’s activities;
 
formalized our annual individual director evaluation process and expanded our disclosure about the annual Board evaluation process;
expanded and enhanced the Proxy Summary and the Compensation Discussion and Analysis Executive Summary;
enhanced readability of our proxy statement with graphics, charts and colors; and
added a chart of director qualifications and experience on page 9 of this proxy statement.

Corporate Governance Guidelines
 
You can find the full text of our Corporate Governance Guidelines on our website at www.cardinalhealth.com under “About Us —Corporate — Investor Relations — Corporate Governance —
 
Corporate Governance Documents.” This information also is available in print (free of charge) to any shareholder who requests it from our Investor Relations department.

Proxy Access
 
In June 2016, following input from our shareholders, the Board amended our Code of Regulations to include a provision for proxy access. Under proxy access, a shareholder, or a group of up to 20 shareholders, owning at least three percent of our outstanding common shares continuously for at least three years, may nominate and include in our proxy materials director nominees
 
constituting up to the greater of two nominees or 20% of the Board, if the shareholders and the nominees satisfy the requirements specified in our Code of Regulations. See “Submitting Proxy Proposals and Director Nominations for the Next Annual Meeting of Shareholders" on page 58.

Certain Relationships and Related Transactions
 
Related Party Transactions Policy
The Board follows a written policy that the Audit Committee must approve or ratify any "related party transactions" (transactions exceeding $120,000 in which we are a participant and any related party has a direct or indirect material interest). "Related parties" include our directors, nominees for election as a director, persons controlling over 5% of our common shares, executive officers and the immediate family members of each of these individuals.
Once a related party transaction is identified, the Audit Committee will review all of the relevant facts and circumstances and determine whether to approve the transaction. The Audit Committee will take into account such factors as it considers appropriate, including the material terms of the transaction, the nature of the related party’s interest in the transaction, the significance of the transaction to the related party and us, the nature of the related party’s relationship with us and whether the transaction would be likely to impair the judgment of a director or executive officer to act in our best interest.
 
If advance approval of a transaction is not feasible, the Audit Committee will consider the transaction for ratification at its next regularly scheduled meeting. The Audit Committee Chairman may pre-approve or ratify any related party transactions in which the aggregate amount is expected to be less than $1 million.
Related Party Transactions
Since July 1, 2015, there have been no transactions, and there are no currently proposed transactions, involving an amount exceeding $120,000 in which we were or are to be a participant and in which any related party had or will have a direct or indirect material interest.




 
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17 



Proposal 2—Ratification of Ernst & Young LLP as Independent Auditor
The Audit Committee of the Board of Directors is directly responsible for the appointment, compensation, retention and oversight of our independent auditor and approves the audit engagement letter with Ernst & Young LLP and its audit fees. The Audit Committee has appointed Ernst & Young LLP as our independent auditor for fiscal 2017 and believes that the continued retention of Ernst & Young LLP as our independent auditor is in the best interest of Cardinal Health and its shareholders. Ernst & Young LLP has served as our independent auditor since 2002. In accordance with SEC rules, lead audit partners are subject to rotation requirements, which limit the number of consecutive years an individual partner may serve us. The Audit Committee oversees the rotation of the audit partners. The Audit Committee Chairman interviews candidates for audit partner and the Audit Committee discusses them.
While not required by law, we are asking our shareholders to ratify the appointment of Ernst & Young LLP as our independent auditor for fiscal 2017 at the Annual Meeting as a matter of good corporate
 
governance. If shareholders do not ratify this appointment, the Audit Committee will consider whether it is appropriate to appoint another audit firm. Even if the appointment is ratified, the Audit Committee in its discretion may appoint a different audit firm at any time during the fiscal year if it determines that such a change would be in the best interest of the company and its shareholders. Our Audit Committee approved, and our shareholders ratified, the appointment of Ernst & Young LLP as our independent auditor for fiscal 2016.
We expect representatives of Ernst & Young LLP to be present at the Annual Meeting. They will have an opportunity to make a statement if they desire to do so and to respond to appropriate questions from shareholders.
The Board recommends that you vote FOR the proposal to ratify the appointment of Ernst & Young LLP as our independent auditor for fiscal 2017.

Audit Committee Report and Audit Matters
Audit Committee Report
 
The Audit Committee is responsible for monitoring the integrity of Cardinal Health’s financial statements; the independent auditor’s qualifications, independence and performance; Cardinal Health’s internal audit function; Cardinal Health’s ethics and compliance program and its compliance with legal and regulatory requirements; and Cardinal Health’s processes for assessing and managing risk. The Audit Committee currently consists of four members of the Board of Directors. The Board of Directors has determined that each Committee member is an “audit committee financial expert” for purposes of the SEC rules and is independent. The Audit Committee’s activities are governed by a written charter, most recently revised by the Board of Directors in November 2014. The charter is available on Cardinal Health’s website at www.cardinalhealth.com under “About Us — Corporate — Investor Relations — Corporate Governance — Board Committees and Charters."
Management has primary responsibility for the financial statements and for establishing and maintaining the system of internal control over financial reporting. Management also is responsible for reporting on the effectiveness of Cardinal Health’s internal control over financial reporting. Cardinal Health’s
 
independent auditor, Ernst & Young LLP, is responsible for performing an independent audit of Cardinal Health’s consolidated financial statements and for issuing a report on the financial statements and a report on the effectiveness of Cardinal Health’s internal control over financial reporting based on its audit.
The Audit Committee reviewed and discussed the audited financial statements for the fiscal year ended June 30, 2016 with management and with Ernst & Young LLP. The Audit Committee also reviewed and discussed with management and Ernst & Young LLP the effectiveness of Cardinal Health’s internal control over financial reporting as well as management's report and Ernst & Young LLP's report on the subject. The Audit Committee discussed with Ernst & Young LLP the matters related to the conduct of its audit that are required to be communicated by auditors to audit committees under applicable requirements of the Public Company Accounting Oversight Board (the "PCAOB") and matters related to Cardinal Health’s financial statements, including critical accounting estimates and judgments. The Audit Committee received from Ernst & Young LLP the written disclosures and letter regarding Ernst & Young LLP’s independence from Cardinal



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Cardinal Health | 2016 Proxy Statement
 



Audit Committee Report and Audit Matters
 
 


Health required by applicable PCAOB requirements and discussed Ernst & Young LLP’s independence.
The Audit Committee meets regularly with Ernst & Young LLP, with and without management present, to review the overall scope and plans for Ernst & Young LLP’s audit work and to discuss the results of its examinations, the evaluation of Cardinal Health’s internal control over financial reporting and the overall quality of Cardinal Health’s accounting and financial reporting. In addition, the Audit Committee annually considers the performance of Ernst & Young LLP.
 
In reliance on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements for the fiscal year ended June 30, 2016 be included in Cardinal Health’s Annual Report on Form 10-K for filing with the SEC.
Submitted by the Audit Committee of the Board of Directors.
Clayton M. Jones, Chairman
David J. Anderson
Bruce L. Downey
Patricia A. Hemingway Hall

Fees Paid to Independent Accountants
 
The following table sets forth the fees billed to us by Ernst & Young LLP for services in fiscal 2016 and 2015.
 
Fiscal Year 
Ended
June 30, 2016
($)
Fiscal Year 
Ended
June 30, 2015
($)
Audit fees (1)
9,722,883

6,541,953

Audit-related fees (2)(4)
3,780,485

3,270,937

Tax fees (3)(4)
980,523

1,153,408

All other fees


Total fees
14,483,891

10,966,298

(1)
Audit fees include fees paid to Ernst & Young LLP related to the annual audit of our consolidated financial statements, the annual audit of the effectiveness of our internal control over financial reporting, the review of financial statements included in our Quarterly Reports on Form 10-Q and statutory audits of various international subsidiaries. Audit fees also include fees for
 
services performed by Ernst & Young LLP that are closely related to the audit and in many cases could only be provided by our independent accountant, such as comfort letters and consents related to SEC registration statements. The year-over-year increase in audit fees was due primarily to services in connection with the Cordis and other acquisitions and growth of our Specialty Solutions division.
(2)
Audit-related fees include fees for services related to acquisitions and divestitures, audit-related research and assistance, internal control reviews, service auditor’s examination reports and employee benefit plan audits.
(3)
Tax fees include fees for tax compliance and other tax-related services. The aggregate fees billed to us by Ernst & Young LLP for tax compliance and other tax-related services for fiscal 2016 were $546,722 and $433,801, respectively, and for fiscal 2015 were $452,096 and $701,312, respectively.
(4)
In fiscal 2016, we began classifying certain acquisition-related tax due diligence services as audit-related fees in accordance with a change in our Audit Committee Audit and Non-Audit Services Pre-Approval Policy. Previously, we classified these services as tax fees. Fiscal 2015 fees of $674,763 have been reclassified from tax fees to audit-related fees to conform to the current year presentation.

Audit Committee Audit and Non-Audit Services Pre-Approval Policy
 
The Audit Committee must pre-approve the audit and permissible non-audit services performed by our independent accountants in order to help ensure that the accountants remain independent from Cardinal Health. The Audit Committee has adopted a policy governing this pre-approval process.
Under the policy, the Audit Committee annually pre-approves certain services and assigns specific dollar thresholds for these types of services. If a proposed service is not included in the annual pre-approval, the Audit Committee must separately pre-approve the service before the engagement begins.
 
The Audit Committee has delegated pre-approval authority to the Chairman of the Audit Committee for proposed services up to $500,000. Proposed services exceeding $500,000 require full Audit Committee approval.
All audit and non-audit services provided for us by Ernst & Young LLP for fiscal 2016 and 2015 were pre-approved by the Audit Committee.



 
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Proposal 3—Approval of Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan
General
 
We are requesting that shareholders approve the Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan (the "Amended 2011 LTIP"), which amends and restates our existing Cardinal Health, Inc. 2011 Long-Term Incentive Plan (the "2011 LTIP"). Shareholders approved the 2011 LTIP at our 2011 Annual Meeting of Shareholders. The Amended 2011 LTIP authorizes equity and performance-based compensation arrangements that we have used previously and continue to use. These arrangements are necessary to remain competitive with our peers, to adapt compensation awards to changes in corporate objectives and the marketplace, and to effectively attract, motivate and retain the caliber of employees required to drive our future growth and success.
 
Additional information regarding the Amended 2011 LTIP, including a description of its terms, is set forth below. This information should be read with, and is subject to, the specific provisions of the Amended 2011 LTIP. The full text of the Amended 2011 LTIP, marked with deletions indicated by strike-outs and additions indicated by underlining to show the proposed amendments, is attached to this proxy statement as Appendix A.
If the Amended 2011 LTIP is approved by our shareholders, it will be effective as of the date of the Annual Meeting. If the Amended 2011 LTIP is not approved by our shareholders, no awards will be made under it, but awards may continue to be made under the 2011 LTIP.

Key Changes to the Amended 2011 LTIP
 
The Board approved the Amended 2011 LTIP on September 8, 2016. The following is a summary of the key changes.
Share Increase
The 2011 LTIP initially authorized issuance of 30,000,000 of our common shares, plus an additional 9,608,190 shares that were subject to awards granted under our Prior Plans (as defined below), but were not issued. As of September 6, 2016, we had issued shares and outstanding awards totaling 21,408,393 shares under
 
the 2011 LTIP, leaving 18,199,797 shares available for future issuance. The Amended 2011 LTIP increases the available shares by another 5,000,000 shares to 23,199,797 shares, if approved by shareholders.
The following table includes information as of September 6, 2016 regarding 2011 LTIP award grants and shares available for future issuance:

 
Shares
(#)(1)
Initial 2011 LTIP shares authorized
30,000,000

Less: shares issued under 2011 LTIP awards (2)
(8,867,280
)
Less: shares reserved for issuance under outstanding 2011 LTIP awards (3)
(12,541,113
)
Plus: shares from canceled or forfeited Prior Plan awards and Prior Plan RSUs and PSUs withheld for taxes (4)
9,608,190

Shares available for future issuance under 2011 LTIP
18,199,797

Additional shares under Amended 2011 LTIP, if approved by shareholders
5,000,000

Shares available under Amended 2011 LTIP, if approved by shareholders
23,199,797

(1)
Under the 2011 LTIP's fungible share counting provisions, the number of shares available for issuance is reduced by two and one-half shares for each share actually issued under any stock award other than a stock option or stock appreciation right. These stock awards include restricted share units ("RSUs") and performance share units ("PSUs"). All numbers in this table are presented using this fungible share counting.
(2)
Includes shares issued upon vesting of RSUs and PSUs and exercise of stock options; excludes shares that were withheld for taxes upon settlement of RSUs and PSUs under the terms of the 2011 LTIP.


