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. )

Filed by the Registrant þ
Filed by a Party other than the Registrant o

Check the appropriate box:

o		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to §240.14a-12

 

McKesson Corporation

(Name of Registrant as Specified In Its Charter)

 

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

Payment of Filing Fee (Check the appropriate box):

þ		No fee required.
o		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

	(1)		Title of each class of securities to which transaction applies:
	(2)		Aggregate number of securities to which transaction applies:
	(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
	(4)		Proposed maximum aggregate value of transaction:
	(5)		Total fee paid:

o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	(1)		Amount Previously Paid:
	(2)		Form, Schedule or Registration Statement No.:
	(3)		Filing Party:
	(4)		Date Filed:

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

OF McKESSON CORPORATION

 

The 2010 Annual Meeting of Stockholders of McKesson Corporation will be held on Wednesday, July 28, 2010 at 8:30 a.m. at the Palace Hotel, Twin Peaks Ballroom, 2 New Montgomery Street, San Francisco, California to:

 

 

Stockholders of record at the close of business on June 1, 2010 are entitled to notice of and to vote at the meeting or any adjournment or postponement of the meeting.

 

By Order of the Board of Directors

 

Willie C. Bogan
Associate General Counsel and Secretary

 

One Post Street

San Francisco, California 94104-5296

June 21, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

PROXY STATEMENT

 

General Information

 

 

The Board of Directors of McKesson Corporation (the “Company” or “we” or “us”), a Delaware corporation, is soliciting proxies to be voted at the Annual Meeting of Stockholders to be held July 28, 2010 (the “Annual Meeting”), and at any adjournment or postponement thereof. This proxy statement includes information about the matters to be voted upon at the Annual Meeting.

 

On June 21, 2010, the Company began delivering proxy materials to all stockholders of record at the close of business on June 1, 2010 (the “Record Date”). On the Record Date, there were 259,946,481 shares of the Company’s common stock outstanding and entitled to vote. As a stockholder, you are entitled to one vote for each share of common stock you held on the Record Date, including shares: (i) held directly in your name as the stockholder of record; (ii) held for you in an account with a broker, bank or other nominee; or (iii) allocated to your account in the Company’s Profit-Sharing Investment Plan (the “PSIP”).

 

You can revoke your proxy at any time before the Annual Meeting by sending to the Company’s Corporate Secretary a written revocation or a proxy bearing a later date. You may also revoke your proxy by attending the Annual Meeting in person and casting a ballot. If you hold your shares through a broker, bank or other nominee and have instructed the broker, bank or other nominee as to how to vote your shares, you must follow directions received from the broker, bank or other nominee in order to change your vote or to vote at the Annual Meeting.

 

If you are a stockholder of record or a participant in the Company’s PSIP, you can give your proxy by calling a toll-free number, by using the Internet, or by mailing your signed proxy card(s). Specific instructions for voting by means of the telephone or Internet are located on the enclosed proxy card. The telephone and Internet voting procedures are designed to authenticate each stockholder’s identity and to allow each stockholder to vote his or her shares and confirm that his or her voting instructions have been properly recorded. If you do not wish to vote by telephone or via the Internet, please complete, sign and return the proxy card in the self-addressed, postage-paid envelope provided.

 

If you have shares held by a broker, bank or other nominee, you may instruct your nominee to vote your shares by following your nominee’s instructions. Your vote as a stockholder is important. Please vote as soon as possible to ensure that your vote is recorded.

 

All shares represented by valid proxies will be voted as specified. If you sign and return a proxy card without specific voting instructions, your shares will be voted as recommended by our Board of Directors (the “Board” or the “Board of Directors”) on all proposals described in this proxy statement, and in the discretion of the designated proxy holders as to any other matters that may properly come before the Annual Meeting. We currently know of no other matter to be presented at the Annual Meeting, except for the proposals described in this proxy statement.

 

All votes cast at the Annual Meeting will be tabulated by Broadridge Financial Solutions, Inc. (“Broadridge”), which has been appointed the independent inspector of election. Broadridge will determine whether or not a quorum is present.

 

You will need to bring your admission ticket if you plan to attend the Annual Meeting. You will find an admission ticket attached to the proxy card if you are a registered stockholder or PSIP participant. If your shares are held in the name of a broker, bank or other stockholder of record and you plan to attend the Annual Meeting in person, you may obtain an admission ticket in advance by sending a request, along with proof of ownership, such as a brokerage or bank account statement, to the Company’s Corporate Secretary, One Post Street, 35th Floor, San Francisco, California 94104. Stockholders who do not have an admission ticket will only be admitted upon verification of ownership.

 

For those stockholders who participate in the Company’s Automatic Dividend Reinvestment Plan (“DRP”), the enclosed proxy card includes all full shares of common stock held in your DRP account on the Record Date for the Annual Meeting, as well as your shares held of record.

 

The votes required and the methods of calculation for the proposals to be considered at the Annual Meeting are as follows:

 

Item 1 — Election of Directors. Each share of the Company’s common stock you own entitles you to one vote. You may vote “for” or “against” one or more of the director nominees, or “abstain” from voting on the election of any nominee. A nominee will be elected as a director if he or she receives a majority of votes cast (that is, the number of votes cast “for” a director nominee must exceed the number of votes cast “against” that nominee). Abstentions or broker non-votes (as described below), if any, will not count as votes cast. There is no cumulative voting with respect to the election of directors.

