DEF 14A 1 d716709ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.     )

 

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

McKESSON CORPORATION

 

 

LOGO

 

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

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A LETTER FROM OUR BOARD CHAIR

 

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Dear Fellow Shareholders,

 

On behalf of the entire Board, I thank all of you for your continued support and investment in McKesson. While the past year has marked a period of significant transformation for our Company, we have been and will continue to be successful over the long term. That’s because we put the patient at the center of everything that we do and listen carefully to our customers, partners and shareholders.

 

As directors, we play a key role in oversight of the Company’s culture, setting the tone at the top. We hold management accountable for maintaining high standards and effective policies and practices that encourage ethical and compliant conduct.

 

Let me take a moment to reflect on my new role as Independent Chair. For the past 11 years, I have developed a deep knowledge of McKesson and our industry. I have seen the Company grow and evolve. I have seen firsthand the dedication our associates have for their jobs and our customers’ needs. McKesson employees truly believe “it’s not a package, it’s a patient.”

As we approach the 2019 Annual Meeting, let me highlight several of the ways the Board has been working on your behalf.

Implementing a Thoughtful and Orderly CEO Succession

The Board had long planned for the eventual retirement of our former Chairman and CEO, John Hammergren. We were proud to see that our work developing a deep bench of experienced executives delivered a successful CEO transition with the promotion of a strong internal candidate, former president and chief operating officer Brian Tyler. McKesson is a multifaceted business in a moment of strategic transition and we see tremendous value in leadership continuity. Brian’s deep experience in healthcare and within McKesson makes him the ideal leader to guide our Company through the next era. As a 22-year McKesson veteran, Brian has led nearly every major business within the Company as well as corporate strategy and business development. Having spent his entire career in healthcare, Brian has a strong point of view on the future of the industry, both in the U.S. and globally, and a vision for how McKesson will continue to play an integral role in improving patient care while driving long-term value for McKesson’s shareholders.

We would like to thank John for his contributions and tremendous leadership since assuming the CEO role nearly two decades ago. John became McKesson’s CEO during a time of crisis. Over his tenure, McKesson has had a far-reaching, positive impact on healthcare. In addition, John helped build a leadership team that steered McKesson through evolving markets, challenges and opportunities, enabling the Company to become a leading provider of healthcare services and information technology solutions, and allowing organizations across the healthcare industry to improve their business performance and deliver better care.

Launching a New Growth Strategy

Last year we announced a new strategic growth initiative, focused on creating innovative solutions that improve patient care delivery and drive incremental profit growth. The initiative comprises multiple growth pillars and operational and cost structure enhancements designed to increase efficiency, accelerate execution and improve long-term performance. McKesson’s growth priorities include expanded supply chain and commercialization services for pharmaceutical and medical supply manufacturers; enhanced solutions for the rapidly-growing specialty pharmaceutical market; and new offerings that will strengthen and expand the role of retail pharmacy in patient care delivery. These growth priorities are all supported by our ongoing investments in data and analytics.

The Board remains actively involved in overseeing progress against this strategic initiative to accelerate the Company’s growth trajectory over the long term and generate shareholder value.

Aligning Pay and Performance

As our business evolves and grows under Brian’s leadership, the Compensation Committee remains focused on ensuring our compensation program continues to support our strategic goals, demonstrates pay and performance alignment and reflects the views of our shareholders. This proxy statement includes a letter from the Compensation Committee describing their efforts over the last year.

Reshaping the Board with New Perspectives

We have made significant changes to the leadership structure and composition of the Board. We previously combined the CEO and Board Chair roles, but with the CEO transition, the Board elected me Independent Chair of the Board as of April 1, 2019. As Independent Chair, I will continue to ensure that we invigorate Board discussion through the appointment of new directors and the rotation of directors through different Board roles. Thoughtful and ongoing attention to Board composition is


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an important part of my role — and that of the Governance Committee — as we seek to ensure an appropriate mix of tenure and expertise that provides a balance of fresh perspectives and significant institutional knowledge.

Last year we appointed Brad Lerman and Dominic Caruso to the Board, and refreshed leadership of the Compensation, Finance and Governance Committees. Brad, who chairs our newly-created Compliance Committee, brings a deep understanding of the healthcare industry, experience linking compliance and legal considerations with corporate strategy, and other valuable insights to our Board. Dominic, who joined the Audit, Finance, and Compliance Committees, has demonstrated a commitment to rigorous financial stewardship throughout his career, which has complemented our dedication to strong financial management, disciplined growth and strategic capital allocation. We also approved several changes to the composition and leadership of our Compensation Committee. As part of this refreshment, Tony Coles assumed the role of Compensation Committee Chair, Susan Salka and Brad joined the Committee as new members, and Chris Jacobs left the Committee.

Consistent with our commitment to thoughtful governance and effective risk oversight, the Board has taken certain steps and committed to implement additional changes:

 

   

New Independent Director: Effective July 1, 2019, Dr. Ken Washington, Chief Technology Officer at Ford Motor Company, joins our Board as our newest independent director. Ken brings deep technology, privacy and strategy expertise to our Board.

 

   

Committee Refreshment: As part of our commitment to diverse perspectives on our committees, on July 1, 2019, Dominic will become Audit Committee Chair, Ken will join our Finance Committee as well as our Compliance Committee, concurrent with Chris leaving the Compliance Committee. With these changes, 75% of our Compliance Committee members will be directors who joined our Board after January 1, 2018.

 

   

Ongoing Board Refreshment:

 

   

By 2022, we plan to implement a policy requiring directors with 12+ years tenure to offer to resign from Board service annually, which the Board, after careful consideration, can choose to accept or reject. If the Board decides it is in the best interests of the Company and its shareholders to reject a resignation, the Board will disclose its rationale.

 

   

Chris and Marie Knowles, our two longest-serving directors, have indicated that they intend to complete their service on the Board no later than the 2021 Annual Meeting.

 

   

By 2021, we plan to add at least one additional new director, with our selection process continuing to ensure that the pool of potential nominees includes diverse candidates.

Integrating Shareholder Feedback into Our Corporate Governance Structure

We have also established multiple governance mechanisms to ensure accountability of the Board and management to shareholders. Our commitment to solicit shareholder feedback ensures ongoing dialogue that results in adopting sound and effective corporate governance practices as well as continuous improvements. Our outreach efforts led to several important actions in the last year, including the following:

 

   

Lobbying Policy and Disclosure: We enhanced our Political Contributions and Lobbying Policy to include Board oversight of lobbying and to clarify how we interact with and evaluate trade associations, among other refinements.

 

   

Special Meeting Ownership Threshold: We lowered the ownership threshold required to call a special meeting from 25% to 15%.

Continuing to Fight the Opioid Epidemic

McKesson remains deeply concerned by the impact the opioid epidemic is having on families and communities, and this issue continues to be top of mind for the Board. We continue to make progress on the initiatives we launched in March 2018 to help fight the opioid epidemic. The nonprofit organization we formed to combat the opioid crisis has appointed a board chair and president, and has defined both its mission and its vision. With patients at the center, the foundation is focused on supporting programs and grants in four key areas: provider education, payer strategies, policy initiatives and public awareness, all with the vision to accelerate action to end the opioid epidemic. We also continue to advance public policy recommendations that we believe can have a meaningful impact. See pages 8-9 of this proxy statement for more information regarding our continued fight to help combat the opioid crisis.

We Ask for Your Support

We value the trust you place in us through your investment in McKesson. Your vote is very important to us. We encourage you to read both our proxy statement and annual report in their entirety prior to the Annual Meeting on July 31, and ask that you vote with our recommendations.

 

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Edward A. Mueller

Independent Chair


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 Notice of 2019 Annual Meeting

 of Stockholders

Wednesday, July 31, 2019

8:30 a.m. Central Daylight Time

The 2019 Annual Meeting of Stockholders of McKesson Corporation will be held at the Dallas/Fort Worth Airport Marriott, 8440 Freeport Parkway, Irving, Texas 75063.

ITEMS OF BUSINESS:

 

   

Elect for a one-year term a slate of 10 directors as nominated by the Board of Directors;

 

   

Ratify the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the fiscal year ending March 31, 2020;

 

   

Conduct a non-binding advisory vote on executive compensation;

 

   

Vote on two proposals submitted by shareholders, if properly presented; and

 

   

Conduct such other business as may properly be brought before the meeting.

Shareholders of record at the close of business on June 4, 2019 are entitled to notice of and to vote at the meeting or any adjournment or postponement of the meeting.

June 21, 2019

By Order of the Board of Directors

 

 

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Michele Lau

Senior Vice President,

Corporate Secretary and

Associate General Counsel

On June 21, 2019, we began delivering proxy materials to all shareholders of record at the close of business on June 4, 2019. The mailing address of our principal executive offices is McKesson Corporation, 6555 State Highway 161, Irving, Texas 75039.

 

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YOUR VOTE IS IMPORTANT                        

We encourage you to read the proxy statement and vote your shares as soon as possible. Instructions on how to vote via Internet, by phone, by mail or in person are included on pages 1 and 72 of the proxy statement and on the proxy card.


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TABLE OF CONTENTS

 

Proxy Summary

   1
Item 1.   Election of Directors    10
     Nominees    10
     The Board, Committees and Meetings    15
     Corporate Governance    18
     Director Compensation    22
Item 2.   Ratification of Appointment of Deloitte  & Touche LLP as the Company’s
Independent Registered Public Accounting Firm for Fiscal Year 2020
   25
     Audit Committee Report    26
Principal Shareholders    27
     Security Ownership of Certain Beneficial Owners    27
     Security Ownership of Directors and Executive Officers    28
Executive Compensation    29
     Compensation Discussion and Analysis    31
     Compensation Committee Report on Executive Compensation    51
     Compensation Committee Interlocks and Insider Participation    51
     2019 Summary Compensation Table    52
     2019 Grants of Plan-Based Awards Table    54
     2019 Outstanding Equity Awards Table    56
     2019 Option Exercises and Stock Vested Table    57
     2019 Pension Benefits Table    58
     2019 Nonqualified Deferred Compensation Table    58
     Hammergren Employment Agreement and Retirement    60
     Executive Severance Policies    62
     Potential Payments upon Termination or Change in Control    63
Item 3.   Advisory Vote on Executive Compensation    67
Item 4.   Shareholder Proposal on Disclosure of Lobbying Activities and Expenditures    68
Item 5.   Shareholder Proposal on 10% Ownership Threshold for Calling Special Meetings of Shareholders    70
Annual Meeting Information    72
Appendix A   Supplemental Information: GAAP to Non-GAAP Reconciliation    A-1


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PROXY SUMMARY

This summary highlights certain information in this proxy statement and does not contain all the information you should consider in voting your shares. Please refer to the complete proxy statement and our annual report prior to voting at the Annual Meeting of Stockholders to be held on July 31, 2019.

Meeting Information

 

 

2019 Annual Meeting of Stockholders

 

   

Date and Time

 

Wednesday, July 31, 2019 | 8:30 a.m. Central Daylight Time

   

Location

 

Dallas/Fort Worth Airport Marriott, 8440 Freeport Parkway, Irving, Texas

   

Record Date

 

 

June 4, 2019

 

Voting Items

 

Item

 

 

 

Your Board’s
Recommendation

 

 

 Page 

 

1  Election of 10 Directors for a One-Year Term

  Vote FOR   10

2  Ratification of the Appointment of the Independent Registered Public Accounting Firm

  Vote FOR   25

3  Non-binding Advisory Vote on Executive Compensation

  Vote FOR   67

4  Shareholder Proposal on Disclosure of Lobbying Activities and Expenditures

  Vote AGAINST   68

5  Shareholder Proposal on 10% Ownership Threshold for Calling Special Meetings of Shareholders

 

 

Vote AGAINST

 

 

70

 

How to Vote (see pages 72-73 for additional voting information)

Your vote is important. As a shareholder, you are entitled to one vote for each share of common stock you held on the Record Date. You can vote in any of the following ways. Please have your control number (located on your proxy card) when voting by Internet or telephone.

 

Vote via Internet   Call Toll-Free   Vote by Mail   Vote in Person
     
LOGO   LOGO   LOGO   LOGO
www.AALVote.com/MCK  

1 (866) 804-9616

 

  Follow the instructions on
your proxy card
  Attend our Annual Meeting
and vote by ballot

 

    LOGO  - 2019 Proxy Statement   1


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PROXY SUMMARY

 

McKesson at a Glance

Our vision: To improve patient care in every setting — one product, one partner, one patient at a time. We partner with life sciences companies, manufacturers, providers, pharmacies, governments and other healthcare organizations to help provide the right medicines, medical products and healthcare services to the right patients at the right time, safely and cost-effectively. Our employees work every day to innovate and deliver opportunities that make our customers and partners more successful — all for the better health of patients.

Putting The Patient At The Center Of What We Do

 

 

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To achieve our vision, our focus is to strengthen our core business through operational excellence, efficiency and effectiveness. During the fiscal year ended March 31, 2019 (“FY 2019”), we saw increasing momentum in our strategic growth initiative, including priority areas that focus on the manufacturer value proposition, services to support specialty pharmaceuticals, and the expanding role of retail pharmacy in community health services, all supported by data and analytics. We also continued to optimize our operating model to improve our cost position and the overall speed and effectiveness of the organization. Despite the challenging industry environment we faced in FY 2019, we executed on our plan and successfully delivered for our customers, and took decisive action to position McKesson for success over the long term.

Fiscal 2019 Highlights:

 

   

FY 2019 revenues of $214.3 billion, full-year revenue growth of 3%

 

   

FY 2019 cash flow from operations of $4.0 billion and free cash flow of $3.5 billion

 

   

Returned $1.9 billion to shareholders through share repurchases and dividends

Leadership Transition

 

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Last fall, the Board began an orderly and stable leadership transition following John Hammergren’s decision to retire from his roles as Chief Executive Officer and Chairman of the Board of Directors. On April 1, 2019, Brian Tyler, previously our President and Chief Operating Officer, became Chief Executive Officer and joined the Board. Mr. Tyler’s appointment was the culmination of a deliberate and comprehensive succession planning process conducted by the Board over the course of multiple years, and it exemplifies the Board’s commitment to cultivating and developing executive talent.

The appointment of Mr. Tyler, a 22-year veteran of McKesson who has led multiple McKesson businesses and strategy in addition to serving as Chief Operating Officer, enables leadership continuity at an important time. Mr. Tyler’s experience has provided him with the optimal background and perspective to lead McKesson’s current strategic initiatives and continue to drive long-term growth in the future. As a result of the thoughtful succession planning process, the Board believes we have the right leadership team in place to continue to drive long-term shareholder value creation.

 

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PROXY SUMMARY

 

Director Nominees

 

    

 

Committee Memberships*

     
    

Name and Title

 

 

  AUD  

 

 

  COMP  

 

 

  CMPL  

 

 

  FIN  

 

 

  GOV  

 

 

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Dominic J. Caruso (New director in FY 2019)

Executive Vice President and Chief Financial Officer (Retired)

Johnson & Johnson

 

  C        

 

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N. Anthony Coles, M.D.

Chairman and Chief Executive Officer

Yumanity Therapeutics, LLC

 

    C      

 

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M. Christine Jacobs

Chairman of the Board, President and Chief Executive Officer (Retired)

Theragenics Corporation

 

         

 

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Donald R. Knauss

Chairman of the Board and Chief Executive Officer (Retired)

The Clorox Company

 

        C  

 

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Marie L. Knowles

Executive Vice President and Chief Financial Officer (Retired)

Atlantic Richfield Company

 

         

 

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Bradley E. Lerman (New director in FY 2019)

Senior Vice President, General Counsel and Corporate Secretary

Medtronic plc

 

      C    

 

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Edward A. Mueller – Independent Chair (New role in FY 2020)

Chairman of the Board and Chief Executive Officer (Retired)

Qwest Communications International Inc.

 

         

 

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Susan R. Salka

Chief Executive Officer and President

AMN Healthcare Services, Inc.

 

          C

 

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Brian S. Tyler (New director in FY 2020)

Chief Executive Officer

McKesson Corporation

         

 

 

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Kenneth E. Washington (New director in FY 2020)

Chief Technology Officer

Ford Motor Company

 

               

AUD: Audit   COMP: Compensation   CMPL: Compliance   FIN: Finance   GOV: Governance   C: Chair

* As of July 1, 2019. Please see pages 16-17 for current committee memberships.

Diverse Perspectives and Experience

 

Multidisciplinary Board Attributes             Balanced Board Tenure
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    LOGO  - 2019 Proxy Statement   3


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PROXY SUMMARY

 

Risk Oversight, Governance and Culture

At McKesson, doing business in the right way is fundamental to our culture. Our long-term success depends on ensuring that we demonstrate the highest ethical standards in everything we do, everywhere we operate. We work to foster an inclusive and diverse culture for our employees, customers and partners.

Oversight of Risk

We believe an effective risk oversight and compliance program is foundational to a company’s long-term success and future growth. Because patients are at the center of what we do, risk management and risk oversight is top of mind for our management and Board. This year, our Board formed a standing Compliance Committee, whose purpose is to assist the Board in overseeing the Company’s compliance programs and management’s identification and evaluation of its principal legal and regulatory compliance risks. Brad Lerman, who has significant healthcare experience leading global legal, government affairs, ethics and compliance functions, chairs the committee. As of July 1, 2019, three-quarters of our director nominees serving on the Compliance Committee will have joined the Board since January 2018. Among other responsibilities, the Compliance Committee meets regularly with the Chief Compliance Officer, which as of June 2019 is an exclusively dedicated compliance role. The Chief Compliance Officer has a dotted line reporting relationship to the committee. The committee is responsible for reviewing the appointment, compensation, performance and replacement, as necessary, of the Chief Compliance Officer.

 

 

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Governance Highlights

Independent Chair. This year, our Board adopted an independent chair leadership structure with the election of Ed Mueller as Independent Chair of the Board and Brian Tyler as Chief Executive Officer. We believe this leadership structure provides the best leadership combination for our shareholders and employees at this dynamic time in our industry.

Board refreshment. Two independent directors joined our Board in FY 2019 — Dominic Caruso and Brad Lerman — and effective July 1, 2019, Dr. Ken Washington also joins our Board as an independent director. Mr. Caruso, a former public company chief financial officer in the healthcare sector, Mr. Lerman, a public company general counsel with a deep understanding of the healthcare industry, and experience linking compliance and legal considerations with corporate strategy, and Dr. Washington, a public company chief technology officer, with prior experience as a public company privacy officer, add to the diverse expertise and skills on our Board.

 

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PROXY SUMMARY

 

Enhanced shareholder rights to call a special meeting. Following our 2018 Annual Meeting of Shareholders, our Board considered shareholder response to the proposal to reduce the ownership threshold required to call a special meeting of shareholders from 25% to 10%. After deliberation, including consideration of the disparate views of our shareholders and the composition of our shareholder base, our Board amended our By-Laws to decrease the ownership threshold required to call a special meeting from 25% to 15% in May 2019.

 

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Inclusion, Diversity, Equality and Culture

McKesson’s culture is grounded in our ICARE values (integrity, customer-first, accountability, respect and excellence). These shared values guide and unite all of our employees and are infused in all aspects of our Company. ICARE helps create an inclusive culture through the expectation that all employees will treat each other with respect and appreciate the diversity of identities, thoughts, backgrounds and styles. Our ILEAD principles (inspire, leverage, execute, advance and develop) articulate our leadership behaviors across all parts of our business. These behaviors, combined with our shared values, promote a culture in which all employees feel supported and valued.

 

 

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  *      McKesson’s Fiscal 2018 Corporate Social Responsibility Report  

 

    LOGO  - 2019 Proxy Statement   5


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PROXY SUMMARY

 

Diversity and inclusion are integral to McKesson’s culture, and pay equity is fundamental to McKesson’s compensation systems. More information about how McKesson’s compensation policies are designed to drive equitable pay decisions can be found at www.mckesson.com/Documents/About-McKesson/Corporate-Citizenship/Pay-Equity-Disclosure/.

We strive to create and maintain an environment where our employees can be themselves and enjoy great employee experiences at every touchpoint. We sponsor a culture of empowerment, recognition and belonging. We build the best teams by recruiting, developing and retaining diverse talent. And, we engage and build a high-performing organization to deliver unrivaled business results. We are proud to be recognized for our culture of inclusion. Among other achievements, we are:

 

   

recognized for 4th year by the Disability Equality Index as one of the best places to work, with a 100% score in 2019

 

   

honored as one of the best places to work for LGBT equality by the Human Rights Campaign for 6th year in a row

 

   

recognized as one of the best employers for diversity by Forbes

 

   

women and people of color comprise 50% of our director nominees

Shareholder Engagement

Our Board and management take a long-term view toward shareholder engagement and recognize that solicitation and consideration of shareholder feedback is critical to driving growth and creating shareholder value. As a result, we regularly meet with our shareholders throughout the year in multiple forums to encourage ongoing, meaningful dialogue on critical corporate governance issues that are important to our shareholders and the Company. Since our 2018 Annual Meeting, our Shareholder Engagement team, led by our Corporate Secretary, proactively engaged with corporate governance teams, portfolio managers, analysts and others to discuss a wide range of important topics.

Who We Met

 

 

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Tony Coles, our Compensation Committee Chair, led engagements with shareholders representing over 23% of our outstanding common stock. A variety of topics were covered in these meetings, including the following:

 

 

Topics Discussed with Shareholders

 

Our CEO transition (effective April 1, 2019)

Separation of our CEO/Chair roles and the appointment of an Independent Chair (effective April 1, 2019)

Board diversity, refreshment and tenure

Board oversight of opioid risks, compliance program developments and accountability for managing those risks

Our global headquarters’ relocation to Irving, Texas

Additional transparency and disclosure of our lobbying policy, activities and payments and Board oversight

Corporate culture and human capital management

Magnitude of CEO compensation

Alignment of NEO’s incentive awards with rigorous performance goals and the Company’s strategic growth initiative

Simplification and design of our compensation program

 

Our Board, Governance Committee and Compensation Committee discuss shareholder feedback throughout the year, demonstrating the Board’s commitment to continually improving and enhancing our corporate practices and policies.

 

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PROXY SUMMARY

 

Significant Changes Made to Our Governance and Compensation Practices Informed by Shareholder Feedback

During our meetings with shareholders we heard strong support for our new CEO and feedback regarding executive compensation. Our shareholders also expressed continued interest in the Board’s oversight of opioid risks, the Company’s ongoing compliance efforts to managing the opioid issue and clarifications to our Political Contributions and Lobbying Policy, including Board oversight. Informed by those discussions, we made the following changes to our governance and compensation practices:

 

   

Separated CEO/Chair Roles: Effective April 1, 2019, McKesson delivered on its commitment to shareholders to separate the Chair and CEO roles upon the appointment of Brian Tyler, our new CEO. The Board appointed Ed Mueller as its Independent Chair.

 

   

Continued Board Refreshment Efforts: On July 1, 2019, Ken Washington joins our Board as our newest independent director. We intend to add at least one additional new director by July 2021, with our selection process continuing to ensure that the pool of potential nominees includes diverse candidates. Chris Jacobs and Marie Knowles, our two longest-serving directors, have indicated that they intend to complete their service on the Board no later than the 2021 Annual Meeting.