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Cardinal Health | 2016 Proxy Statement
 



Proposal 3—Approval of Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan
 
 


(3)
Includes shares subject to currently outstanding awards, although some may become available again due to cancellations or forfeitures or withholding for taxes upon settlement of RSUs and PSUs. Outstanding PSUs are included at target.
(4)
"Prior Plans" refers to the Cardinal Health, Inc. 2005 Long-Term Incentive Plan, the Cardinal Health, Inc. Equity Incentive Plan and the Cardinal Health, Inc. Broadly-based Equity Incentive Plan. If the Amended 2011 LTIP is approved by shareholders at the Annual Meeting, no additional shares from Prior Plan awards will be added back to the Amended 2011 LTIP.
We expect the shares available under the Amended 2011 LTIP will enable us to make grants for five years before seeking shareholder approval of more shares, although our actual share usage will depend on many factors, including award design and the breadth of our equity compensation programs, stock price and forfeiture rates.
Non-Employee Directors Awards and Award Limit
We currently grant equity awards to non-employee directors under the Cardinal Health, Inc. 2007 Nonemployee Directors Equity Incentive Plan (the “Director EIP”). The Director EIP was approved by shareholders at the 2007 Annual Meeting of Shareholders, has 694,196 shares remaining for future issuance as of September 6, 2016 and allows no new grants after November 2017.
In order to improve administrative efficiencies, the Amended 2011 LTIP adds non-employee directors as eligible participants. If the Amended 2011 LTIP is approved by our shareholders, no further awards will be made under the Director EIP following the 2016 annual grant of RSUs to non-employee directors. The Amended
 
2011 LTIP includes a $600,000 limit on non-employee director equity awards and cash compensation for any fiscal year, with an exception for a non-executive chair of the Board.
Other Changes
The Amended 2011 LTIP also contains provisions under which we plan to administer our annual cash incentive program beginning in fiscal 2018 in lieu of relying on the Cardinal Health, Inc. Management Incentive Plan ("MIP") in order to have a single plan for all of our executive incentive arrangements. The MIP was most recently approved by shareholders at the 2014 Annual Meeting of Shareholders.
Also under the Amended 2011 LTIP, shares subject to awards previously granted under the Prior Plans that were forfeited or expired, or were tendered or withheld to satisfy withholding tax liabilities on full-value awards (as defined below), will no longer be added back to the shares available for future issuance. The Amended 2011 LTIP also reflects other technical, clarifying and conforming changes and deletions.

Key Features of Amended 2011 LTIP
 
The Amended 2011 LTIP includes (and the original 2011 LTIP included) features that we believe reinforce the alignment between the interests of officers and employees and those of shareholders. These features are highlighted below and are more fully described under the heading “Description of the Amended 2011 LTIP.”
Fungible share limit. The Amended 2011 LTIP maintains the same fungible share counting as the 2011 LTIP. Shares issued under "full-value awards" (that is, awards other than stock options and stock appreciation rights, such as RSUs and PSUs) are counted against the plan's share limit as two and one-half shares for every share that is actually issued. Shares issued under stock options or stock appreciation rights count on a share-for-share basis against the plan's share limit. This means that, for example, only 9,279,918 shares could be issued under full-value awards from the 23,199,797 shares available under the Amended 2011 LTIP, if approved by shareholders.
No repricing without shareholder approval. We cannot reduce the exercise price of stock options and the base price of stock appreciation rights, or cancel “underwater” stock options and stock appreciation rights for cash or other awards, without shareholder approval.
 
“Double-trigger” change of control provision. The Amended 2011 LTIP maintains “double-trigger” accelerated vesting in the event of a change of control, which means that the vesting of awards will accelerate upon a change of control only if there is a qualifying termination within two years after the change of control, or if the surviving entity does not provide qualifying replacement awards.
Fair market value pricing of stock options and stock appreciation rights. Stock options and stock appreciation rights may not be granted with exercise or base prices lower than the fair market value of our common shares on the grant date.
Dividends and dividend equivalents. Dividends and dividend equivalents on awards with restrictions that lapse as a result of the achievement of performance criteria will be paid only upon the achievement of the applicable performance criteria.
Recoupment policy. The plan administrator has authority to require repayment of any award if the amount was calculated based upon the achievement of financial results that were subsequently the subject of a restatement of our financial statements, the participant engaged in misconduct that caused or contributed to the need for the restatement,



 
Cardinal Health | 2016 Proxy Statement
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Proposal 3—Approval of Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan
 
 


and the amount payable to the participant would have been lower than the amount actually paid had the financial results been properly reported. The Amended 2011 LTIP also will be administered in compliance with the final rules implementing the Dodd-Frank Wall Street Reform and Consumer Protection
 
Act’s (the "Dodd-Frank Act's") mandatory recoupment requirements, once final rules are adopted by the SEC and implemented by the NYSE.

Selected Plan Data
 
The following table includes information regarding outstanding equity awards and shares available for future issuance under our equity plans as of September 6, 2016:
 
2011 LTIP (1)
Other Plans
All Plans (1)
Total shares underlying outstanding stock options
6,245,490

1,540,355

 
7,785,845
 
 
Weighted average exercise price of outstanding stock options
$66.59
$36.70
 
$60.67
 
 
Weighted average remaining contractual life of outstanding stock options, in years
7.95

3.10

 
6.99
 
 
Total shares underlying outstanding time-based RSUs
4,978,540

216,274

 
5,194,814
 
 
Total shares underlying outstanding PSUs, at target
1,317,083

10,214

 
1,327,297
 
 
Total shares currently available for future issuance
18,199,797

694,196

(2)
18,893,993
 
(2)
Total shares available for future issuance after shareholder approval of Amended 2011 LTIP with 5,000,000 share increase
23,199,797


(2)
23,199,797
 
(2)
(1)
All 2011 LTIP share numbers presented using fungible share counting.
(2)
694,196 shares remained available under the Director EIP as of September 6, 2016. If the Amended 2011 LTIP is approved by our shareholders, no further awards will be made under the Director EIP following the 2016 annual grant of RSUs to non-employee directors.
The following table includes information regarding our equity run rate for the last three fiscal years ended June 30:
Fiscal Year
Stock Options Granted (#)
Time-Based RSUs Granted
(#)
PSUs Earned
(#)(1)
Total Granted/Earned
(#)
Weighted Average Number of Common Shares Outstanding
(#)
Equity Run Rate (%)(2)
2016
1,376,778
1,025,758
352,198
2,754,734
327,349,565
0.84
2015
1,482,133
1,168,382
403,744
3,054,259
331,802,666
0.92
2014
2,219,714
1,459,678
208,660
3,888,052
340,756,297
1.14
(1)
The amount of PSUs earned based on performance through the end of the fiscal year. The PSUs each had a three-year performance period.
(2)
For purposes of this table, equity run rate is the total number of shares subject to stock options and time-based RSUs granted and PSUs earned in the fiscal year divided by the weighted average number of our common shares outstanding during the fiscal year.
For the three-fiscal-year period from fiscal 2014 through fiscal 2016, our average equity run rate (calculated as described above) was 0.97%. We also present information relating to our equity compensation plans at June 30, 2016 under “Equity Compensation Plan Information” on page 57. Due to the fungible share counting provisions under both the 2011 LTIP and the Amended 2011 LTIP, the maximum number of shares that could be issued under full value awards under the Amended 2011 LTIP would represent potential dilution of 5.3% at September 6, 2016. Potential dilution would be 9.1% if all such shares were issued under stock options and stock appreciation rights at September 6, 2016. For this purpose, dilution is the number of shares subject to outstanding
 
equity awards, plus the number of shares available for future issuance, divided by the number of our common shares outstanding, plus the number of shares subject to outstanding equity awards and the number of shares available for future issuance. The closing price for our shares on the NYSE on September 6, 2016 was $80.81 per share.



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Cardinal Health | 2016 Proxy Statement
 



Proposal 3—Approval of Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan
 
 


Section 162(m) of the Code
 
The Amended 2011 LTIP is designed with the intention that stock options, PSUs and cash incentive awards granted under the plan to certain key employees may qualify for deductibility for purposes of our federal income taxes as “performance-based” compensation within the meaning of Section 162(m) of the Internal Revenue Code of 1986 (the “Code”). In general, Section 162(m) limits our ability to deduct compensation in excess of $1 million paid in any one year to our chief executive officer or any of our other three most highly paid executive officers (not including the chief financial officer) unless the excess compensation qualifies under Section 162(m) as “performance-based.” We may also grant awards under the Amended 2011 LTIP that are not designed to qualify as “performance-based” under Section 162(m), and awards intended to qualify as “performance-based” may not qualify for deductibility under Section 162(m).
One of the requirements of “performance-based” compensation under Section 162(m) is that the material terms of the performance goals be approved by shareholders. The material terms, which are addressed below, include (i) the employees eligible to receive
 
compensation, (ii) a description of the business criteria on which the performance goal may be based, and (iii) the maximum amount of compensation that can be paid to an employee under the performance goal. Shareholder approval of the Amended 2011 LTIP is intended to constitute approval of the material terms of the Amended 2011 LTIP for purposes of the approval requirements of Section 162(m) of the Code.
If our shareholders approve the material terms for performance-based compensation under the Amended 2011 LTIP, assuming that all other requirements under Section 162(m) of the Code are met, we may be able to obtain tax deductions with respect to awards issued under the Amended 2011 LTIP to our covered employees without regard to the limitations of Section 162(m) of the Code through the 2021 Annual Meeting of Shareholders (in other words, for around five years). If our shareholders do not approve this proposal, any awards we make under the 2011 LTIP after the fifth anniversary of its last approval by our shareholders will not qualify as deductible under Section 162(m) of the Code.

Description of the Amended 2011 LTIP
 
Administration
The Amended 2011 LTIP may be administered by the Board, its Human Resources and Compensation Committee (the "Compensation Committee") or their delegates. The Board has designated the Compensation Committee as the administrator of the Amended 2011 LTIP. The administrator has the authority to make all determinations necessary or advisable for administering the Amended 2011 LTIP and awards granted under the plan, including the authority to determine the employees to whom awards may be granted and the terms of such awards. The administrator has authority in its discretion to construe and interpret the terms of the Amended 2011 LTIP and awards granted under the plan, to prescribe, amend and rescind rules and regulations relating to the Amended 2011 LTIP, and to modify or amend awards. All decisions, determinations and interpretations by the administrator regarding the Amended 2011 LTIP, the rules and regulations under the Amended 2011 LTIP, and the terms and conditions of any award are final and binding on all participants and other persons claiming rights under the Amended 2011 LTIP or any award.
The administrator may, except to the extent prohibited by applicable law, delegate to one of more directors or authorized officers the power to grant awards to, and administer awards for, persons eligible to receive awards under the Amended 2011 LTIP who are not subject to Section 16 of the Securities Exchange Act of 1934 (the “Exchange Act”) or, at the time of the approval,
 
“covered employees” under Section 162(m) of the Code. Except to the extent prohibited by applicable law, the administrator also delegates to the Chairman and Chief Executive Officer and Chief Human Resources Officer, each individually, and to such persons as they designate the day-to-day administration of the Amended 2011 LTIP.
Eligibility
Employees of Cardinal Health and its affiliates are eligible to receive awards under the Amended 2011 LTIP, including all seven of our executive officers and approximately 1,700 other employees. Non-employee directors (currently 10) also are eligible for awards under the Amended 2011 LTIP. Incentive stock options ("ISOs") may only be granted to employees of Cardinal Health and corporations connected to it by chains of ownership of voting power representing 50% or more of the total combined voting power of all classes of stock of the lower-tier entity. Actual participants are selected by the administrator from among the eligible individuals.
Share Limits
Subject to the adjustment provisions of the Amended 2011 LTIP, the maximum aggregate number of common shares that may be issued under awards granted under the Amended 2011 LTIP is 30,000,000, plus (i) 9,608,190 shares, which became available between September 6, 2011 and June 30, 2016 as a result of the share counting provisions contained in the 2011 LTIP prior to the



 
Cardinal Health | 2016 Proxy Statement
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Proposal 3—Approval of Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan
 
 


