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![]() 2013 Annual Meeting of Stockholders July 9, 2013 |
![]() 2 Executive Summary Strong Performance Over the past five years, McKesson has delivered returns that exceeded both our compensation peers and the S&P 500 In FY 2013, we generated operating cash flows of $2.5 billion, completed acquisitions valued at $2.5 billion and ended the year with $2.5 billion in cash and cash equivalents Substantial Improvements to Pay Program More closely aligned pay and performance and reduced total direct compensation Further explained and adjusted where appropriate the prevalence of, and rationale for selecting, our financial metrics Continued to set ambitious targets for performance-based pay Significant Investor Outreach and Response We routinely engage with investors to better understand their concerns and address their expectations In response, the Board and senior management recently made substantial compensation and governance changes Reduction of Total Compensation Levels Effective Independent Oversight and Strong Corporate Governance Practices We have a strong, independent Board that effectively governs the Company, listens and responds to stockholder concerns, and has overseen tremendous stockholder value creation The directors have also exercised independent oversight of pay through our Compensation Committee, which has retained both independent legal counsel and an independent compensation consultant and adopted emerging best practices We are aligned with best practices in corporate governance with, among recent enhancements, the addition of a lead independent director with robust powers and responsibilities We ask for your support at our 2013 Annual Meeting of Stockholders * Total direct compensation refers to the total compensation disclosed in the 2013 Summary Compensation Table minus the amount displayed under the column entitled “Change in Pension Value and Nonqualified Deferred Compensation Earnings.” Stock price appreciated by 64% while average total direct NEO compensation decreased by 18% since the end of fiscal year 2010* Reduced payout opportunities under our long-term incentive program |
![]() 3 A History of Strong, Sustained Performance CEO Oversaw Turnaround Mr. Hammergren became co-CEO in 1999, CEO in 2001 and Chairman in 2002 Turned the Company around from period of crisis in 1999 to a market leader Currently number 14 on the Fortune 500 Over a Decade of Sustained Performance for Investors Mr. Hammergren’s tenure as CEO is marked by sustained, long-term performance Cumulative total stockholder return of 468% from FY 2001 through FY 2013 Stock is currently trading near a record high price A Company and Executive Team That Have Been Successful for Investors The incremental higher pay for McKesson executives has proven beneficial to investors who have experienced significant returns throughout this executive team’s tenure As the Compensation Committee moderates pay in the face of strong Company performance, it’s important to remember that the executive team has a consistent track record of performance Our CEO, executive team and experienced Board of Directors turned the Company around during a time of crisis and have driven tremendous, long-term value for investors ever since |
![]() 4 A Stronger Return on Investment vs. Peers Investors received a return of more than 2X on their investment in McKesson * * Total stockholder return assumes $100 invested at the close of trading on March 31, 2008 (the close of our fiscal year) and the reinvestment of dividends when paid. McKesson strongly outperformed both the S&P 500 and its peers over the last five years $100.00 $100.00 $100.00 $132.64 $176.31 $216.44 S&P 500 Compensation Peer Group McKesson FY 2008 FY 2012 |
![]() 5 Director Nominee: Alton F. Irby III Demonstrated Leadership Mr. Irby has more than 35 years of experience serving on the boards of a variety of companies, including a number of public companies in the United States and Europe He has demonstrated leadership experience and strong entrepreneurial talent Having served on McKesson’s Board of Directors since 1999, he offers important institutional knowledge and experience Expert in Financial Services and Capital Markets Mr. Irby has more than 40 years of experience in financial services and capital markets, having served as chief executive officer or founding partner of several investment and investment banking firms in the United States and Europe His financial and capital markets experience spans several industries His experience includes areas of importance to McKesson, including acquisitions, divestitures and international transactions Leader of Committee Implementing Changes As chair of McKesson’s Compensation Committee, Mr. Irby led the Board’s initiative to make substantial changes to the Company’s executive compensation program, demonstrating a serious commitment to contemporary best practices in response to investor feedback Mr. Irby’s accomplished career in a variety of leadership roles and the significant program and policy changes implemented under his leadership make him a valuable Board member and leader of the Compensation Committee |
![]() 6 Director Nominee: Jane E. Shaw Wealth of Experience As a former Chairman and CEO, Dr. Shaw brings exceptional leadership, business management and director experience in the healthcare industry Dr. Shaw had a distinguished career on Intel’s board, with 19 years of service including steering the company through compliance with the 2002 Sarbanes-Oxley Act and being named Intel’s first non-executive chairman in 2009 Poise and Stability in Time of Crisis With her strong financial background, valuable leadership skills and methodical scientific training, Dr. Shaw helped navigate a positive course for the Company in the aftermath of the difficult HBO & Co. acquisition Dr. Shaw was named a 2010 Outstanding Director by the Outstanding Directors Exchange and a 2013 Outstanding Director by the San Francisco Business Times and the Silicon Valley Business Journal Strong Institutional Knowledge Dr. Shaw’s strong institutional knowledge helped position McKesson as a leader in the healthcare industry, and as chair of the Governance Committee, guided our adoption of best practices in corporate governance Dr. Shaw’s commitment to sound corporate governance practices has been recognized by the major proxy advisory firms, which have consistently given McKesson high marks Dr. Shaw’s distinguished executive career and wealth of experience as a director during challenging times makes her an outstanding Board member and leader of the Governance Committee |