 

Item 2 — Proposal to Reapprove the Performance Measures Available for Performance-Based Awards under the Company’s Amended and Restated 2005 Stock Plan. Re-approval of the performance measures for performance-based awards under the Company’s amended and restated 2005 Stock Plan (the “2005 Stock Plan”) requires the affirmative vote of a majority of the shares present, in person or by proxy, and entitled to vote on the proposal at the Annual Meeting. You may vote “for” or “against,” or “abstain” from voting on, the proposal to reapprove the performance measures for performance-based awards under the Company’s 2005 Stock Plan. Abstentions on this proposal, if any, will have the same effect as voting against the proposal; however, broker non-votes, if any, will be disregarded for purposes of calculating the outcome.

 

Item 3 — Proposal to Reapprove the Performance Measures Available for Performance-Based Awards under the Company’s Amended and Restated 2005 Management Incentive Plan. Re-approval of the performance measures for performance-based awards under the Company’s amended and restated 2005 Management Incentive Plan (the “MIP”) requires the affirmative vote of a majority of the shares present, in person or by proxy, and entitled to vote on the proposal at the Annual Meeting. You may vote “for” or “against,” or “abstain” from voting on, the proposal to reapprove the performance measures for performance-based awards under the Company’s MIP. Abstentions on this proposal, if any, will have the same effect as voting against the proposal; however, broker non-votes, if any, will be disregarded for purposes of calculating the outcome.

 

Item 4 — Ratification of the Appointment of Independent Registered Public Accounting Firm. Ratification of the appointment of Deloitte & Touche LLP for the current fiscal year requires the affirmative vote of a majority of the shares present, in person or by proxy, and entitled to vote on the proposal at the Annual Meeting. Our 2011 fiscal year began on April 1, 2010 and will end on March 31, 2011 (“FY 2011”). You may vote “for” or “against,” or “abstain” from voting on, the proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for FY 2011. Abstentions on this proposal, if any, will have the same effect as voting against the proposal; however, broker non-votes, if any, will be disregarded for purposes of calculating the outcome.

 

Item 5 — Stockholder Proposal on Executive Stock Retention for Two Years Beyond Retirement. Approval of this stockholder proposal requires the affirmative vote of a majority of the shares present, in person or by proxy, and entitled to vote on the proposal at the Annual Meeting. You may vote “for” or “against,” or “abstain” from voting on this proposal. Abstentions on this proposal, if any, will have the same effect as voting against the proposal; however, broker non-votes, if any, will be disregarded for purposes of calculating the outcome.

 

Item 6 — Stockholder Proposal on Preparing a Pay Differential Report. Approval of this stockholder proposal requires the affirmative vote of a majority of the shares present, in person or by proxy, and entitled to vote on the proposal at the Annual Meeting. You may vote “for” or “against,” or “abstain” from voting on this proposal. Abstentions on this proposal, if any, will have the same effect as voting against the proposal; however, broker non-votes, if any, will be disregarded for purposes of calculating the outcome.

 

The Board recommends a vote “FOR” each nominee named in Item 1,

“FOR” Items 2, 3 and 4, and “AGAINST” Items 5 and 6.

 

We intend to announce preliminary voting results at the Annual Meeting, and publish preliminary or final results, if available, in a Current Report on Form 8-K to be filed with the Securities and Exchange Commission (the “SEC”) within four business days of the Annual Meeting.

 

The presence in person or by proxy of holders of a majority of the outstanding shares of common stock entitled to vote will constitute a quorum for the transaction of business at the Annual Meeting. In the event of abstentions or broker non-votes, as defined below, the shares represented will be considered present for quorum purposes.

 

 

If you submit your proxy or attend the Annual Meeting, but choose to abstain from voting on any proposal, you will be considered present and not voting on the proposal.

 

Generally, broker non-votes occur when a broker, bank or other nominee is not permitted (that is, it does not have discretion) to vote on a proposal without instructions from the beneficial owner and instructions are not given. Under rules of the New York Stock Exchange (the “NYSE”), brokers, banks and other nominees do not have such discretionary voting authority for matters that are considered non-routine by the NYSE. As the result of recent NYSE rule changes, the election of directors is now, unlike in prior years, classified as a non-routine matter. Accordingly, brokers, banks and other nominees will not be permitted to vote on the election of directors without instructions from the beneficial owners. We therefore encourage all beneficial owners to provide voting instructions to ensure that their shares are voted at the Annual Meeting.

 

In the election of directors, abstentions and broker non-votes, if any, will be disregarded and have no effect on the outcome of the vote. For the proposed re-approval of the performance measures available under the Company’s 2005 Stock Plan and MIP, the ratification of the appointment of Deloitte & Touche LLP and the vote on the two stockholder proposals, abstentions from voting will have the same effect as voting against such matters; however, broker non-votes, if any, will be disregarded for purposes of calculating the outcome.

 

Participants in the Company’s tax qualified 401(k) plan, the PSIP, have the right to instruct the PSIP Trustee, on a confidential basis, how the shares allocated to their accounts are to be voted, and will receive a voting instruction card for that purpose. In general, the PSIP provides that all shares for which no voting instructions are received from participants and unallocated shares of common stock held in the employee stock ownership plan established as part of the PSIP, will be voted by the Trustee in the same proportion as shares for which voting instructions are received. However, shares that have been allocated to PSIP participants’ PAYSOP accounts for which no voting instructions are received will not be voted.