Annual Meeting and which relate to shares subject to awards previously granted under the Prior Plans that were forfeited or expired or were tendered or withheld to satisfy withholding tax liabilities on full-value awards and (ii) after the date of the Annual Meeting, an additional 5,000,000 shares. The aggregate number of shares available for issuance under the Amended 2011 LTIP is reduced by (i) one share for every share issued upon exercise of a stock option or stock appreciation right granted under the plan and (ii) two and one-half shares for every share issued under a full-value award granted under the plan. Subject to the share counting provisions described below, shares subject to an award granted under the Amended 2011 LTIP will not be counted as used unless and until they are actually issued or transferred.
Subject to the adjustment provisions of the Amended 2011 LTIP, the aggregate number of shares that may be subject to stock options and stock appreciation rights granted under the Amended 2011 LTIP during any fiscal year to any one participant may not exceed 1,500,000. With respect to full-value and cash-based awards intended to qualify as performance-based compensation under Section 162(m) of the Code, no participant may receive in any fiscal year, stock awards and other stock-based awards (as defined below) subject to more than 750,000 shares (subject to the adjustment provisions of the Amended 2011 LTIP) or cash-based awards that have an aggregate maximum value in excess of $10,000,000.
Subject to the adjustment provisions of the Amended 2011 LTIP, no more than 20,000,000 shares may be issued under the Amended 2011 LTIP upon the exercise of incentive stock options.
With respect to any non-employee director, the aggregate dollar value of (i) any share-based awards granted under the Amended 2011 LTIP and (ii) any cash compensation otherwise paid by us with respect to the director's service for any fiscal year may not exceed $600,000. The Board may make an exception to this limit for a non-executive chair of the Board.
The shares issued under the Amended 2011 LTIP may be either shares that were reacquired by us, including shares purchased in the open market or authorized but unissued shares.
Share Counting Provisions
If any award granted under the Amended 2011 LTIP is forfeited, expires or is settled for cash, the shares subject to the award will, to the extent of such forfeiture, expiration or settlement, again be available for issuance under the Amended 2011 LTIP. In addition, if withholding tax liabilities arising from a cash award or full-value award granted under the Amended 2011 LTIP are satisfied by tendering shares to us or by us withholding shares, those shares will again be available for issuance under the Amended 2011 LTIP.
The following shares will not be added back to the aggregate number of shares available for issuance under the Amended 2011 LTIP: (i) shares tendered to us or withheld by us to pay the exercise price of a stock option, or to satisfy any tax withholding obligation
 
with respect to stock options or stock appreciation rights; (ii) shares subject to stock appreciation rights granted that are not issued in connection with the settlement of the stock appreciation rights in shares upon exercise; and (iii) shares reacquired by us on the open market or otherwise using cash proceeds from the exercise of stock options. In addition to these plan provisions, upon shareholder approval of the Amended 2011 LTIP, shares subject to awards previously granted under the Prior Plans that were forfeited or expired, or were tendered or withheld to satisfy withholding tax liabilities on full-value awards, will no longer be added back to the Amended 2011 LTIP.
The aggregate number of shares available for issuance under the Amended 2011 LTIP will not be reduced by shares issued with respect to awards granted upon the conversion of, or in substitution for, awards granted by a business or entity that is acquired by us or whose assets are acquired by us. Additionally, as permitted under NYSE rules, in the event that a company that we acquire has shares available under a pre-existing plan approved by shareholders and not adopted in contemplation of the acquisition, subject to certain limitations, the shares available for grant under the pre-existing plan may be used for awards under the Amended 2011 LTIP and will not reduce the shares available for issuance under the Amended 2011 LTIP.
Any shares that become available for issuance under the Amended 2011 LTIP under the share counting provisions described above will be added back (i) as one share if such shares were subject to stock options or stock appreciation rights and (ii) as two and one-half shares if such shares were subject to awards other than stock options or stock appreciation rights.
Stock Options
Stock options provide the recipient the right to purchase our common shares at an exercise price not less than fair market value on the date of the grant (except with respect to awards converted or substituted in connection with an acquisition by us). The Amended 2011 LTIP permits the administrator to choose several ways for the exercise price to be paid: (i) in cash; (ii) by check or wire transfer; (iii) by exchanging other shares that have a fair market value on the date of surrender equal to or greater than the exercise price of the stock option being exercised; (iv) by directing us to withhold shares that are otherwise issuable upon exercise of a stock option under a “net exercise” arrangement; (v) by consideration received from a broker-assisted sale; or (vi) by any other legal consideration that the administrator deems appropriate.
Stock options granted under the Amended 2011 LTIP may be stock options that are intended to qualify as ISOs within the meaning of Section 422 of the Code or stock options that are not intended to so qualify. ISOs may be granted only to employees of Cardinal Health or any of its subsidiaries, who, as of the grant date, own no more than 10% of the total combined voting power of Cardinal Health.



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Cardinal Health | 2016 Proxy Statement
 



Proposal 3—Approval of Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan
 
 


Stock options granted under the Amended 2011 LTIP will vest or be exercisable at such time and in such installments prior to their expiration as determined by the administrator. The terms and conditions on the vesting or exercisability of the stock options will be determined by the administrator and may be based on performance criteria. No stock option may be exercised more than 10 years from the date of grant, except that the administrator may, subject to certain restrictions, provide that the period of time over which an option other than an ISO may be exercised will be extended if on the scheduled option expiration date, the participant's exercise of the option would violate applicable law. At any time after the grant of a stock option, the administrator may reduce or eliminate any restrictions surrounding any participant’s right to exercise all or part of the stock option.
Except in connection with a corporate transaction or event that leads to an adjustment of the number or kind of shares underlying the awards granted under the Amended 2011 LTIP, the terms of any outstanding stock options that are “underwater” (that is, have an exercise price above the market value of our shares) may not be amended to reduce the exercise price without shareholder approval. The administrator also may not cancel any such outstanding stock options in exchange for cash, other awards or stock options with an exercise price that is less than the exercise price of the original stock options without shareholder approval.
Stock Appreciation Rights
Stock appreciation rights provide the recipient with the right to receive from us an amount (in cash or shares) equal to or based on the excess of the fair market value of our common shares on the date the rights are exercised over the aggregate base price of the stock appreciation rights. The base price of stock appreciation rights may not be less than the fair market value of the shares underlying the stock appreciation rights on the date of grant (except with respect to awards converted or substituted in connection with an acquisition by us). Stock appreciation rights can be tandem (that is, granted with a stock option) or free-standing. Free-standing stock appreciation rights must have a base price per right that equals or exceeds the fair market value of a common share on the date of grant, must specify the terms and conditions on the vesting or exercisability as determined by the administrator (which may be based on performance conditions), and may not be exercisable more than 10 years from the date of grant, subject to the limited exception described above under "Stock Options." Tandem stock appreciation rights granted in connection with previously granted stock options will generally have the same terms and conditions of the stock options.
Except in connection with a corporate transaction or event that leads to an adjustment of the number or kind of shares underlying the awards granted under the Amended 2011 LTIP, the terms of outstanding stock appreciation rights that are “underwater” (that is, have a base price above the market value of our shares) may not be amended to reduce the base price without shareholder approval. The administrator also may not cancel any such
 
outstanding stock appreciation rights in exchange for cash, other awards or stock appreciation rights with a base price that is less than the base price of the original stock appreciation rights without shareholder approval.
Stock Awards
A “stock award” is an award or issuance of shares or stock units where the grant, issuance, retention, vesting or transferability during specified periods of time is subject to the terms and conditions (such as continued employment or performance conditions) set forth in the award agreement. Stock awards include RSUs and PSUs.
The administrator may subject the grant, issuance, retention or vesting of any stock award to such performance criteria and levels of achievement as the administrator determines, as further described below under the heading “Performance Criteria.” Unless otherwise provided for by the administrator, the participant will have the rights equivalent to those of a shareholder and will be a shareholder only after shares are issued to the participant.
Other Stock-Based Awards
An “other stock-based award” is any other type of equity-based or equity-related award not otherwise described by the terms of the Amended 2011 LTIP (including the grant or offer for sale of unrestricted shares) in such amount and subject to such terms and conditions as the administrator determines. Other stock-based awards may involve the transfer of actual shares to the participant or payment in cash or other property in amounts based on the value of the shares. The administrator may establish performance criteria applicable to other stock-based awards in its discretion and will determine the other applicable terms of other stock-based awards.
Cash Awards
A cash bonus opportunity may be awarded under the Amended 2011 LTIP under which a participant may become entitled to receive an amount denominated in dollars or another appropriate currency. The administrator may establish in its discretion the performance criteria and level of achievement of such criteria that determine the amounts payable under a cash award or the vesting criteria otherwise applicable to the award. The administrator determines the timing of payment of any cash award, provided that unless otherwise provided in the award agreement, payment will occur on before the 15th day of the third month after the end of the applicable performance period, if any. The administrator may provide for the payment of any cash award to be deferred to a specified date or event, subject to such terms and conditions as the administrator may specify. Payments for cash awards may be in either cash or other property, as determined by the administrator.



 
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Proposal 3—Approval of Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan
 
 


Dividends and Dividend Equivalents
To the extent permitted by Section 409A of the Code, any award other than stock options or stock appreciation rights may provide the participant with the right to receive dividend payments or dividend equivalent payments on the shares subject to the award. Any dividends or other distributions on awards with restrictions that lapse upon the achievement of performance criteria will be deferred until, and paid after, the achievement of the applicable performance criteria. Our RSUs and PSUs accrue cash dividend equivalents that are payable when, and only to the extent that, the RSUs and PSUs vest.
Performance Criteria
The Compensation Committee may specify performance criteria for stock options, stock appreciation rights, stock awards, other stock-based awards and cash awards. With respect to any award that is intended to satisfy the requirements for performance-based compensation under Section 162(m) of the Code, the applicable performance criteria must be any one or more of the following performance criteria or derivations of such performance criteria, either individually, alternatively or in any combination, applied to either Cardinal Health as a whole or to a business segment, division, department, region, function or unit, affiliate or product or product category, either individually, alternatively or in any combination, and measured either periodically, annually or cumulatively over multiple periods or years, on an absolute basis or relative to a pre-established target, to prior-period results or to an index or a designated comparison group or to divisions, departments, regions, functions or units within such comparison group, and either calculated in accordance with U.S. GAAP or as adjusted based on factors identified at the time of grant, in each case as specified by the administrator: cash flow; earnings (including gross margin, operating earnings, earnings before interest and taxes, segment profit, earnings before taxes and discontinued operations, earnings from continuing operations and net earnings); earnings per share; stock price; shareholders’ equity; total shareholder return; capital or invested capital; assets or net assets; return on investment; revenue; economic profit; tangible capital; market share; contract awards or backlog; distribution, selling, general and/or administrative expenses; credit rating; dividend payments; improvement in workforce diversity; customer satisfaction, retention or loyalty; employee satisfaction or retention; service levels; net working capital or net working capital days; days sales outstanding; days inventory on hand; days payable outstanding; capital expenditures; generics penetration; and preferred product growth. Notwithstanding the satisfaction of any performance criteria, the number or amount of shares, stock options, cash or other benefits granted, issued, retainable, payable or vested under an award when performance criteria are satisfied may be reduced by the Compensation Committee on the basis of such further considerations as the Compensation Committee determines in its sole discretion. Certain modifications may be made by the Compensation Committee to the performance criteria
 
except to the extent that such modifications (other than in connection with death, disability or a change of control) would result in the award no longer qualifying for the performance-based compensation exemption under Section 162(m) of the Code. Awards that are intended to qualify as performance-based compensation under Section 162(m) of the Code will only be granted to key employees.
Transferability of Awards
The administrator may only provide for transferability of awards under the Amended 2011 LTIP if the awards are not transferred in exchange for consideration. Otherwise, recipients may not transfer awards under the Amended 2011 LTIP other than by beneficiary designation, will or the laws of descent and distribution.
Termination of Employment
With the exception of cash awards, the Amended 2011 LTIP provides that the administrator will determine at the time of grant (subject to subsequent modification) the effect that a participant’s termination of employment will have on awards granted under the plan.
With respect to cash awards, the Amended 2011 LTIP provides that, unless otherwise determined by the administrator, awards vest on a pro-rata basis based on the length of time that the participant was employed by us during the applicable performance period in the event of a termination of employment by reason of disability, retirement or death, or by reason of an involuntary termination of employment (other than a termination for cause) during or after the last quarter of the applicable performance period. In each case, the cash award will be based on the level of financial, business or operational performance actually achieved, to the extent applicable to the award. In the event of a termination of employment that occurs before the last quarter of the applicable performance period for a reason other than due to disability, retirement or death, or a termination is for cause, all of the participant’s rights to any cash award for that performance period will be forfeited.
Adjustments
The share limits in the Amended 2011 LTIP, as well as the number and kind of shares covered by outstanding stock options, stock appreciation rights, stock awards and other stock-based awards, and the prices per share applicable thereto, must be adjusted in certain situations as provided in the Amended 2011 LTIP, including a stock dividend, stock split, reverse stock split, share combination, extraordinary cash dividend or recapitalization or similar event affecting the capital structure of Cardinal Health, or a merger, consolidation, acquisition of property or shares, separation, spin-off, split-off, split-up, reorganization, stock rights offering, partial or complete liquidation, disaffiliation or other distribution of assets, issuance of rights or warrants to purchase securities or similar event affecting Cardinal Health or any of its affiliates.