 

   

Rotated Committee Assignments: We made a number of changes to the composition of our Board Committees. Brad Lerman assumed the role of Chair of our newly established Compliance Committee (see below). Dominic Caruso joined the Audit, Finance and Compliance Committees. Tony Coles assumed the role of Compensation Committee Chair, Susan Salka and Brad joined the Committee as new members, and Chris left the Committee. In addition, effective July 1, 2019, Dominic will become Audit Committee Chair, and Ken will join our Finance Committee as well as our Compliance Committee, concurrent with Chris leaving the Compliance Committee (see pages 10-15).

 

   

Established Compliance Committee: In January 2019, the Board established a standing Compliance Committee to assist the Board in overseeing (i) our compliance programs and (ii) management’s identification and evaluation of our principal legal and regulatory compliance risks.

 

   

Reduced Magnitude of FY 2019 Pay for John Hammergren: For FY 2019, the Compensation Committee reduced Mr. Hammergren’s total target LTI compensation by $4.7 million, a 32% decrease in target LTI compared to FY 2018 (see page 34).

 

   

Simplified Pay Program for All NEOs, Including New CEO: The newly comprised Compensation Committee spent significant time and effort reviewing our executive compensation program to ensure it was appropriately serving the needs of our Company and shareholders. As a result of this thorough review, for FY 2020 the Compensation Committee eliminated Stock Options and the Cash LTIP from the LTI award mix and added Restricted Stock Units, simplifying the overall structure. The Committee also added Adjusted Operating Profit as a metric to the Management Incentive Plan, and replaced Adjusted Operating Cash Flow with Free Cash Flow, in order to balance a broader set of strategic objectives tasked to management. For FY 2020, the Compensation Committee approved target direct compensation of $13,000,000 for our new CEO, Brian Tyler, which is a lower target value than Mr. Hammergren’s FY 2019 total target direct compensation (see page 36).

 

   

Lowered Special Meeting Threshold: Amended the Company’s By-Laws to lower the ownership threshold required for shareholders to call a special meeting from 25% to 15%.

 

   

Enhanced Political Contributions and Lobbying Policy: This year, McKesson further refined its Political Contributions and Lobbying Policy in direct response to shareholder feedback. The policy more prominently discloses our public policy approaches and priorities, explains our robust internal procedures designed to ensure alignment between our political activities, public policy priorities and applicable law, clarifies the Board’s oversight of the Company’s lobbying activities and describes the criteria the Company uses to interact with and evaluate trade associations. Please visit https://www.mckesson.com/about-mckesson/public-affairs/political-engagement/ for a full copy of the revised policy.

 

   

Establishing Director Tenure Policy: By July 2022, we plan to implement a policy that would require directors with 12+ years tenure to offer to resign annually. The Board can, after careful consideration, choose to accept or reject the resignation. If the Board decides it is in the best interests of the Company and its shareholders to reject a resignation, the Board will disclose its rationale.

Engagement Efforts of Our CEO, CFO and Investor Relations Team

In addition to ongoing engagements led by our Shareholder Engagement team, we have an extensive investor relations outreach effort through which members of senior management routinely meet with investors to review strategy, financial and operating performance, capital allocation priorities, and near-term outlook. Our Chief Executive Officer, Chief Financial Officer and Investor Relations team hosted quarterly earnings calls and engaged with more than 500 institutional investors via conference calls and in person, including during seven sell-side healthcare conferences and several non-deal road shows.

 

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PROXY SUMMARY

 

Our Continued Fight to Help Combat the Opioid Crisis

McKesson remains steadfast in its commitment to maintaining a strong culture of compliance and a clear expectation to always do the right thing. We are deeply concerned by the opioid epidemic’s impact on families and our local communities. We continue to lead, develop and collaborate with others on various initiatives that we believe can have a meaningful impact on this challenging issue. As a pharmaceutical distributor, McKesson operates as one component within the pharmaceutical supply chain, which also includes drug manufacturers, regulatory bodies like the U.S. Drug Enforcement Administration (“DEA”) and state pharmacy boards, insurers and pharmacy benefit managers, prescribing doctors and dispensing pharmacists. We take seriously our role in helping to protect the safety and integrity of the pharmaceutical supply chain in our fight against this complicated, multifaceted public health crisis.

McKesson is only one component of the pharmaceutical supply chain

 

 

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Manufacturers   Distributors   Pharmacy   Doctor        Patient

Manufacturers send

FDA-approved medications

to distributors like

McKesson in bulk.

McKesson safely stores

the medication until it is

delivered to pharmacies.

 

Medications move from manufacturers to pharmacies with the help of distributors like McKesson. Pharmacies may order from multiple distributors. McKesson

delivers medications as they are ordered by DEA-registered and state-licensed pharmacies, hospitals and others, often within hours.

 

DEA-registered and state-licensed pharmacy independently assesses the validity of the patient’s prescription and fills the prescription using the medications the pharmacist ordered from McKesson (or from another distributor).

 

Doctor writes a prescription for

medication. Doctors are DEA-

registered and state-licensed to

prescribe controlled substances,

including opioids. Patient goes to

a pharmacy to receive their

mediation.

 

Patient visits their

doctor to address

a health concern.

Board Oversight of Opioid Risks and Compliance

Consistent with its belief that an effective risk oversight and compliance program is foundational to the Company’s long-term success and future growth, our Board is committed to maintaining strong oversight and compliance processes as we help combat this crisis. To further this commitment, the Board actively monitors the pending litigation and investigations related to opioid distribution as well as the Company’s Controlled Substance Monitoring Program (“CSMP”). In addition, the full Board discusses the implementation and effectiveness of the Company’s compliance programs.

This year, our Board formed a standing Compliance Committee, whose purpose is to assist the Board in overseeing the Company’s compliance programs and management’s identification and evaluation of its principal legal and regulatory compliance risks. As part of its responsibilities, the Committee oversees the Company’s compliance programs. This includes the review of (with the appropriate members of management) the organizational structure, staffing, implementation and management’s assessment of the effectiveness of the Company’s compliance programs relating to the Company’s principal legal and regulatory compliance risks, the related policies and procedures, and the adequacy of the resources for those programs.

Continuing to Enhance our Opioid Anti-Diversion Platform

We remain committed to maintaining – and continuously enhancing – our CSMP, which helps detect and prevent opioid diversion within the pharmaceutical supply chain through significant investments of time and financial resources, including the following:

 

 

McKesson’s internal compliance team now includes more than 40 diversion experts with over 200 years of cumulative DEA enforcement experience.

 

  

 

McKesson hired industry experts with experience in the retail pharmacy industry, state and board of pharmacy investigators, pharmaceutical manufacturers and data analytics.

 

    

 

McKesson performs comprehensive analysis on prospective pharmacy customers before agreeing to supply prescription medications. This rigorous process includes the gathering of specific pharmacy information and the validation of regulatory licensure. McKesson monitors its customers’ orders of controlled substances for potential red flags throughout the customer relationship.

 

    

 

8   LOGO  - 2019 Proxy Statement    


Table of Contents

PROXY SUMMARY

 

 

McKesson has developed a controlled substances threshold management program, using complex data analytics. The threshold management program receives ongoing refinements to reflect the most up-to-date information and trends.

 

    

 

McKesson reports controlled substances transactions, including orders deemed suspicious and blocked by our CSMP, to DEA. Certain controlled substance transactions are reported to DEA through ARCOS, DEA’s automated drug reporting system. The system monitors the flow of specified controlled substances from their point of manufacture through commercial distribution channels to point of sale or dispensing by, for example, hospitals and retail pharmacies.

 

    

 

Controlled substances are locked, monitored and stored in two DEA-regulated spaces. Schedule 2 narcotics go in a high-security “vault” and inventory checks of controlled substances are conducted frequently. Enhanced formal background checks are performed on all employees who handle Schedule 2 narcotics. Controlled substances are packaged under video cameras in specially sealed plastic bags.

 

    

 

McKesson is an active participant in state and federal legislative efforts around controlled substances. The Company also strongly supports the Center for Disease Control’s calls for additional formal and continuing medical education on the risks of opioid use as important ways to curb clinically inappropriate prescribing, doctor shopping and diversion.

 

Company-Led Initiatives

McKesson remains involved in various initiatives to help address issues contributing to the opioid epidemic. These programs are part of our ongoing mission – delivering better care for patients – and McKesson remains committed to work with pharmacists, policymakers, doctors, drug manufacturers and others to advance the following initiatives:

 

   

National Prescription Safety-Alert System (RxSAS): To identify patients who are at risk for opioid overuse, abuse, addiction or misuse McKesson is investing in a national system that uses prescription information to provide real-time alerts to pharmacists and, ultimately, prescribers when additional information may be needed before dispensing opioids.

 

   

Facilitate E-Prescribing: To reduce fraudulent or counterfeit prescriptions, the Company has worked diligently with customers to understand their ability to adopt e-prescribing of controlled substances. McKesson continues to advocate that Congress require mandatory e-prescribing of all opioid prescriptions.

 

   

Fast-Track Distribution of New, Non-Opioid Pain Medications: To improve access to medicines, McKesson works with manufacturing partners to facilitate immediate distribution of FDA-approved, non-opioid pain medication.

 

   

Free Pharmacist Training on Opioid Overdose Reversal Medication: Since April 2018, through independent medical experts McKesson has provided pharmacists with complimentary, on-going education and training materials to help them stay current on the evolving opioid epidemic and prepared to assist in an emergency.

 

   

Customer Education: McKesson proactively educates its customers about the importance of complying with DEA and state agency regulations and identifying warning signs of prescription abuse and diversion.

McKesson continues to advocate for solutions that help mitigate the opioid public health crisis. Since the creation of our special task force, requested in 2015 by our former CEO John Hammergren to study the opioid issue and its challenges, we have drafted policy papers and held hundreds of meetings with government policy makers, administrators and regulators to advocate for public policies aligned with our recommendations to help fight the opioid crisis.

Advocating at the National and State Level for Policy Changes. McKesson actively advocates for public policies that will help address the opioid epidemic, including the 2015 passage of the Comprehensive Addiction and Recovery Act (CARA). CARA contained provisions for preventing and treating addiction, and McKesson supports more robust funding of those policy proposals. Additionally, we supported the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment (SUPPORT) for Patients and Communities Act passed in October 2018. This landmark legislation includes critical provisions to improve addiction medicine by strengthening our clinical workforce, expand access to high-quality evidence-based care, and cover addiction medicine in a way that facilitates the delivery of coordinated and comprehensive treatment. McKesson is a member of a number of organizations dedicated to addressing the opioid crisis and is a strong supporter of initiatives championed by a variety of organizations and governments.

In addition, in March 2018 McKesson committed to contribute $100 million to create and launch a nonprofit foundation, neither owned nor controlled by McKesson, to identify and collaborate with experts to address the opioid crisis.

Foundation for Opioid Response Efforts. The Foundation for Opioid Response Efforts, a Section 501(c)(3) nonprofit organization (FORE) whose vision is to inspire and accelerate action to end the opioid epidemic, is focused on supporting programs and grants in four key areas: provider education, payer strategies, policy initiatives and public awareness.

Please visit www.mckesson.com/about-mckesson/fighting-opioid-abuse/opioid-policy-recommendations/ for more information regarding the Company’s efforts to combat the opioid epidemic. This site has a wide variety of information, including the Company’ s opioid abuse policy paper entitled “Combatting the Opioid Abuse Epidemic: A Shared Responsibility that Requires Innovative Solutions” and “Call to Action: Execute Solutions Today to Combat the Opioid Crisis”.

 

    LOGO  - 2019 Proxy Statement   9


Table of Contents

PROPOSALS TO BE VOTED ON

 

ITEM 1.

Election of Directors

There are 10 nominees for election to the Board of Directors of the Company. The directors elected at the Annual Meeting will hold office until the 2020 Annual Meeting of Stockholders and until their successors have been elected and qualified, or until their earlier resignation, removal or death.

All nominees, with the exception of Ken Washington, who was appointed to the Board effective July 1, 2019, are current directors. Tony Coles, Chris Jacobs, Don Knauss, Marie Knowles, Brad Lerman, Ed Mueller, and Susan Salka were elected to the Board at the 2018 Annual Meeting of Stockholders. Dominic Caruso was appointed to the Board effective September 12, 2018 and Brian Tyler was appointed to the Board effective April 1, 2019.

The Governance Committee has recommended the reelection of each nominee as a director at the Annual Meeting. Each nominee has informed the Board that he or she is willing to serve as a director. If any nominee should decline or become unable or unavailable to serve as a director for any reason, your proxy authorizes the persons named in the proxy to vote for a replacement nominee, or the Board may reduce its size.

The following is a brief description of the age, principal occupation, position and business experience, including other public company directorships, for at least the past five years and major affiliations of each of the nominees. Each director’s biographical information includes a description of the director’s experience, qualifications, attributes or skills that qualify the director to serve on the Company’s Board at this time.

Nominees

Your Board recommends a vote “FOR” each Nominee.

 

   

 

LOGO

 

Independent Director

 

Committees

(as of July 2019):

 

•   Audit Committee, Chair

 

•   Compliance Committee

 

•   Finance Committee

     

 

Dominic J. Caruso

Executive Vice President and Chief Financial Officer, Johnson & Johnson (Retired)

 

Biography: Mr. Caruso, age 61, retired as executive vice president and chief financial officer from Johnson & Johnson (J&J), a manufacturer of medical devices, pharmaceutical and consumer packaged goods, in August 2018, having served in the role since 2007. He led the company’s financial and investor relations activities, as well as the procurement organization. Mr. Caruso joined Johnson & Johnson in October 1999 as chief financial officer for Centocor, Inc., upon the completion of the merger of Centocor and Johnson & Johnson. Prior to joining Centocor, he had varied industry experiences with KPMG. Mr. Caruso is actively involved in government relations activities globally, including having served as the co-chair of the U.S. Chamber of Commerce Global Initiative on Health and the Economy. He currently serves on the Board of Trustees of The Children’s Hospital of Philadelphia and the Cystic Fibrosis Foundation. Mr. Caruso has been a director of the Company since September 2018.

 

Skills & Qualifications: Having previously served as a chief financial officer of a publicly-traded healthcare company, Mr. Caruso adds financial expertise and leadership to the Board, as well as a deep familiarity with investors’ perspectives in the healthcare industry. Mr. Caruso’s healthcare compliance focus throughout his career at J&J, Centocor and KPMG deepens the Board’s skills and experience in financial and compliance risk oversight.

 

Current Committee Assignments:

  Audit Committee

 

  Compliance Committee

 

  Finance Committee

 

   

 

10   LOGO  - 2019 Proxy Statement    


Table of Contents

ITEM 1. ELECTION OF DIRECTORS

 

 

   

 

LOGO

 

Independent Director

 

Committees

(as of July 2019):

 

•   Compensation Committee, Chair

 

•   Finance Committee

 

     

 

N. Anthony Coles, M.D.

Chairman and Chief Executive Officer, Yumanity Therapeutics, LLC

 

Biography: Dr. Coles, age 59, has served as chairman and chief executive officer of Yumanity Therapeutics, LLC, a company focused on transforming drug discovery for neurodegenerative diseases, since October 2014. From October 2013 to October 2014, Dr. Coles served as chairman and chief executive officer of TRATE Enterprises LLC. Dr. Coles served as president, chief executive officer and chairman of the board of Onyx Pharmaceuticals, Inc. from 2012 until 2013, having served as its president, chief executive officer and a member of its board of directors from 2008 until 2012. Prior to joining Onyx Pharmaceuticals, Inc. in 2008, he was president, chief executive officer and a member of the board of directors of NPS Pharmaceuticals, Inc. Before joining NPS Pharmaceuticals, Inc. in 2005, he served in various leadership positions in the biopharmaceutical and pharmaceutical industries, including at Merck & Co., Inc., Bristol-Myers Squibb Company and Vertex Pharmaceuticals Incorporated. Dr. Coles currently serves as a director of Regeneron Pharmaceuticals, Inc. and Cerevel Therapeutics, LLC. In addition to having previously served as a director of Onyx Pharmaceuticals, Inc. and NPS Pharmaceuticals, Inc., he was formerly a director of CRISPR Therapeutics, Laboratory Corporation of America Holdings and Campus Crest Communities, Inc. Dr. Coles has been a director of the Company since April 2014.

 

Skills & Qualifications: Dr. Coles brings to the Board executive and board leadership experience, as well as business management and strategic planning experience, in the healthcare industry. As a founding investor of Yumanity, Dr. Coles’ innovative mindset is a valuable addition to our Board. We believe Dr. Coles’ diverse perspective as a physician and as member of the Harvard Medical School Advisory Board aligns with the Company’s commitment to put the patient at the center of our work.

 

Current Committee Assignments:

  Compensation Committee, Chair

 

  Finance Committee

 

   

 

   

 

LOGO

 

Independent Director

 

Committees

(as of July 2019):

 

•   Audit Committee

 

•   Governance Committee

     

 

M. Christine Jacobs

Chairman of the Board, President and Chief Executive Officer, Theragenics Corporation (Retired)

 

Biography: Ms. Jacobs, age 68, retired from Theragenics Corporation, a manufacturer of prostate cancer treatment devices and surgical products, in 2013, having served as its chairman, president and chief executive officer. She held the position of chairman from 2007 to 2013, and previously from 1998 to 2005. She was co-chairman of the board from 1997 to 1998 and was elected president in 1992 and chief executive officer in 1993. Ms. Jacobs has been a director of the Company since January 1999.

 

Skills & Qualifications: Having led a public company within the healthcare industry for over 20 years, Ms. Jacobs brings to our Board significant relevant industry experience and a keen understanding of and strong insight into issues, challenges and opportunities facing the Company, including those related to legislative healthcare initiatives. As chairman and chief executive officer of Theragenics Corporation, she was at the forefront of her company in regard to the evolving corporate governance environment, which enables her to provide ongoing valuable contributions as a member of the Governance Committee of our Board. Ms. Jacobs served as co-chair of the Securities and Exchange Commission (SEC) Advisory Committee on Small and Emerging Companies from September 2011 to September 2015, which reflects her leadership and public company experience, including capital formation experience.

 

Current Committee Assignments:

  Audit Committee

 

  Compliance Committee

 

  Governance Committee

 

   

 

    LOGO  - 2019 Proxy Statement   11


Table of Contents

ITEM 1. ELECTION OF DIRECTORS

 

 

   

 

LOGO

 

Independent Director

 

Committees

(as of July 2019):

 

   Finance Committee, Chair

 

   Audit Committee

 

     

 

Donald R. Knauss

Chairman of the Board and Chief Executive Officer, The Clorox Company (Retired)

 

Biography: Mr. Knauss, age 68, retired from The Clorox Company, a consumer goods company, in 2015, having served as executive chairman of the board from November 2014 until July 2015 and chairman and chief executive officer from October 2006 until November 2014. He was executive vice president of The Coca-Cola Company and president and chief operating officer for Coca-Cola North America from February 2004 until September 2006. Prior to his employment with The Coca-Cola Company, he held various positions in marketing and sales with PepsiCo, Inc. and Procter & Gamble and served as an officer in the United States Marine Corps. He currently serves as a director of the Kellogg Company and the Target Corporation. Mr. Knauss also serves as the chairman of the board of trustees for the University of San Diego. He was formerly a director of URS Corporation. Mr. Knauss has been a director of the Company since October 2014.

 

Skills & Qualifications: Mr. Knauss has gained substantial board leadership skills through his chairmanship role at The Clorox Company. He also brings substantial executive experience, including in the roles of chief executive officer, president and chief operating officer, through which he has developed valuable operational insights and strategic and long-term planning capabilities. In addition, Mr. Knauss possesses extensive international business management experience, which provides him with valuable insights into global business strategy. He also possesses extensive retail expertise, which includes experience in the retail pharmacy area. Mr. Knauss also has significant other public company board experience. Having worked outside of the healthcare industry, Mr. Knauss enhances the diverse perspectives on the Board.

 

Current Committee Assignments:

  Finance Committee, Chair

 

  Audit Committee

 

   

 

   

 

LOGO

 

Independent Director

 

Committees

(as of July 2019):

 

   Audit Committee

 

   Compliance Committee

 

   Finance Committee

 

     

 

Marie L. Knowles

Executive Vice President and Chief Financial Officer, Atlantic Richfield Company (Retired)

 

Biography: Ms. Knowles, age 72, retired from Atlantic Richfield Company, a petroleum company, in 2000 and was executive vice president and chief financial officer from 1996 until 2000. She joined Atlantic Richfield Company in 1972 and held a number financial and operating management positions including president of ARCO Transportation Company from 1993 to 1996. Ms. Knowles is also an Independent Trustee of Fidelity Fixed Income and Asset Allocation Funds. Ms. Knowles was formerly a director of America West Holdings Corporation, Atlantic Richfield Company, Phelps Dodge Corporation and URS Corporation. She has been a director of the Company since March 2002.

 

Skills & Qualifications: Ms. Knowles brings to the Board extensive financial experience gained through her career at ARCO, including her tenure as chief financial officer. This experience makes her well qualified to serve as chair of the Company’s Audit Committee and as the audit committee financial expert. This experience also enables Ms. Knowles to provide critical insight into, among other things, the Company’s financial statements, accounting principles and practices, internal control over financial reporting, and risk management processes. Ms. Knowles was named a 2013 Outstanding Director by the San Francisco Business Times and the Silicon Valley Business Journal.

 

Current Committee Assignments:

  Audit Committee, Chair

 

  Compliance Committee

 

  Finance Committee

 

   

 

12   LOGO  - 2019 Proxy Statement    


Table of Contents

ITEM 1. ELECTION OF DIRECTORS

 

 

   

 

LOGO

 

Independent Director

 

Committees

(as of July 2019):

 

   Compliance Committee, Chair

 

   Compensation Committee

 

   Governance Committee

 

     

 

Bradley E. Lerman

Senior Vice President, General Counsel and Corporate Secretary, Medtronic plc

 

Biography: Mr. Lerman, age 62, was named senior vice president, general counsel and corporate secretary of Medtronic plc, a provider of medical technology, services, and solutions, in May of 2014 and serves as a member of the executive committee. In this role, he leads Medtronic’s global legal, government affairs and ethics and compliance functions. Prior to Medtronic, Mr. Lerman served as executive vice president, general counsel and corporate secretary for the Federal National Mortgage Association (Fannie Mae). Previous to Fannie Mae, he served as senior vice president, associate general counsel and chief litigation counsel for Pfizer. Mr. Lerman also served as a litigation partner at Winston & Strawn LLP in Chicago and as an assistant U.S. attorney in the Northern District of Illinois. Mr. Lerman has been a director of the Company since April 2018.

 

Skills & Qualifications: Mr. Lerman brings to our Board significant legal and regulatory expertise gained from years of large law firm practice and government positions with law enforcement responsibilities. His legal experience and seasoned judgment are instrumental in helping the Board navigate legal and compliance challenges. Mr. Lerman’s deep understanding of the healthcare industry and experience linking compliance and legal considerations with corporate strategy also bring valuable insights to our Board.

 

Current Committee Assignments:

  Compliance Committee, Chair

 

  Compensation Committee

 

  Governance Committee

 

   

 

   

 

LOGO

 

Independent Chair

 

Committees

(as of July 2019):

 

   Compensation Committee

 

   Governance Committee

 

     

 

Edward A. Mueller

Chairman of the Board and Chief Executive Officer, Qwest Communications International Inc. (Retired)

 

Biography: Mr. Mueller, age 72, retired as chairman and chief executive officer of Qwest Communications International Inc., a provider of voice, data and video services, in April 2011. He held the position of chairman and chief executive officer of Qwest Communications from August 2007 to April 2011. From January 2003 until July 2006, he served as chief executive officer of Williams-Sonoma, Inc., a provider of specialty products for cooking. Prior to joining Williams-Sonoma, Inc., Mr. Mueller served as president and chief executive officer of Ameritech Corporation, a subsidiary of SBC Communications, Inc., from 2000 to 2002. He was formerly a director of The Clorox Company, CenturyLink, Inc., Williams-Sonoma, Inc. and VeriSign, Inc. Mr. Mueller has been a director of the Company since April 2008 and was elected as independent board chair, effective April 1, 2019. Prior to this, he served as the Company’s lead independent director from 2013 to 2019.