 

The names of stockholders of record entitled to vote at the Annual Meeting will be available at the meeting and for ten days prior to the meeting for any purpose germane to the Annual Meeting, or during ordinary business hours, at our principal executive offices at One Post Street, 35th Floor, San Francisco, California. You may obtain this information by contacting the Secretary of the Company.

 

The notice of annual meeting, proxy statement and Annual Report on Form 10-K for our fiscal year ended March 31, 2010 are available at www.proxyvote.com. Instead of receiving future copies of the proxy statement and Annual Report on Form 10-K by mail, you may, by following the applicable procedures described below, elect to receive these documents electronically, in which case you will receive an e-mail with a link to these documents.

 

Stockholders of Record: You may elect to receive proxy materials electronically next year in place of printed materials by logging on to www.proxyvote.com and entering your control number, which you can locate on the accompanying proxy card. By doing so, you will save the Company printing and mailing expenses, reduce the

impact on the environment and obtain immediate access to the Annual Report on Form 10-K, proxy statement and voting form when they become available.

 

Beneficial Stockholders: If you hold your shares through a broker, bank or other holder of record, you may also have the opportunity to receive copies of the proxy statement and Annual Report on Form 10-K electronically. Please check the information provided in the proxy materials mailed to you by your broker, bank or other holder of record regarding the availability of this service or contact the broker, bank or other holder of record through which you hold your shares and inquire about the availability of such an option for you.

 

If you elect to receive your materials via the Internet, you can still request paper copies by leaving a message with Investor Relations at (800) 826-9360 or by sending an e-mail to investors@mckesson.com.

 

In a further effort to reduce printing costs and postage fees, we have adopted a practice approved by the SEC called “householding.” Under this practice, stockholders who have the same address and last name and do not participate in electronic delivery of proxy materials will receive only one copy of our proxy materials, unless any of these stockholders notifies us that he or she wishes to continue receiving individual copies. Stockholders who participate in householding will continue to receive separate proxy cards.

 

If you share an address with another stockholder and received only one set of proxy materials, but would like to request a separate copy of these materials, please contact Broadridge by calling 800-542-1061 or by writing to Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717. Similarly, you may also contact Broadridge if you received multiple copies of the proxy materials and would prefer to receive a single copy in the future.

PROPOSALS TO BE VOTED ON

 

 

There are nine nominees for election to the Board of Directors of the Company. The directors elected at the Annual Meeting will hold office until the 2011 Annual Meeting of Stockholders and until their successors have been elected and qualified, or until their earlier death, resignation or removal.

 

All nominees are existing directors and were elected to the Board at the 2009 Annual Meeting of Stockholders. For purposes of the upcoming Annual Meeting, the Committee on Directors and Corporate Governance (the “Governance Committee”) recommended the reelection of all nominees as a director. 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, if the Board names one, as such persons determine in their best judgment. As an alternative, the Board may reduce the number of directors to be elected at the Annual Meeting.

 

Majority Voting Standard for Election of Directors. The Company’s Amended and Restated By-laws provide for a majority voting standard for the election of directors in uncontested director elections, such as that being conducted this year. Under this standard, a director nominee will be elected only if the number of votes cast “for” the nominee exceeds the number of votes cast “against” that nominee. In the case of contested elections (a situation in which the number of nominees exceeds the number of directors to be elected), the plurality vote standard will apply. This majority voting standard is described further below under the section entitled “Corporate Governance — Majority Voting Standard.”

 

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.

 

 

Mr. Bryant, age 60, has served as Executive Vice President and Chief Administrative Officer of Intel Corporation since October 2007. He served as Intel’s Chief Financial Officer from 1994 to October 2007. Mr. Bryant joined Intel in 1981 and held a number of management positions before becoming Chief Financial Officer. He is also a director of Columbia Sportswear Company and Kryptiq Corporation. He was formerly a director of Synopsys Inc. Mr. Bryant has been a director of the Company since January 2008. He is Chair of the Finance Committee and a member of the Audit Committee.

 

Mr. Bryant’s years of experience as an executive at a large global company, including as Chief Administrative Officer and Chief Financial Officer, provide to the Company’s Board operational, strategic planning and financial expertise and considerable business acumen, as well as international business experience. Mr. Bryant also has public company board experience with service on audit and governance committees. In addition, having joined the Company’s Board in 2008, Mr. Bryant has brought a valuable new perspective to the Board.

 

 

Mr. Budd, age 68, joined the law firm of Goodwin Procter LLP as Senior Counsel in October 2004. He had been Senior Executive Vice President and General Counsel and a director of John Hancock Financial Services, Inc. since 2000 and a director of John Hancock Life Insurance Company since 1998. From 1996 to 2000, Mr. Budd was Group President-New England for Bell Atlantic Corporation (now Verizon Communications, Inc.). From 1994 to 1997, Mr. Budd was a Commissioner, United States Sentencing Commission and from 1993 to 1996, he was a senior partner at the law firm of Goodwin Procter LLP. From 1992 to 1993, he was the Associate Attorney General of the United States and from 1989 to 1992, he was United States Attorney for the District of Massachusetts. Mr. Budd has been a director of the Company since October 2003. He is a member of the Audit Committee and the Committee on Directors and Corporate Governance.

 

Mr. Budd brings to our Board significant legal and regulatory expertise gained from years of large law firm practice, and major governmental positions with both civil and law enforcement responsibilities. His legal experience and seasoned judgment have been instrumental in helping the Board navigate legal challenges. Additionally, he has senior executive business experience and public company board experience with service on audit, governance, compensation, and special litigation committees.