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Cardinal Health | 2016 Proxy Statement
 



Proposal 3—Approval of Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan
 
 


Change of Control
The following is a description of the acceleration, exercisability and valuation provisions that apply to employee and non-employee director awards upon a change of control under the Amended 2011 LTIP, unless otherwise determined by the administrator or set forth in an award agreement or as provided for in an individual severance or employment agreement. Vesting of employee awards will accelerate only if (i) the surviving entity does not provide a qualifying “replacement award” to the participant to replace or adjust each outstanding award, or (ii) within two years after the change of control, the participant terminates his or her employment for “good reason,” the participant’s employment is terminated by the surviving entity other than for cause, or the participant dies or is disabled. If a participant’s employment is terminated under those circumstances, employee stock options and stock appreciation rights that he or she held at the time of the change of control that were replaced will become fully exercisable and remain exercisable for their remaining term.
Similarly, vesting of non-employee director awards will accelerate only if (i) the non-employee director does not continue to serve on the Board or serve as a member of the board of directors of Cardinal Health’s successor in the change of control or of another entity that is affiliated with Cardinal Health or its successor following the change of control and (ii) the surviving entity does not provide a qualifying “replacement award” to the non-employee director to replace or adjust each outstanding award.
An award qualifies as a “replacement award” if: (i) it is of the same type as the replaced award; (ii) it has a value at the time of grant or adjustment that is at least equal to that of the replaced award; (iii) it relates to publicly traded equity securities of Cardinal Health or its successor or affiliate; and (iv) the U.S. tax consequences, if applicable, and the other terms and conditions of the replacement award are no less favorable to the participant when compared to the replaced award.
The Amended 2011 LTIP includes a definition of “change of control.” In general, a change of control will be deemed to have occurred if:
a person or group acquires 30% or more of Cardinal Health’s outstanding common shares or voting securities, subject to limited exceptions;
during any two-year period, individuals who as of the beginning of such two-year period constituted the Board cease for any reason to constitute at least a majority of the Board, unless the replaced directors are approved as described in the Amended 2011 LTIP;
there is a consummation of a reorganization, merger, consolidation, sale or other disposition of all or substantially all of Cardinal Health’s assets or another business combination unless: (i) after the transaction all or substantially all of the owners of Cardinal Health’s outstanding common
 
shares or voting securities prior to the transaction own more than 50% of such securities after the transaction in substantially the same proportions; (ii) no person, subject to certain exclusions, owns 30% or more of the outstanding common shares or voting securities of the resulting entity (unless such ownership level existed before the transaction); and (iii) a majority of the directors of the resulting entity were members of Cardinal Health’s Board (including applicable replacements as described above) when the transaction was approved or the transaction agreement was executed; or
our shareholders approve a complete liquidation or dissolution of Cardinal Health.
Recoupment
The administrator may require repayment to us of all or any portion of any award if the amount of the award was calculated based upon the achievement of financial results that were subsequently the subject of a restatement of our financial statements, the participant engaged in misconduct that caused or contributed to the need for the restatement of the financial statements, and the amount payable to the participant would have been lower than the amount actually paid had the financial results been properly reported. In addition, the administrator may, in its discretion, require that all or any portion of an award is subject to an obligation of repayment to us upon a violation of a non-competition and confidentiality covenant applicable to the participant. These provisions will not apply after a change of control, except as otherwise required by applicable law.
The Amended 2011 LTIP will be administered in compliance with any rules or regulations implementing the Dodd-Frank Act’s mandatory recoupment requirements. Under those rules and regulations, we expect to implement and disclose additional policies with respect to the recovery of incentive-based compensation paid to current or former executive officers following an accounting restatement due to material noncompliance with financial reporting requirements under the securities laws.
Tax Withholding
Each participant must pay us, or make arrangements satisfactory to us regarding the payment of, any federal, state, local or foreign taxes of any kind required to be withheld with respect to any award under the Amended 2011 LTIP no later than the date when any amount under the award first becomes includible as compensation for any tax purposes for which we have a tax withholding obligation. To the extent determined by the administrator, withholding obligations may be settled with shares, including shares that are part of the award giving rise to the withholding requirement, but no more than the legally required withholding may be settled with shares, and withholding above the minimum withholding requirements is only available after the administrator has authorized it. Our obligations under the Amended 2011 LTIP will be conditional on such payment or arrangements, and we will, to



 
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Proposal 3—Approval of Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan
 
 


the extent permitted by law, have the right to deduct any such taxes from any vested shares or any other payment due to the participant at that time or at any future time.
Termination and Amendment
The Amended 2011 LTIP will become effective if and when it is approved by shareholders. It will remain in effect until November 3, 2026 unless terminated earlier under its terms. Awards granted prior to termination of the Amended 2011 LTIP will remain outstanding in accordance with their terms. The administrator may amend, alter or discontinue the Amended 2011 LTIP or any award agreement, but any such amendment will be subject to approval of our shareholders in the manner and to the extent required by applicable laws, including stock exchange listing standards. In addition, unless approved by our shareholders, and subject to the adjustment provisions of the Amended 2011 LTIP, no such amendment will be made that would: (i) increase the maximum aggregate number of shares which may be issued based on
 
awards granted under the Amended 2011 LTIP; (ii) reduce the minimum exercise price or base price, as applicable, for stock options or stock appreciation rights; or (iii) result in a repricing of outstanding stock options or stock appreciation rights as described in Sections 8(c) and 10(b) of the Amended 2011 LTIP, respectively.
No amendment, suspension or termination of the Amended 2011 LTIP or an award may impair the rights of any participant with respect to an outstanding award unless agreed to by the participant and Cardinal Health. Other than following a change of control, no such agreement will be required if the administrator determines in its sole discretion that such amendment either (i) is required or advisable in order for Cardinal Health, the Amended 2011 LTIP or the award to satisfy any applicable law or to meet the requirements of any accounting standard or (ii) is not reasonably likely to significantly diminish the benefits provided under such award, or that any such diminishment has been adequately compensated.

French-Qualified RSUs and PSUs
 
Approval of the Amended 2011 LTIP will allow us to comply with the August 2015 French law (Loi Macron) that requires grants of tax-qualified RSUs and PSUs to employees in France be authorized by a shareholder vote occurring after August 7, 2015. Although the tax-qualified RSUs and PSUs would provide specific tax and social treatment that may be favorable to our local employer subsidiary and its employees, we are not required to
 
grant tax-qualified RSUs or PSUs in France and may choose, at our discretion, to grant non-qualified awards depending on the circumstances. The Amended 2011 LTIP provides that the administrator is specifically authorized to adopt sub-plans and plan addenda as it deems desirable, to accommodate foreign laws, regulations and practice.

New Plan Benefits
 
The benefits that will be awarded or paid under the Amended 2011 LTIP currently are not determinable. The awards granted under the Amended 2011 LTIP will depend on the administrator’s actions and the fair market value of shares at various future dates and the administrator has not determined future awards or who might receive them. As a result, it is not possible to determine the benefits that executive officers and other employees and non-employee directors will receive if the Amended 2011 LTIP is approved by the shareholders.



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Cardinal Health | 2016 Proxy Statement
 



Proposal 3—Approval of Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan
 
 


Existing Plan Benefits
 
The following table sets forth information with respect to stock options and full-value awards (RSUs and PSUs at target) previously granted under the 2011 LTIP as of September 6, 2016:
Name and Principal Position
Number of Shares Covered by Stock Options
(#)
Number of Shares Covered by Full-Value Awards
(#)
George S. Barrett, Chairman and Chief Executive Officer
1,201,603

478,406

Michael C. Kaufmann, Chief Financial Officer
325,027

168,677

Donald M. Casey Jr., Chief Executive Officer — Medical Segment
375,100

178,978

Jon L. Giacomin, Chief Executive Officer — Pharmaceutical Segment
182,952

75,273

Craig S. Morford, Chief Legal and Compliance Officer
169,707

78,844

All current executive officers as a group
2,426,926

1,061,925

All current employees as a group (excluding executive officers)
6,805,029

6,366,265

U.S. Federal Income Tax Consequences
 
The following is a brief summary of certain of the U.S. federal income tax consequences of certain transactions under the Amended 2011 LTIP based on the law in effect as of the date of this proxy statement. This summary, which is presented for the information of shareholders considering how to vote on this proposal, is not intended to be exhaustive. It does not describe federal taxes other than income taxes (such as Medicare and Social Security taxes) or foreign, state or local tax consequences. Nor does it describe tax consequences based on particular circumstances. Each participant in the Amended 2011 LTIP should refer to the actual text of the plan set forth in Appendix A and consult with a tax advisor as to specific questions relating to tax consequences of participation in the plan.
Federal Income Tax Consequences to Participants
Stock options. In general, (i) an optionee will not recognize income at the time a nonqualified stock option is granted, (ii) when a nonqualified stock option is exercised, the optionee will recognize ordinary income in an amount equal to the difference between the exercise price paid for the shares and the fair market value of the shares, if unrestricted, on the date of exercise, and (iii) when shares acquired under the exercise of a nonqualified stock option are sold, appreciation (or depreciation) in the value of the shares after the exercise date will be treated as either short-term or long-term capital gain (or loss), depending on how long the shares have been held.
An optionee generally will not recognize income when an ISO is granted or exercised. However, the exercise of an ISO may result in alternative minimum tax liability. If shares are issued to the
 
optionee under the exercise of an ISO, and if the optionee does not make a disqualifying disposition of such shares within two years after the date of grant or within one year after the transfer of such shares to the optionee, then upon the sale of such shares, any amount realized in excess of the exercise price will be taxed to the optionee as a long-term capital gain and any loss sustained will be a long-term capital loss.
If shares acquired upon the exercise of an ISO are disposed of prior to the expiration of either holding period described above, the optionee generally will recognize ordinary income in the year of disposition in an amount equal to the excess (if any) of the fair market value of such shares at the time of exercise (or, if less, the amount realized on the disposition of such shares if a sale or exchange) over the exercise price paid. Any further gain (or loss) realized by the optionee generally will be taxed as short-term or long-term capital gain (or loss), depending on the holding period.
Stock appreciation rights. A participant will not recognize any income in connection with the grant of a tandem stock appreciation right or a free-standing stock appreciation right. When the stock appreciation right is exercised, the participant normally will be required to include as taxable ordinary income in the year of exercise an amount equal to the amount of cash received and the fair market value of any unrestricted shares received as a result of the exercise.
Stock awards. The recipient of a stock award in the form of restricted shares generally will be subject to tax at ordinary income rates on the fair market value of the underlying shares (reduced by any amount paid by the participant for such shares) at such



 
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Proposal 3—Approval of Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan
 
 


time as the shares are no longer subject to forfeiture or restrictions on transfer for purposes of Section 83 of the Code (“Restrictions”). However, a participant may, within 30 days of the date of transfer of the shares, elect under Section 83(b) of the Code to have taxable ordinary income on the date of transfer equal to the excess of the fair market value of such shares (determined without regard to the Restrictions) over the purchase price, if any, of such restricted shares. If a participant does not make a Section 83(b) election, any dividends received with respect to shares that are subject to the Restrictions generally will be treated as compensation that is taxable as ordinary income to the participant.
No income generally will be recognized upon the grant of stock awards in the form of RSUs, PSUs or other share units. The recipient of such an award generally will be subject to tax at ordinary income rates on the fair market value of unrestricted shares on the date that such shares are transferred to the participant under the award (reduced by any amount paid by the participant for such award), and the capital gains/loss holding period for such shares will also commence on such date.
Cash awards. A recipient generally will not recognize any income upon the grant of a cash award. Upon payment in respect of the earn-out of a cash award, the recipient generally will be required to include as taxable ordinary income in the year of receipt an amount equal to the cash or other property received and the fair market value of any unrestricted shares received.
 
Federal Income Tax Consequences to Cardinal Health or its Subsidiary
At the time and to the extent that a recipient recognizes ordinary income in the circumstances described above, Cardinal Health or the subsidiary for which the participant performs services will be entitled to a corresponding deduction provided that, among other things, the income meets the test of reasonableness, is an ordinary and necessary business expense, is not an “excess parachute payment” within the meaning of Section 280G of the Code and is not disallowed by the $1 million limitation on certain executive compensation under Section 162(m) of the Code. As noted above, we may grant awards under the Amended 2011 LTIP that are not designed to qualify as “performance-based” under Section 162(m) and awards intended to qualify as “performance-based” may not qualify for deductibility under Section 162(m).
The Board recommends that you vote FOR the proposal to approve the Amended 2011 LTIP.



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Cardinal Health | 2016 Proxy Statement
 



Proposal 4—Advisory Vote to Approve the Compensation of Our Named Executive Officers
In accordance with Section 14A of the Exchange Act, we are asking our shareholders to approve, on a non-binding advisory basis, the compensation of our named executive officers, as disclosed in the Compensation Discussion and Analysis, the Summary Compensation Table and the related compensation tables, notes and narrative in this proxy statement.
We urge shareholders to read the Compensation Discussion and Analysis beginning on page 34 of this proxy statement, which describes in more detail how our executive compensation program operates and is designed to achieve our compensation objectives, as well as the Summary Compensation Table and related compensation tables, notes and narrative appearing on pages 42 through 54, which provide detailed information on the compensation of our named executive officers. The Compensation Committee and the Board believe that the executive compensation program described in the Compensation Discussion and Analysis is effective in achieving our goals and that the compensation of our named executive officers reported in this proxy statement has supported and contributed to our success.
 