 

Skills & Qualifications: Mr. Mueller brings to the Board chief executive leadership and business management experience, as well as a strong business acumen and strategic planning expertise. Having worked outside the healthcare industry, he also adds to the mix of experiences and perspectives on our Board that promote a robust and deliberative decision-making process. While Chairman of the Board of Qwest Communications, Mr. Mueller had a leadership role in corporate governance, which enables him to provide valuable contributions as a member of the Governance Committee of our Board. He also has public company board experience with audit committee service.

 

Current Committee Assignments:

  Compensation Committee

 

  Governance Committee

 

   

 

    LOGO  - 2019 Proxy Statement   13


Table of Contents

ITEM 1. ELECTION OF DIRECTORS

 

 

   

 

LOGO

 

Independent Director

 

Committees

(as of July 2019):

 

   Governance Committee, Chair

 

   Compensation Committee

     

 

Susan R. Salka

Chief Executive Officer, AMN Healthcare Services, Inc.

 

Biography: Ms. Salka, age 54, has served as chief executive officer and president of AMN Healthcare Services, Inc., provider of healthcare workforce solutions and staffing services to healthcare facilities across the nation, since 2005, and a director of the company since 2003. She has served in several other executive roles since joining AMN Healthcare Services, Inc. in 1990, including chief operating officer, chief financial officer and senior vice president of business development. She was formerly a director of Beckman Coulter Inc. and Playtex Products. Ms. Salka has been a director of the Company since October 2014.

 

Skills & Qualifications: With over 25 years of experience in the healthcare services industry, Ms. Salka brings to the Board a deep understanding of emerging trends in healthcare services. This industry experience gives her insight into important aspects of the Company’s businesses, including opportunities potentially available to those businesses. She has also served in a number of executive leadership positions, including as a chief executive officer, chief financial officer and chief operating officer, which have provided her with business management, operational, financial and long-range planning experience. Ms. Salka also brings valuable experience acquired through significant public company board service.

 

Current Committee Assignments:

  Governance Committee, Chair

 

  Compensation Committee

 

   

 

   

 

LOGO

 

     

 

Brian S. Tyler

Chief Executive Officer, McKesson Corporation

 

Biography: Mr. Tyler, age 52, has served as chief executive officer of McKesson Corporation since April 1, 2019, and previously served as the Company’s president and chief operating officer from August 2018 to March 2019. Mr. Tyler served as chairman of the Management Board of McKesson Europe AG from 2017 to 2018, president and chief operating officer of McKesson Europe from 2016 to 2017, the Company’s president of North American Pharmaceutical Distribution and Services from 2015 to 2016, and as the Company’s executive vice president, corporate strategy and business development from 2012 to 2015. Mr. Tyler previously served in various other leadership roles in the Company, including as president of U.S. Pharmaceutical, president of McKesson Medical-Surgical, and president of McKesson Specialty Health. Mr. Tyler is a member of the board of directors of the International Federation of Pharmaceutical Wholesalers (IFPW) and a member of the IFPW Foundation board of directors. He is a member of the American Cancer Society’s CEOs Against Cancer group in the North Texas chapter. He has been a director of the Company since April 2019.

 

Skills & Qualifications: Mr. Tyler brings more than 20 years of business and healthcare experience to the Board, and prior to that, earned his Ph.D. from The University of Chicago, Department of Economics specializing in industrial organization, labor economics and public finance/project evaluation. As McKesson’s CEO and a long-time leader of McKesson’s businesses, Mr. Tyler has extensive knowledge of the Company’s culture and workforce, and its challenges and opportunities.

 

   

 

14   LOGO  - 2019 Proxy Statement    


Table of Contents

ITEM 1. ELECTION OF DIRECTORS

 

 

   

 

LOGO

 

 

Independent Director

 

Committees

(as of July 2019):

 

•   Compliance Committee

 

•   Finance Committee

     

 

Kenneth E. Washington, Ph.D.

Chief Technology Officer, Ford Motor Company

 

Biography: Dr. Washington, age 58, has served as chief technology officer of Ford Motor Company, an automotive manufacturer, since June 2017. In this role, he leads Ford’s worldwide research organization, oversees the development and implementation of Ford’s technology strategy and plans, and plays a key role in Ford’s expansion into emerging mobility opportunities. Previous to his role as CTO, Dr. Washington was appointed as Fords’ vice president of Research and Advanced Engineering in August 2014. Prior to joining Ford, Dr. Washington was vice president of the Advanced Technology Center at Lockheed Martin Space Systems Company. Previous to this, he served as Lockheed Martin Corporation’s first chief privacy officer. Dr. Washington also previously served as the vice president and chief technology officer for the Lockheed Martin internal IT organization. Prior to joining Lockheed Martin in February 2007, Dr. Washington served as chief information officer for Sandia National Laboratories, where he also previously served in a variety of technical, management and program leadership positions.

 

Skills & Qualifications: Dr. Washington’s leadership in technology, research, and privacy at complex, global organizations will contribute to the Board’s oversight of risk and strategy, particularly in the areas of cybersecurity and other compliance matters as the Company continues to pursue growth opportunities globally. Dr. Washington earned his bachelor’s, master’s and doctorate degree in Nuclear Engineering from Texas A&M University and is a fellow of the MIT Seminar XXI program on International Relations. As the newest member of the Board, we expect Dr. Washington will add additional breadth to the expert perspectives on the Board.

 

   

 

The Board, Committees and Meetings

The Board of Directors is the Company’s governing body with responsibility for oversight, counseling and direction of the Company’s management to serve the long-term interests of the Company and its shareholders. The Board’s goal is to build long-term value for the Company’s shareholders and to ensure the vitality of the Company for its customers, employees and other individuals and organizations that depend on the Company. To achieve its goal, the Board monitors both the performance of the Company and the performance of the Chief Executive Officer. The Board consists of nine members and, effective July 1, 2019, will consist of ten members. Ed Mueller serves as the Board’s Independent Chair. All of the directors during FY 2019 were independent with the exception of John Hammergren, the Company’s then-Chairman and CEO. All of the director nominees are independent with the exception of Brian Tyler, the Company’s CEO.

With the Board’s January 2019 formation of the Compliance Committee, the Board has five standing committees: the Audit Committee, Compensation Committee, Compliance Committee, Finance Committee, and Governance Committee. Each of these committees is governed by a written charter approved by the Board in compliance with the requirements of the SEC and the New York Stock Exchange, where applicable. The charter of each committee is reviewed annually by that committee and the Board. Each member of our standing committees is independent, as determined by the Board, under the NYSE listing standards and the Company’s director independence standards. In addition, each member of the Audit Committee and Compensation Committee meets the additional, heightened independence criteria applicable to such committee members under the applicable rules. The members of each standing committee are appointed by the Board each year for a term of one year or until their successors are elected and qualified or their earlier resignation.

Board and Meeting Attendance

 

The Board met eight times during FY 2019. Each director attended at least 75% of the aggregate number of meetings of the Board and of all the standing committees. The independent directors also met in executive session during FY 2019, as necessary. Directors meet their responsibilities not only by attending Board and committee meetings, but also through communication with senior management, independent accountants, advisors and consultants and others on matters affecting the Company. Directors are also expected to attend the upcoming Annual Meeting. All then-directors attended the 2018 Annual Meeting of Stockholders. The membership of each standing committee in FY 2019 and the number of meetings held during FY 2019 are identified below.

 

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Table of Contents

ITEM 1. ELECTION OF DIRECTORS

 

Committee Membership, Responsibilities and Other Information

 

The following are the standing committees of the Board of Directors:

 

 

Audit Committee

 

  

Committee responsibilities include:

 

  

 

Members in FY 2019:1

Marie L. Knowles*, Chair

Dominic J. Caruso*

M. Christine Jacobs

Donald R. Knauss

 

Committee Meetings in
FY 2019:

5

 

All members are independent and financially literate

 

*  designated as “audit committee financial expert”

 

  

   reviewing with management the interim and annual audited financial statements filed in the Quarterly Reports on Form 10-Q and Annual Report on Form 10-K, respectively, including any major issues regarding accounting principles and practices, and the adequacy and effectiveness of internal control over financial reporting that could significantly affect the Company’s financial statements

 

   reviewing with management and the independent registered public accounting firm the interim financial statements

 

   appointing the independent accountants and monitoring their independence, evaluating their performance and approving their fees

 

   reviewing and accepting the annual audit plan, including the scope of the audit activities of the independent accountants

 

   assisting the Board with respect to its oversight of the Company’s policies and procedures regarding compliance with applicable laws and regulations

 

  

 

 

Compensation Committee

 

  

Committee responsibilities include:

 

  

 

Members in FY 2019:1

N. Anthony Coles, M.D., Chair

Bradley E. Lerman

Edward A. Mueller

Susan R. Salka

 

Committee Meetings in
FY 2019:

9

 

  

   reviewing and overseeing the Company’s overall compensation philosophy and the development and implementation of compensation programs aligned with the Company’s business strategy

 

   determining the structure and amount of all elements of executive officer compensation and benefits, including material perquisites, after consideration of management’s recommendation and in consultation with the committee’s independent compensation consultant

 

   reviewing and making determinations regarding the adoption, administration, and amendments to all equity incentive plans for employees, and cash incentive plans for executive officers

 

   evaluating the relationship between the incentives associated with Company plans and the level of risk-taking by executive officers in response to such incentives

 

   participating with management in the preparation of the Compensation Discussion and Analysis for the Company’s proxy statement

 

   evaluating the qualifications, performance and independence of its advisors

 

  

 

 

Compliance Committee

 

  

Committee responsibilities include:

 

  

 

Members in FY 2019:1

Bradley E. Lerman, Chair

Dominic J. Caruso

M. Christine Jacobs

Marie L. Knowles

 

Committee Meetings in
FY 2019:

2*

 

*  Compliance Committee formed in January 2019

 

  

   overseeing the Company’s compliance programs

 

   reviewing the Company’s approach to, and results of, risk identification, assessment and mitigation plans for the principal legal and regulatory compliance risks facing the Company

 

   overseeing significant complaints and other matters raised through the Company’s compliance reporting mechanisms

 

   reviewing significant government inquiries or investigations and other significant legal actions

 

   receiving information about current and emerging legal and regulatory compliance risks and enforcement trends that may affect the Company’s business operations, performance or strategy

 

  

 

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ITEM 1. ELECTION OF DIRECTORS

 

 

 

Finance Committee

 

  

Committee responsibilities include:

 

  

 

Members in FY 2019:1

Donald R. Knauss, Chair

Dominic J. Caruso

N. Anthony Coles, M.D.

Marie L. Knowles

 

Committee Meetings in
FY 2019:

5

 

  

   reviewing with management the long-range financial policies of the Company

 

   providing advice and counsel to management on the financial aspects of significant acquisitions and divestitures, major capital commitments, proposed financings and other significant transactions of a financial nature

 

   making recommendations concerning significant changes in the capital structure of the Company

 

   reviewing tax policy utilized by management and the funding status and investment policies of the Company’s tax-qualified retirement plans

 

  

 

 

Governance Committee

 

  

Committee responsibilities include:

 

  

 

Members in FY 2019:1

Susan R. Salka, Chair

M. Christine Jacobs

Bradley E. Lerman

Edward A. Mueller

 

Committee Meetings in
FY 2019:

6

 

  

   reviewing the size and composition of the Board and recommending measures to be taken so that the Board reflects the appropriate balance of knowledge, experience, skills, expertise and diversity

 

   recommending the slate of nominees to be proposed for election at the annual meeting of stockholders, recommending qualified candidates to fill Board vacancies

 

   evaluating the Board’s overall performance, reviewing the level and form of non-employee director compensation, and administering the Company’s related party transactions policy

 

   monitoring emerging corporate governance trends, and overseeing and evaluating the Company’s corporate governance policies and programs

 

  

1 See pages 10-15 for committee memberships as of July 1, 2019.

Director Qualifications, Nomination and Diversity

 

To fulfill its responsibility to recruit and recommend to the Board nominees for election as directors, the Governance Committee considers all qualified candidates who may be identified by any one of the following sources: current or former Board members, a professional search firm, Company executives or shareholders.

Shareholders who wish to make a recommendation or propose a director candidate may do so by submitting the candidate’s name, resume and biographical information and qualifications to the attention of the Corporate Secretary’s Office at 6555 State Highway 161, Irving, Texas 75039. All recommendations or nominations received by the Corporate Secretary will be presented to the Governance Committee for its consideration. The Governance Committee will consider those candidates who meet the criteria described below, and the Governance Committee will recommend to the Board nominees who best suit the Board’s needs. In order for a shareholder to make a nomination of a director candidate for election at an upcoming annual meeting of stockholders, such shareholder’s nomination must comply with the requirements set forth in the Company’s By-Laws.

In evaluating candidates for the Board, the Governance Committee reviews each candidate’s independence, skills, experience and expertise against the criteria adopted by the Board. Members of the Board should have the highest professional and personal ethics, integrity and values, and represent diverse backgrounds and experience consistent with the Company’s values. They should have broad experience at the policy-making level in business, technology, healthcare or public interest, or have achieved prominence in a relevant field. The Governance Committee will consider whether the candidate’s background and experience demonstrates the ability to make the kind of important and sensitive judgments that the Board is called upon to make, and whether the nominee’s skills are complementary to the existing Board members’ skills. In addition, Board members must be able to devote sufficient time and energy to the performance of his or her duties as a director, and must be open to hearing different perspectives.

Mr. Caruso and Dr. Washington have each been nominated to stand for election by the shareholders for the first time. Both were initially identified as a potential director candidate by a professional search firm. The search firm gathered biographical information on each of Mr. Caruso and Dr. Washington and vetted their qualifications, experience and skills, as well as those of other potential director candidates. At its meeting in July 2018, the Governance Committee considered Mr. Caruso’s experience, qualifications and skills, as well as those of other potential director candidates. Several members of the Board interviewed Mr. Caruso. Other candidates were also interviewed. In September 2018, the Board elected Mr. Caruso to serve on the Board. At its meetings in October 2018 and January 2019, the Governance Committee considered biographical

 

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ITEM 1. ELECTION OF DIRECTORS

 

information and background information of director candidates, including Dr. Washington, and evaluated their experience, qualifications and skills. Several members of the Board interviewed Dr. Washington. Other candidates were also interviewed. In June 2019, the Board elected Dr. Washington to serve on the Board effective July 1, 2019.

The Board does not maintain a formal policy regarding diversity; however, the Governance Committee considers diversity to include diversity of backgrounds, cultures, education, experience, skills, thought, perspectives, personal qualities and attributes, and geographic profiles (i.e., where the individuals have lived and worked), as well as race, ethnicity, gender, national origin and other categories. Our Governance Committee and the Board believe that a diverse representation on the Board fosters a robust, comprehensive, and balanced deliberation and decision-making process that is essential to the continued effective functioning of the Board and continued success of the Company. Women and people of color comprise 50% of our director nominees.

Corporate Governance

We are committed to continually assessing our governance policies and structures to incorporate best practices. We highlight some of our corporate governance practices below.

 

Key Governance Attributes
  

Independent Chair

  

 

In 2017, following extensive engagement with our shareholders, we committed to splitting the role of chairman and CEO commencing with our next CEO. This year, we adopted an independent chair structure with the election of Ed Mueller as Independent Chair.

 

       

 

CEO and Senior Management Succession Planning

 

  

 

Recognizing that succession planning is a key component of the Company’s continued success, the Board is committed to CEO and senior management succession planning. Brian Tyler’s appointment as CEO this year is a product of that work and commitment.

 

       

Reduced Ownership Threshold to Call a Special Meeting to 15%

 

  

 

Following our 2018 Annual Meeting of Stockholders, our Board continued to carefully consider shareholder feedback and the best interests of the Company and reduced the ownership threshold required to call a special meeting from 25% to 15%.

 

       

Robust Shareholder Engagement Program

 

  

 

McKesson invests in a robust shareholder engagement program, having met with shareholders representing over 39% of our outstanding shares since the 2018 Annual Meeting of Shareholders. The Governance Committee, Compensation Committee and the full Board receive regular updates from management about shareholder feedback and best practices in corporate governance.

 

       
Committed to Board Refreshment   

 

Seven of our 10 nominees have served on our Board for six years or less. By 2021, we will add at least one new director. By 2022, we plan to implement a policy that would require directors with 12+ years tenure to offer to resign from Board service annually, which the Board can, after careful consideration, choose to accept or reject.

 

       

Significant Risk Oversight

 

  

 

The Board and its committees devote significant time and effort to understanding and reviewing enterprise risks. This includes oversight of our Company’s strategy and reputation as well as review of risks related to financial reporting, compensation practices, cybersecurity and opioid distribution.

 

       

Establishment of Compliance Committee

 

  

 

The Board established a standing Compliance Committee in January 2019. The purpose of the Compliance Committee is to assist the Board in oversight of McKesson’s compliance programs and management’s identification and evaluation of our primary legal and regulatory compliance risks.

 

       

 

Other Governance Best Practices

  

 

  Regular executive sessions of the independent directors

  Proxy access right since 2015

  Eliminated supermajority voting requirements in 2011

  Majority voting standard for uncontested director elections

  Annual director elections

  Eliminated poison pill

 

You can access the following governance materials on our website at www.mckesson.com/investors/corporate-governance:

 

   Certification of Incorporation

  

   Committee Charters

   By-Laws

  

   Director Independence Standards

   Corporate Governance Guidelines

  

   Code of Conduct

 

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ITEM 1. ELECTION OF DIRECTORS

 

Director Independence

 

Under the Company’s Corporate Governance Guidelines, the Board must have a substantial majority of directors who meet the applicable criteria for independence required by the NYSE. Each year, the Board must determine, based on all relevant facts and circumstances, whether in its business judgment the nonexecutive directors satisfy the criteria for independence, including the absence of a material relationship with the Company. The Board will deem a director independent if no relationship or transaction exists that would disqualify such a director under these standards, and no other relationship or transaction exists of a type not specifically mentioned in NYSE standards that, in the Board’s opinion, taking into account all relevant facts and circumstances, would impair a director’s ability to exercise his or her independent judgment. Applying these standards, and all applicable laws, rules or regulations, the Board has determined that, with the exception of Brian Tyler, all of the Company’s director nominees, namely Dominic Caruso, Tony Coles, Chris Jacobs, Don Knauss, Marie Knowles, Brad Lerman, Ed Mueller, Susan Salka and Ken Washington, are independent. The Board also determined that with the exception of John Hammergren, the Company’s then-Chairman and CEO, all of the Company’s directors during FY 2019 were independent.

Board Leadership Structure

 

The Board has an independent chair leadership structure with Ed Mueller serving as Board Chair and Brian Tyler serving as CEO.

The Board believes that this is the most effective Board leadership structure for the Company at this time. Prior to his election as Independent Board Chair, Mr. Mueller served as the Company’s Lead Independent Director since 2013 and has served on the Company’s Compensation Committee and Governance Committee. Mr. Mueller’s experience serving on McKesson’s Board, as well as other public company boards, positions him to effectively lead the Board. The Chair regularly solicits input from the CEO and independent directors as to the additional matters to place on the Board agenda and the information that would be useful for their review and consideration. All of the Board’s standing committees are composed solely of, and chaired by, independent directors.

Mr. Tyler is a 22-year McKesson veteran who brings expert perspective on the future of the industry, both in the U.S. and globally. Having spent his entire career in healthcare, he has a clear vision on how McKesson will continue to play an integral role in improving care while driving value for McKesson’s shareholders. He also brings with him a deep understanding of the Company, its culture and what’s important to its employees. We believe the combined leadership of Mr. Mueller as Independent Chair and Mr. Tyler as CEO best serves the Company and its shareholders at this time.

The Governance Committee and Board annually evaluates the Board’s leadership structure to determine the structure that would best serve the Company and its shareholders.

Board of Directors’ Role in Risk Oversight

 

Our Board has responsibility for overseeing the business and affairs of the Company. This general oversight responsibility includes oversight of risk management, which the Board carries out as a whole or through its committees. Among other things, the Board as a whole periodically discusses the Company’s enterprise risk management process, including its identification, ranking and assessment of operations, strategic, financial and compliance risks. This discussion includes the output of that process, as well as the Company’s compliance programs and management of legal and regulatory risks. Below, as an example, we highlight two risk areas and the Board’s role in risk oversight:

Controlled Substance Distribution Risk Oversight

Our Board actively oversees the Company’s work to address the opioid epidemic. It regularly receives reports on the Company’s Controlled Substance Monitoring Program (“CSMP”) and discusses the Company’s compliance with federal controlled substances regulatory requirements and the effectiveness of the Company’s CSMP. The Board additionally receives updates on pending litigation and investigations. Further, the Compliance Committee regularly receives updates on the CSMP. For more information on the Company’s work to address the opioid epidemic, please see pages 8-9 of this proxy statement.

 

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ITEM 1. ELECTION OF DIRECTORS

 

Cybersecurity Risk Oversight

At least twice annually, the Board reviews with management the Company’s cybersecurity risk reduction strategy. Management’s reports to the Board focus on:

 

   

cybersecurity trends and regulatory updates

 

   

information protection program strategy, framework and program scorecard

 

   

implications for the Company’s business strategy

 

   

operational technology strategy and risk reduction

 

   

audit and compliance

Role of Board Committees in Risk Oversight

Although the Board has ultimate responsibility for overseeing risk management, it has delegated certain oversight responsibilities to committees with specific areas of responsibility and expertise. Each of the standing committees regularly meets in executive session. The chairs of the committees report to the full Board the significant risks facing the Company, as identified by management, and the measures undertaken by management for controlling and mitigating those risks.

 

 

Committee Roles in Risk Oversight

 

     

Audit Committee

 

 

  

 

  

 

Governance Committee

 

     

 Assists the Board in monitoring integrity of financial statements, independent auditor’s qualifications, independence and performance, performance of the Company’s internal audit function

 

 Coordinates with the Compliance Committee in monitoring compliance with legal and regulatory requirements

 

     

 Oversees evaluation of the Board’s performance, Board composition, refreshment and committee leadership

 

 Evaluates the Company’s governance practices and monitors shareholder feedback

     

Compliance Committee

 

     

Finance Committee

 

     

 Assists the Board in oversight of compliance programs and management’s identification and evaluation of the Company’s principal legal and regulatory compliance risks

 

 Coordinates with the Audit Committee in monitoring compliance with legal and regulatory requirements

 

     

 Oversees risk assessment and management processes related to, among other things, credit, capital structure, liquidity and insurance programs

 

 Assists the Board in oversight of the financial aspects of significant acquisitions and divestitures and other significant transactions of a financial nature

 

     

Compensation Committee

 

       
     

 Oversees risk assessment and management with respect to the Company’s compensation policies and practices.