 

 

Mr. Hammergren, age 51, has served as Chairman of the Board since July 2002, and President and Chief Executive Officer of the Company since April 2001. Mr. Hammergren joined the Company in 1996 and held a number of management positions before becoming President and Chief Executive Officer. He is also a director of Nadro, S.A. de C.V. (Mexico), an entity in which the Company holds interests, and a director of the Hewlett-Packard Company. He has been a director of the Company since July 1999.

 

Including his experience at other significant healthcare organizations prior to joining the Company, Mr. Hammergren brings to the Board nearly 30 years of business and leadership experience in healthcare, as well as public company board experience. In addition to the strong leadership skills exhibited as Chief Executive Officer of the Company, he currently serves as Chairman of the Healthcare Leadership Council, a coalition of chief executives of the nation’s leading healthcare companies and organizations. His healthcare industry and general business perspective have been broadened through his membership on this council, on the Business Council and on the Business Roundtable. The Board benefits from Mr. Hammergren’s extensive knowledge of the Company, and from his deep understanding of its customer base, workforce, competition, challenges and opportunities.

 

 

Mr. Irby, age 69, was the founding partner and has been Chairman of London Bay Capital, a privately-held investment firm, since May 2006. He was the founding partner of Tricorn Partners LLP, a privately-held investment bank from May 2003 to May 2006, a partner of Gleacher & Co. Ltd. from January 2001 until April 2003, and Chairman and Chief Executive Officer of HawkPoint Partners, formerly known as National Westminster Global Corporate Advisory, from 1997 until 2000. He was a founding partner of Hambro Magan Irby Holdings from 1988 to 1997. He is the Chairman of ContentFilm plc and also serves as a director of Thomas Weisel Partners Group, Inc. He is also a director of an indirect wholly-owned subsidiary of the Company, McKesson Information Solutions UK Limited. He was formerly a director of Catlin Group PLC and Centaur Holdings PLC. Mr. Irby has been a director of the Company since January 1999. He is Chair of the Compensation Committee and a member of the Finance Committee.

 

Mr. Irby has 35 years of experience as a senior executive of a number of financial services companies, and 30 years of service on various private and public company boards. During this time, he has acquired significant international business experience and demonstrated entrepreneurial talent as the founding partner of several firms. Based on his overall experience, Mr. Irby is able to provide to the Company’s Board valuable insights into financial and capital market matters, acquisition opportunities and divestiture considerations.

 

 

Ms. Jacobs, age 59, is the Chairman, President and Chief Executive Officer of Theragenics Corporation, a manufacturer of prostate cancer treatment devices and surgical products. She has held the position of Chairman since May 2007, 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. She is a member of the Compensation Committee and the Committee on Directors and Corporate Governance.

 

Having led a public company within the healthcare industry for 17 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 a Chairman and Chief Executive Officer, she is at the forefront of her company in regard to the evolving corporate governance environment, which enables her to provide valuable contributions as a member of the Governance Committee of our Board.

 

 

Ms. Knowles, age 63, retired from Atlantic Richfield Company (“ARCO”) in 2000 and was Executive Vice President and Chief Financial Officer from 1996 until 2000 and a director from 1996 until 1998. She joined ARCO in 1972. Ms. Knowles is also a member of the Board of Trustees of the Fidelity Funds. She has been a director of the Company since March 2002. She is the Chair of the Audit Committee and a member of the Finance Committee.

 

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.

 

 

Dr. Lawrence, age 69, retired as Chief Executive Officer and Chairman of Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals in December 2002. He served as Chairman of the Board from 1992 to May 2002 and Chief Executive Officer from 1991 to May 2002 of Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals. He held a number of management positions with these organizations prior to assuming these positions, including Vice Chairman of the Board and Chief Operating Officer. He is also a director of Agilent Technologies Inc. He was formerly a director of Raffles Medical Group, Inc., PG&E Corporation and Dynavax Technologies Corporation. Dr. Lawrence has been a director of the Company since January 2004. He is a member of the Compensation Committee and Finance Committee.

 

Dr. Lawrence possesses considerable leadership experience in the healthcare industry, having served for a decade as Chairman and Chief Executive Officer of the largest private healthcare system in the world. This experience, coupled with his training as a physician, enables him to provide an important perspective and valuable insight into various aspects of the Company’s businesses. In addition, Dr. Lawrence brings to our Board broad experience and perspective gained through his considerable public company board experience, including his service on compensation, audit, finance and governance committees.

 

 

Mr. Mueller, age 63, has served as Chairman and Chief Executive Officer of Qwest Communications International Inc., a provider of voice, data and video services, since August 2007. He served as Chief Executive Officer of Williams-Sonoma, Inc., a provider of specialty products for cooking, from January 2003 until July 2006. 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 is also a director of The Clorox Company. He was formerly a director of Williams-Sonoma, Inc. and VeriSign, Inc. Mr. Mueller has been a director of the Company since April 2008. He is a member of the Compensation Committee and the Committee on Directors and Corporate Governance.

 

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 deliberative and decision-making process. As Chairman of the Board of his company, Mr. Mueller takes a leadership role in the corporate governance of his company, 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.