Although this advisory vote is not binding on the Board, the Board and the Compensation Committee will review and consider the voting results when evaluating our executive compensation program.
The Board has adopted a policy providing for annual say-on-pay advisory votes. Unless the Board modifies this policy, the next say-on-pay advisory vote will be held at our 2017 Annual Meeting of Shareholders.
The Board recommends that you vote FOR the approval, on a non-binding advisory basis, of the compensation of our named executive officers, as disclosed in the Compensation Discussion and Analysis, the Summary Compensation Table and the related compensation tables, notes and narrative in this proxy statement.



 
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31 



Share Ownership Information
The table below sets forth certain information regarding the beneficial ownership of our common shares by and the percentage of our outstanding common shares represented by such ownership for:
each person known by us to own beneficially more than 5% of our outstanding common shares;
our directors;
our executive officers named in the Summary Compensation Table on page 43; and
 
all executive officers and directors as a group.
A person has beneficial ownership of shares if the person has voting or investment power over the shares or the right to acquire such power in 60 days. Investment power means the power to direct the sale or other disposition of the shares. Except as otherwise described in the notes below, information on the number of shares beneficially owned is as of September 6, 2016, and the listed beneficial owners have sole voting and investment power.

Name of Beneficial Owner
Common Shares
Additional Restricted and Performance Share
Units (8)
Number
Beneficially
Owned
Percent
of
Class
Wellington Management Group LLP (1)
33,275,405

10.4


BlackRock, Inc. (2)
22,783,228

7.1


The Vanguard Group (3)
21,070,900

6.6


David J. Anderson (4)(5)
5,276

*


Colleen F. Arnold (5)
4,998

*

19,569

George S. Barrett (6)
1,943,759

*

79,848

Donald M. Casey Jr. (6)
244,451

*

98,991

Carrie S. Cox (5)
4,311

*

16,306

Calvin Darden (5)
9,979

*

19,608

Bruce L. Downey (5)
14,528

*

18,387

Jon L. Giacomin (6)
123,095

*

19,807

Patricia A. Hemingway Hall (5)
3,876

*

2,612

Clayton M. Jones (5)
3,876

*

6,018

Michael C. Kaufmann (6)
414,721

*

58,210

Gregory B. Kenny (5)
9,442

*

19,584

Nancy Killefer (5)
1,848

*


David P. King (5)
6,528

*

9,446

Craig S. Morford (6)
114,310

*

95,115

All Executive Officers and Directors as a Group (17 Persons)(7)
3,009,982

*

480,761

*
Indicates beneficial ownership of less than 1% of the outstanding shares.
(1)
Based on information obtained from a Schedule 13G/A filed with the SEC on March 10, 2016 by Wellington Management Group LLP, Wellington Group Holdings LLP, Wellington Investment Advisors Holdings LLP and Wellington Management Company LLP. The address of these entities is 280 Congress Street, Boston, Massachusetts 02210. These entities reported that, as of February 29, 2016, Wellington Management Group LLP had shared voting power with respect to 8,206,757 shares and shared dispositive power with respect to all shares shown in the table, Wellington Group Holdings LLP had shared voting power with respect to 8,206,757 shares and shared dispositive power with respect to all shares shown in the table, Wellington Investment Advisors Holdings LLP had shared voting power with respect to 8,206,757 shares and shared dispositive power with respect to all shares shown in the table and Wellington Management Company LLP had shared voting power with respect to 7,888,700 shares and shared dispositive power with respect to 32,579,744 shares. The number and percentage of shares held by these entities may have changed since the filing of the Schedule 13G/A.
(2)
Based on information obtained from a Schedule 13G/A filed with the SEC on February 10, 2016 by BlackRock, Inc. ("BlackRock"). The address of BlackRock is 55 East 52nd Street, New York, New York 10055. BlackRock reported that, as of December 31, 2015, it had sole voting power with respect to 19,084,519 shares and sole dispositive


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Cardinal Health | 2016 Proxy Statement
 



Share Ownership Information
 
 



power with respect to all shares shown in the table. The number and percentage of shares held by BlackRock may have changed since the filing of the Schedule 13G/A.
(3)
Based on information obtained from a Schedule 13G/A filed with the SEC on February 10, 2016 by The Vanguard Group ("Vanguard"). The address of Vanguard is 100 Vanguard Boulevard, Malvern, Pennsylvania 19355. Vanguard reported that, as of December 31, 2015, it had sole voting power with respect to 613,280 shares, shared voting power with respect to 33,100 shares, sole dispositive power with respect to 20,418,255 shares and shared dispositive power with respect to 652,645 shares. The number and percentage of shares held by Vanguard may have changed since the filing of the Schedule 13G/A.
(4)
Includes 400 common shares held by Mr. Anderson's spouse.
(5)
Common shares listed as being beneficially owned by our non-management directors include (a) outstanding RSUs that may be settled within 60 days, as follows: Mr. Anderson — 3,876 shares; Ms. Arnold — 3,876 shares; Ms. Cox — 3,876 shares; Mr. Darden — 3,876 shares; Mr. Downey — 3,876 shares; Ms. Hemingway Hall — 3,876 shares; Mr. Jones — 3,876 shares; Mr. Kenny — 4,360 shares; Ms. Killefer — 1,848 shares; and Mr. King — 3,876 shares; and (b) phantom stock over which the participants have sole voting rights under our Deferred Compensation Plan, as follows: Ms. Arnold — 1,122 shares; Mr. Darden — 4,968 shares; and Mr. Kenny — 5,082 shares.
(6)
Common shares listed as being beneficially owned by our named executives include (a) outstanding stock options that are currently exercisable or will be exercisable within 60 days, as follows: Mr. Barrett — 1,559,376 shares; Mr. Casey — 208,493 shares; Mr. Giacomin — 109,887 shares; Mr. Kaufmann — 293,003 shares; and Mr. Morford — 114,310 shares; and (b) outstanding RSUs that will be settled within 60 days, as follows: Mr. Casey — 10,005 shares; Mr. Giacomin — 1,779 shares; and Mr. Kaufmann — 13,340 shares.
(7)
Common shares listed as being beneficially owned by all executive officers and directors as a group include (a) outstanding stock options for an aggregate of 2,342,955 shares that are currently exercisable or will be exercisable within 60 days; (b) an aggregate of 62,340 RSUs that may or will be settled in common shares within 60 days; and (c) an aggregate of 11,986 shares of phantom stock over which the participants have sole voting rights under our Deferred Compensation Plan.
(8)
"Additional Restricted and Performance Share Units" include vested and unvested RSUs and vested PSUs that will not be settled in common shares within 60 days. RSUs and PSUs do not confer voting rights and generally are not considered “beneficially owned” shares under the SEC rules.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5 furnished to us and written representations from our officers and directors, we believe that all of our officers and directors and all beneficial owners of 10% or more of any class of our registered equity securities timely filed all reports required under Section 16(a) of the Exchange Act during fiscal 2016, except that due to an administrative error, Messrs. Kaufmann and Giacomin each filed a late Form 4 relating to reporting the retention of shares to satisfy tax withholding obligations in connection with the vesting of RSUs.


 
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33 



Compensation Discussion and Analysis
Executive Summary
 
This Compensation Discussion and Analysis focuses on the compensation of the following executive officers (the "named executives") for fiscal 2016 and describes the executive compensation program and the decisions of the Compensation Committee under the program.
Name
Title
George S. Barrett
Chairman and Chief Executive Officer
Michael C. Kaufmann
Chief Financial Officer
Donald M. Casey Jr.
Chief Executive Officer — Medical Segment
Jon L. Giacomin
Chief Executive Officer — Pharmaceutical Segment
Craig S. Morford
Chief Legal and Compliance Officer
Fiscal 2016 Highlights
Fiscal 2016 was an outstanding year for us as we delivered excellent financial performance.
Increased revenue by 19% to a record $121.5 billion.
Grew GAAP operating earnings by 14% to a record $2.5 billion and non-GAAP operating earnings by 17% to a record $2.9 billion.*
Grew GAAP diluted EPS by 20% to $4.32 and non-GAAP diluted EPS by 20% to $5.24.*
Generated a record $3.0 billion in operating cash flow.
Deployed $3.6 billion for acquisitions and returned $1.2 billion to shareholders, including $650 million in share repurchases.
Increased quarterly dividend by 16% in accordance with our annual dividend payout ratio goal of 30% to 35% of non-GAAP diluted EPS.
tsr2016.jpg
 
At the segment level, our Pharmaceutical segment grew revenue by 20% and segment profit by 19%. Our Medical segment grew revenue by 9% and segment profit by 6%.
Mr. Barrett received an above-target annual incentive award, reflecting our record operating earnings and Mr. Barrett's strong individual contributions in fiscal 2016. His cash compensation was down slightly on a year-over-year basis, and he did not receive a base salary increase in fiscal 2016.
Mr. Barrett's total compensation was up slightly year-over-year reflecting an increase in his long-term incentive target provided for in the August 2015 extension of his employment agreement. We emphasize performance and retention through long-term incentive compensation, two-thirds of which is performance-based and the value of which is dependent on the company's future results.
Shareholder Engagement and Results of 2015 Advisory Vote on Executive Compensation
At the 2015 Annual Meeting of Shareholders, our say-on-pay advisory vote received 97% support. We hold regular discussions with our largest shareholders and solicit feedback from our top 50 investors on corporate governance topics, including executive compensation. During fiscal 2016, we contacted governance professionals from our shareholders owning more than 50% of our outstanding shares. (See pages 16 and 17 for further detail about shareholder engagement.) The Compensation Committee considered the favorable say-on-pay vote and shareholder feedback as well as market considerations and concluded that there would be no changes to our executive compensation practices.

___________
*
We provide the reasons we use non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures on pages 23 through 25 of the Fiscal 2016 Form 10-K.


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Cardinal Health | 2016 Proxy Statement
 



Compensation Discussion and Analysis
 
 



Compensation Philosophy and Practices
 
Our compensation program is designed to support our long-term growth with accountability for key annual results. It has the following key objectives:
Reward performance. We tie most of executive pay to performance based on both financial and individual performance.
Emphasize long-term incentive compensation. We emphasize performance and retention through the use of long-term incentive compensation. We provide opportunity for individual value accumulation through long-term incentive and deferred compensation rather than through pensions.
 
Drive stock ownership. Long-term incentive grants combined with stock ownership guidelines provide executives with meaningful ownership stakes and align their interests with shareholders.
Attract, retain and reward the best talent to achieve superior results for shareholders. We need to recruit and retain superior talent who can drive superior results. We have structured our compensation programs to be competitive in the marketplace as well as to motivate and reward strong performance.

Executive Compensation Governance Features
 
WHAT WE HAVE
WHAT WE DON'T HAVE
ü
Significant portion of executive pay "at risk"
û
No executive pensions or supplemental executive retirement plans
ü
Stock ownership guidelines for directors and executive officers
û
No hedging or pledging of company stock
ü
Compensation recovery ("clawback") provisions
û
No excise tax gross-ups upon change of control
ü
CEO is only executive officer with employment agreement
û
No repricing of underwater options without shareholder approval
ü
Double trigger vesting of equity awards upon change of control
û
No dividend equivalents on unearned PSUs or RSUs
ü
Different measures for annual cash incentives and PSUs
û
No cash severance exceeding 2.99 times base salary and bonus without shareholder approval
ü
Caps on annual cash incentive and PSU payouts
 
 
ü
Long-standing, proactive shareholder engagement program
 
 
 
 
 
 


 
Cardinal Health | 2016 Proxy Statement
35 



Compensation Discussion and Analysis
 
 



Elements of Fiscal 2016 Compensation for Executive Officers
 
We have three elements of total direct compensation: base salary, annual incentives and long-term incentives. Long-term incentives consist of an equally-weighted mix of PSUs, stock options and RSUs. A significant portion of executive compensation is performance-based and at-risk (annual incentives, PSUs and stock options).
ceopaymixa02.jpg otherexecpaymix2.jpg
Pay Element
Description and Purpose
Links to Business and Talent Strategies
Base salary
Fixed cash compensation; reviewed annually and adjusted when appropriate
Set based on historic salary levels, market data, individual performance, experience and skills, and internal pay equity
Competitive base salaries support our ability to attract and retain executive talent
Annual incentives
Variable cash compensation based on achieving key annual financial and corporate goals and individual performance
Target as a percentage of base salary based on market data and internal pay equity
Financial measures reflect our focus on growing operating earnings, with tangible capital modifier promoting efficient use of capital
Long-term incentives
Equally weighted between PSUs, stock options and RSUs
PSUs vest based on achieving performance goals over a three-year period; stock options and RSUs vest ratably over three years
Target annual grant value based on market data and internal pay equity
Drives sustainable long-term shareholder return and closely aligns management's interests with shareholders'
PSU measures (non-GAAP diluted EPS growth and dividend yield) are key factors that influence shareholder returns
Stock options and RSUs retain executive talent and promote focus on stock price appreciation
Base Salary
 
Early in fiscal 2016, the Compensation Committee increased base salaries for Messrs. Kaufmann, Casey and Morford between 4% and 5%, and for Mr. Giacomin by 10%, based on individual performance, market data for their roles and internal pay equity. The Compensation Committee did not change Mr. Barrett's base salary during fiscal 2016.