 

           

McKesson senior leadership is responsible for the day-to-day management of the risks facing the Company, including macroeconomic, financial, strategic, operational, public reporting, legal, regulatory, political, cybersecurity, compliance, and reputational risks. Management carries out this risk management responsibility through a coordinated effort among the various risk management functions within the Company. As part of its ongoing compliance program, the Company monitors potential uses of conflict minerals in its businesses, particularly in the context of acquisitions, and it reports when required these diligence efforts and determinations.

Risk Assessment of Compensation Policies and Practices

 

We annually conduct a review of all incentive compensation plans utilized throughout the Company, using a framework for risk assessment provided to us by a nationally recognized outside compensation advisor. In conducting our review, a detailed assessment of each incentive compensation plan, without regard to materiality, is first prepared by representatives from the Company’s business units and then reviewed by senior executives of our Human Resources Department. The review framework requires representatives of our business units to examine and report on the presence of certain design elements under both cash and equity incentive compensation plans that could encourage our employees to incur excessive risk, such as the selection and documentation of incentive metrics, the ratio of incentive to fixed compensation, the year-over-year variability in payouts, the amount of management discretion, and the percentage of compensation expense as compared to the business units’ revenues. Consistent with our findings in past years, management concluded that for FY 2019 our policies and practices do not create risks that are reasonably likely to have a material adverse effect on the Company. A summary of management’s findings was reviewed with the Compensation Committee at its April 2019 meeting.

 

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The Compensation Committee discussed management’s findings, and considered that the Company utilizes many design features that mitigate the likelihood of encouraging excessive risk-taking behavior. Among these design features are:

 

   

Multiple metrics across the entire enterprise that balance top-line, bottom-line and cash management objectives;

 

   

Linear payout curves, performance thresholds and caps;

 

   

Reasonable goals and objectives, which are well-defined and communicated;

 

   

Strong compensation recoupment policy; and

 

   

Training on our Code of Conduct and other policies that educate our employees on appropriate behaviors and the consequences of taking inappropriate actions.

In addition, incentives for senior management feature the following:

 

   

Balance of short- and long-term variable compensation tied to a mix of financial and operational objectives and the long-term value of our stock;

 

   

The Compensation Committee’s ability to exercise downward discretion in determining payouts, including after consideration of regulatory, compliance and legal issues; and

 

   

Rigorous stock ownership and retention guidelines.

Based on the foregoing, the Compensation Committee concurred with management that our compensation policies and practices do not create inappropriate or unintended significant risk to the Company as a whole. We believe that our incentive compensation plans do not provide incentives that encourage risk-taking beyond the organization’s ability to effectively identify and manage significant risks, are compatible with effective internal controls and the risk management practices of the Company, and are supported by the oversight and administration of the Compensation Committee with regard to our executive compensation program.

Related Party Transactions Policy and Transactions with Related Persons

 

The Company has a written Related Party Transactions Policy requiring approval or ratification of certain transactions involving executive officers, directors and nominees for director, beneficial owners of more than 5% of the Company’s common stock, and immediate family members of any such persons where the amount involved exceeds $120,000. Under the policy, the Company’s General Counsel initially determines if a transaction or relationship constitutes a transaction that requires compliance with the policy or disclosure. If so, the matter will be referred to the Governance Committee. Annually, our directors, nominees and executive officers are asked to identify any transactions that might fall under the policy as well as to identify immediate family members. Additionally, they are required to notify the General Counsel of any potential related party transaction. The transaction may be approved or ratified if, in the Governance Committee’s business judgment and based on the review of all relevant facts and circumstances, it is determined that the transaction is fair and reasonable to the Company and consistent with its best interests. Factors that may be taken into account in making that determination include, without limitation: (i) the business purpose of the transaction; (ii) whether the transaction is made in the ordinary course of business and is entered into on an arm’s-length basis; (iii) whether it would impair the independence of a director; and (iv) whether it would violate the provisions of the Company’s Code of Conduct.

The brother-in-law of the Company’s former CEO John Hammergren is employed by the Company and received approximately $137,783 in salary and bonus during FY 2019 and was eligible to participate in the Company’s general employee benefit plans. The son-in-law of Mr. Hammergren is employed by the Company and received approximately $203,569 in salary and bonus during FY 2019 and was eligible to participate in the Company’s general employee benefit plans. Such compensation was established by the Company in accordance with its employment and compensation practices applicable to employees with equivalent qualifications and responsibilities and holding similar positions.

Communications with Directors

 

Shareholders and other interested parties may communicate with any of the directors, including the Board Chair and any other, or all of the directors as a group, by addressing their correspondence to the Board member or members, c/o the Corporate Secretary’s Office, McKesson Corporation, 6555 State Highway 161, Irving, Texas 75039, or via e-mail to boardchair@mckesson.com or to nonmanagementdirectors@mckesson.com. The Corporate Secretary’s office maintains a log of such correspondence received by the Company that is addressed to members of the Board, other than advertisements, solicitations or correspondence deemed by the Corporate Secretary to be irrelevant to Board responsibilities. Directors may review the log at any time, and request copies of any correspondence received.

 

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ITEM 1. ELECTION OF DIRECTORS

 

Director Compensation

We use a combination of cash and equity-based compensation to attract and retain qualified candidates to serve on our Board. The Governance Committee annually reviews the level and form of the Company’s director compensation and, if it deems appropriate, recommends to the Board changes in director compensation. In reviewing our non-employee director compensation program, the committee is guided by these principles:

 

   

Compensation should pay directors at competitive levels for the work required in a company of our size and scope, differentiating among directors where appropriate to reflect different levels of responsibilities;

 

   

A significant portion of compensation should be in the form of stock, to align the directors’ interests with our shareholders; and

 

   

The structure of the program should be simple and transparent.

The compensation for each non-employee director of the Company includes an annual cash retainer, an annual restricted stock unit (“RSU”) award and meeting fees. The Lead Independent Director and chairs of the standing committees receive an additional annual cash retainer, and the Lead Independent Director receives an additional annual grant of RSUs. Detail on the value of the annual retainer and RSU awards provided to each non-employee director for FY 2019 is provided below. With regard to the Board and standing committees, non-employee directors receive a $1,500 per-meeting fee, except that the fee is $2,000 for Audit Committee meetings. With regard to meetings other than standing committee meetings, the Governance Committee determines on a case-by-case basis whether meeting fees are appropriate for non-employee directors. Non-employee directors are paid their reasonable expenses for attending Board and committee meetings. Directors who are employees of the Company or its subsidiaries do not receive any compensation for service on the Board.

In October 2018, in connection with Mr. Hammergren’s announcement of his intention to retire from the Company, our Board appointed Ed Mueller as Independent Chair of the Board, effective April 1, 2019. Following a review of director compensation practices at companies of similar size and complexity, the Board also approved for the Independent Chair an annual cash retainer of $120,000 and annual RSU grant with an approximate grant date value of $120,000, which amounts are incremental to the compensation provided to Mr. Mueller for his service as a non-employee director and member of multiple Board committees.

2019 Director Compensation Table

 

The following table sets forth information concerning the compensation paid to or earned by each non-employee director for the fiscal year ended March 31, 2019. Mr. Hammergren is not included in this table as he was an employee of the Company during FY 2019 and received no compensation for his service as a director. The compensation paid to or earned by Mr. Hammergren as an officer of the Company is shown in the 2019 Summary Compensation Table.

 

 

Name

 

 

 

Fees Earned
or Paid in
Cash ($)
(1)

 

      

 

Stock
Awards
($)(2)

 

      

 

All Other
Compensation
($)(3)

 

      

 

Total
($)

 

 

 

Andy D. Bryant

 

 

 

 

 

 

45,130

 

 

 

 

    

 

 

 

 

-0-

 

 

 

 

    

 

 

 

 

-0-

 

 

 

 

    

 

 

 

 

45,130

 

 

 

 

 

Dominic J. Caruso

 

 

 

 

 

 

58,630

 

 

 

 

    

 

 

 

 

155,436

 

 

(4) 

 

    

 

 

 

 

-0-

 

 

 

 

    

 

 

 

 

214,066

 

 

 

 

 

N. Anthony Coles, M.D.

 

 

 

 

 

 

141,902

 

 

 

 

    

 

 

 

 

180,023

 

 

 

 

    

 

 

 

 

5,000

 

 

 

 

    

 

 

 

 

326,925

 

 

 

 

 

M. Christine Jacobs

 

 

 

 

 

 

114,500

 

 

 

 

    

 

 

 

 

180,023

 

 

 

 

    

 

 

 

 

-0-

 

 

 

 

    

 

 

 

 

294,523

 

 

 

 

 

Donald R. Knauss

 

 

 

 

 

 

119,500

 

 

 

 

    

 

 

 

 

180,023

 

 

 

 

    

 

 

 

 

-0-

 

 

 

 

    

 

 

 

 

299,523

 

 

 

 

 

Marie L. Knowles

 

 

 

 

 

 

132,500

 

 

 

 

    

 

 

 

 

180,023

 

 

 

 

    

 

 

 

 

-0-

 

 

 

 

    

 

 

 

 

312,523

 

 

 

 

 

Bradley E. Lerman

 

 

 

 

 

 

108,847

 

 

 

 

    

 

 

 

 

225,085

 

 

(5) 

 

    

 

 

 

 

-0-

 

 

 

 

    

 

 

 

 

333,932

 

 

 

 

 

Edward A. Mueller

 

 

 

 

 

 

139,500

 

 

 

 

    

 

 

 

 

205,092

 

 

(6) 

 

    

 

 

 

 

-0-

 

 

 

 

    

 

 

 

 

344,592

 

 

 

 

 

Susan R. Salka

 

 

 

 

 

 

114,222

 

 

 

 

    

 

 

 

 

180,023

 

 

 

 

    

 

 

 

 

20,000

 

 

 

 

    

 

 

 

 

314,245

 

 

 

 

(1)

Consists of the following, as applicable, whether paid or deferred: director annual cash retainer; standing committee meeting fees; other meeting fees; and the annual standing committee chair and Lead Independent Director retainers.

 

(2)

Represents the aggregate grant date fair value of RSUs, computed in accordance with Accounting Standards Codification issued by the Financial Accounting Standards Board, Topic 718, labeled “Compensation — Stock Compensation” (“ASC Topic 718”) disregarding any estimates of forfeitures related to service-based vesting conditions. Such values do not reflect whether the recipient has actually realized a financial benefit from the award. For information on the assumptions used to calculate the value of the awards, refer to Financial Note 8 of the Company’s consolidated financial statements in its Annual Report on Form 10-K for the fiscal year ended March 31, 2019 as filed with the SEC on May 15, 2019.

 

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(3)

Represents the amount of matching contributions and other charitable donations provided by the McKesson Foundation.

 

(4)

Mr. Caruso was elected to the Board effective September 2018 and received a prorated portion of the automatic annual grant of RSUs made to non-employee directors in July 2018.

 

(5)

Mr. Lerman was elected to the Board effective April 2018 and received a prorated portion of the automatic annual grant of RSUs made to non-employee directors in July 2017, in addition to the automatic annual grant of RSUs he received in July 2018.

 

(6)

Represents both the automatic annual grant of RSUs made to all non-employee directors and the automatic annual grant of RSUs for service as Lead Independent Director.

Cash Compensation

 

Each non-employee director receives an annual retainer, and the Lead Independent Director (beginning with FY 2020, the Independent Chair) and chairs of the standing committees receive an additional annual retainer. Information on retainers and meeting fees, in each case as paid in FY 2019, are set forth in the table below. Directors may elect in advance of a calendar year to defer up to 100% of their annual retainer (including any standing committee chair or Lead Independent Director retainer) and meeting fees into the Company’s Deferred Compensation Administration Plan III (“DCAP III”). The minimum deferral period for any amounts deferred is five years; however, notwithstanding the director’s deferral election, if a director ceases to be a director of the Company for any reason other than disability, retirement or death, the account balance will be paid in a lump sum in the first January or July which is at least six months following and in the year after the director’s separation from service. In the event of disability, retirement or death, the account balance will be paid in accordance with the director’s deferral election. To be eligible for retirement, a director must have served on the Board for at least six consecutive years prior to the director’s separation. The Compensation Committee approves the rate at which interest or earnings are credited each year to amounts deferred into DCAP III. A director may elect to have all or part of his or her DCAP III account credited with earnings (or losses) based on the director’s choice of a hypothetical investment in certain funds available under the Company’s 401(k) plan. To the extent no such hypothetical investment selection is made by the director, interest is credited at an interest rate determined by the committee, which for calendar year 2019 is 120% of the long-term applicable federal rate published for December 2018 by the Internal Revenue Service (“IRS”).

The following table summarizes the cash compensation provided to non-employee directors during FY 2019:

 

 

FY 2019 Non-Employee Director Cash Compensation

 

 

 

Total ($)

 

 

 

Annual cash retainer

 

 

 

 

 

 

80,000

 

 

 

 

 

Additional retainer for Lead Independent Director

 

 

 

 

 

 

25,000

 

 

 

 

 

Additional retainer for Chair of the Audit Committee

 

 

 

 

 

 

20,000

 

 

 

 

 

Additional retainer for Chair of the Compensation Committee

 

 

 

 

 

 

20,000

 

 

 

 

 

Additional retainer for Chair of all other standing committees

 

 

 

 

 

 

10,000

 

 

 

 

 

Meeting fee for each Audit Committee meeting attended

 

 

 

 

 

 

2,000

 

 

 

 

 

Meeting fee for each Board, committee or other meeting attended

 

 

 

 

 

 

1,500

 

 

 

 

Equity Compensation

 

Non-employee directors receive an automatic annual grant of RSUs with an approximate grant date value of $180,000. The actual number of RSUs granted is determined by dividing $180,000 by the closing price of the Company’s common stock on the grant date (with any fractional unit rounded up to the nearest whole unit); provided, however, that the number of units granted in any annual grant will in no event exceed 5,000, in accordance with our 2013 Stock Plan. In addition to the $25,000 annual cash retainer for the Lead Independent Director (as shown in the above table), the Lead Independent Director receives an annual grant of RSUs with an approximate grant date value of $25,000.

The RSUs granted to non-employee directors are vested upon grant. If a director meets the director stock ownership guidelines (currently $480,000, six times the annual cash retainer), then the director will, on the grant date, receive the shares underlying the RSUs, unless the director elects to defer receipt of the shares. The determination of whether a director meets the director stock ownership guidelines is made as of the last day of the deferral election period preceding the applicable RSU award. If a non-employee director has not met the stock ownership guidelines as of the last day of such deferral election period, then issuance of the shares underlying the RSUs will automatically be deferred until the director’s separation from service.

 

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ITEM 1. ELECTION OF DIRECTORS

 

Recipients of RSUs are entitled to dividend equivalents at the same dividend rate applicable to the Company’s common shareholders, which is determined by our Board and currently is $0.39 per share each quarter. For our directors, dividend equivalents on RSUs are credited quarterly to an interest-bearing cash account and are not distributed until the shares underlying the RSUs are issued to the director. Interest accrues on directors’ credited dividend equivalents at the rate set by the Compensation Committee under the terms of our 2013 Stock Plan, which is currently 120% of the long-term applicable federal rate published for December 2018 by the IRS.

All Other Compensation and Benefits

 

Non-employee directors are eligible to participate in the McKesson Foundation’s Executive Request Program and Matching Gifts Program. Under the Executive Request Program, our non-employee directors may request that the foundation make donations to qualifying public charitable organizations. Under the Matching Gifts Program, our non-employee directors’ own gifts to schools, educational associations or funds and other public charitable organizations are eligible for a match by the foundation of up to $5,000 per director for each fiscal year.

 

24   LOGO  - 2019 Proxy Statement    


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ITEM 2.

Ratification of Appointment of Deloitte & Touche LLP as the Company’s Independent Registered Public Accounting Firm for Fiscal Year 2020

Your Board recommends a vote “FOR” this ratification proposal.

The Audit Committee has approved Deloitte & Touche LLP (“D&T”) as the Company’s independent registered public accounting firm to audit the consolidated financial statements of the Company and its subsidiaries for the fiscal year ending March 31, 2020. The committee believes that D&T is knowledgeable about the Company’s operations and accounting practices, and is well qualified to act as the Company’s independent registered public accounting firm.

We are asking our shareholders to ratify the selection of D&T as the Company’s independent registered public accounting firm. Although ratification is not required by our By-Laws or otherwise, the Board is submitting the selection of D&T to our shareholders for ratification as a matter of good corporate practice. If shareholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain D&T. Even if the selection is ratified, the Audit Committee in its discretion may select a different registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and our shareholders. Representatives of D&T are expected to be present at the Annual Meeting to respond to questions and to make a statement if they desire to do so. For the fiscal years ended March 31, 2019 and 2018, professional services were performed by D&T, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, “Deloitte & Touche”), which includes Deloitte Consulting. Fees for those years were as follows:

 

   

 

FY 2019

 

   

 

FY 2018

 

 

 

Audit Fees

 

 

 

$

 

 

19,145,000

 

 

 

 

 

 

$

 

 

19,420,500

 

 

 

 

 

Audit-Related Fees

 

 

 

 

 

 

2,245,000

 

 

 

 

 

 

 

 

 

4,865,000

 

 

 

 

 

TOTAL AUDIT AND AUDIT-RELATED FEES

 

 

 

 

 

 

21,390,000

 

 

 

 

 

 

 

 

 

24,285,500

 

 

 

 

 

Tax Fees

 

 

 

 

 

 

414,000

 

 

 

 

 

 

 

 

 

1,248,000

 

 

 

 

 

All Other Fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

 

 

$

 

 

21,804,000

 

 

 

 

 

 

$

 

 

25,533,500

 

 

 

 

Audit Fees. This category consists of fees for professional services rendered for the audit of the Company’s consolidated annual financial statements, the audit of the Company’s internal control over financial reporting as required by the Sarbanes-Oxley Act of 2002, review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by D&T in connection with statutory and regulatory filings or engagements. This category also includes advice on accounting matters that arose during, or as a result of, the audit or the review of interim financial statements, foreign statutory audits required by non-U.S. jurisdictions, registration statements and comfort letters.

Audit-Related Fees. This category consists of fees for assurance and related services such as employee benefit plan audits, accounting and financial reporting audit-related fees, due diligence in connection with mergers, divestitures and acquisitions, and attest services related to financial reporting that are not required by statute or regulation. The decrease in fiscal year ended March 31, 2019 was primarily related to less acquisition activity.

Tax Fees. This category consists of fees for professional services rendered for U.S. and international tax compliance, including services related to the preparation of tax returns and professional services. For the fiscal years ended March 31, 2019 and 2018, no amounts were incurred by the Company for tax advice, planning or consulting services. The decrease in fiscal year ended March 31, 2019 was primarily related to less tax provisions and compliance projects.

All Other Fees. This category consists of fees for products and services other than the services reported above.

 

    LOGO  - 2019 Proxy Statement   25


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ITEM 2. RATIFICATION OF APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL YEAR 2020

 

Policy on Audit Committee Pre-Approval of Audit and Permissible

Non-Audit Services of Independent Registered Public Accounting Firm

 

Pursuant to the Applicable Rules, and as set forth in the terms of its charter, the Audit Committee has sole responsibility for appointing, setting compensation for, and overseeing the work of the independent registered public accounting firm. The Audit Committee has established a policy that requires it to pre-approve all audit and permissible non-audit services, including audit-related and tax services, to be provided by Deloitte & Touche. Between meetings, the Chair of the Audit Committee is authorized to pre-approve services, which are reported to the committee at its next meeting. All of the services described in the fee table above were approved in conformity with the Audit Committee’s pre-approval process.

Audit Committee Report

The Audit Committee assists the Board in fulfilling its responsibility for oversight of the quality and integrity of the Company’s financial reporting processes. The functions of the Audit Committee are described in greater detail in the Audit Committee’s written charter adopted by the Company’s Board of Directors, which may be found on the Company’s website at www.mckesson.com under the caption “Investors — Corporate Governance.” The Audit Committee is composed exclusively of directors who are independent under the applicable SEC and NYSE rules and the Company’s independence standards. The Audit Committee’s members are not professionally engaged in the practice of accounting or auditing, and they necessarily rely on the work and assurances of the Company’s management and the independent registered public accounting firm. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal control over financial reporting. D&T is responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with generally accepted auditing standards and expressing opinions on the conformity of those audited financial statements with United States generally accepted accounting principles and the effectiveness of the Company’s internal control over financial reporting.The Audit Committee has: (i) reviewed and discussed with management the Company’s audited financial statements for the fiscal year ended March 31, 2019; (ii) discussed with D&T the matters required to be discussed by the Public Company Accounting Oversight Board (“PCAOB”) and NYSE standards; (iii) received the written disclosures and the letter from D&T required by applicable requirements of the PCAOB regarding D&T’s communications with the Audit Committee concerning independence; and (iv) discussed with D&T its independence from the Company. The Audit Committee further considered whether the provision of non-audit related services by D&T to the Company is compatible with maintaining the independence of that firm from the Company. The Audit Committee has also discussed with management of the Company and D&T such other matters and received such assurances from them as it deemed appropriate.

The Audit Committee discussed with the Company’s internal auditors and D&T the overall scope and plans for their respective audits. The Audit Committee meets regularly with the internal auditors and D&T, with and without management present, to discuss the results of their audits, the evaluation of the Company’s internal control over financial reporting and the overall quality of the Company’s accounting and financial reporting.

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors, and the Board has approved, that the audited financial statements for the fiscal year ended March 31, 2019 be included in the Company’s Annual Report on Form 10-K for filing with the SEC.

Audit Committee of the Board of Directors

Marie L. Knowles, Chair

Dominic J. Caruso

M. Christine Jacobs

Donald R. Knauss

 

26   LOGO  - 2019 Proxy Statement    


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PRINCIPAL SHAREHOLDERS

Security Ownership of Certain Beneficial Owners

The following table sets forth information regarding ownership of the Company’s outstanding common stock by any entity or person, to the extent known by us or ascertainable from public filings, that is the beneficial owner of more than 5% of the outstanding shares of common stock:

 

Name and Address of Beneficial Owner

  Amount and
Nature of
Beneficial
Ownership
       Percent
of Class*
 

The Vanguard Group

100 Vanguard Boulevard

Malvern, Pennsylvania 19355

    16,542,861 (1)         8.88

BlackRock, Inc.

55 East 52nd Street

New York, New York 10022

    15,773,706 (2)         8.46
*

Based on 186,377,093 shares of common stock outstanding as of June 4, 2019.

 

(1)

This information is based upon a Schedule 13G/A filed with the SEC on February 11, 2019 by The Vanguard Group, which reports sole voting power with respect to 229,129 shares, shared voting power with respect to 46,929 shares, sole dispositive power with respect to 16,270,857 shares, and shared dispositive power with respect to 272,004 shares.

 

(2)

This information is based upon a Schedule 13G/A filed with the SEC on February 6, 2019 by BlackRock, Inc., which reports sole voting power with respect to 13,732,518 shares and sole dispositive power with respect to 15,773,706 shares as a result of being a parent company or control person of certain subsidiaries.