 

 

Dr. Shaw, age 71, retired as Chairman of the Board of Aerogen, Inc., a company specializing in the development of products for improving respiratory therapy, in October 2005. She had held that position since 1998. She retired as Chief Executive Officer of that company in June 2005. She is also currently the non-executive Chairman of Intel Corporation, and a director of Talima Therapeutics, Inc. She was formerly a director of OfficeMax Incorporated. Dr. Shaw has been a director of the Company since April 1992. She is the Chair of the Committee on Directors and Corporate Governance and a member of the Audit Committee.

 

As a former Chief Executive Officer, Dr. Shaw brings to the Board executive leadership and business management experience in the healthcare industry. She also has a strong financial background, which positions her well to serve on the Audit Committee. As a former Board Chairman and the current non-executive Chairman of Intel Corporation, Dr. Shaw is well qualified to serve as Chair of the Governance Committee and has played a major role in helping the Company navigate the changing governance landscape. Having been raised and educated in Europe, she also has an international background that broadens the Board’s perspective. As the longest-standing Board member, the Board benefits from her considerable institutional knowledge. It is also noteworthy that Dr. Shaw was named a “2010 Outstanding Director” by the Outstanding Directors Exchange.

 

 

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 stockholders. The Board’s

goal is to build long-term value for the Company’s stockholders 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 goals, the Board monitors both the performance of the Company and the performance of the Chief Executive Officer (“CEO”). The Board currently consists of nine members, all of whom are independent with the exception of the Chairman.

 

The Board has, and for many years has had, standing committees: currently, the Audit Committee, the Compensation Committee, the Committee on Directors and Corporate Governance, and the Finance Committee. Each of these committees is governed by a written charter approved by the Board in compliance with the applicable requirements of the SEC and the NYSE listing requirements (collectively, the “Applicable Rules”). The charter of each committee requires an annual review by such committee. 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 meets the additional, heightened independence criteria applicable to audit committee members, as established by the SEC. 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. The members of the committees are identified in the table below.

 

 

Board and Meeting Attendance

 

During the fiscal year ended March 31, 2010 (“FY 2010”), the Board met seven times. Each director attended at least 75% of the aggregate number of meetings of the Board and of all the committees on which he or she served. Directors meet their responsibilities not only by attending Board and committee meetings, but also through communication with executive management on matters affecting the Company. Directors are also expected to attend the upcoming Annual Meeting, and all but one director attended the prior year Annual Meeting of Stockholders held in July 2009.

 

Audit Committee

 

The Audit Committee is responsible for, among other things, reviewing with management the annual audited financial statements filed in the Annual Report on Form 10-K, including any major issues regarding accounting principles and practices as well as the adequacy and effectiveness of internal control over financial reporting that could significantly affect the Company’s financial statements; reviewing with financial management and the independent registered public accounting firm (the “independent accountants”) the interim financial statements prior to the filing of the Company’s quarterly reports on Form 10-Q; the appointment of the independent accountants; monitoring the independence and evaluating the performance of the independent accountants; approving the fees to be paid to the independent accountants; reviewing and accepting the annual audit plan, including the scope of the audit activities of the independent accountants; at least annually reassessing the adequacy of the Audit Committee’s charter and recommending to the Board any proposed changes; reviewing major changes to the Company’s accounting principles and practices; reviewing the appointment, performance, and replacement of the senior internal audit department executive; advising the Board with respect to the Company’s policies and procedures regarding compliance with applicable laws and regulations and with the Company’s code of conduct; and performing such other activities and considering such other matters, within the scope of its responsibilities, as

the Audit Committee or Board deems necessary or appropriate. The composition of the Audit Committee, the attributes of its members, including the requirement that each be “financially literate” and have other requisite experience, and the responsibilities of the Audit Committee, as reflected in its charter, are in accordance with the Applicable Rules for corporate audit committees.

 

Audit Committee Financial Expert

 

The Board has designated Ms. Knowles as the Audit Committee’s financial expert and has determined that she meets the qualifications of an “audit committee financial expert” in accordance with SEC rules, and that she is “independent” as defined for audit committee members in the listing standards of the NYSE and applicable SEC requirements, and in accordance with the Company’s additional director independence standards.

 

Compensation Committee

 

The Compensation Committee has responsibility for, among other things, reviewing all matters relating to CEO compensation, including making and annually reviewing decisions concerning cash and equity compensation, and other terms and conditions of employment for the CEO, incorporating the review of the CEO’s performance against pre-established business and individual objectives that is conducted annually by the full Board; reviewing and approving corporate goals and objectives relating to compensation of other executive officers, and making and annually reviewing decisions concerning the cash and equity compensation, and other terms and conditions of employment for those executive officers; reviewing and making recommendations to the Board with respect to adoption of, or amendments to, all equity-based incentive compensation plans and arrangements for employees and cash-based incentive plans for senior executive officers, including an evaluation of whether the relationship between the incentives associated with these plans and the level of risk-taking by executive officers in response to such incentives is reasonably likely to have a material adverse effect on the Company; approving grants of stock, stock options, stock purchase rights or other equity grants to employees eligible for such grants (unless such responsibility is delegated pursuant to the applicable stock plan); interpreting the Company’s stock plans; reviewing its charter annually and recommending to the Board any changes the Compensation Committee determines are appropriate; participating with management in the preparation of the Compensation Discussion and Analysis for the Company’s proxy statement; and performing such other activities required by applicable law, rules or regulations, and consistent with its charter, as the Compensation Committee or the Board deems necessary or appropriate. The Compensation Committee may delegate to any officer or officers the authority to grant awards to employees other than directors or executive officers, provided that such grants are within the limits established by the Delaware General Corporation Law and by resolution of the Board. The Compensation Committee determines the structure and amount of all executive officer compensation, including awards of equity, based upon the initial recommendation of management and in consultation with the Compensation Committee’s outside compensation consultant.