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Cardinal Health | 2016 Proxy Statement
 



Compensation Discussion and Analysis
 
 



Annual Incentive Compensation
 
Fiscal 2016 Goal Setting and Results
Early in fiscal 2016, the Compensation Committee set the annual incentive goal, which called for us to achieve the Board-approved budget of 14% non-GAAP operating earnings growth for a 100% payout.
As in past years, the Compensation Committee set the fiscal 2016 goal based on non-GAAP operating earnings — one of our primary measures of operating performance. Once we achieve the threshold earnings performance, tangible capital management serves as a modifier. Tangible capital was selected as a modifier because it focuses on the efficient use of capital.
 
Our earnings measure is the same non-GAAP operating earnings that we use in our presentations with shareholders, adjusted to exclude certain variable, performance-based compensation expenses. Both this measure and tangible capital also are adjusted to exclude acquisitions during the year unless their expected results are reflected in our annual budget. We describe how we calculate these measures under "Annual Cash Incentive and PSU Performance Measure Calculations” on page 47.

 
Actual
($)
Threshold
($)
Goal
($)
Maximum
($)
Comments
Adjusted non-GAAP operating earnings
2,936
2,417
2,807
3,295
Exceeded fiscal 2016 goal by 5%
Tangible capital
modifier (1)
1,314
 
2,454
 
Increased enterprise funding percentage by 10 percentage points
Enterprise funding percentage
111%

 
 
 
 
 
 
The Compensation Committee adjusted the actual funding slightly downward to reflect prevailing pharmaceutical market conditions in the later part of the fiscal year; this reduction was partially offset by a positive adjustment for progress made in company-wide workplace diversity initiatives
(1)
Tangible capital below $2,454 million increases the enterprise funding percentage by up to 10 percentage points until it reaches $1,963 million. Tangible capital above $2,454 million reduces the enterprise funding percentage by up to 10 percentage points until it reaches $2,945 million. Decreases below $1,963 million and increases above $2,945 million have no further impact on the enterprise funding percentage.


 
Cardinal Health | 2016 Proxy Statement
37 



Compensation Discussion and Analysis
 
 



Fiscal 2016 Annual Incentive Payouts
Name
Target
(Percent of Base Salary)(1)
Target
Amount
($)
Actual Amount
($)
Actual
(Percent of Target)
Barrett
150
1,954,754

2,386,755

122
Kaufmann
100
721,311

880,723

122
Casey
100
671,311

894,188

133
Giacomin
100
542,623

602,314

111
Morford
85
451,615

576,487

128
(1)
We review target annual incentives annually. Under Mr. Barrett's employment agreement, effective in August 2015, his target annual incentive increased to not less than 150% of his annual base salary. Mr. Morford's target annual incentive was increased during fiscal 2016 to 85% of his annual base salary based on additional responsibilities he assumed following the Cordis acquisition and leadership transitions within the Legal and Compliance organization as well as market data. Our other named executives' fiscal 2016 targets as a percentage of base salary remained unchanged from fiscal 2015.
Mr. Barrett's annual incentive was based on our record revenue, operating earnings and operating cash flow and the strong strategic positioning of the company to achieve long-term growth.
Mr. Kaufmann's annual incentive was based on our strong financial performance and discipline, his significant leadership role with Red Oak Sourcing, and talent development and leadership in company-wide workplace diversity initiatives.
Mr. Casey's annual incentive was based on the strong repositioning and performance of the Medical segment, the successful completion of the Cordis acquisition, the development of market-leading capabilities in post-acute care, and talent development.
 
Mr. Giacomin's annual incentive was based on the overall strength of the Pharmaceutical segment's fiscal 2016 performance, the significant expansion of our Specialty Solutions division, and the successful integration of the Harvard Drug and Metro Medical Supply acquisitions.
Mr. Morford's annual incentive was based on the significant role he played in the successful completion of the Cordis acquisition, the expansion of our global regulatory and compliance capabilities, and his continued strong leadership of our overall legal and compliance programs in a rapidly evolving landscape.

Long-Term Incentive Compensation
 
We equally weighted our fiscal 2016 long-term incentive grants between PSUs, stock options and RSUs. As shown in the table below, in certain instances, annual grants were adjusted from target to reflect individual performance, retention or succession planning.
Fiscal 2016 Long-Term Incentive Grants
Name
Annual Grant Target
($)
Actual Grants
Stock
Options
($)
RSUs
($)
Target
PSUs
($)
Total
($)
Barrett
9,500,000

(1)
3,325,000

(1)
3,325,000

(1)
3,166,667

 
9,816,667

Kaufmann
2,250,000

(2)
825,000

 
825,000

 
750,000

 
2,400,000

Casey
2,100,000

 
805,000

 
805,000

 
700,000

 
2,310,000

Giacomin
2,100,000


700,000

 
700,000

 
700,000

 
2,100,000

Morford
1,200,000

 
420,000

 
1,220,000

(3)
400,000

 
2,040,000

(1)
Under Mr. Barrett's employment agreement, as amended, his target dollar value for annual long-term incentive grants is $9.5 million. His annual grant made in August 2016 reflects the Compensation Committee's assessment of his performance, placing the company in a strong strategic position and leading meaningful strategic initiatives, including Red Oak Sourcing and the Harvard Drug and Cordis acquisitions, as well as the Committee's assessment of his expected future performance and contribution to the company.
(2)
Mr. Kaufmann's target was increased to $2.25 million in connection with his appointment to Chief Financial Officer.


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Cardinal Health | 2016 Proxy Statement
 



Compensation Discussion and Analysis
 
 



(3)
Includes $800,000 in RSUs granted to Mr. Morford based on additional responsibilities he assumed following the Cordis acquisition and leadership transitions within the Legal and Compliance organization.
Fiscal 2016-2018 PSU Grants
The Compensation Committee set three-year goals for the PSUs granted in early fiscal 2016 (the "Fiscal 16-18 PSUs") based on the sum of non-GAAP diluted EPS annual growth rate and dividend yield. We have used these two measures because we believe they are key factors that influence total shareholder return and are integral to our strategy to deliver sustainable total shareholder return over the long term. These measures reflect operating performance in addition to capital deployment through acquisitions, dividends and share repurchases. They are consistent with our long-term financial aspirations, which we shared at both our 2013 and 2015 Investor and Analyst Days and reaffirmed in our August 2016 earnings call, of 10% to 15% non-GAAP diluted EPS annual growth rate over a three-year period and an annual dividend payout ratio of 30% to 35%. We describe how we calculate these measures under “Annual Cash Incentive and PSU Performance Measure Calculations” on page 47.
While we selected absolute measures, we set the goals based on relative market data. We considered historical data for diluted EPS growth rate and dividend yield of the Standard & Poor's ("S&P") 500 Index, the S&P 500 Healthcare Index and our Comparator Group. In general, we aim for a target payout if we achieve growth within the top half of the S&P 500 Index. We also took into account analysts' estimates of future performance of Comparator Group companies as well as our long-term outlook.
A named executive can receive 50% of his target Fiscal 16-18 PSUs if we attain threshold performance and can receive up to 200% of target for maximum performance. A named executive will receive no shares if we do not attain threshold performance. The Compensation Committee set threshold, goal and maximum performance of 7%, 12% and 17%, respectively, for this grant, so that amounts can be earned only if we continue significant improvement.
Fiscal 2014-2016 PSU Payouts
In August 2016, the Compensation Committee determined the payout of the PSUs granted in fiscal 2014 (the "Fiscal 14-16
 
PSUs"). The table below shows the performance levels, which were established at the beginning of fiscal 2014, and our actual performance.
 
Performance
(%)
Funding Percentage
Threshold
6.0

 
50
Goal
11.0

 
100
Maximum
17.0

 
200
Actual
16.0

(1)
170
(1)
Non-GAAP diluted EPS annual growth rate was 13.4% and dividend yield was 2.6% over the performance period. As permitted by the terms of the PSU agreements, the Compensation Committee excluded the $0.18 per share positive effect of a change in a deferred tax liability from fiscal 2013 non-GAAP diluted EPS. This adjustment adversely affected the payout of the fiscal 2011 through 2013 PSUs and positively impacted the payout of the Fiscal 14-16 PSUs (fiscal 2013 is the base year of these PSUs). The Compensation Committee also excluded the $0.06 per share net positive effect of certain discrete tax items from fiscal 2016 non-GAAP diluted EPS.
In setting the goals for the Fiscal 14-16 PSUs, we considered historical data for diluted EPS growth rates and dividend yields of the S&P 500 Index and our Comparator Group and also took into account analysts' estimates of future performance of Comparator Group companies as well as our long-term outlook.
The following table shows the target and earned Fiscal 14-16 PSUs for our named executives.
 
Name
Target
Number of Shares
(#)
Number of Shares
Earned
(#)
 
 
Barrett
51,790

88,043

 
Kaufmann
13,595

23,112

 
Casey
13,595

23,112

 
Giacomin
4,046

6,878

 
Morford
7,768

13,206


Other Elements of Compensation
 
Deferred Compensation and 401(k) Savings Plans
We maintain a Deferred Compensation Plan (“DCP”) and 401(k) Savings Plan to allow employees to accumulate value on a tax-deferred basis and to be competitive in recruiting and retaining executive talent. Our DCP permits some management employees, including the named executives, to defer payment and taxation of a portion of their salary and annual incentive compensation into a variety of different investment alternatives. We may make
 
matching contributions to the deferred balances of participants, subject to limits discussed under “Deferred Compensation” on page 49. We also may make contributions to the 401(k) Savings Plan and DCP based on pre-established performance goals on the same basis for all employees. Fiscal 2016 contributions made with respect to our named executives are included in the “All Other Compensation” table on page 44. Named executives also may elect to defer payment and taxation of PSUs and RSUs.



 
Cardinal Health | 2016 Proxy Statement
39 



Compensation Discussion and Analysis
 
 



Other Benefits and Perquisites
Mr. Barrett's employment agreement provides that he and his family may use our corporate aircraft for personal travel. He does not receive tax reimbursement for any imputed income associated with personal travel. The Compensation Committee encourages Mr. Barrett to use corporate aircraft for personal travel as it increases his time available for business purposes and enhances his safety and security. In fiscal 2016, Mr. Barrett received up to $100,000 in personal use. We also have an aircraft time sharing agreement with Mr. Barrett that permits him to reimburse us for incremental costs when he uses the aircraft for personal travel; reimbursed travel does not count against the $100,000 threshold.
Severance and Change of Control Benefits
Mr. Barrett's employment agreement provides for benefits payable upon specified employment termination events. Mr. Barrett will receive cash severance equal to two times the sum of his annual
 
base salary and his target bonus payable in 24 equal monthly installments if we terminate his employment without "cause,” or if he terminates employment for “good reason.” He also will receive a prorated bonus for the year of termination based on actual achievement of performance goals and his vested stock options will remain exercisable for two years. Mr. Barrett's employment agreement does not provide for special treatment of any unvested equity awards.
We discuss our limited severance payments and benefits in detail under “Potential Payments on Termination of Employment or Change of Control” beginning on page 51. We do not have any agreements to provide change-of-control excise tax gross-ups.
Our Board has a policy requiring us to obtain shareholder approval of severance agreements with our executives that provide cash severance benefits that exceed 2.99 times the sum of base salary and bonus.

Our Policies, Guidelines and Practices Related to Executive Compensation
 
Role of Compensation Committee’s Compensation Consultant
Frederic W. Cook & Co., Inc. ("Cook") has served as the Compensation Committee's independent executive compensation consultant since 2011.
The nature and scope of the compensation consultant's engagement consist primarily of:
participating in meetings of the Compensation Committee;
providing compensation data on the Comparator Group; and
providing consulting support, advice and recommendations related to compensation for our Chief Executive Officer and other executive officers, the design of our executive compensation program (including the plan design for annual and long-term incentives), the composition of our Comparator Group and director compensation.
The Compensation Committee has made an assessment under factors set forth in NYSE rules and concluded that Cook is independent and that the firm's work for the Compensation Committee did not raise any conflicts of interest.
 
Role of Executive Officers
Our Chief Executive Officer and Chief Human Resources Officer participate in Compensation Committee meetings to make recommendations as to design and compensation amounts, to present performance assessments of the named executives (other than our Chief Executive Officer) and, together with our Chief Financial Officer, to discuss our financial and operational performance.
Our Chief Executive Officer reviewed fiscal 2016 performance objectives with the Compensation Committee at the beginning of the fiscal year, including financial objectives and non-financial objectives for customer, strategic and talent priorities. The Compensation Committee reviews and discusses the performance and compensation of our Chief Executive Officer in executive session with and without its compensation consultant and with the Lead Director. The Chief Executive Officer does not participate in decisions regarding his own compensation.