 

    LOGO  - 2019 Proxy Statement   27


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PRINCIPAL SHAREHOLDERS

 

Security Ownership of Directors and Executive Officers

The following table sets forth, as of June 4, 2019, except as otherwise noted, information regarding ownership of the Company’s outstanding common stock by: (i) all directors and director nominees; (ii) each executive officer named in the 2019 Summary Compensation Table below (collectively, our named executive officers or the “NEOs”); and (iii) all directors, NEOs and executive officers as a group. The table also includes shares of common stock that underlie outstanding RSUs and options to purchase common stock of the Company that either vest or become exercisable within 60 days of June 4, 2019:

 

Name of Individual

 

 

 

Shares of
Common
Stock
Beneficially
Owned(1)

 

   

Percent
of Class

 

 

 

Dominic J. Caruso

 

 

 

 

 

 

1,193

 

 

 (2) 

 

 

 

 

 

 

*

 

 

 

 

 

N. Anthony Coles, M.D.

 

 

 

 

 

 

3,789

 

 

 (2) 

 

 

 

 

 

 

*

 

 

 

 

 

John H. Hammergren

 

 

 

 

 

 

1,094,435

 

 

 (3)(4)(5) 

 

 

 

 

 

 

*

 

 

 

 

 

M. Christine Jacobs

 

 

 

 

 

 

25,261

 

 

 (2) 

 

 

 

 

 

 

*

 

 

 

 

 

Donald R. Knauss

 

 

 

 

 

 

4,714

 

 

 (2) 

 

 

 

 

 

 

*

 

 

 

 

 

Marie L. Knowles

 

 

 

 

 

 

9,342

 

 

 (2) 

 

 

 

 

 

 

*

 

 

 

 

 

Bradley E. Lerman

 

 

 

 

 

 

1,662

 

 

 (2) 

 

 

 

 

 

 

*

 

 

 

 

 

Edward A. Mueller

 

 

 

 

 

 

19,676

 

 

 (2) 

 

 

 

 

 

 

*

 

 

 

 

 

Bansi Nagji

 

 

 

 

 

 

60,043

 

 

 (3) 

 

 

 

 

 

 

*

 

 

 

 

 

Susan R. Salka

 

 

 

 

 

 

6,719

 

 

 (2)(4) 

 

 

 

 

 

 

*

 

 

 

 

 

Lori A. Schechter

 

 

 

 

 

 

86,837

 

 

 (3)(4) 

 

 

 

 

 

 

*

 

 

 

 

 

Brian S. Tyler

 

 

 

 

 

 

133,846

 

 

 (3)(5) 

 

 

 

 

 

 

*

 

 

 

 

 

Britt J. Vitalone

 

 

 

 

 

 

22,739

 

 

 (3)(5) 

 

 

 

 

 

 

*

 

 

 

 

 

Kenneth E. Washington

 

 

 

 

 

 

 

 

 (6) 

 

 

 

 

 

 

*

 

 

 

 

 

All directors, NEOs and executive officers as a group (15 persons)

 

 

 

 

 

 

1,631,791

 

 

 (2)(3)(4)(5) 

 

 

 

 

 

 

*

 

 

 

 

*

Less than 1.0%. The number of shares beneficially owned and the percentage of shares beneficially owned are based on 186,377,093 shares of the Company’s common stock outstanding as of June 4, 2019, adjusted as required by the rules promulgated by the SEC. Shares of common stock that may be acquired by exercise of stock options or vesting of RSUs within 60 days of June 4, 2019 and vested RSUs that are not yet settled are deemed outstanding and beneficially owned by the person holding such stock options or RSUs for purposes of computing the number of shares and percentage beneficially owned, but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person.

 

(1)

Except as otherwise indicated in the footnotes to this table, the persons named have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable.

 

(2)

Includes vested RSUs or common stock units accrued under the 2013 Stock Plan, 2005 Stock Plan, Directors’ Deferred Compensation Administration Plan and the 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan (the receipt of the underlying shares having been deferred) as follows: Mr. Caruso, 1,193 units; Dr. Coles, 3,789 units; Ms. Jacobs, 25,261 units; Mr. Knauss, 4,714 units; Ms. Knowles, 9,342 units; Mr. Lerman, 1,662 units; Mr. Mueller, 19,676 units; Ms. Salka, 4,714 units; and all directors, NEOs and executive officers as a group, 70,351,units. Directors, NEOs and executive officers have neither voting nor investment power with respect to such units

 

(3)

Includes shares that may be acquired by exercise of stock options or vesting of RSUs within 60 days of June 4, 2019, as follows: Mr. Hammergren, 689,903 shares; Mr. Nagji, 55,238 shares; Ms. Schechter, 73,915 shares; Mr. Tyler, 121,446 shares; Mr. Vitalone, 21,155 shares and all directors, NEOs and executive officers as a group, 1,096,484 shares.

 

(4)

Includes shares held by immediate family members who share a household with the named person, by family trusts as to which the named person and his or her spouse have shared voting and investment power, or by an independent trust for which the named person disclaims beneficial ownership as follows: Mr. Hammergren, 400,256 shares; Ms. Salka, 2,005 shares; Ms. Schechter, 10,887 shares; and all directors, NEOs and executive officers as a group, 413,148 shares.

 

(5)

Includes shares held under the Company’s 401(k) Retirement Savings Plan as of June 4, 2019, as follows: Mr. Hammergren, 4,276 shares; Mr. Tyler, 208 shares; Mr. Vitalone, 533 shares; and all NEOs and executive officers as a group, 5,298 shares.

 

(6)

Dr. Washington is included in this table as a director nominee.

 

28   LOGO  - 2019 Proxy Statement    


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EXECUTIVE COMPENSATION

 

A Letter from Our Compensation Committee    30
Overview    31
     FY 2019 Performance Highlights    31
     FY 2019 — A Year of Transition and Transformation    31
     Responding to Shareholders; Evolving Pay Practices    33
     Best Practices in Compensation Governance    34
     Target Direct Compensation Mix    35
     FY 2019 Pay Elements and Performance Metrics    35
     Looking Forward to FY 2020    36
Performance-Based Program with Rigorous Targets    37
     Performance Targets Designed to Reward Stretch Performance    37
Each Compensation Element Serves A Unique Purpose    38
     Annual Compensation    38
    

Base Salary

   38
    

Management Incentive Plan (Annual Cash Incentive)

   38
     Long-Term Incentive Compensation    40
    

Performance Stock Unit Program (Long-Term Equity Incentive)

   40
    

Stock Options (Long-Term Equity Incentive)

   42
    

Cash Long-Term Incentive Plan (Long-Term Cash Incentive)

   42
    

Performance Restricted Stock Unit Program (Long-Term Equity Incentive)

   43
     Other Compensation and Benefits    44
Compensation Peer Group    45
     Peer Selection Process    45
     FY 2019 Compensation Peer Group and How We Used the Data    45
Independent Review Process    47
     Role of Independent Compensation Consultant and Legal Counsel    48
     Role of Management    48
Information on Other Compensation-Related Topics    48
     Severance and Change in Control Benefits    48
     Stock Ownership Policy    49
     Insider Trading Policy    49
     Anti-Hedging and Pledging Policy    49
     Equity Grant Practices    49
     Tax Deductibility and Considerations for Compensation Design    50
     Compensation Recoupment Policy    50
     Supplemental Death Benefits    51
     Excise Tax Gross-Up Policy    51
Compensation Committee Report on Executive Compensation    51
Compensation Committee Interlocks and Insider Participation    51
Executive Compensation Tables and Narratives    52
     2019 Summary Compensation Table    52
     2019 Grants of Plan-Based Awards Table    54
     2019 Outstanding Equity Awards Table    56
     2019 Option Exercises and Stock Vested Table    57
     2019 Pension Benefits Table    58
     2019 Nonqualified Deferred Compensation Table    58
     Hammergren Employment Agreement and Retirement    60
     Executive Severance Policies    62
     Potential Payments upon Termination or Change in Control    63
     CEO Pay Ratio    66

 

    LOGO  - 2019 Proxy Statement   29


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EXECUTIVE COMPENSATION

 

A Letter from Our Compensation Committee

 

Dear Fellow Shareholders,

As members of McKesson’s Compensation Committee, we endeavor to create an executive compensation program that strikes the right balance of pay for performance; attracts and retains an exceptionally talented executive team; and steers McKesson’s leadership to meet ambitious goals without taking undue risk. This framework was of particular importance in FY 2019, which was a year of transition and transformation for the Company, in light of changes made to both our senior management team and our Board. The committee recognizes that as McKesson continues to evolve, our executive compensation programs have been, and will continue to be, essential to our ongoing success through this period of meaningful change.

Our refreshed Compensation Committee brought new perspectives. In 2018, we approved a number of changes to the composition and leadership of our committee. As part of this refreshment, Dr. Coles assumed the role of Committee Chair, and Mr. Lerman and Ms. Salka joined the Committee as new members. Over the past 12 months, we dedicated significant time and effort to thoroughly review the Company’s executive compensation structure amidst our leadership transition and based on shareholder feedback received during the course of our ongoing engagement efforts.

We implemented a number of changes and decisions to support the Company’s transformation. In FY 2019, we:

 

   

Continued decreasing reported CEO pay by reducing Mr. Hammergren’s target long-term incentive (“LTI”) compensation by $4.7 million;

 

   

Approved one-time incentive awards to select executive officers, excluding Mr. Hammergren, in order to facilitate a successful leadership transition, enhance our competitive position, strengthen retention of key executives with skills critical to our strategic growth initiative, and create alignment with our shareholders on both the upside and downside, as more fully described on pages 32-33 of this proxy statement; and

 

   

Reinforced and codified our long-standing practice of considering regulatory, compliance and legal issues when making executive compensation decisions, by revising our annual governance checklist to incorporate these considerations as a formal agenda item at appropriate committee meetings.

More recently, we made several changes to the compensation program for FY 2020 that are intended to promote a focus on operational objectives and drive sustained shareholder value creation. These changes, which are described on page 36, include:

 

   

Rebalancing our Management Incentive Plan (annual cash incentive) to be more aligned with the design of our current business unit bonus programs; and

 

   

Simplifying our LTI compensation program by eliminating stock options and cash long-term incentive awards, which are being replaced with restricted stock units to provide stability and retention.

We conducted a substantial shareholder outreach effort that included the committee Chair and management. This effort involved meeting with shareholders representing over 39% of the Company’s outstanding common stock. We had robust discussions, many including our Chair, in which we listened to your views and shared our perspectives. We also heard your support for retaining our management team, and making targeted changes to the program that would be meaningful to you. The range of views we encountered and the thoughtful dialogue reminded us of the debates that we have within our boardroom, where a diversity of voices helps to identify the right path forward.

We believe the evolution of our program is consistent with your input and ensures that our leadership team is aligned with our strategic goals. We worked diligently to implement changes that we believe are in the best interests of our shareholders as a group and allow us to retain our executive team. We have great confidence in the abilities of our new CEO and the entire leadership team at McKesson to continue to execute against our strategic growth initiative. We look forward to maintaining ongoing dialogue with our shareholders as we guide McKesson through our next era.

Our committee is and will remain committed to the ongoing evaluation and improvement of our executive compensation program, informed by an ongoing discussion with you. We look forward to continuing the dialogue and encourage you to reach out with any questions or concerns related to our program before making your voting decision. Thank you for your investment in McKesson.

The Compensation Committee,

N. Anthony Coles, M.D., Chair

Bradley E. Lerman

Edward A. Mueller

Susan R. Salka

 

30   LOGO  - 2019 Proxy Statement    


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EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

The Compensation Discussion and Analysis describes McKesson’s executive compensation program and reviews compensation decisions for our CEO and CFO, and our three other most highly compensated executive officers, all of whom were serving as of March 31, 2019 (collectively, our Named Executive Officers or “NEOs”). Mr. Hammergren served as our CEO for all of FY 2019 and retired from the Company effective March 31, 2019. For FY 2019, our NEOs and their respective titles were as follows:

 

 

  Name

 

 

 

Title

 

  John H. Hammergren

 

Chairman of the Board and Chief Executive Officer

  Britt J. Vitalone

 

Executive Vice President and Chief Financial Officer

  Brian S. Tyler

 

President and Chief Operating Officer

  Lori A. Schechter

 

Executive Vice President, General Counsel and Chief Compliance Officer

  Bansi Nagji

 

 

Executive Vice President, Chief Strategy and Business Development Officer

 

Overview

 

FY 2019 Performance Highlights

In FY 2019, we delivered adjusted operating results that were in line with our expectations at the enterprise level and across most of our business units. We focused on execution and operational excellence, and invested to enhance our ability to deliver value to our manufacturer partners, our customers, and patients. In addition, the acquisition of Medical Specialties Distributors (MSD) supported two of the Company’s strategic growth pillars – manufacturer services and specialty – and contributed in an accretive way to our FY 2019 Medical-Surgical business results. Most importantly, we positioned ourselves to lead in areas of patient care delivery that present powerful new growth opportunities. Our announced strategic growth initiative, which included a review of our organizational structure, articulates a bold path for McKesson, and we are poised for the next significant wave of healthcare innovation.

 

 

LOGO

In our discussion of executive compensation throughout this proxy statement, we refer to adjusted earnings per share (“Adjusted EPS”), Adjusted Operating Cash Flow (“Adjusted OCF”) and Free Cash Flow (“FCF”) as performance metrics specifically used in our incentive programs. In Appendix A to this proxy statement, we provide reconciliations from earnings per share and operating cash flow calculated in accordance with generally accepted accounting principles (“GAAP”) to the above non-GAAP metrics used in calculating performance under our incentive plans. A description of ROIC, a non-GAAP metric, can be found on page 42 of this proxy statement.

FY 2019 — A Year of Transition and Transformation

Leadership Transition

Last fall, the Board commenced an orderly leadership transition following Mr. Hammergren’s decision to retire from his roles as Chief Executive Officer and Chairman of the Board of Directors, effective as of March 31, 2019. On April 1, 2019, Mr. Tyler, previously our President and Chief Operating Officer, became Chief Executive Officer and joined the Board. The appointment of Mr. Tyler, a 22-year veteran of McKesson who has led multiple McKesson businesses and strategy, in addition to serving as President and Chief Operating Officer, enables leadership continuity at an important time.

Mr. Tyler’s experience has provided him with the optimal background and perspective to lead McKesson’s current strategic initiatives and continue to drive long-term growth in the future. As a result of the thoughtful succession planning process, the Board believes we have the right leadership team in place to continue to drive long-term shareholder value creation.

 

    LOGO  - 2019 Proxy Statement   31


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EXECUTIVE COMPENSATION

 

Business Strategy and Key Initiatives

In April 2018 we launched a strategic growth initiative focused on creating innovative solutions that improve patient care delivery and drive incremental profit growth. The initiative comprises multiple growth pillars and operational and cost structure enhancements designed to increase efficiency, accelerate execution and improve long-term performance. McKesson’s growth priorities include expanded supply chain and commercialization services for pharmaceutical and medical supply manufacturers; enhanced solutions for the rapidly growing specialty pharmaceutical market; and new offerings that will strengthen and expand the role of retail pharmacy in patient care delivery. These growth priorities are all supported by our ongoing investments in data and analytics capabilities.

 

 

LOGO

In FY 2019, we acquired Medical Specialties Distributors, a leading national distributor of infusion and medical-surgical supplies as well as biomedical services to alternate site and home health providers, which supports two of the Company’s strategic growth pillars – manufacturer services and specialty – and complements the Company’s existing low-cost site of care infusion platform. In addition, we made progress on evolving our operating structure with particular emphasis in the areas of finance, technology, human resources and indirect spend. These actions included the adoption of disciplined and rigorous internal spend guidelines across the enterprise; transitioning several business unit functional and back-office services to a more centralized hub model, leveraging outsourcing and technology; and accelerating technology adoption, including increasing the use of robotics processing automation, artificial intelligence, and data and analytics to deliver more efficient and accurate service and output.

Incentive Awards to Drive Successful Strategic Execution

To incentivize execution on our growth initiative and ensure leadership continuity through Mr. Hammergren’s retirement, in FY 2019 our Compensation Committee approved one-time incentive awards to select executive officers, excluding Mr. Hammergren. The Board believed that this award would provide a compensation opportunity that would encourage our executive team to successfully execute on our growth initiative to drive long-term shareholder value while also ensuring continuity at the highest level of the Company.

These incentive awards were designed to focus our leadership team on executing on initiatives that will drive Adjusted Operating Profit (“AOP”), which over the long term is expected to drive the value of our shares. In Appendix A to this proxy statement, we have included the definition of AOP that we will use for purposes of these awards. The Compensation Committee selected incremental cumulative AOP as the sole metric because it would focus the executive team on driving operational performance and profitability. The awards also enhance our competitive position and strengthen retention of key executives with skills critical to our growth initiative. The awards are divided equally between performance stock units (“PSUs”) with a performance period of three years and total vesting period of four years, and restricted stock units (“RSUs”) that will vest 100% in November 2021.

PSUs will be earned based on performance against incremental cumulative AOP goals that are over and above profit targets already established in our long-range plan for the period of FY 2019 through FY 2021. Therefore, the PSUs will not pay out at all unless significant stretch performance is achieved. Key terms of the PSU awards are described and illustrated below. The aggregate grant date value of each such incentive awarded to Mr. Vitalone, Ms. Schechter and Mr. Nagji is $5 million. The aggregate grant date value of Mr. Tyler’s incentive award is $6 million, granted to him in May 2018 when he was president of a business unit and not yet a Named Executive Officer.

 

32   LOGO  - 2019 Proxy Statement    


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EXECUTIVE COMPENSATION

 

 

 

Key PSU Terms

 

Performance Goal In Excess of Long-Range Plan

Threshold-level PSU vesting occurs only if the incremental cumulative AOP contribution for the period exceeds $0.4B.

 

 

Rigorous Three-Year AOP Goals; Four-Year Total Vesting

PSU vesting requires performance against rigorous incremental cumulative AOP goals for the FY 2019 FY 2021 period. One-half of earned PSUs are paid at the end of the performance period, and the remaining one-half of earned PSUs are paid after an additional year of service.

 

Absolute TSR Cap on Payouts

If positive absolute TSR is not achieved over the performance period, PSU awards will not pay out above target.

 

 

Self-Funding Awards

Incremental cumulative AOP will be calculated net of costs associated with the incentive awards.

 

 

 

LOGO

Responding to Shareholders; Evolving Pay Practices

Responding to the 2018 Say-on-Pay Vote

We were pleased that our 2018 say-on-pay proposal was approved by shareholders representing 86% of the shares voted on the proposal at the 2018 Annual Meeting of Stockholders. Nevertheless, after Dr. Coles assumed the role of Chair and Mr. Lerman and Ms. Salka joined the committee, the Compensation Committee undertook a thorough review of the Company’s executive compensation structure, examining and discussing all aspects of the program during a time of Company transformation and leadership transition. In doing so, they took into account many sources of shareholder feedback, including recent say-on-pay votes as well as views gathered during our year-round shareholder outreach program.

Shareholder Engagement

As we do every year, our Board undertook a significant engagement effort to receive feedback from shareholders regarding our executive compensation program and other matters of importance to the Company and our shareholders. During FY 2019 our Shareholder Engagement team sought feedback from our top shareholders representing over 39% of the Company’s outstanding common stock (see pages 6-7 for a description of our shareholder engagement program, feedback we have received and responsive actions taken across a range of topics, including compensation). Our shareholders’ views on executive compensation and corporate governance are important to us, and we value and utilize their feedback and insights. The Board and its committees regularly discuss and consider the feedback we receive from investors through this engagement process, as well as the outcome of the annual advisory vote on executive compensation. As we continue to execute on our transformation, we look forward to ongoing shareholder engagement, including dialogue focused on our executive compensation program and corporate governance practices.

 

    LOGO  - 2019 Proxy Statement   33


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EXECUTIVE COMPENSATION

 

Continued Evolution of Executive Pay

CEO FY 2019 Target LTI Lowered by $4.7 million. As highlighted in the table below, Mr. Hammergren’s target LTI opportunity was reduced by $4.7 million for FY 2019. This represented a 32% decrease in target LTI compared to FY 2018, and is in addition to the 30% decrease in reported CEO pay over the prior five fiscal years. The decision to reduce Mr. Hammergren’s FY 2019 target LTI opportunity was made in connection with the Company’s regular annual grants in May 2018, taking into account shareholder engagement throughout FY 2018. We believe this change directly addresses shareholder feedback concerning the overall magnitude of Mr. Hammergren’s pay.

 

CEO Target Long-Term Incentives
   Fiscal Year   

PSU Target

($)

  

Option Grant Value

($)

  

Cash LTIP Target(1)

($)

  

Total Target LTI  

($)

  2019    5,000,155    3,000,034    2,000,000    10,000,189
  2018    7,369,248    4,422,022    2,948,000    14,739,270
  2017    5,896,178    5,896,024    2,947,000    14,739,202

 

(1)

The Cash Long-Term Incentive Plan (“Cash LTIP”) is disclosed in the Grants of Plan-Based Awards Table at target (and maximum) in the year of grant, and the actual payout is disclosed in the Summary Compensation Table for the year in which the performance period ends. The 2019 Summary Compensation Table does not fully reflect the decrease in target LTI because of the difference in how cash and equity long-term incentives are disclosed.

Recent Program Design Changes. In addition to the significant reduction in Mr. Hammergren’s target LTI, the following changes to our program design, consistent with our pay-for-performance philosophy, have been made over the last two years:

 

   

For FY 2019, we increased the weighting of rTSR in Mr. Hammergren’s PSU award to 75% (from 25%; PSU is 50% of total target LTI);

   

Effective in FY 2018, we eliminated the individual modifier for executive officers;

   

Effective in FY 2018, we reduced MIP maximum payout to 200% of target for executive officers; and

   

Effective in FY 2018, we increased PSUs to 50% (from 40%) of total target LTI for executive officers.

We also note the following regarding Mr. Hammergren’s compensation:

 

   

Pay as disclosed in the 2019 Summary Compensation Table is down 30% over the past five years;

   

Base salary remained unchanged since May 2010 (ninth consecutive year); and

   

Target annual MIP award remained unchanged since May 2008 (eleventh consecutive year).

Best Practices in Compensation Governance

 

 

What We Do

 

 

 

Pay for performance

 

     

 

 

Engage with investors

 

 

 

Emphasize long-term performance

 

     

 

 

Align with business strategy

 

 

 

Design with mix of metrics

 

     

 

 

Balance annual and long-term metrics

 

 

 

Develop sound financial goals

 

     

 

 

Engage independent advisors

 

 

 

Manage use of equity incentive plan conservatively

 

     

 

 

Maintain robust compensation recoupment policy

 

 

 

Use double-trigger vesting provisions

 

     

 

 

Review tally sheets

 

 

 

Maintain rigorous stock ownership guidelines

 

   

 

 

Mitigate undue risk

 

 

What We Don’t Do

 

 

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Allow directors and executive officers to hedge or pledge Company securities

 

     

 

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Enter into new agreements with executive officers providing for golden parachute tax gross-ups

 

 

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Re-price or exchange stock options without shareholder approval

 

 

     

 

 

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Accrue or pay dividend equivalents during performance periods

 

 

 

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Provide tax gross-ups on perquisites for executives, except in the case of certain business-related relocation expenses

 

     

 

 

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Pay above-market interest on deferred compensation

 

 

34   LOGO  - 2019 Proxy Statement    


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EXECUTIVE COMPENSATION

 

Target Direct Compensation Mix

Our executive compensation program is predominantly performance-based. As an executive’s ability to impact operational performance increases, so does the proportion of at-risk compensation. Target LTI grows proportionately as job responsibilities increase, which encourages our officers to focus on McKesson’s long-term success and aligns with the long-term interests of our shareholders. The graphics below illustrate the mix of fixed, annual and long-term target incentive compensation we provided to our CEO and other NEOs for FY 2019. These graphics also illustrate the amount of target direct compensation tied to achievement of performance goals.