![]() 7 Tremendous Industry Knowledge and Experience Mr. Hammergren has over 30 years of business and leadership experience in the healthcare space Mr. Hammergren recently served as Chairman of the Healthcare Leadership Council, a coalition of chief executives of the nation’s leading healthcare companies and organizations With 17 years at McKesson, Mr. Hammergren has a deep understanding of McKesson’s customer base, workforce, competition, challenges and opportunities Exceptional Leadership Skills and Consistent Delivery of Outstanding Returns to Stockholders Under Mr. Hammergren’s leadership, the Company has experienced exceptional growth and success Annual Revenues FY 1999 FY 2013 $30bn $122bn Market Capitalization FY 1999 FY 2013 $8bn $25bn Increased more than 3X Mr. Hammergren has a strong track record of creating tremendous stockholder value Adjusted EPS Growth* FY 2007 FY 2013 $3.02 $6.33 13% CAGR Increased more than 4X Director Nominee: John H. Hammergren Reflects non-GAAP information calculated on an Adjusted Earnings basis. A reconciliation to GAAP is available in the 2013 proxy statement and on the Company’s website under the “Investors” tab. * |
![]() 8 A Distinguished and Experienced Board Leadership and business experience in the healthcare industry Strategic planning and financial expertise Legal and regulatory experience International business experience Former healthcare professionals Public and private company directorships Experience with legislative initiatives Former Chief Executive Officers and Chief Financial Officers A Board that engages with stockholders, responds to their views and expectations and incorporates their feedback Retain our talented Board; vote FOR each director nominee |
![]() 9 Investor Outreach and Response We heard the message delivered by our stockholders and made changes to our compensation program and governance practices to address investor issues and concerns We engaged with our investors throughout 2012 and 2013, holding discussions with, among others: • Large institutional investors • Labor union funds • Pension funds • Proxy advisors Feedback from stockholders was clear: • Moderate total levels of executive compensation • More closely align pay and performance • Further explain and adjust where appropriate the prevalence of, and rationale for selecting, financial metrics • Describe the role of stockholder return in our incentive program • As to governance practices, allow stockholders to take action between annual meetings and enhance independent director leadership We listened to our investors: • Our Compensation Committee embarked on a measured multi-year effort to balance pay and performance with executive retention by reducing pay levels and implementing a number of important changes to our pay practices that resulted in lower compensation for our CEO and other NEOs • Our Governance Committee recommended, and the Board approved, (i) by-law provisions, subject to stockholder approval, to give stockholders the right to call a special meeting, and (ii) a lead independent director structure |
![]() 10 Reduction of Total Compensation Levels: FY 2010 to FY 2013 Stock Appreciation Average Decrease in NEO Total Direct Compensation Since the end of FY 2010, McKesson’s stock price has risen while average NEO total direct compensation has decreased 64% -18% |
![]() 11 Moderation of Total Compensation Levels Base Salaries Maintained CEO base pay since May 2010, NEO base pay since May 2011 Long-Term Incentive Plan Reduced the maximum payout opportunity for executive officers by 33%, effective for the FY 2012 – FY 2014 performance period Reduced the target payout opportunity for FY 2013 – FY 2015 by 5% from last year Performance RSUs Reduced the maximum payout opportunity by 9% from last year Reduced Performance RSU target grant amounts by an average of 4% from last year Option Awards Reduced the grant date value of option awards by an average of 5% from last year We heard our investors’ views about the level of total compensation and responded by reducing almost every element of our pay program |
![]() Closer Alignment of Pay and Performance • Established increasingly ambitious targets that reflect Company performance • Made a significant portion of our NEOs' target direct compensation (67%) equity-based Added Financial Metrics and Enhanced Explanation • Added several new metrics that correlate to operational success, including EBITDA, ROIC and operating cash flow, which we believe fuel greater stockholder return • Additional metrics selected through analysis of historical trends, incentive design features and performance of comparable U.S. companies, analyst expectations and investor feedback • Performance targets are thoughtfully set to reflect true Company performance; e.g., earnings targets established at the beginning of a fiscal year reflect anticipated annual share buybacks 12 Substantial Improvements to Pay Program Based on Investor Feedback We acted on our investors’ feedback and made several significant revisions to our pay program |
![]() 13 Financial Metrics Driving Our Pay Program Long-Term (Equity) Long-Term (Cash) Annual Incentive Program Performance Restricted Stock Units (PeRSUs) Share Price Adjusted EPS Stock Options Adjusted ROIC Long-Term Incentive Plan (LTIP) Long-Term Earnings Growth Adjusted OCF Management Incentive Plan (MIP) Adjusted EPS Adjusted EBITDA Individual Modifier Focus on a rigorous and sustainable approach to delivering returns to our investors * Terms used in this table are defined in McKesson’s 2013 proxy statement. Financial Metrics * |