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Cardinal Health | 2016 Proxy Statement
 



Compensation Discussion and Analysis
 
 



Use of Comparator Group
The Compensation Committee establishes target compensation levels based on a variety of factors, including data from a "Comparator Group" of similarly situated public companies, which helps the Committee to assess whether our executive pay remains reasonable and competitive in the marketplace. Developed with the assistance of Cook, our Comparator Group reflects the industry in which we primarily compete for executive talent and includes direct competitors and other companies in the healthcare field. Our Comparator Group also includes air/freight and logistics companies because of those companies' similar business models. The following companies comprised the Comparator Group for fiscal 2016 executive pay decisions:
Aetna
CVS Health
Owens & Minor
Allergan
Express Scripts
Quest Diagnostics
Anthem
FedEx
Sysco
AmerisourceBergen
Henry Schein
Thermo Fisher Scientific
Baxter International
Humana
United Parcel Service
Becton, Dickinson
Kimberly-Clark
UnitedHealth Group
Boston Scientific
LabCorp
Walgreens Boots Alliance
CIGNA
McKesson
 
The Committee, working with Cook, annually reviews the group's composition to ensure that the companies remain relevant for comparison purposes. Following a review in May 2015, the Committee noted that two companies (Covidien and Forest Laboratories) would be removed due to acquisitions and determined that the remaining Comparator Group was still appropriate.
The Committee used the following screening criteria when it reviewed the Comparator Group's composition:
revenue ranging from approximately one-quarter to two times our annual revenue;
market capitalization ranging from approximately one-half to five times our market capitalization;
whether a company is included in the peer group of five or more of the other companies in our Comparator Group; and
whether a company is included in our Global Industry Classification Standard (GICS) sub-industry group, Health Care Equipment and Services.
Our revenue has been in the top quartile of the Comparator Group, while our market capitalization has been in the third quartile.
Our Compensation Committee compares total direct compensation (base salary plus annual and long-term incentives) against the 50th percentile of the Comparator Group as a reference point in setting target compensation levels. In addition to competitive market data, the Committee also takes into
 
consideration internal pay equity and an executive’s experience and scope of responsibility, individual performance, potential and unique or hard-to-replace skills, as well as retention considerations.
CEO Employment Agreement
In August 2015, we extended the term of Mr. Barrett's employment agreement for an additional three years. Mr. Barrett is the only executive officer with an employment agreement. We discuss the terms of the agreement under “CEO Employment Agreement” on page 44.
Stock Ownership Guidelines
We have stock ownership guidelines to align the interests of executive officers and directors with the interests of our shareholders. The guidelines specify a dollar value (expressed as a multiple of salary or cash retainer) of shares that executive officers and directors must accumulate and hold while serving in these positions. We count common shares, RSUs and phantom shares held through the DCP under the stock ownership guidelines.
 
Multiple of Base Salary/Annual Cash Retainer
Chairman and Chief Executive Officer
6x
Chief Financial Officer and Segment CEOs
4x
Other executive officers
3x
Non-management directors
5x
Under the guidelines, executive officers and directors must retain 100% of the net after-tax shares received under any equity awards until they satisfy the required ownership levels. All named executives exceed the required ownership level.
Potential Impact on Compensation from Executive Misconduct ("Clawbacks")
Our incentive plans and agreements provide that we may require repayment of cash incentives and gains realized under equity awards and cancel outstanding equity awards in instances of executive misconduct. We discuss these policies in more detail under “Potential Impact on Compensation from Executive Misconduct ("Clawbacks")” on page 47.
Hedging and Pledging Shares
Our Board has adopted a policy prohibiting all employees and directors from engaging in short sales, publicly traded options, puts and calls, forward sale contracts and other swap, hedging and derivative transactions relating to our securities. The Board also has adopted a policy prohibiting our executive officers and directors from holding our securities in margin accounts or pledging our securities as collateral for a loan.



 
Cardinal Health | 2016 Proxy Statement
41 



Compensation Discussion and Analysis
 
 



Equity Grant Practices
The Compensation Committee typically approves the annual equity grant in August of each year and sets August 15 as the grant date. The Compensation Committee expects the annual grant date to follow the release of earnings for the prior fiscal year in early August, without regard to whether we are aware of material nonpublic information.
Equity Dilution Practices
Our fiscal 2016 annual equity run rate was 0.79%. We calculate our equity run rate as the total number of shares subject to equity awards granted in the fiscal year divided by the weighted average number of our common shares outstanding during the fiscal year.
Tax Matters
Section 162(m) of the Code precludes us from taking a tax deduction for non-performance-based compensation in excess of
 
$1 million paid in any fiscal year to our Chief Executive Officer and three other most highly compensated executive officers (other than the Chief Financial Officer). While we intend annual cash incentive awards under our MIP and stock options and PSUs granted under our 2011 LTIP to qualify as performance-based compensation within the meaning of Section 162(m) and, as such, to be fully deductible, due to the complexity of Section 162(m), amounts intended to qualify as "performance-based compensation" may not satisfy applicable requirements. In addition, we maintain flexibility to operate our compensation programs in a manner designed to promote varying company goals. For purposes of qualifying payments as performance-based compensation under Section 162(m), the Compensation Committee established the performance criteria of $900 million in non-GAAP operating earnings for fiscal 2016 MIP awards and $1.00 of non-GAAP diluted EPS in fiscal 2016 for the Fiscal 14-16 PSUs, both of which we exceeded.

Executive Compensation
Human Resources and Compensation Committee Report
 
We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on that review and discussion, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and in Cardinal Health’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016.
Submitted by the Human Resources and Compensation Committee of the Board.
David P. King, Chairman
Carrie S. Cox

Calvin Darden
Nancy Killefer


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Cardinal Health | 2016 Proxy Statement
 



Executive Compensation
 
 



Executive Compensation Tables
 
The table below summarizes fiscal 2016 compensation for our Chief Executive Officer, our Chief Financial Officer and each of our three other most highly compensated executive officers at June 30, 2016, the end of our fiscal 2016.
Summary Compensation Table
Name and
Principal Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)(1)
 
Option
Awards
($)(2)
Non-Equity
Incentive
Plan
Compensation
($)
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)(3)
Total
($)
George S. Barrett
Chairman and Chief Executive Officer
2016
1,320,000

6,491,739

 
3,330,665

2,386,755

131,928

13,661,087

2015
1,320,000

5,983,334

 
3,320,657

2,510,508

135,232

13,269,731

2014
1,314,630

5,533,321

 
2,866,244

2,601,983

132,440

12,448,618

Michael C. Kaufmann
Chief Financial Officer
2016
721,311

1,575,006

 
826,402

880,723

27,251

4,030,693

2015
688,630

4,540,005

 
841,018

1,053,260

36,338

7,159,251

2014
647,699

1,400,013

 
699,897

1,229,008

32,290

4,008,907

Donald M. Casey Jr.
Chief Executive Officer — Medical Segment
2016
671,311

1,505,062

 
806,369

894,188

22,830

3,899,760

2015
650,000

3,005,055

 
805,967

618,118

31,653

5,110,793

2014
647,699

1,469,988

 
769,891

544,067

28,190

3,459,835

Jon L. Giacomin (4)
Chief Executive Officer — Pharmaceutical Segment

2016
542,623

1,400,062

 
701,196

602,314

27,770

3,273,965

2015
480,685

1,237,482

 
629,304

679,692

37,170

3,064,333

Craig S. Morford
Chief Legal and Compliance Officer
2016
531,311

1,620,055

(5)
420,707

576,487

37,579

3,186,139

2015
510,000

800,016

 
400,477

559,598

35,453

2,305,544

2014
508,466

799,948

 
399,944

552,957

32,390

2,293,705

(1)
The amounts reported represent the aggregate grant date fair value of PSUs (at target) and RSUs granted during each fiscal year. The amounts reported in each fiscal year do not represent amounts paid to or realized by the named executives. See the Grants of Plan-Based Awards for Fiscal 2016 table on page 45 and the accompanying footnotes for information on the grant date fair value of each award granted in fiscal 2016. The value of the Fiscal 16-18 PSUs granted during fiscal 2016 assuming achievement of the maximum performance level of 200% would be: Mr. Barrett — $6,333,396; Mr. Kaufmann — $1,500,006; Mr. Casey — $1,400,062; Mr. Giacomin — $1,400,062; and Mr. Morford — $800,059. The named executives may never realize any value from the PSUs.
(2)
The amounts reported represent the grant date fair value of nonqualified stock options granted during each fiscal year and do not represent amounts paid to or realized by the named executives. See the Grants of Plan-Based Awards for Fiscal 2016 table on page 45 and the accompanying footnotes for information on the grant date fair value of stock options granted during fiscal 2016 and the assumptions used in determining the grant date fair value. The named executives may never realize any value from these stock options, and to the extent they do, the amounts realized may be more or less than the amounts reported above.
(3)
The elements of compensation included in the “All Other Compensation” column for fiscal 2016 are set forth in the table below.
(4)
Mr. Giacomin was promoted to Chief Executive Officer — Pharmaceutical Segment effective in November 2014 and was not previously a named executive.
(5)
The amount shown in this column includes RSUs with a grant date fair value of $800,023 granted to Mr. Morford based on additional responsibilities he assumed following the Cordis acquisition and leadership transitions within the Legal and Compliance organization.


 
Cardinal Health | 2016 Proxy Statement
43 



Executive Compensation
 
 



The amounts shown for “All Other Compensation” for fiscal 2016 include (a) company matching and fiscal 2016 performance contributions to the named executive’s account under our 401(k) plan; (b) company matching and fiscal 2016 performance contributions to the named executive’s account under our DCP; and (c) perquisites, in the following amounts:
Name
Company
401(k) Savings
Plan
Contributions
($)
Company
Deferred
Compensation
Plan
Contributions
($)
Perquisites
($)(a)
Total
($)
Barrett
18,830
8,000
105,098

131,928

Kaufmann
18,830
8,421

27,251

Casey
18,830
4,000

22,830

Giacomin
19,430
8,340

27,770

Morford
19,230
8,042
10,307

37,579

(a)
The amounts shown include the value of perquisites and other personal benefits if the aggregate value exceeded $10,000. Where we report perquisites and other personal benefits, we quantify each perquisite or personal benefit if it exceeds $25,000. The amount reported for Mr. Barrett for fiscal 2016 included the incremental cost to us of his personal use of corporate aircraft ($99,871), legal fees paid with respect to services provided to him in connection with the negotiation of his amended employment agreement, and home security system monitoring fees. The amount reported for Mr. Morford for fiscal 2016 included reimbursement relating to a deferred compensation penalty due to a company administrative error and home security system monitoring fees.
We own corporate aircraft and lease other aircraft. We calculate the incremental cost of personal use of corporate aircraft based on the average cost of fuel, average trip-related maintenance costs, crew travel expenses, per flight landing fees, hangar and parking costs and smaller variable costs, offset by any timeshare payments by the executive. Since we use our aircraft primarily for business travel, we do not include fixed costs, such as depreciation, pilot salaries and certain maintenance costs. Mr. Barrett received up to $100,000 in personal use of corporate aircraft in fiscal 2016. He did not receive tax reimbursement for any imputed income associated with personal travel. We have an aircraft time sharing agreement with Mr. Barrett under which he is permitted to reimburse us for the incremental costs of his personal use of corporate aircraft consistent with FAA regulations; reimbursed travel did not count against the $100,000 threshold.
CEO Employment Agreement
In August 2015, we entered into an amendment with Mr. Barrett to his employment agreement to provide that he will continue to serve as Chairman and Chief Executive Officer until the earlier of the date of our Annual Meeting of Shareholders following June 30, 2018 or December 31, 2018, subject to earlier termination in accordance with its terms. The employment agreement was scheduled to expire in November 2015.
As amended, the employment agreement provides, among other things, for Mr. Barrett:
to receive an annual base salary of at least $1,320,000;
to participate in our annual cash incentive award program with a target annual award of at least 150% of his annual base salary, payable based on performance objectives that our Compensation Committee determines in consultation with him; and
 
to receive an annual long-term incentive award grant comprised of PSUs, stock options, RSUs and other incentives as determined by the Committee with a target value of $9,500,000, with each annual award subject to the Board's discretion based on both company and individual performance.
The agreement also provides that Mr. Barrett continues to receive personal use of corporate aircraft, which was a maximum of $100,000 in fiscal 2016.