 

The Compensation Committee directly employs its own independent compensation consultant, Compensation Strategies, Inc., and independent legal counsel, Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. These advisors do not provide any other services to the Company, other than Compensation Strategies, Inc., which also provides consulting services to the Governance Committee in the area of director compensation. In accordance with its charter, the Compensation Committee annually evaluates the qualifications, performance and independence of its advisors. Additional information on the Compensation Committee’s process and procedures for consideration of executive compensation is addressed in the Compensation Discussion and Analysis below.

 

Finance Committee

 

The Finance Committee has responsibility for, among other things, reviewing the Company’s dividend policy; reviewing the adequacy of the Company’s insurance programs; 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; making recommendations concerning significant changes in the capital structure of the Company; reviewing tax planning strategies utilized by management; reviewing the funding status and investment policies of the Company’s tax-qualified retirement plans; and reviewing and (when authorized by the Board) approving the principal terms and conditions of securities that may be issued by the Company.

Committee on Directors and Corporate Governance

 

The Governance Committee has responsibility for, among other things, recommending guidelines and criteria to be used to select candidates for Board membership; reviewing the size and composition of the Board to assure that proper skills and experience are represented; 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; developing and administering the Company’s related party transactions policy; advising the Board on matters of corporate governance, including the Corporate Governance Guidelines and composition of committees; and advising the Board regarding director compensation and administering the 2005 Stock Plan with respect to directors’ equity awards.

 

Director Qualifications, Nomination and Diversity

 

To fulfill its responsibility to recruit and recommend to the full 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 stockholders. Stockholders who wish to propose a director candidate for consideration by the Governance Committee may do so by submitting the candidate’s name, resume and biographical information and qualifications to the attention of the Secretary of the Company at One Post Street, 35th Floor, San Francisco, California 94104. All proposals for recommendation or nomination received by the Secretary will be presented to the Governance Committee for its consideration. The Governance Committee and the Company’s CEO will interview those candidates who meet the criteria described below, and the Governance Committee will recommend to the Board nominees that best suit the Board’s needs. In order for a recommended director candidate to be considered by the Governance Committee for nomination for election at an upcoming annual meeting of stockholders, the recommendation must be received by the Secretary not less than 120 days prior to the anniversary date of the Company’s most recent annual meeting of stockholders.

 

In evaluating candidates for the Board, the Governance Committee reviews each candidate’s biographical information and credentials, and assesses each candidate’s independence, skills, experience and expertise based on a variety of factors. Members of the Board should have the highest professional and personal ethics, integrity and values 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 national prominence in a relevant field as a faculty member or senior government officer. The Governance Committee will consider whether the candidate has had a successful career that 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. Board members must take into account and balance the legitimate interests and concerns of all of the Company’s stockholders and other stakeholders, and must be able to devote sufficient time and energy to the performance of their duties as a director, as well as have a commitment to diversity.

 

The Governance Committee has responsibility under its charter to review annually with the Board the size and composition of the Board with the objective of achieving the appropriate balance of knowledge, experience, skills, expertise and diversity required for the Board as a whole. Although the Board does not maintain a formal policy regarding diversity, 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. A high level of diversity on our Board has been achieved in these areas, as evidenced by the information concerning our directors that is provided under “Nominees” above. Our Governance Committee and Board believe that a diverse representation on the Board fosters a robust, comprehensive, and balanced deliberative and decision-making process that is essential to the continued effective functioning of the Board and continued success of the Company.

 

Director Compensation

 

The Company believes that compensation for non-employee directors should be competitive and should encourage ownership of the Company’s stock. The compensation for each non-employee director of the Company includes an annual cash retainer, an annual restricted stock unit (“RSU”) award and per-meeting fees. The Presiding Director

and committee chairs also receive an additional annual retainer. 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. 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.

 

Cash Compensation

 

Directors may receive their annual retainers and meeting fees in cash or defer their cash compensation into the Company’s Deferred Compensation Administration Plan III (“DCAP III”). Directors may elect in advance to defer up to 100% of their annual retainer (including any committee chair or Presiding Director retainer) and all of their meeting fees earned during any calendar year into the Company’s DCAP III. The minimum deferral period for any amounts deferred is five years, and if a director ceases to be a director of the Company for any reason other than death, disability or retirement, the account balance will be paid in January or July, which is at least six months following his or her separation. In the event of death, disability or retirement, the account balance will be paid in accordance with the director’s distribution election. To attain retirement, a director must have served on the Board for at least six successive years prior to his or her separation. The Compensation Committee approves the interest rate to be credited each year to amounts deferred into the DCAP III, and the interest rate for calendar year 2010 is (i) 8.0% per annum for amounts deferred prior to January 1, 2010, and (ii) 120% of the long-term applicable federal rate as published by the U.S. Internal Revenue Service for December 2009, i.e., 4.91% per annum, for amounts deferred in calendar year 2010.

 

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

 

 

Equity Compensation

 

Each July, non-employee directors receive an automatic annual grant of RSUs with an approximate value as of the grant date equal to $150,000. The actual number of RSUs under the grant is determined by dividing $150,000 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 units, in accordance with the requirements of our 2005 Stock Plan.