![]() 14 Explanation of the Pension Value Change Annual Assessments of Actuarial Assumptions Each year, we must assess the actuarial assumptions underlying the calculation of our pension liability, including the “lump-sum interest rate” which is used to convert the estimated pension benefit into a lump sum The lump-sum value of the pension benefit is inversely correlated to fluctuations in the lump-sum interest rate Adjustments to the Lump-Sum Interest Rate and Its Effect on Pension Accrual In FY 2013, we lowered the lump-sum interest rate from 4.0% to 2.3% to reflect the persistent low interest rate environment This change in interest rate assumption led to a meaningful increase in pension accrual this year; however, of the $24 million shown in the 2013 Summary Compensation Table, $21 million was attributable to the changes in actuarial assumptions Rise in Pension Accrual Does Not Equate to Granting Additional Compensation In assessing the Compensation Committee’s executive compensation decisions, we do not believe our investors should factor in pension value swings due to changes in interest rates These value swings are not in the Compensation Committee’s control. Just as investors should not give the Company credit when lump-sum pension values drop significantly because of interest rate increases, investors should not view the Company as granting additional compensation when lump-sum pension values rise due to changes in interest rate assumptions Investors should evaluate the pension in the context of the amount contributed, not on the basis of changes in actuarial assumptions |
![]() 15 Putting Realizable Pay in Context A Measure of Pay for Performance Alignment Realizable pay is a measure that some investors utilize to evaluate the alignment between pay and performance A well-designed incentive plan combined with strong company performance will result in realizable pay that exceeds grant-date values In an appropriately performance-based program, when performance is strong, realizable pay increases; if performance is weak, it declines Alignment with Performance Reflected in Plan Design Our plans are performance-based to align executive interests with investor interests 68% of our CEO’s target direct compensation was granted in equity In response to feedback from investors and our Board’s commitment to continually raise the bar on performance for the benefit of our investors, the Compensation Committee acted to meaningfully reduce overall pay in almost every category. These reductions required our management team to stretch even further in their quest for superior performance in order to realize the outcomes produced. The committee’s approach is working, as evidenced by the strong continued growth of our stockholder return for the past several years Strong Performance Over the last three years our performance has been exceptional, which has resulted in higher realizable pay than grant-date pay While the use of equity grants to incentivize executives has resulted in improved outcomes for our management team, it has also resulted in outstanding returns for McKesson’s investors (64% share price appreciation in the last three fiscal years) Investors should be pleased that realizable pay has grown because it reflects strong long-term performance and the alignment of pay with performance |
![]() Structural Alignment with Performance 16 Our Commitment to Align Pay and Performance has Proven Effective The vast majority of CEO target direct compensation for the past several years was granted in equity Outstanding performance resulted in higher realizable pay, benefiting all investors, including executives who hold substantial share positions CEO Equity-Based Compensation (68%) CEO Cash Compensation (32%) Stock Price Appreciation = 64% FY 2010 FY 2013 Strong Company Performance |
![]() 17 Recently Adopted Best Practices 3 Eliminated a golden parachute benefit Eliminated CEO excise tax gross-up Prohibited hedging and pledging 1 2 4 5 Implemented majority voting for director elections 6 Adopted lead independent director role with robust powers and responsibilities 7 Proposed adoption of by-law provisions to give stockholders the right to call a special meeting Eliminated supermajority voting provisions |
![]() Board: All directors, except one, are independent and must be elected annually by a majority vote Lead Director: Our strong independent board leadership is being enhanced in July 2013 when a lead independent director with clearly defined powers and responsibilities begins his service Committee Membership: All committees, including the Compensation Committee, consist of entirely independent directors Independent Advisors: Our Compensation Committee has engaged and considers the advice of an independent compensation consultant and independent legal counsel Investor Input: • Our Compensation Committee and senior management have engaged with investors and have acted on their feedback regarding McKesson’s pay program • Our Governance Committee has been responsive to stockholders on corporate governance matters and recently implemented a number of contemporary best practices 18 Effective Independent Oversight Independent directors with an overall goal of delivering superior stockholder value |
![]() Election of Directors • Strong, experienced and independent directors who effectively govern the Company and continue to drive tremendous long-term stockholder value Say on Pay • Maintained our track record of superior performance within the market and our compensation peer group • Continued to engage with our investors to enhance our pay program and meet investor expectations • Improved the compensation program to more closely align pay and performance • Moderated total direct compensation levels • Continued to follow, and adopt, emerging compensation best practices 19 We Ask for Your Support Vote FOR our director nominees and say on pay |