 

FY 2019 CEO Compensation Mix   FY 2019 Other NEOs Compensation Mix

 

 

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(1)

Mr. Tyler received PeRSUs in FY 2019 because he was not an executive officer when PSU awards were granted in May 2018. Upon his promotion to President and Chief Operating Officer effective August 2, 2018, Mr. Tyler was granted PSUs for the FY 2019 — FY 2021 performance period, which are in addition to his FY 2019 PeRSUs.

FY 2019 Pay Elements and Performance Metrics

The metrics below incentivize our executives to focus on operational objectives which are expected to drive shareholder value. Our FY 2019 incentive metrics were determined by the Compensation Committee in May 2018. All incentives are performance-based, and all LTI awards have performance or vesting periods of at least three years.

 

Pay Element

 

 

 

  

 

  

 

Performance
Metric

 

  

Rationale

 

  

Target Pay

 

                    
Base Salary        

Attracts and retains high-performing executives by providing market-competitive fixed pay

 

  
                         
                    

Management Incentive Plan

(annual cash incentive)

    

 

Adjusted EPS

(75%)

  

 

Rewards operational performance and bottom line profitability; shareholders’ primary valuation component

 

   100% - 150% of Base Salary
    

Adjusted OCF

(25%)

  

 

Measures the ability to translate earnings to cash which fuels our capital deployment with a goal of maximizing shareholder returns

 

                         
                    
                    

Performance Stock Units

(long-term equity incentive)

    

 

3-Year Cumulative Adjusted EPS

(25% for CEO; 75% for other NEOs)

 

   Measures long-term earnings power, drives returns for the Company and directly correlates to share price performance    50% of Target LTI Value
    

 

 

MCK TSR vs. S&P 500 Health Care Index

(75% for CEO; 25% for other NEOs)

   Rewards relative performance against peers over time
                    
                       
                    
Stock Options      Stock Price   

Aligns directly with value delivered to shareholders

 

  

 

30% of Target LTI Value

 

 

                       
                    
Cash Long-Term
Incentive Plan
    

 

3-Year Cumulative Adjusted OCF

(75%)

 

  

 

Measures effective management of working capital and cash generation over a multi-year period to return value to shareholders

 

   20% of Target LTI Value
    

 

3-Year Average ROIC (25%)

  

 

Encourages leaders to make sound investments that generate strong returns for shareholders

 

                         

 

    LOGO  - 2019 Proxy Statement   35


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EXECUTIVE COMPENSATION

 

Looking Forward to FY 2020

Brian Tyler’s FY 2020 Compensation. In connection with Mr. Tyler assuming the role of CEO, the Compensation Committee approved changes to his compensation, all of which became effective April 1, 2019. Mr. Tyler’s FY 2020 target direct compensation is $13,000,000. His annual base salary is $1,250,000, his target annual bonus opportunity is 150% of salary, and his annual target LTI, all in the form of PSUs and RSUs, is $9,875,000.

FY 2020 Executive Compensation Program Design Changes. During FY 2019, several changes were made to refresh the composition of the Compensation Committee. Thereafter, the newly comprised committee spent significant time and effort reviewing our executive compensation program to ensure it is appropriately serving the needs of our Company and shareholders, and would continue to effectively incentivize our executives to achieve the goals of our growth initiative. In its review, the Compensation Committee considered factors such as market data, emerging best practices, incentive and retentive value of awards, the recommendation of its independent compensation consultant and shareholder feedback.

After this comprehensive and thorough review process, the Compensation Committee made the following changes to the annual and long-term incentive programs, effective for FY 2020:

 

   

Annual Cash Incentive: Added Adjusted Operating Profit as a metric at 25% weighting, and replaced Adjusted Operating Cash Flow with Free Cash Flow; for FY 2020, the metrics under this plan are Adjusted EPS (50%), Adjusted Operating Profit (25%) and Free Cash Flow (25%).

 

   

Long-term Incentives: Eliminated stock options and the Cash LTIP from the LTI award mix, and added three-year ratable vesting RSUs. Awards will be delivered 60% in the form of PSUs and 40% in the form of RSUs. PSUs will be earned based on three-year Cumulative Adjusted EPS (50%), three-year average return on invested capital (“ROIC”) (25%) and relative TSR measured against a comparator group (25%).

 

 

LOGO

The Compensation Committee believes these changes will drive additional focus on operational objectives which are expected to drive sustained shareholder value creation. In addition, the elimination of stock options and Cash LTIP from LTI awards simplifies the overall program, which facilitates understanding for participants and shareholders, and balances the need for both retention and shareholder alignment.

 

Pay Element

 

 

 

  

 

  

 

FY 2020 Metric

 

  

 

Weight

 

  

Rationale

 

          

Management Incentive Plan

(annual cash incentive)

    

 

Adjusted EPS

  

50%

  

 

Rewards operational performance and bottom line profitability; shareholders’ primary valuation component

 

    

 

Adjusted Operating Profit

 

  

 

25%

 

  

 

Rewards focus on operational performance and profitability

 

    

 

Free Cash Flow

  

 

25%

  

 

Rewards generating cash to invest in growth and return capital to shareholders; important valuation metric

 

                    
                         
                    

Performance Stock Units

(long-term equity incentive)

    

 

 

3-Year Cumulative Adjusted EPS

 

 

  

 

 

50%

 

  

Measures long-term earnings power, drives returns for the Company and directly correlates to share price performance

 

    

 

 

 

3-Year Average ROIC

 

 

  

 

 

 

25%

 

 

   Encourages leaders to make sound investments that generate strong returns for shareholders
    

 

 

MCK TSR vs.

 

Comparator Group

  

 

 

 

 

25%

  

 

Rewards relative performance against peers over time

                    
                       
                    

Restricted Stock Units

    

  

  

Directly aligns with value delivered to shareholders

 

                         

 

36   LOGO  - 2019 Proxy Statement    


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EXECUTIVE COMPENSATION

 

Performance-Based Program with Rigorous Targets

 

Performance Targets Designed to Reward Stretch Performance

Each year the Compensation Committee establishes performance goals to drive operational performance and TSR growth. The committee reviews and challenges performance targets for all our corporate incentive plans to motivate our leaders to deliver a high degree of business performance while encouraging prudent risk-taking. We structure performance-based compensation to reward an appropriate balance of short-term and long-term financial and strategic business results, with an emphasis on managing the business for long-term results. Targets are set after a rigorous planning process that considers McKesson’s business objectives, the competitive environment and several external factors. The committee also considers growth expectations for our competitors, as well as the market outlook for our industry.

 

 

 

Key Considerations in Development of Annual and Long-Term Goals

 

    

External Factors

 

  Competitive Environment   McKesson’s Objectives
   

 

  Analyst & Shareholder Expectations

 

  Market Outlook

 

  International Trends

 

  Tax Policy

 

  Public Policy

 

 

  Competitor Performance

 

  Competitor Plans

 

  Competitive Landscape

 

  Market Growth

 

  Industry Trends

 

 

  Historical Performance and Trends

 

  Long-Range Planning

 

  Capital Deployment Opportunities

 

  Recent Capital Deployment Decisions

 

  Long-Range Corporate Strategy

Target Setting for Annual Plans

We set rigorous annual goals based on Company and industry outlook for the year, historical and projected growth rates for McKesson and its peers, and performance expectations from equity research analysts. The annual incentive plan is aligned with the Company’s annual operating plan and is designed so that target payout requires achievement of a high degree of business performance without encouraging excessive risk-taking. Financial goals for our annual plans include capital deployment considerations, including acquisition activity. The Company’s annual operating and three-year strategic plans serve as the basis of the annual forward earnings guidance we communicate to investors. The annual operating plan builds on the prior year’s results and is based on the anticipated business environment. Our projected earnings growth reflects market conditions that affect our peer group and analyst forecasts. Cash flow goals are set by focusing on working capital efficiency and reviewing operating plans by business unit.

We entered FY 2019 with anticipated significant headwinds, including loss of customers in our U.S. Pharmaceutical business and challenges in our UK and Canadian businesses driven by reductions in government reimbursement rates, which the Company anticipated to offset with contribution from capital deployment and organic growth. The FY 2019 Adjusted EPS target for our annual cash incentive was 5.6% higher than the Adjusted EPS result used for FY 2018 annual cash incentive payouts and assumed year-over-year performance in line with analyst projections. Our FY 2019 operating cash flow projections were lower versus FY 2018 due to outperformance in FY 2018 primarily driven by timing, as well as the impact of a customer loss. Consistent with prior years, our FY 2019 targets considered public policy as well as competitors’ publicly disclosed projected performance.

Target Setting for Long-Term Plans

The Company’s three-year plan considers business strategies that will take longer than 12 months to accomplish and reflects capital deployment, including projected acquisitions, along with other external, public policy and competitive risks, opportunities and challenges. Our Cash Long-Term Incentive Plan was aligned with our rolling three-year strategic plan and was designed so that a target payout requires achievement of stretch operational and financial goals. Our FY 2017 — FY 2019 PSU awards were based on TSR performance relative to the S&P 500 Health Care Index and three-year cumulative Adjusted EPS. For that portion of the award tied to rTSR performance, payout at target level continues to require above-median performance at the 55th percentile. In addition, the number of shares earned for the rTSR portion of the award is capped at the target amount if absolute TSR is negative during the three-year period. The Compensation Committee chose cumulative Adjusted EPS as a metric because it serves as an operational metric – including operating profit growth, tax strategy and capital deployment – that directly correlates to share price performance. Cumulative adjusted EPS also is the primary metric underpinning our guidance to investors. No shares are earned for the rTSR portion of the award if rTSR for the three-year period falls below the 35th percentile.

Integration of Regulatory, Compliance and Legal Considerations

In 2018, the Compensation Committee codified its long-standing practice of considering regulatory, compliance and legal issues when making compensation decisions. The Compensation Committee carefully considered the work that was done to address regulatory and legal aspects of McKesson’s business during FY 2019. The committee has integrated those considerations into our compensation decisions. The Board’s newly formed Compliance Committee is actively engaged in monitoring legal and compliance risks, and is working closely with the Company, to ensure a culture of integrity.

 

    LOGO  - 2019 Proxy Statement   37


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EXECUTIVE COMPENSATION

 

Each Compensation Element Serves A Unique Purpose

 

Our executive compensation program seeks to motivate and reward our executive officers to meet and exceed challenging business goals and deliver sustained performance growth. McKesson’s executive compensation program consists of four compensation elements that each serve a unique purpose. We provide three direct compensation elements: base salary, annual cash incentive and long-term incentives. The fourth element consists of other compensation and benefits (e.g., limited perquisites, severance and change in control benefits). Our incentive plans incorporate metrics that we believe are the key measures of our success and will drive long-term shareholder returns.

We focus on Adjusted EPS in our incentive plans because earnings is one of the principal measures used by investors to assess financial performance, and it is a central component of our guidance to investors. Adjusted EPS aligns our executives’ interests with the broader set of strategic objectives they are tasked to manage, keeping enterprise value and shareholder interests at the forefront of management decisions on both a short-term and long-term basis. Accordingly, Adjusted EPS is included as a key component of both our annual and long-term incentives.

Cash flow is important to our value creation because it provides the fuel to invest in the growth of our business and return capital to shareholders. We grow our earnings by putting the cash we generate to work. Thoughtful, efficient use of cash supports our portfolio approach to capital deployment. Accordingly, we use return on invested capital as a metric to encourage our leaders to make sound investments that will generate strong future returns for our shareholders.

Annual Compensation

Annual compensation is delivered in cash with a substantial portion at risk and contingent on the successful accomplishment of pre-established performance targets.

 

       Base Salary

Base salary is the only fixed component of our executive officers’ total cash compensation and is intended to provide market-competitive pay to attract and retain executives. Following a review of target direct compensation components and competitive market data derived from our Compensation Peer Group, during FY 2019 the Compensation Committee approved base salary increases for all of our NEOs other than our CEO. Mr. Hammergren’s base salary remained unchanged since 2010.

The table below summarizes base salary decisions for our NEOs:

 

 Name

  

 

FY 2018 Annual Base 
Salary

($)

  

 

FY 2019 Annual Base 
Salary

($)

 

John H. Hammergren

    

 

 

 

1,680,000

 

    

 

 

 

1,680,000

 

 

Britt J. Vitalone

    

 

 

 

750,000

 

    

 

 

 

780,000

 

 

Brian S. Tyler(1)

    

 

 

 

 

    

 

 

 

1,000,000

 

 

Lori A. Schechter

    

 

 

 

775,000

 

    

 

 

 

800,000

 

 

Bansi Nagji

    

 

 

 

735,000

 

    

 

 

 

760,000

 

  (1)

Mr. Tyler was not an executive officer on April 1, 2018, the start of FY 2019.

 

 

       Management Incentive Plan

 

Overview. The Management Incentive Plan (“MIP”) is our corporate annual cash incentive plan. MIP awards are conditioned on the achievement of Company financial and operational performance goals. Mr. Hammergren’s target MIP award, which is expressed as a percentage of base salary, remained unchanged since May 2008. The maximum MIP payout for executive officers is 200% of target. MIP financial and operational goals are established each May, shortly after the beginning of the fiscal year. In connection with his promotion to the positions of President and Chief Operating Officer, the Compensation Committee increased Mr. Tyler’s MIP target opportunity for the remainder of FY 2019 to 125% of his annual salary.

FY 2019 MIP Performance Metrics. In May 2018, the Compensation Committee selected Adjusted EPS and Adjusted OCF as financial metrics for FY 2019 MIP, the same metrics used for the prior fiscal year, because they are key areas of focus to drive our near-term success and advance our long-term strategy. The following summarizes the FY 2019 MIP performance metrics:

 

   

Adjusted EPS. Adjusted EPS is an important driver of share price valuation and shareholder expectations and determined 75% of the payout. The Compensation Committee applied an Adjusted EPS result of $12.43 for purposes of calculating FY 2019 MIP payouts. A related metric, three-year Cumulative Adjusted EPS, is used as a metric for Performance Stock Units. Adjusted EPS is highly relevant in both short- and long-term contexts, and the Compensation Committee believed it was useful to measure Adjusted EPS across both periods, with greater economic opportunity in the long-term portion of the program to ensure that short-term gains are not sought at the expense of long-term

 

38   LOGO  - 2019 Proxy Statement    


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EXECUTIVE COMPENSATION

 

 

performance. Adjusted EPS targets and results exclude the effects of our equity investment in Change Healthcare. See Appendix A to this proxy statement for a reconciliation of diluted earnings per share from continuing operations as reported under U.S. generally accepted accounting principles (“GAAP”) to the Adjusted EPS result used for incentive payout purposes.

 

   

Adjusted OCF. Adjusted Operating Cash Flow fuels our portfolio approach to capital deployment and determines 25% of the award. For purposes of calculating FY 2019 MIP payouts, the Compensation Committee approved an Adjusted OCF result of $4,036 million. The committee applied this result when determining FY 2019 MIP payouts to all MIP participants. A related metric, three-year Cumulative Adjusted OCF, is used as a metric for our Cash Long-Term Incentive Plan. Adjusted OCF is highly relevant in both short- and long-term contexts, as it measures effective generation and management of cash. The Compensation Committee believed it was useful to measure Adjusted OCF across both periods. Our FY 2019 operating cash flow projections were lower versus the prior year due to outperformance in FY 2018 primarily driven by timing, as well as the impact of a customer loss. See Appendix A to this proxy statement for a reconciliation of operating cash flow as reported under U.S. GAAP to the Adjusted OCF result used for incentive payout purposes.

The following summarizes the FY 2019 MIP payout formula. As is the case for all of the Company’s performance-based payout scales, when a result falls between reference points, we use linear interpolation to determine the result.

 

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The table below summarizes MIP payouts to our NEOs for FY 2019:

 

 

Name

 

Eligible

Earnings

($)

 

 

X

 

MIP Target

(%)

 

 

=

 

MIP
Target
Award

($)

 

 

X

  (  

Adjusted

EPS Result

(%)

75% Weight

 

 

+

 

Adjusted

OCF Result

(%)

25% Weight

  )  

 

X

 

Individual

Modifier(1)

 

 

 

=

 

Payout

($)

    

 

 John H. Hammergren

 

 

1,680,000

   

 

150%

   

 

2,520,000

     

 

103%

   

 

109%

     

 

133%

   

 

3,485,664

 

 

 

 Britt J. Vitalone

 

 

775,000

   

 

100%

   

 

775,000

     

 

103%

   

 

109%

     

 

N/A

   

 

806,000

 

 

 Brian S. Tyler(2)

 

 

929,375

   

 

115%

   

 

1,068,781

       

 

97.6%

       

 

N/A

   

 

1,043,131

 

 

 Lori A. Schechter

 

 

795,833

   

 

100%

   

 

795,833

     

 

103%

   

 

109%

     

 

N/A

   

 

827,667

 

 

 Bansi Nagji

 

 

755,833

     

 

100%

     

 

755,833

         

 

103%

     

 

109%

         

 

N/A

     

 

786,067

   

 

(1)

Consistent with the terms of his employment agreement, as last amended in 2008, Mr. Hammergren’s final MIP payout includes an individual modifier equal to his average MIP individual modifier over the prior three fiscal years. The individual modifier was eliminated for our executive officers beginning with the FY 2018 MIP.

 

(2)

Mr. Tyler’s MIP target and performance results were prorated and blended to reflect the roles he held over the entire fiscal year.

FY 2020 MIP Performance Metrics. As described above at “Looking Forward to FY 2020,” the Compensation Committee made changes to MIP performance metrics following a rigorous and comprehensive review of the entire executive compensation program. The committee added Adjusted Operating Profit as a metric at 25% weighting and replaced Adjusted Operating Cash Flow with Free Cash Flow; the metrics under the plan for FY 2020 are Adjusted EPS (50%), Adjusted Operating Profit (25%) and Free Cash Flow (25%). The committee believes that the new set of metrics will more effectively drive behavior that results in value creation.

 

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EXECUTIVE COMPENSATION

 

Long-Term Incentive Compensation

Long-term incentive (“LTI”) compensation is a critical component of our executive compensation program. It is in our shareholders’ interests that our executives foster a long-term view of the Company’s financial results. Long-term incentives are also an important retention tool that management and the Compensation Committee use to align the financial interests of executives and other key contributors with sustained shareholder value creation.

For FY 2019, the Company’s LTI compensation program for NEOs included three award opportunities:

 

   

Performance Stock Units are performance-based awards paid in shares (50% of target LTI value);

 

   

Stock Options are time-vested equity grants (30% of target LTI value); and

 

   

Cash LTIP is performance-based cash (20% of target LTI value).

As described above at “Looking Forward to FY 2020,” the Compensation Committee made changes to the mix of vehicles under the Company’s LTI compensation program in order to better incentivize value-creating behaviors, simplify the program, and provide for a more effective balance of retention and shareholder alignment. The committee made these decisions after considering factors such as market data, emerging best practices, incentive and retentive value of awards, the recommendation of its independent compensation consultant and shareholder feedback. For FY 2020, executive officers’ LTI compensation program includes two award vehicles:

 

   

Performance Stock Units (60% of target LTI value)

 

   

Restricted Stock Units (40% of target LTI value)

 

       Performance Stock Unit Program

 

Overview. The PSU program is a long-term equity incentive program conditioned in part on the achievement of the Company’s total shareholder return relative to a comparator group. PSU performance goals and the target awards for our executive officers are established each May, shortly after the beginning of the fiscal year. Awards are earned over a three-year period with a new three-year performance period beginning each year.

FY 2017 — FY 2019 PSU Performance Metrics. In May 2016, the Compensation Committee established total shareholder return relative to the S&P 500 Health Care Index and Cumulative Adjusted EPS as the performance metrics for FY 2017 — FY 2019 PSU payouts.

 

   

Total Shareholder Return. Total Shareholder Return (“TSR”) is calculated as stock price appreciation (or reduction) over the performance period, including reinvestment of dividends when paid, divided by the stock price at the beginning of the period. At the end of the performance period, performance is determined by ranking the Company’s TSR against the TSR of the companies in the index. Upon certification of the result, participants receive shares of Company common stock if the performance threshold is met. For FY 2017 — FY 2019, the Company had to achieve performance at the 35th percentile relative to the S&P 500 Health Care Index to earn a threshold payout for the TSR portion of the award. As our TSR was at the 10th percentile relative to the S&P 500 Health Care Index over the three-year period ending March 31, 2019, the TSR portion of the FY 2017 — FY 2019 PSU awards did not pay out.

 

   

Cumulative Adjusted EPS. Cumulative Adjusted Earnings Per Share (“EPS”) was selected as a metric because of the importance of earnings as a driver of share price valuation and shareholder expectations. For FY 2017 — FY 2019, the Compensation Committee applied a Cumulative Adjusted EPS result of $35.28 for purposes of calculating PSU payouts. A related metric, one-year Adjusted EPS, is used as a metric for the Management Incentive Plan. Adjusted EPS is highly relevant in both short- and long-term contexts, and the Compensation Committee believed it was useful to measure Adjusted EPS across both periods, with greater economic opportunity in the long-term portion of the program to ensure that short-term gains are not sought at the expense of long-term performance. See Appendix A to this proxy statement for a reconciliation of diluted earnings per share from continuing operations as reported under U.S. GAAP to the Adjusted EPS result used for incentive payout purposes.

Based on these results, our NEOs received 47% of their target FY 2017 — FY 2019 PSUs. As with all of the Company’s performance-based payout scales, when a result falls between reference points, we use linear interpolation to determine the result. Mr. Vitalone did not receive PSUs in FY 2017 because he was not an executive officer when awards were granted in May 2016.

 

 

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40   LOGO  - 2019 Proxy Statement    


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EXECUTIVE COMPENSATION

 

 

 

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The table below summarizes PSU payouts for our NEOs who received an award for the FY 2017 — FY 2019 performance period:

 

 

Name

 

FY 2017 — FY 2019
Target PSUs

(# units)

 

 

X

  (  

Relative TSR

Result

(%)

50% Weight

 

 

+

 

Adjusted EPS

Result

(%)

50% Weight

  )  

 

=

 

FY 2017 — FY 2019

Earned PSUs

(# units)

 

John H. Hammergren

 

 

 

28,017

 

     

 

0%

 

   

 

94%

 

     

 

13,168

 

 

Brian S. Tyler

 

 

 

5,703

 

     

 

0%

 

   

 

94%

 

     

 

2,680

 

 

Lori A. Schechter

 

 

 

4,263

 

     

 

0%

 

   

 

94%

 

     

 

2,004

 

 

Bansi Nagji

 

 

 

2,994

 

         

 

0%

 

     

 

94%

 

         

 

1,407

 

FY 2019 — FY 2021 PSU Performance Metrics. Mr. Hammergren’s FY 2019 — FY 2021 PSU target award is based 75% on McKesson’s three-year TSR relative to the S&P 500 Health Care Index and 25% on three-year Cumulative Adjusted EPS. For our other NEOs, PSU target awards are based 25% on McKesson’s TSR performance relative to the S&P 500 Health Care Index and 75% on Cumulative Adjusted EPS performance over the three-year period. The Compensation Committee believes that the combination of Cumulative Adjusted EPS and rTSR over a three-year period will drive value creation and ensure alignment with shareholders. No changes were made to the peer group or slopes for the rTSR portion of the PSU awards. The Company must continue to achieve above-median performance (55th percentile) relative to the S&P 500 Health Care Index to earn a target payout for the rTSR portion of the award. If the Company’s TSR is negative for the performance period, then the rTSR result is capped at target regardless of ranking relative to the index. No shares are earned for the rTSR portion of the award if rTSR for the three-year period falls below the 35th percentile. The payout formula illustrated below applies to our NEOs other than Mr. Hammergren:

 

 

LOGO

We generally do not disclose forward-looking goals for our multi-year incentive programs, because the Company does not provide forward-looking guidance to our investors with respect to multi-year periods and it is competitively sensitive information. Consistent with our past and current practice, we will disclose multi-year performance goals in our regular programs in full after the close of the performance period.