 

The RSUs granted to non-employee directors vest immediately. If a director meets the director stock ownership guidelines (currently $300,000 in shares and share equivalents), then the director will, on the grant date, receive the shares underlying the RSU award, 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 the shares underlying the RSU award will automatically be deferred until after the director’s separation from service.

 

Recipients of RSUs are entitled to dividend equivalents at the same dividend rate applicable to the Company’s common stockholders, which for FY 2010, was set at $0.12 per share each quarter. At its meeting on May 26, 2010, the Board approved an increase in the Company’s dividend rate to $0.18 per share each quarter for dividends declared on and after such date, until further action by the Board. For our directors, dividend equivalents on the RSUs are credited quarterly to an interest bearing cash account and are not distributed until the shares underlying the RSU award are released to the director. Interest accrues on directors’ credited dividend equivalents at the rate set by the Compensation Committee under the terms of our 2005 Stock Plan, which for calendar year 2010 is 8.0% per annum.

All Other Compensation and Benefits

 

Non-employee directors are eligible to participate in the McKesson Foundation’s Matching Gifts Program. Under this program, directors’ gifts to schools, educational associations or funds, and other public charitable organizations are eligible for a match by the foundation up to $5,000 per director for each fiscal year.

 

2010 Director Compensation Table

 

The following table sets forth information concerning the compensation paid or earned by each non-employee director for the fiscal year ended March 31, 2010. Mr. Hammergren, our Chairman, President and Chief Executive Officer, is not included in this table as he is an employee of the Company and thus receives no compensation for his service as a director. The compensation received by Mr. Hammergren as an officer of the Company is shown in the 2010 Summary Compensation Table.

 

 

 

 

Corporate Governance

 

The Board is committed to, and for many years has adhered to, sound and effective corporate governance practices. The Board is also committed to diligently exercising its oversight responsibilities with respect to the Company’s business and affairs consistent with the highest principles of business ethics, and to meeting the corporate governance requirements of both federal law and the NYSE. In addition to its routine monitoring of best practices, each year the Board and its committees review the Company’s current corporate governance practices, the corporate governance environment and current trends, and update their written charters and guidelines as necessary. The Board has adopted independence standards for its members, Corporate Governance Guidelines, as well as charters for the Audit, Compensation, Finance and Governance Committees, all of which can be found on the Company’s website at www.mckesson.com under the caption “Investors — Corporate Governance” and are described more fully below.

 

Majority Voting Standard

 

The Company’s Amended and Restated By-Laws (the “By-Laws”) provide for a majority voting standard for the election of directors. This standard states that in uncontested director elections, a director nominee will be elected only if the number of votes cast “for” the nominee exceeds the number of votes cast “against” that nominee. To address the “holdover” director situation in which, under Delaware law, a director remains on the Board until his or her successor is elected and qualified, the By-Laws require each director nominee to submit an irrevocable resignation in advance of the stockholder vote. The resignation would be contingent upon both the nominee not receiving the required vote for reelection and acceptance of the resignation by the Board pursuant to its policies.

 

If a director nominee receives more “against” votes for his or her election, the Board’s Governance Committee, composed entirely of independent directors, will evaluate and make a recommendation to the Board with respect to the tendered resignation. In its review, the Governance Committee will consider, by way of example, the following factors: the impact of the acceptance of the resignation on stock exchange listing or other regulatory requirements; the financial impact of the acceptance of the resignation; the unique qualifications of the director whose resignation has been tendered; the reasons the Governance Committee believes that stockholders cast votes against the election of such director (such as a “vote no” campaign on an illegitimate or wrongful basis); and any alternatives for addressing the “against” votes.

 

The Board must take action on the Governance Committee’s recommendation within 90 days following certification of the stockholders’ vote. Absent a determination by the Board that it is in the best interests of the Company for an unsuccessful incumbent to remain on the Board, the Board shall accept the resignation. The majority vote standard states that the Board expects an unsuccessful incumbent to exercise voluntary recusal from deliberations of the Governance Committee or the Board with respect to the tendered resignation. In addition, the standard requires the Company to file a current report on Form 8-K with the SEC within four business days after the Board’s acceptance or rejection of the resignation, which must include an explanation of the reasons for any rejection of the tendered resignation. Finally, the standard also provides procedures to address the situation in which a majority of the members of the Governance Committee are unsuccessful incumbents or all directors are unsuccessful incumbents.

If the Board accepts the resignation of an unsuccessful incumbent director, or if in an uncontested election a nominee for director who is not an incumbent director does not receive a majority vote, the Board may fill the resulting vacancy or decrease the size of the Board. In contested elections, the plurality vote standard will apply. A contested election is an election in which a stockholder has duly nominated a person to the Board and has not withdrawn that nomination at least five days prior to the first mailing of the notice of the meeting of stockholders.

 

Codes of Business Conduct and Ethics

 

The Company is committed to the highest standards of ethical and professional conduct and has adopted a Code of Business Conduct and Ethics that applies to all directors, officers and employees, and provides guidance for conducting the Company’s business in a legal, ethical and responsible manner. In addition, the Company has adopted a Code of Ethics applicable to the Chief Executive Officer, Chief Financial Officer, Controller and Financial Managers (“Senior Financial Managers’ Code”) that supplements the Code of Business Conduct and Ethics by providing more specific requirements and guidance on certain topics. Both of the Codes are available on the Company’s website at www.mckesson.com under the caption “Investors — Corporate Governance.” The Company intends to post any amendment to, or waiver from, its Senior Financial Managers’ Code on its website within four business days after any such amendment or waiver.