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Cardinal Health | 2016 Proxy Statement
 



Executive Compensation
 
 



Grants of Plan-Based Awards for Fiscal 2016
The table below supplements our Summary Compensation Table by providing additional information about our plan-based compensation for fiscal 2016.
Name/
Award Type
Grant
Date
Approval
Date
Estimated Potential Payouts
Under Non-Equity Incentive Plan Awards (1)
Estimated Potential Payouts Under Equity Incentive Plan
Awards (2)
All Other
Stock
Awards:
Number
of Shares
of Stock
or Units
(#)(3)
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)(4)
Exercise
or Base
Price of
Option
Awards
($/Sh)(5)
Grant
Date Fair
Value of
Stock and
Option
Awards
($)(6)
Threshold
($)
Target
($)
Maximum
($)
Threshold
(#)
Target
(#)
Maximum
(#)
Barrett
 
 
 
 
 
 
 
 
 
 
 
 
Annual Incentive
 
8/4/2015
781,902

1,954,754

3,909,508

 
 
 
 
 
 
 
PSUs
8/15/2015
8/4/2015
 
 
 
18,789

37,578

75,156

 
 
 
3,166,698

Option
8/15/2015
8/4/2015
 
 
 
 
 
 
 
189,695

84.27

3,330,665

RSUs
8/15/2015
8/4/2015
 
 
 
 
 
 
39,457

 
 
3,325,041

Kaufmann
 
 
 
 
 
 
 
 
 
 
 
 
Annual Incentive
 
8/4/2015
288,524

721,311

1,442,622

 
 
 
 
 
 
 
PSUs
8/15/2015
8/4/2015
 
 
 
4,450

8,900

17,800

 
 
 
750,003

Option
8/15/2015
8/4/2015
 
 
 
 
 
 
 
47,067

84.27

826,402

RSUs
8/15/2015
8/4/2015
 
 
 
 
 
 
9,790

 
 
825,003

Casey
 
 
 
 
 
 
 
 
 
 
 
 
Annual Incentive
 
8/4/2015
268,524

671,311

1,342,622

 
 
 
 
 
 
 
PSUs
8/15/2015
8/4/2015
 
 
 
4,154

8,307

16,614

 
 
 
700,031

Option
8/15/2015
8/4/2015
 
 
 
 
 
 
 
45,926

84.27

806,369

RSUs
8/15/2015
8/4/2015
 
 
 
 
 
 
9,553

 
 
805,031

Giacomin
 
 
 
 
 
 
 
 
 
 
 
 
Annual Incentive
 
8/4/2015
217,049

542,623

1,085,246

 
 
 
 
 
 
 
PSUs
8/15/2015
8/4/2015
 
 
 
4,154

8,307

16,614

 
 
 
700,031

Option
8/15/2015
8/4/2015
 
 
 
 
 
 
 
39,936

84.27

701,196

RSUs
8/15/2015
8/4/2015
 
 
 
 
 
 
8,307

 
 
700,031

Morford
 
 
 
 
 
 
 
 
 
 
 
 
Annual Incentive
 
8/4/2015
180,646

451,615

903,230

 
 
 
 
 
 
 
PSUs
8/15/2015
8/4/2015
 
 
 
2,374

4,747

9,494

 
 
 
400,030

Option
8/15/2015
8/4/2015
 
 
 
 
 
 
 
23,961

84.27

420,707

RSUs
8/15/2015
8/4/2015
 
 
 
 
 
 
4,984

 
 
420,002

RSUs (7)
11/15/2015
11/3/2015
 
 
 
 
 
 
9,357

 
 
800,023

(1)
This information relates to annual cash incentive award opportunities with respect to fiscal 2016 performance. Amounts actually earned under the annual cash incentive awards are reported in the Summary Compensation Table under the "Non-Equity Incentive Plan Compensation" column.
(2)
"Equity Incentive Plan Awards" are PSUs granted during the fiscal year under our 2011 LTIP that are eligible to vest after a three-year performance period based on the sum of (i) non-GAAP diluted EPS annual growth rate and (ii) dividend yield. We accrue cash dividend equivalents that are payable when, and only to the extent that, the PSUs vest.
(3)
"All Other Stock Awards" are RSUs granted during the fiscal year under our 2011 LTIP that, unless otherwise noted, vest ratably over three years and accrue cash dividend equivalents that are payable when, and only to the extent that, the RSUs vest.
(4)
"All Other Option Awards" are nonqualified stock options granted during the fiscal year under our 2011 LTIP that vest ratably over three years and have a term of 10 years.
(5)
The stock options have an exercise price equal to the closing price of our common shares on the NYSE on the nearest date preceding the grant date on which sales of common shares occurred.


 
Cardinal Health | 2016 Proxy Statement
45 



Executive Compensation
 
 



(6)
We valued the PSUs and RSUs by multiplying the closing price of our common shares on the NYSE on the nearest date preceding the grant date on which sales of common shares occurred by the number of PSUs (at target) and RSUs awarded. We valued the stock options granted utilizing a lattice model with the following assumptions: expected stock option life: 7.03 years; dividend yield: 1.84%; risk-free interest rate: 1.91%; and expected volatility: 24.50%.
(7)
These RSUs were granted to Mr. Morford based on additional responsibilities he assumed following the Cordis acquisition and leadership transitions within the Legal and Compliance organization. They vest 50% on the second anniversary of the grant date and 50% on the third anniversary of the grant date.
Management Incentive Plan
Our key executive employees, including our named executives, receive annual cash incentives under our MIP. The Compensation Committee establishes performance criteria during the first three months of each fiscal year and may establish performance goals (which criteria and goals may vary from year to year). For fiscal 2016, the Compensation Committee established the performance criterion of $900 million in non-GAAP operating earnings. This performance criterion was intended to allow payments under the MIP to qualify as performance-based compensation under the Code and to be fully tax deductible by us. The named executives do not receive any payout under the MIP unless we achieve this threshold.
As discussed in the Compensation Discussion and Analysis, the Compensation Committee also set a performance goal of adjusted non-GAAP operating earnings, and established a matrix of potential funding percentages based upon achievement of varying levels of earnings, with a tangible capital modifier. The funding percentage determines the total pool for annual incentive awards under the MIP. Although not relevant for fiscal 2016, the MIP allows the Compensation Committee, in its discretion, to make annual incentive awards to named executives if we do not achieve the minimum performance goal, but we achieve the performance criterion.
2011 Long-Term Incentive Plan
Under our 2011 LTIP, we may grant stock options, stock appreciation rights, stock awards, other stock-based awards and cash awards to employees. During fiscal 2016, we granted PSUs, nonqualified stock options and RSUs to our named executives, as shown in the Grants of Plan-Based Awards for Fiscal 2016 table on page 45, under the 2011 LTIP. The plan provides for “double-trigger” accelerated vesting, under which the vesting of awards will accelerate in connection with a change of control only if there is a qualifying termination within two years after the change of control or if the surviving entity does not provide qualifying replacement awards.
 
PSUs granted under the 2011 LTIP settle following the end of a performance period by the issuance of a number of our common shares, which may be a fraction or multiple of the number of PSUs subject to an award. Issuance of the shares under the PSUs is subject to both continued employment by us and the achievement of performance criteria or goals established by the Compensation Committee (which may vary from award to award).
The Compensation Committee establishes performance criteria during the first three months of each performance period and may establish performance goals. For the PSUs granted during fiscal 2016, the Compensation Committee established the performance criterion of non-GAAP diluted EPS for our fiscal year ending June 30, 2018 equal to or greater than $1.00 per share. This performance criterion is intended to allow the PSUs to be performance-based compensation under Section 162(m) of the Code and to be fully tax deductible by us.
As discussed in the Compensation Discussion and Analysis, the Compensation Committee also established three-year performance goals under the PSUs granted during fiscal 2016 based upon the achievement of the sum of non-GAAP diluted EPS annual growth rate and dividend yield over the performance period. A named executive can receive 50% of his target PSUs if we attain threshold performance and can receive up to 200% of his target PSUs for above-target performance. A named executive will receive no shares under the PSUs if we do not attain threshold performance.



  46

Cardinal Health | 2016 Proxy Statement
 



Executive Compensation
 
 



Annual Cash Incentive and PSU Performance Measure Calculations
Award
Performance Measure
 
Calculation
Annual Cash Incentive
Adjusted non-GAAP operating earnings(1)
 
Non-GAAP operating earnings(2) adjusted to exclude annual cash incentive expense to the extent below or above target performance, contributions to the DCP and 401(k) Savings Plan when we exceed pre-established performance goals and income or expense related to the performance of our DCP assets that is included within distribution, selling, general and administrative expenses in our consolidated statement of earnings.
 
Tangible capital(1)
 
12-month average of total assets, less total liabilities (other than interest-bearing long-term obligations), goodwill and other intangibles, net, and cash and equivalents.
PSUs
Sum of non-GAAP diluted EPS annual growth rate and dividend yield
 
Non-GAAP diluted EPS annual growth rate is non-GAAP diluted EPS(3) for the last fiscal year of the performance period divided by non-GAAP diluted EPS for the last fiscal year preceding the performance period; the quotient is then raised to the power of one divided by the number of years in the performance period.
 
 
 
Dividend yield is the sum of all cash dividends paid per share during a performance period divided by the number of years in the performance period; the quotient is then divided by our closing share price on the grant date.
(1)
We generally exclude the results of acquired or divested businesses from the adjusted non-GAAP operating earnings and tangible capital calculations if they are not included in our Board-approved annual budget. Accordingly, we excluded a few small acquisitions from adjusted non-GAAP operating earnings and tangible capital performance for fiscal 2016. The Compensation Committee also may make other adjustments to adjusted non-GAAP operating earnings and tangible capital for purposes of determining whether we achieved our performance goals, although none were made for fiscal 2016.
(2)
Non-GAAP operating earnings is operating earnings, excluding LIFO inventory credits and charges, restructuring and employee severance costs, amortization and other acquisition-related costs, impairments and gains and losses on disposal of assets and net litigation recoveries and charges.
(3)
Non-GAAP diluted EPS is non-GAAP net earnings from continuing operations attributable to Cardinal Health, Inc. divided by the diluted weighted average shares outstanding. Non-GAAP net earnings from continuing operations attributable to Cardinal Health, Inc. is net earnings attributable to Cardinal Health, Inc., adjusted to exclude earnings and losses from discontinued operations, LIFO inventory credits and charges, restructuring and employee severance costs, amortization and other acquisition-related costs, impairments and gains and losses on disposal of assets, net litigation recoveries and charges and tax benefits and expenses associated with each of the items mentioned above. For purposes of the PSUs, the Compensation Committee may approve adjustments to how we calculate non-GAAP net earnings attributable to Cardinal Health, Inc. to reflect a change by us to the definition of that measure as presented to investors, exceptional acquisitions or divestitures, changes in accounting principles or other exceptional items that are not reflective of our operating performance.
In addition to determining incentive compensation, we use the non-GAAP financial measures referenced above internally to evaluate our performance, evaluate the balance sheet and engage in financial and operational planning because we believe that these measures provide additional perspective on and, in some circumstances are more closely correlated to, the performance of our underlying, ongoing business. We provide these non-GAAP financial measures to investors as supplemental metrics to assist readers in assessing the effects of items and events on our financial and operating results on a year-over-year basis and in comparing our performance to that of our competitors.
Potential Impact on Compensation from Executive Misconduct ("Clawbacks")
The MIP and the 2011 LTIP both authorize us to seek repayment of cash incentive compensation paid to an executive if that executive engages in misconduct that causes or contributes to the need to restate previously filed financial statements and the payment was based on financial results that we subsequently restate. In addition, the MIP and the 2011 LTIP will be administered in compliance with the clawback provisions of the Dodd-Frank Act, once rules implementing those provisions become effective.
 
Mr. Barrett’s employment agreement gives Cardinal Health the right to repayment of any bonus or other compensation paid to him if he engaged in misconduct that caused or materially contributed to the need to restate financial statements and, if based on the financial statements as restated, he otherwise would not have received such compensation. This right of repayment applies to compensation granted or vesting within three years of the date on which we originally filed the subject financial statements with the SEC. Under the employment agreement, Mr. Barrett also agreed to comply with any repayment policy that we are required to adopt, or to which we become subject, once rules implementing the clawback provisions of the Dodd-Frank Act become effective.
Under our stock option, PSU and RSU agreements, unexercised stock options, unvested PSUs and RSUs and certain vested PSUs and RSUs are forfeited if the holder engages in specified conduct while employed by Cardinal Health or during a set time period after termination of employment. We also may require the holder to repay the gross gain realized from any stock option exercises or the value of the PSUs and RSUs settled within a set time period prior to such conduct. The specified conduct that triggers forfeiture or repayment includes disclosure of confidential information, fraud, gross negligence or willful misconduct, solicitation of business or our employees, disparagement and competitive actions.



 
Cardinal Health | 2016 Proxy Statement
47 



Executive Compensation
 
 



Finally, all or a portion of a MIP award may be subject to repayment if a named executive violates an applicable non-competition or confidentiality agreement.

Outstanding Equity Awards at Fiscal Year-End for Fiscal 2016
The table below shows the number of shares underlying exercisable and unexercisable stock options and unvested PSUs and RSUs held by our named executives on June 30, 2016.
Name
Option Awards
Stock Awards
Option
Grant
Date
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
Number of
Securities
Underlying