FY 2020 — FY 2022 PSU Weighting and Performance Metrics. PSUs comprise 60% of the target LTI award granted in FY 2020, and will be earned based on Cumulative Adjusted EPS (50%), three-year average ROIC (25%) and relative TSR versus a comparator group (25%).

 

    LOGO  - 2019 Proxy Statement   41


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EXECUTIVE COMPENSATION

 

 

 

   Stock Options

 

Overview. Stock option awards are time-vested equity grants that generally vest 25% on the first four anniversaries of the grant date and have a seven-year term. Stock option awards directly align the interests of executives with those of shareholders, because executives recognize value only if the market value of the Company’s stock appreciates over time. The Compensation Committee determines the proportion of total target long-term incentives that will be awarded in stock options by considering the balance of cash and equity in our annual and long-term incentive plans, our strategic and operational objectives, the responsibilities of our NEOs, a review of similar grants made at companies in our Compensation Peer Group and other factors the committee deems relevant.

FY 2019 Stock Option Awards. At its May 2018 meeting, following a review of all direct compensation components and market data derived from our Compensation Peer Group, the Compensation Committee granted FY 2019 stock option awards to our NEOs as follows: Mr. Hammergren, 84,318 shares; Mr. Vitalone, 25,296 shares; Mr. Tyler, 25,296; Ms. Schechter, 21,951 shares; and Mr. Nagji, 16,864 shares. In connection with his promotion to President and Chief Operating Officer in August 2018, Mr. Tyler was granted a stock option to purchase 9,772 shares.

The ultimate value of these awards will not be known until the options vest and are exercised. The stock options awarded in May 2018 were granted with an exercise price of $144.43. The closing price of our common stock on the last trading day of our fiscal year, March 29, 2019, was $117.06. Stock options granted to our NEOs during the last three fiscal years were all underwater as of the end of FY 2019.

FY 2020 LTI Award. After a comprehensive review of our executive compensation program, the Compensation Committee eliminated stock options from our FY 2020 LTI program. The committee made this decision after considering factors such as market data, emerging best practices, incentive and retentive value of awards, the recommendation of its independent compensation consultant and shareholder feedback.

 

       Cash Long-Term Incentive Plan

 

Overview. The Cash Long-Term Incentive Plan (“Cash LTIP”) is a cash-based long-term incentive plan that was a component of our overall FY 2019 LTI award, but was not included in our FY 2020 LTI award, as described below. We traditionally used cash in our long-term incentive mix to reduce shareholder dilution attributable to equity compensation awards. Cash LTIP awards are conditioned on the achievement of Company financial performance goals and are earned over a three-year performance period. Cash LTIP performance goals, as well as the target award levels for participants, are established in May, shortly after the beginning of each fiscal year. Cash LTIP payouts made to executive officers may not exceed 200% of target awards.

FY 2017 — FY 2019 Cash LTIP Performance Metrics. In May 2016, the Compensation Committee established Cumulative Adjusted OCF and average ROIC as the financial metrics for FY 2017 — FY 2019 Cash LTIP awards. The following summarizes each FY 2017 — FY 2019 Cash LTIP performance metric:

 

   

Cumulative Adjusted OCF. Cumulative Adjusted Operating Cash Flow (“Adjusted OCF”) fuels our portfolio approach to capital deployment and determined 75% of the payout. Adjusted OCF is measured over a three-year performance period. For FY 2017 — FY 2019, the Compensation Committee approved an Adjusted OCF result for Cash LTIP payouts of $12,908 million. Adjusted OCF for FY 2017 was adjusted to exclude the impact of the formation of the Change Healthcare joint venture. A related metric, one-year Adjusted OCF, is used as a metric for the Management Incentive Plan. Adjusted OCF is highly relevant in both short- and long-term contexts, as it measures effective generation and management of cash. The Compensation Committee believed it was useful to measure Adjusted OCF across both periods. See Appendix A to this proxy statement for a reconciliation of operating cash flow as reported under U.S. GAAP to the Adjusted OCF result used for incentive payout purposes.

 

   

Average ROIC. Return on Invested Capital (“ROIC”) measures the Company’s ability to create value by generating a return that is above our weighted average cost of capital; adjusted three-year average ROIC determined 25% of the payout. Adjusted three-year average ROIC measures, as a percentage, the average of our annual after-tax adjusted operating income divided by invested capital over the three-year performance period. For FY 2017 — FY 2019, the Compensation Committee approved an average ROIC result for Cash LTIP payouts of 12.4%. Consistent with prior practice we excluded the Change Healthcare joint venture in determining this result for Cash LTIP payouts for all plan participants.

Based on these results, our NEOs received 129% of their FY 2017 — FY 2019 Cash LTIP target awards. As with all of the Company’s performance-based payout scales, when a result falls between reference points, we use linear interpolation to determine the result.

 

 

LOGO

 

42   LOGO  - 2019 Proxy Statement    


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EXECUTIVE COMPENSATION

 

 

 

LOGO

The table below summarizes Cash LTIP payouts for our NEOs for the FY 2017 — FY 2019 performance period:

 

 

Name

 

FY 2017 — FY 2019
Cash LTIP Target

($)

 

 

X

  (  

Cumulative

Adjusted OCF

Result (%)

75% Weight

 

 

+

 

Average ROIC

Result

(%)

25% Weight

  )  

 

=

 

FY 2017 — FY 2019

Cash LTIP Payout

($)

 

John H. Hammergren

 

 

 

2,947,000

 

     

 

143%

 

   

 

85%

 

     

 

3,801,630

 

 

Britt J. Vitalone

 

 

 

115,000

 

     

 

143%

 

   

 

85%

 

     

 

148,350

 

 

Brian S. Tyler

 

 

 

600,000

 

     

 

143%

 

   

 

85%

 

     

 

774,000

 

 

Lori A. Schechter

 

 

 

449,000

 

     

 

143%

 

   

 

85%

 

     

 

579,210

 

 

Bansi Nagji

 

 

315,000

 

         

143%

 

     

85%

 

         

406,350

 

FY 2019 — FY 2021 Cash LTIP Performance Metrics. In May 2018, the Compensation Committee established Cash LTIP target awards for our executive officers utilizing the same metrics used in May 2017 for the prior year’s target awards, because these are key areas of focus to advance our long-term strategy. Cumulative Adjusted OCF is the primary metric, with average ROIC as the secondary metric.

 

 

LOGO

We generally do not disclose forward-looking goals for our multi-year incentive programs, because the Company does not provide forward-looking guidance to our investors with respect to multi-year periods and it is competitively sensitive information. Consistent with our past and current practice, we will disclose multi-year performance goals in our regular programs in full after the close of the performance period.

FY 2020 LTI Award. After a comprehensive review of our executive compensation program, the Compensation Committee eliminated Cash LTIP from our FY 2020 LTI program. The committee made this decision after considering factors such as market data, emerging best practices, incentive and retentive value of awards, the recommendation of its independent compensation consultant and shareholder feedback.

 

 

   Performance Restricted Stock Unit Program

 

   
    Mr. Tyler was the only NEO to participate in this program in FY 2019, because he was not an executive officer when PSU awards were granted in May 2018 for the FY 2019 — FY 2021 performance period.

Overview. The Performance Restricted Stock Unit (“PeRSU”) program is a long-term equity incentive program. Our NEOs other than Mr. Tyler were not granted awards under this program in FY 2019. However, Mr. Tyler was a participant in this program for the FY 2019 performance period, in his prior role as Chairman of the Management Board, McKesson Europe. Upon his promotion to President and Chief Operating Officer, he became a participant in the PSU program with our other executive officers.

 

    LOGO  - 2019 Proxy Statement   43


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EXECUTIVE COMPENSATION

 

PeRSUs are long-term performance-based equity awards conditioned on the achievement of Company financial performance goals. PeRSUs convert to restricted stock units (“RSUs”) upon completion of a one-year performance period and are subject to an additional vesting period of three years. The grant date fair value of Mr. Tyler’s FY 2019 PeRSU award appears in the 2019 Summary Compensation Table. His FY 2019 threshold, target and maximum PeRSU opportunities appear in the 2019 Grants of Plan-Based Awards Table.

FY 2019 PeRSU Performance Metrics for FY 2019 Payouts. In May 2018, the Compensation Committee established Adjusted EPS and Free Cash Flow as financial metrics for FY 2019 PeRSUs.

 

   

Adjusted EPS. Adjusted EPS is a central driver of share price valuation and shareholder expectations and is the primary metric in the PeRSU program. For FY 2019, the Adjusted EPS result for PeRSU payouts was $12.43, the same result used for determining FY 2019 MIP payouts.

 

   

FCF. Free Cash Flow (“FCF”) is defined as Adjusted OCF less internal capital investments to grow and maintain the business. FCF is an important valuation metric and represents the cash generated by the business, which is available to invest externally for growth and to return capital to shareholders. We used FCF as a multiplier in the FY 2019 PeRSU program. For purposes of calculating FY 2019 PeRSU payouts, the Compensation Committee approved an FCF result of $3,479 million, resulting in a multiplier of 109%.

Based on these results, Mr. Tyler received RSUs equal to 109% of his FY 2019 PeRSU target award, which are subject to an additional three-year vesting period.

 

 

LOGO

 

 

LOGO

Other Compensation and Benefits

The Company provides an array of benefits to all employees. These benefits are comparable to those offered by employers in our industry and geographic footprint, including a competitive suite of health and life insurance and retirement benefits. In providing these benefits, both management and the Compensation Committee determined that they are appropriate for the attraction and retention of talent. In addition to the discussion of benefits below, the compensation associated with these items is described in footnote 4 to the 2019 Summary Compensation Table.

The Company offers two voluntary nonqualified, unfunded deferred compensation plans: (i) the Supplemental Retirement Savings Plan (“SRSP,” formerly named Supplemental PSIP II) and (ii) the Deferred Compensation Administration Plan III (“DCAP III”). The SRSP is offered to all employees, including executive officers, who may be impacted by compensation limits that restrict participation in the McKesson Corporation 401(k) Retirement Savings Plan (“401(k) Plan”). The DCAP III is offered to all employees eligible for MIP (annual cash incentive) targets of at least 15% of base salary, including executive officers.

Our employees in the U.S. and Canada are eligible to participate in McKesson Foundation’s Matching Gifts Program. Under this program, gifts to schools, educational associations or funds and other public charitable organizations are eligible for a foundation match of up to $2,500 per employee for each fiscal year.

The Company has two benefit plans that are generally restricted to executive officers: (i) the Executive Survivor Benefits Plan, which provides a supplemental death benefit in addition to the voluntary life insurance plan provided to all employees; and (ii) the Executive Benefit Retirement Plan, a nonqualified average final pay defined benefit pension plan. These plans were frozen to new participants in 2010 and 2007, respectively. We provide access to executive health services, including annual physical examinations, to executive officers and their spouses.

 

44   LOGO  - 2019 Proxy Statement    


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EXECUTIVE COMPENSATION

 

A limited number of other benefits are provided to executive officers, because it is customary to provide such benefits or it is in the best interest of the Company and its shareholders to do so. The Company periodically engages an independent security consultant to conduct a comprehensive study of our security program, which includes an evaluation of the risks to certain executive officers and the need for executive transportation and a residential security system. Our Executive Officer Security Policy requires our CEO to use corporate aircraft for both business and personal use. The Company provides security services for our CEO, including the installation and maintenance of home security. We consider the security measures provided to our executive officers to be a reasonable and necessary expense for the Company’s benefit. In accordance with SEC disclosure rules, the aggregate cost of these services is reported in the 2019 Summary Compensation Table.

Compensation Peer Group

 

Peer Selection Process

Each year, the Compensation Committee determines which companies best reflect McKesson’s competitors for customers, shareholders and talent. A key objective of our executive compensation program is to ensure that the total compensation package we provide to our executive officers is competitive with the companies against which we compete for executive talent. The Compensation Committee consults with its independent compensation consultant to develop a compensation peer group of companies to serve as the basis for comparing McKesson’s executive compensation program to the market. The Compensation Committee uses the guiding principles and questions below as a foundational tool to determine McKesson’s Compensation Peer Group.

 

 

Guiding Principles for McKesson Peer Selection

Consider Industry to identify companies with similar business model or philosophy

 

    Start with direct distribution peers in the healthcare industry

 

    Expand to other healthcare peers that might interact with McKesson in its value supply chain

 

    Extend search to non-healthcare peers with operationally similar business models (i.e., companies that have a manufacturing, distribution, wholesale and/or retail component)

 

Consider Size to ensure companies are similar in scope

 

Consider other Business Characteristics to identify publicly traded companies headquartered in the U.S.

 

 

 

Questions Addressed in Developing an Effective Peer Group

Who are key performance comparators?

 

  

    Who is McKesson competing against for customers?

 

    Which companies have similar market demands and influences?

 

Who are closest competitors for talent?

  

    Which companies might try to recruit from McKesson?

 

    If McKesson had to replace the executive team, from which companies might it recruit to attract executives with similar capabilities?

 

Who are the peers from an external perspective?

  

    Who is McKesson competing against for shareholders?

 

    Who do key analysts name as peers?

 

    Who do current peers name as peers?

 

 

FY 2019 Compensation Peer Group and How We Used the Data

Our Company has few direct business competitors, which makes it difficult to create a Compensation Peer Group based on industry codes, revenues or market capitalization alone. The Compensation Committee strives to develop a peer group that best reflects all aspects of McKesson’s complex business. For FY 2019, the committee and its independent compensation consultant used a value supply chain framework to identify companies that may compete with McKesson for executive talent. McKesson’s peers include the following: (i) healthcare companies that may compete or interact with McKesson’s supply chain; (ii) non-healthcare companies that are operationally similar to McKesson or other companies in its supply chain; and (iii) managed care companies.

The committee then considered factors such as revenue and market capitalization to derive an appropriate number of peers within our value supply chain framework. No information technology companies were included as peers because comparator companies had insufficient revenues or were divisions of much larger technology companies. The committee believes our diverse selection of peer group companies provides a better understanding of the evolving and competitive marketplace for executive talent.

 

    LOGO  - 2019 Proxy Statement   45


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EXECUTIVE COMPENSATION

 

 

 

LOGO

The Compensation Committee used data derived from our Compensation Peer Group to inform its decisions about overall compensation, compensation elements, optimum pay mix and the relative competitive landscape of our executive compensation program. The committee used multiple reference points when establishing target compensation levels. The committee did not strive to benchmark any individual compensation component or compensation in the aggregate to be at any specific percentile level relative to the market. Our 21 peer companies below are sorted by revenue and market capitalization. They reflect the Compensation Peer Group utilized by the Compensation Committee at its May 2018 meeting, when it established FY 2019 target direct compensation for our executive officers.

FY 2019 Compensation Peer Group

 

 

LOGO

 

(1)

Revenues are stated in billions for the most recently completed fiscal year as publicly reported by each company as of June 4, 2019.

 

(2)

Market capitalizations are stated in billions as of March 31, 2019, the last day of our fiscal year, with the exception of Aetna and Express Scripts, which are stated as of their last trading days.

 

46   LOGO  - 2019 Proxy Statement    


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EXECUTIVE COMPENSATION

 

Independent Review Process

 

The Compensation Committee sets performance goals, payout scales and target award levels for executive officers. The committee also determines incentive payouts for the prior fiscal year based on actual results against performance goals. While performance goals and payout scales are initially developed by senior management and driven by the one-year operating plan and the rolling three-year strategic plan reviewed with the Board, the Compensation Committee has the authority to approve, modify or amend management’s performance goals and payout scale recommendations. Performance goals are selected to be consistent with the operating and strategic plans reviewed, challenged and approved by the Board and information routinely communicated to employees or shareholders by management.

 

 

Setting Targets for Fiscal Year

 

   
  Independent compensation consultant uses Compensation Peer Group data from independent executive compensation surveys and data published by public companies to inform the Compensation Committee of competitive pay levels for executive officers.
   
  Compensation Committee sets pay targets for executive officers, including our CEO.

 

LOGO

 

 

Mid-Year Review of Compensation Design, Shareholder Feedback and Market Trends

 

   
  Compensation Committee examines the design and purpose of all executive compensation pay elements.
   
  Committee reviews and considers feedback from shareholders and proxy advisory firms regarding executive compensation program and policies.
   
  Committee reviews a compilation of outstanding earned equity awards, unearned cash awards and unvested equity awards for each executive officer.
   
  Management updates the Compensation Committee on actual performance against pre-established targets for performance-based incentive compensation plans.
   
  Committee reflects on market trends and emerging practices in executive compensation and application to McKesson.

 

LOGO

 

 

Assessing Year-End Results and Approving Compensation Decisions

 

   
  Our CEO, in consultation with the Compensation Committee’s independent compensation consultant and our Executive Vice President and Chief Human Resources Officer, develops compensation recommendations for the other executive officers, for approval by the committee.
   
  Committee reviews tally sheets, which display current compensation and estimated benefits on separation from service due to voluntary and involuntary terminations and terminations in connection with a change in control.
   
  Our CEO presents an assessment of his individual performance results to the Board and discusses his goals for the new fiscal year.
   
  Compensation Committee considers, among other things, regulatory, compliance and legal issues in making executive compensation determinations.
   
  Board conducts our CEO’s performance review and discusses in executive session his performance for the prior fiscal year and approves, modifies or amends his goals for the new fiscal year.
   
  Compensation Committee determines our CEO’s compensation in executive session with input from the Compensation Committee’s independent compensation consultant.

 

    LOGO  - 2019 Proxy Statement   47


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EXECUTIVE COMPENSATION

 

 

At McKesson, the way we do business is just as important as the business itself, so each executive is evaluated on his or her commitment to the Company’s “ICARE” and “ILEAD” principles. These principles serve as a guide to all our employees enterprise-wide.

 

ICARE is the cultural foundation of the Company. Our ICARE principles unify the Company and guide individuals’ behavior toward each other, customers, vendors and other stakeholders.

 

   

 

 

Integrity

 

 

 

  

 

 

Customer first

 

 

 

  

 

 

Accountability

 

 

 

  

 

 

Respect

 

 

 

  

 

 

Excellence

 

 

 

    

ILEAD is our common definition, shared leadership framework and our commitment to how we drive better health for our company, our customers and the patients whose lives we touch.

 

      Inspire        Leverage        Execute        Advance        Develop       
                                                  

 

 

Role of Independent Compensation Consultant and Legal Counsel

Pursuant to its charter, the Compensation Committee may retain and terminate any consultant or other advisor, as well as approve the advisor’s fees and other engagement terms. Each year, the committee evaluates the qualifications, performance and independence of its independent compensation consultant and legal counsel. To ensure it receives independent and unbiased advice and analysis, the committee adopted a formal independence policy certified annually by its compensation consultant and legal counsel.

For FY 2019, the Compensation Committee retained Semler Brossy Consulting Group, LLC (“Semler Brossy”) as its independent compensation consultant and Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP (“Gunderson Dettmer”) as its independent legal counsel. Representatives from Semler Brossy and Gunderson Dettmer attended Compensation Committee meetings, participated in executive sessions and communicated directly with the committee. Semler Brossy also provided independent consulting services to the Governance Committee in FY 2019 regarding director compensation. Neither of the firms performed any services for management.

At the start of FY 2020, the Compensation Committee reviewed information regarding the independence and potential conflicts of interest of Semler Brossy and Gunderson Dettmer. The committee members took into account, among other things, the factors set forth in Exchange Act Rule 10C-1 and the NYSE listing standards, and concluded that its compensation consultant and legal counsel are both independent and that no conflict of interest exists with respect to the work performed by either firm.

Role of Management

Our CEO provides the Compensation Committee with pay recommendations for executive officers other than himself. The Compensation Committee, with input from the committee’s independent compensation consultant, determines our CEO’s compensation in executive session. Our Executive Vice President and Chief Human Resources Officer attends committee meetings to provide perspective and expertise relevant to the agenda. Management supports the committee’s activities by providing analyses and recommendations as requested.

Information on Other Compensation-Related Topics

 

Severance and Change in Control Benefits

Our Severance Policy for Executive Employees (“Executive Severance Policy”) affords benefits to selected management employees, including our executive officers, who do not have employment agreements. While Mr. Hammergren was not eligible for this policy because he had an employment agreement with the Company, all executive officers currently serving are eligible for this policy. We provide severance benefits to give executives a measure of financial security following the loss of employment, and to protect the Company from competitive activities after the departure of certain executives. We believe these benefits are important to attract and retain executives in a highly competitive industry. This policy applies if an executive officer is terminated by the Company for reasons other than for cause and the termination is not covered by the Company’s Change in Control Policy for Selected Executive Employees (“CIC Policy”). A more detailed description of these policies is provided below at “Executive Severance Policies.”

Our stock plan and award agreements include change in control provisions which provide for “double-trigger” vesting upon an involuntary or constructive termination of employment following a change in control. Our CIC Policy provides for severance benefits to selected management employees in the event of an involuntary or constructive termination of employment occurring in connection with a change in control. We believe our CIC Policy is in our shareholders’ best interest, so that senior management can remain focused on important business decisions and not on how a potential transaction may affect them personally. The CIC Policy is administered by the Compensation Committee and benefits are consistent with current market practice. A more detailed description of the CIC Policy is provided below at “Executive Severance Policies.”

 

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EXECUTIVE COMPENSATION

 

Stock Ownership Policy

The Company has robust guidelines for stock ownership by executive officers. Our CEO’s ownership requirement is six times base salary, and the ownership requirement for each of the Company’s other executive officers is three times base salary. Stock options and PSU target awards do not count toward ownership under the policy. The Company reserves the right to restrict sales of the underlying shares of vesting equity awards if executives fail to meet the ownership requirements specified in our Stock Ownership Policy. Additionally, we require executives to hold 75% of the net after-tax shares issued upon the vesting or exercise of an award until the policy’s requirements are met. The Company’s directors are also subject to stock ownership guidelines, which are summarized above at “Director Stock Ownership Guidelines.”

The Compensation Committee reviews executive officer compliance with our Stock Ownership Policy each year. As of June 4, 2019, all NEOs satisfied their stock ownership requirement. Mr. Hammergren retired from the Company effective March 31, 2019 and so has not been included in the table below.

 

Name

  Stock Ownership Policy
  Target Ownership      Actual Ownership
 

        Multiple of         

Base Salary

    

Multiple Expressed

in Dollars

    

        Multiple of         

Base Salary(1)

    

Value of Shares Held

by Executives in Dollars(2) 

Brian S. Tyler

 

  6      6,000,000      10.6      10,641,821

Britt J. Vitalone

 

  3      2,340,000        6.9        5,373,210

Lori A. Schechter

 

  3      2,400,000        6.4        5,122,044

Bansi Nagji

 

  3      2,280,000        5.1        3,846,062
(1)

NEO ownership is stated as of June 4, 2019, using FY 2019 salary levels. The ownership requirement may be met through any combination of the following:

 

   

Direct stock holdings of the Company’s common stock, including shares held in a living trust, a family partnership or corporation controlled by the officer, unless the officer expressly disclaims beneficial ownership of such shares;

 

   

Shares of the Company’s common stock held in the 401(k) Plan;

 

   

Shares of the Company’s common stock underlying outstanding restricted stock and restricted stock unit awards; and/or

 

   

Shares of the Company’s common stock underlying restricted stock units that are vested and deferred under a Company-sponsored deferral program.

 

(2)

Based on the $127.56 closing price of the Company’s common stock as reported by the NYSE on June 4, 2019, our Record Date.

Insider Trading Policy

The Company maintains an insider trading policy applicable to all directors and employees. The policy provides that Company personnel may not: buy, sell or engage in other transactions in the Company’s stock while in possession of material non-public information; buy or sell securities of other companies while in possession of material non-public information about those companies they become aware of as a result of business dealings between the Company and those companies; disclose material non-public information to any unauthorized persons outside of the Company; or engage in hedging transactions through the use of certain derivatives, such as put and call options involving the Company’s securities. The policy also restricts trading for a limited group of Company employees (including all directors and NEOs) to defined window periods which follow our quarterly earnings releases.

Anti-Hedging and Pledging Policy

The Company’s anti-hedging and pledging policy applies to all directors and executive officers. The policy prohibits these individuals from engaging in any hedging transaction with respect to Company securities. These individuals are also prohibited from holding Company securities in a margin account or otherwise pledging Company securities as collateral for a loan. Pledges of Company securities arising from certain types of hedging transactions are also prohibited under our insider trading policy, as described above.

Equity Grant Practices

The Company has a written equity grant policy which states that stock options will be awarded at an exercise price equal to the closing price of the Company’s common stock on the date of grant. The policy also generally prohibits the granting of an equity award when the Company’s directors or employees may be in possession of material non-public information. When the Compensation Committee meeting occurs shortly following our public announcement of earnings, the grant date is the same day as the committee meeting. Otherwise, in most situations, the grant date is postponed until the third trading day following the release of our earnings results. The Company’s annual grant cycle occurs at the end of May each year, close in time to our public announcement of financial results for the prior completed fiscal year and publication of our forward estimate of earnings for the current fiscal year.

 

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EXECUTIVE COMPENSATION

 

Under the terms of our 2013 Stock Plan and 2005 Stock Plan, stock option re-pricing is not permitted without shareholder approval. Stock option awards generally vest ratably over four years with a contractual term of seven years. PeRSU target awards have a one-year performance period and convert to RSU awards that cliff-vest in three years. RSU awards that are not granted pursuant to PeRSU awards generally vest over three or four years. The PSU program has a three-year performance period, and the shares that are earned are not subject to any further vesting conditions.

Tax Deductibility and Considerations for Compensation Design

IRC Section 162(m) generally provided, prior to its amendment, that publicly held corporations may not deduct in any taxable year specified compensation in excess of $1,000,000 paid to the CEO and the next three most highly compensated executive officers, excluding the chief financial officer, unless the compensation qualifies as performance-based compensation meeting specified criteria, including shareholder approval of the material terms of applicable plans. Tax legislation enacted in 2017 expanded the scope of IRC Section 162(m) to include the chief financial officer in the group of covered executive officers, and repealed the exemption for performance-based compensation, in each case for tax years beginning after December 31, 2017. Accordingly, compensation in excess of $1,000,000 per year paid to our covered executive officers beginning with FY 2019 (which is our first tax year beginning after December 31, 2017) will not be deductible unless it qualifies for transition relief applicable to certain arrangements in place prior to November 2, 2017.

The Compensation Committee’s intention has been to comply with the requirements for deductibility under IRC Section 162(m), unless the committee concludes that adherence to the limitations imposed by these provisions would not be in the best interest of the Company or its shareholders. Incentive payments made under our MIP, LTIP and PSU programs, RSUs granted under our PeRSU program and our stock options were intended to qualify for deductibility as performance-based compensation under IRC Section 162(m) prior to its amendment, and we intend to seek to benefit from the transition relief described above to the maximum extent possible under the applicable tax laws. However, despite these efforts, and because of uncertainties as to the scope of the transition relief under the recent legislation, there can be no assurance that compensation that was intended to satisfy the requirements of performance-based compensation will benefit from the exemption. Any compensation that does not qualify for transition relief that exceeds $1,000,000 will not be deductible.

Awards under applicable long-term programs that remain eligible for the performance-based compensation exception under transitional relief will not be made to covered individuals unless the Compensation Committee certifies the attainment of performance goals. In the event of attainment of minimum performance goals, the Compensation Committee will exercise negative discretion to adjust awards downward from a potential maximum amount in order to satisfy requirements under IRC Section 162(m), while still providing for awards based on Company performance in accordance with our Cash LTIP and PSU programs.

Compensation Recoupment Policy

The Board is dedicated to maintaining and enhancing a culture focused on integrity and accountability which discourages conduct detrimental to the Company’s sustainable growth. Following constructive engagement by management with a group of key institutional investors and a review of the compensatory practices by peer companies, the Compensation Committee approved an updated Compensation Recoupment Policy (“Recoupment Policy”) that both expanded and clarified the previous policy that was incorporated into the Company’s annual and long-term incentive compensation plans. The Recoupment Policy applies to all cash or equity incentive awards granted after January 1, 2014.

Under the Recoupment Policy, the Company may recover, or “claw back” incentive compensation if an employee: (i) engages in misconduct pertaining to a financial reporting requirement under the federal securities laws that requires the Company to file a restatement of its audited financial statements with the SEC to correct an error; (ii) receives incentive compensation based on an inaccurate financial or operating measure that when corrected causes significant harm to the Company; or (iii) engages in any fraud, theft, misappropriation, embezzlement or dishonesty to the detriment of the Company’s financial results as filed with the SEC.

If triggered, then to the fullest extent permitted by law, the Company may require the employee to reimburse the Company for all or a portion of any incentive compensation received in cash within the last 12 months, and remit to the Company any compensation received from the vesting or exercise of equity-based awards occurring within the last 12 months. The Company will publicly disclose the results of any deliberations about whether to recoup compensation from an executive officer under the Recoupment Policy unless, in individual cases and consistent with any legally mandated disclosure requirements, the Board or the Compensation Committee concludes that legal or privacy concerns would prevent such disclosure.

Our executive incentive plans provide that the Compensation Committee may also seek to recoup economic gain from any employee who engages in conduct that is not in good faith and which disrupts, damages, impairs or interferes with the business, reputation or employees of the Company.

 

50   LOGO  - 2019 Proxy Statement    


Table of Contents

EXECUTIVE COMPENSATION

 

Supplemental Death Benefits

In January 2010, the Board froze the Company’s Executive Survivor Benefits Plan to the then-current roster of participants, which includes Mr. Hammergren. The Company will not enter into a new plan, program or agreement (“Benefit Agreement”) with any executive officer, or a material amendment of an existing Benefit Agreement with any executive officer that provides for a death benefit, including salary continuation upon death, if that benefit is not generally available to all employees, unless such Benefit Agreement or material amendment is approved by the Company’s shareholders pursuant to an advisory vote. This plan provides a supplemental death benefit for its participants, which is in addition to the voluntary and Company-provided life insurance plan afforded to all employees. A description of the benefits payable to Mr. Hammergren under this plan is available below at “Hammergren Employment Agreement and Retirement.”

Excise Tax Gross-Up Policy

The Company may not enter into any new agreement with an executive officer, or a material amendment of an existing executive officer agreement, that provides for payment or reimbursement of excise taxes that are payable by such executive officer under IRC Section 4999 as a result of a change in control of the Company. This policy does not adversely affect any Company plan, policy or arrangement generally available to management employees that provides for the payment or reimbursement of taxes.

Compensation Committee Report on Executive Compensation

 

We have reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference to McKesson Corporation’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

Compensation Committee of the Board of Directors

N. Anthony Coles, M.D., Chair

Bradley E. Lerman

Edward A. Mueller

Susan R. Salka

Compensation Committee Interlocks and Insider Participation

 

The Compensation Committee is composed of the four independent directors listed above. No member of the Compensation Committee is, or was during FY 2019, a current or former officer or employee of the Company or any of its subsidiaries. Additionally, during FY 2019, none of our executive officers served on the board of directors or compensation committee of any entity that had one or more of its executive officers serving on the Board or the Compensation Committee of the Company.

 

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Table of Contents

EXECUTIVE COMPENSATION

 

2019 Summary Compensation Table

The table below provides information regarding compensation and benefits earned by: (i) our Chairman of the Board and Chief Executive Officer; (ii) our Executive Vice President and Chief Financial Officer; (iii) the three other most highly compensated executive officers, in each case, serving as of March 31, 2019 (collectively, our Named Executive Officers or “NEOs”):

 

  Name and Principal Position   Fiscal
Year
 

Salary

($)

 

Bonus

($)

 

Stock

Awards
($)
(2)

  Option
Awards
($)
(2)
 

Non-Equity

Incentive Plan
Compensation
($)
(3)

 

Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings

($)

 

All Other

Compensation

($)(4)

 

Total

($)

John H. Hammergren

Chairman and Chief

Executive Officer(1)

   

 

 

 

 

2019

 

 

 

   

 

 

 

 

1,680,000

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

5,000,155

 

 

 

   

 

 

 

 

3,000,034

 

 

 

   

 

 

 

 

7,287,294

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

432,724

 

 

 

   

 

 

 

 

17,400,207

 

 

 

   

 

 

 

 

2018

 

 

 

   

 

 

 

 

1,680,000

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

7,369,248

 

 

 

   

 

 

 

 

4,422,022

 

 

 

   

 

 

 

 

4,048,300

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

623,447

 

 

 

   

 

 

 

 

18,143,017

 

 

 

   

 

 

 

 

2017

 

 

 

   

 

 

 

 

1,680,000

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

5,896,178

 

 

 

   

 

 

 

 

5,896,024

 

 

 

   

 

 

 

 

6,036,000

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

588,397

 

 

 

   

 

 

 

 

20,096,599

 

 

 

Britt J. Vitalone

Executive Vice President

and Chief Financial Officer

   

 

 

 

 

2019

 

 

 

   

 

 

 

 

775,000

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

6,500,251

 

 

 

   

 

 

 

 

900,032

 

 

 

   

 

 

 

 

954,350

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

81,290

 

 

 

   

 

 

 

 

9,210,923

 

 

 

   

 

 

 

 

2018

 

 

 

   

 

 

 

 

620,839

 

 

 

   

 

 

 

 

500,000

 

 

 

   

 

 

 

 

560,157

 

 

 

   

 

 

 

 

200,022

 

 

 

   

 

 

 

 

366,397

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

40,193

 

 

 

   

 

 

 

 

2,287,608

 

 

 

                                                                                         

Brian S. Tyler

President and Chief

Operating Officer

   

 

 

 

 

2019

 

 

 

   

 

 

 

 

929,375

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

8,000,334

 

 

 

   

 

 

 

 

1,200,032

 

 

 

   

 

 

 

 

1,817,131

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

643,194

 

 

 

   

 

 

 

 

12,590,066

 

 

 

                                   
                                                                                         

Lori A. Schechter

Executive Vice President,

General Counsel and Chief

Compliance Officer

   

 

 

 

 

2019

 

 

 

   

 

 

 

 

795,833

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

6,303,238

 

 

 

   

 

 

 

 

781,017

 

 

 

   

 

 

 

 

1,406,877

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

128,094

 

 

 

   

 

 

 

 

9,415,059

 

 

 

   

 

 

 

 

2018

 

 

 

   

 

 

 

 

775,000

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

1,223,022

 

 

 

   

 

 

 

 

733,022

 

 

 

   

 

 

 

 

1,147,500

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

100,816

 

 

 

   

 

 

 

 

3,979,360

 

 

 

                                                                                         

Bansi Nagji

Executive Vice President and

Chief Strategy and Business

Development Officer

   

 

 

 

 

2019

 

 

 

   

 

 

 

 

755,833

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

6,000,253

 

 

 

   

 

 

 

 

600,021

 

 

 

   

 

 

 

 

1,192,417

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

92,981

 

 

 

   

 

 

 

 

8,641,505

 

 

 

   

 

 

 

 

2018

 

 

 

   

 

 

 

 

735,000

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

866,065

 

 

 

   

 

 

 

 

520,002

 

 

 

   

 

 

 

 

1,072,800

 

 

 

   

 

 

 

 

-0-

 

 

 

   

 

 

 

 

78,828

 

 

 

   

 

 

 

 

3,272,695

 

 

 

                                                                                         
(1)

Mr. Hammergren retired from the Company effective March 31, 2019.

 

(2)

Amounts shown represent the aggregate grant date fair value of stock-based awards calculated in accordance with ASC Topic 718. These values do not include estimated forfeitures and may not reflect compensation actually received by our officers. The assumptions used to calculate the value of these awards can be found in Financial Note 8 of the Company’s consolidated financial statements in its Annual Report on Form 10-K for the fiscal year ended March 31, 2019, as filed with the SEC on May 15, 2019. For awards that are not subject to performance conditions, such as stock options, the maximum award levels would not result in awards greater than disclosed in the table above. For awards that are subject to performance conditions, such as PSUs, we report the value at grant date based upon the probable outcome of such conditions consistent with our estimate of aggregate compensation cost to be recognized over the service period determined under ASC Topic 718, excluding the effect of estimated forfeitures.

 

    

The following represents the aggregate value based on the maximum number of shares that may be earned for annual and special PSU awards computed in accordance with ASC Topic 718 for each of the fiscal years presented above: Mr. Hammergren, $10,000,310, $14,738,495 and $11,792,355; Mr. Vitalone, $8,000,419; Mr. Tyler, $7,000,367; Ms. Schechter, $7,606,392 and $2,446,045; and Mr. Nagji, $7,000,423 and $1,732,130.

 

    

Mr. Tyler participated in the PeRSU program prior to becoming an executive officer and was the only NEO to participate in the PeRSU program in FY 2019. The aggregate value based on the maximum number of shares that may be earned for his FY 2019 PeRSU award computed in accordance with ASC Topic 718 is $2,145,074.

 

(3)

Amounts shown represent payouts under the MIP and the Cash LTIP:

 

   

MIP for FY 2019: Mr. Hammergren, $3,485,664; Mr. Vitalone, $806,000; Mr. Tyler, $1,043,131; Ms. Schechter, $827,667; and Mr. Nagji, $786,067.

 

   

Cash LTIP for FY 2017 — FY 2019: Mr. Hammergren, $3,801,630; Mr. Vitalone, $148,350; Mr. Tyler, $774,000; Ms. Schechter, $579,210; and Mr. Nagji, $406,350.

 

(4)

Amounts shown represent the following with respect to FY 2019:

 

    

Defined Contribution Benefits and Nonqualified Plan Earnings

 

    

The Company made a matching contribution of $11,000 to each NEO’s 401(k) Plan retirement account.

 

    

As described below in the subsection titled “Narrative Disclosure to the 2019 Nonqualified Deferred Compensation Table,” the SRSP and the DCAP III provide for matching contributions. The amount contributed by the Company to each NEO’s SRSP account was as follows: Mr. Hammergren, $195,304; Mr. Vitalone, $0; Mr. Tyler, $53,019; Ms. Schechter, $42,223; and Mr. Nagji, $59,805. The amount contributed by the Company to each NEO’s DCAP III account was as follows: Mr. Hammergren, $0; Mr. Vitalone, $0; Mr. Tyler, $0; Ms. Schechter, $21,390; and Mr. Nagji, $0.

 

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Table of Contents

EXECUTIVE COMPENSATION

 

 

    

Perquisites and Other Benefits

 

    

The value provided to each NEO under the Company’s Executive Officer Security Policy was as follows: Mr. Hammergren, $138,742; Mr. Vitalone, $44,697; Mr. Tyler, $0; Ms. Schechter, $0; and Mr. Nagji, $0. The amounts represent the incremental cost of personal use of Company-provided aircraft and the reimbursement of reasonable expenses related to the installation and maintenance of home security equipment. The Company does not reimburse our NEOs for taxes due on imputed income for items or services provided under the Executive Officer Security Policy.

 

   

Company Aircraft: Mr. Hammergren was directed to use the Company’s aircraft for security, productivity and privacy reasons. The aggregate incremental cost of personal use of Company-provided aircraft for Mr. Hammergren in FY 2019 was $67,491. In FY 2019, Mr. Hammergren approved Mr. Vitalone’s personal use of the Company’s aircraft. The aggregate incremental cost of personal use of Company-provided aircraft for Mr. Vitalone in FY 2019 was $44,697. To calculate this cost, the Company determines the total variable annual operating cost for each aircraft, such as fuel, trip-related maintenance, landing and parking fees, crew expenses, supplies and catering. The total variable operating cost is then averaged for all flight hours flown and multiplied by the total number of personal flight hours for each NEO. Fixed annual costs that do not change based on usage, such as pilots’ salaries, home hangar expenses, general taxes, routine maintenance and insurance, are excluded from the incremental cost calculation. If an aircraft flies empty before picking up or after dropping off a passenger flying for personal reasons, and the empty flight is not related to any other business-related travel, this “deadhead” segment is included in the incremental cost calculation for determining personal use.

 

   

Home Security: The Company paid $71,251 for the installation of home security devices and/or security monitoring services for Mr. Hammergren based on an evaluation performed by an independent security consultant. For a complete description of Mr. Hammergren’s security benefit, please refer to the section entitled “Other Compensation and Benefits” on page 44.

 

    

The value of financial counseling services provided to each NEO was as follows: Mr. Hammergren, $30,348; Mr. Vitalone, $24,030; Mr. Tyler, $22,097; Ms. Schechter, $21,141; and Mr. Nagji, $22,097.

 

    

For Ms. Schechter, includes $25,000 in matching contributions made by the McKesson Foundation to charitable organizations, which were in addition to the matching contributions made available by the foundation to employees generally. Donations totaling $5,000 were made by the foundation to a charitable organization in respect of Ms. Schechter’s service as a director.

 

    

The value of items or services provided in connection with the annual Board of Directors planning sessions and employee award programs attended by our NEOs and their spouses was as follows: Mr. Hammergren, $12,099; Mr. Vitalone, $1,563; Mr. Tyler, $1,842; Ms. Schechter, $2,340; and Mr. Nagji, $79.

 

    

Upon his retirement Mr. Hammergren was paid $45,231 in accrued but unused vacation time, in accordance with Company policy.

 

    

Mr. Tyler’s International Assignment

 

    

During FY 2019, Mr. Tyler served on international assignment as Chairman of the Management Board of McKesson Europe. When this assignment ended, the Company repatriated Mr. Tyler and his family to the United States. Our policies on temporary international assignments and tax equalization are designed to mitigate the inconvenience of such an assignment by covering expenses in excess of what the employee would have incurred had the employee remained in their home country. Accordingly, certain benefits are provided on an income tax-free basis to the employee, and the Company provides for tax equalization to ensure that the employee bears a tax burden comparable to their U.S. tax burden on income that is not related to the international assignment. These benefits are provided to all Company employees covered by the policies. For Mr. Tyler, All Other Compensation includes $311,989 for the value of payments and benefits, including relocation expenses, paid by the Company to Mr. Tyler or on his behalf during FY 2019, $193,110 for U.S. income tax gross-ups paid in FY 2019 with respect to benefits and compensation paid or provided in FY 2019 and prior years and $50,137 for estimated tax equalization payments on compensation and benefits paid or provided to Mr. Tyler in respect of his FY 2019 compensation.

 

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Table of Contents

EXECUTIVE COMPENSATION

 

2019 Grants of Plan-Based Awards Table

The table below provides information on plan-based awards, stock awards and stock options granted to our NEOs during the fiscal year ended March 31, 2019:

 

       

 

 

Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards(1)

 

 

 

Estimated Future Payouts
Under Equity Incentive
Plan Awards(2)

 

All Other

Stock
Awards:

Number

of
Shares

of Stock

or Units
(#)

 

All Other

Option

Awards:

Number

of
Securities

Underlying

Options

(#)(5)

 

Exercise

or Base

Price

of
Option

Awards

(($)/Sh)

 

Grant

Date Fair

Value of

Stock
and

Option

Awards

($)(6)

  Name  

Grant

Date

 

Threshold

($)(3)

 

Target

($)

 

Maximum

($)

 

Threshold

(#)(4)

 

Target

(#)

 

Maximum

(#)

 

John H. Hammergren

   

 

 

 

 

5/30/2018

 

 

 

                               

 

 

 

 

84,318

 

 

 

   

 

 

 

 

144.43

 

 

 

   

 

 

 

 

3,000,034

 

 

 

 

Cash LTIP

 

       

 

 

 

 

1,000,000

 

 

 

   

 

 

 

 

2,000,000

 

 

 

   

 

 

 

 

4,000,000

 

 

 

                           

 

PSU

 

                   

 

 

 

 

12,038

 

 

 

   

 

 

 

 

32,102

 

 

 

   

 

 

 

 

64,204

 

 

 

               

 

 

 

 

5,000,155

 

 

 

 

MIP

 

             

 

 

 

 

1,260,000

 

 

 

   

 

 

 

 

2,520,000

 

 

 

   

 

 

 

 

5,040,000

 

 

 

                                                                     

 

Britt J. Vitalone

 

   

 

 

 

 

5/30/2018

 

 

 

                               

 

 

 

 

25,296

 

 

 

   

 

 

 

 

144.43

 

 

 

   

 

 

 

 

900,032

 

 

 

 

 

Cash LTIP

 

       

 

 

 

 

300,000

 

 

 

   

 

 

 

 

600,000

 

 

 

   

 

 

 

 

1,200,000

 

 

 

                           

 

PSU

 

                   

 

 

 

 

6,334

 

 

 

   

 

 

 

 

10,135

 

 

 

   

 

 

 

 

20,270

 

 

 

               

 

 

 

 

1,500,169

 

 

 

 

MIP

 

         

 

387,500

 

 

     

 

775,000

 

 

     

 

1,550,000

 

 

                           

 

Special PSU(7)

 

     

 

11/9/2018

 

 

                 

 

9,556

 

 

     

 

19,112

 

 

     

 

38,224

 

 

               

 

 

 

 

2,500,041

 

 

 

 

Special RSU(8)

 

     

 

11/9/2018

 

 

                                                                 

 

19,112

 

 

                         

 

2,500,041

 

 

 

Brian S. Tyler

 

   

 

 

 

 

5/30/2018

 

 

 

                               

 

 

 

 

25,296

 

 

 

   

 

 

 

 

144.43

 

 

 

   

 

 

 

 

900,032

 

 

 

 

PeRSU(9)

 

                   

 

 

 

 

5,608

 

 

 

   

 

 

 

 

10,386

 

 

 

   

 

 

 

 

14,852

 

 

 

               

 

 

 

 

1,500,050

 

 

 

 

MIP

 

       

 

 

 

 

534,391

 

 

 

   

 

 

 

 

1,068,781

 

 

 

   

 

 

 

 

2,137,562

 

 

 

                           

 

Special PSU(7)

 

   

 

 

 

 

5/30/2018

 

 

 

               

 

 

 

 

10,386

 

 

 

   

 

 

 

 

20,772

 

 

 

   

 

 

 

 

41,544

 

 

 

               

 

 

 

 

3,000,100

 

 

 

 

Special RSU(8)

 

   

 

 

 

 

5/30/2018

 

 

 

                           

 

 

 

 

20,772