 

Related Party Transactions Policy

 

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 five percent of the Company’s common stock, and immediate family members of any such persons where the amount involved exceeds $100,000. 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 CEO for consideration with the General Counsel as to approval or ratification in the case of other executive officers and/or their immediate family members, or to the Governance Committee in the case of transactions involving directors, nominees for director, the General Counsel, the CEO or holders of more than five percent of the Company’s common stock and/or their immediate family members. Annually directors, nominees and executive officers are asked to identify any transactions that might fall under the policy as well as identify immediate family members. Additionally, they are required to notify the General Counsel promptly of any proposed related party transaction. The policy is administered by the Governance Committee. The transaction may be ratified or approved if it 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: (i) the business purpose of the transaction; (ii) whether it is entered into on an arms-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 Business Conduct and Ethics.

 

The Company and its subsidiaries may, in the ordinary course of business, have transactions involving more than $100,000 with unaffiliated companies of which certain of the Company’s directors are directors and/or executive officers. Therefore, under the policy, the Governance Committee reviews such transactions. However, the Company does not consider the amounts involved in such transactions to be material in relation to its businesses, the businesses of such other companies or the interests of the directors involved. In addition, the Company believes that such transactions are on the same terms generally offered by such other companies to other entities in comparable transactions.

 

Corporate Governance Guidelines

 

The Board for many years has had directorship practices reflecting sound corporate governance practices and, in response to the NYSE listing requirements, in 2003 adopted Corporate Governance Guidelines which address various governance matters, including, among others: director qualification standards and the director nomination process; stockholder communications with directors; director responsibilities; selection and role of the Presiding Director; director access to management and, as necessary and appropriate, independent advisors; director compensation; director stock ownership guidelines; director orientation and continuing education; management succession; and an annual performance evaluation of the Board. The Governance Committee is responsible for overseeing the guidelines and annually assessing their adequacy. The Board most recently approved revised Corporate Governance Guidelines on July 22, 2009, which can be found on the Company’s website at www.mckesson.com under the caption “Investors — Corporate Governance.”

Director Stock Ownership Guidelines

 

Prior to July 25, 2007, pursuant to the Company’s Director Stock Ownership Guidelines, directors were expected to own shares or share equivalents of the Company’s common stock with a value not less than three times the annual board retainer within three years of joining the Board. At its July 25, 2007 meeting, the Board amended the Company’s Director Stock Ownership Guidelines such that directors are now expected to own shares or share equivalents of the Company’s common stock with a value not less than four times the annual board retainer within three years of joining the Board. As of June 1, 2010, all of our directors were in compliance with the Company’s amended Director Stock Ownership Guidelines.

 

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. The Board must determine, based on all relevant facts and circumstances, whether in its business judgment, each director satisfies the criteria for independence, including the absence of a material relationship with the Company, either directly or indirectly. Consistent with the continued listing requirements of the NYSE, the Board has established standards to assist it in making a determination of director independence. A director will not be considered independent if:

 

 

These standards can also be found on the Company’s website at www.mckesson.com under the caption “Investors — Corporate Governance.” Provided that no relationship or transaction exists that would disqualify a director under these standards, and no other relationship or transaction exists of a type not specifically mentioned in these 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, the Board will deem such person to be independent. Applying these standards, and all applicable laws, rules or regulations, the Board has determined that, with the exception of John H. Hammergren, all of the current directors, namely Andy D. Bryant, Wayne A. Budd, Alton F. Irby III, M. Christine Jacobs, Marie L. Knowles, David M. Lawrence, Edward A. Mueller and Jane E. Shaw, are independent.

 

Succession Planning

 

In accordance with our Corporate Governance Guidelines, the Board is responsible for approving and maintaining a succession plan for the CEO and other executive officers. To assist the Board with this requirement, the Company’s Executive Vice President, Human Resources annually leads the Board of Directors in a discussion of CEO and senior management succession. This meeting is held in executive session with only non-management directors and the Executive Vice President, Human Resources present. The annual review includes an evaluation of the requirements for the CEO and each senior management position, and an examination of potential permanent and interim candidates for CEO and senior management positions.

 

Executive Sessions of the Board

 

The independent directors of the Board meet in executive session without management present on a regularly scheduled basis. The members of the Board designate a “Presiding Director” to preside at such executive sessions. Prior to July 2009, the Presiding Director position rotated annually each July among the committee chairs. In July 2009, the Board amended the Company’s Corporate Governance Guidelines so that, effective at that time, the Presiding Director position would rotate annually each July among all independent directors. The Presiding Director establishes the agenda for each executive session meeting and also determines which, if any, other individuals, including members of management and independent advisors, should attend each such meeting. The Presiding Director also, in collaboration with the Chairman and the Corporate Secretary, reviews the agenda in advance of the Board of Directors’ meetings. M. Christine Jacobs is the current Presiding Director until her successor is chosen by the other independent directors at the Board’s meeting in July 2010.

 

Board Leadership Structure

 

Mr. Hammergren serves as our Chairman of the Board and Chief Executive Officer. The Company does not have a policy regarding whether the Chairman and CEO roles should be combined or separated. Rather, the Company’s Corporate Governance Guidelines retain flexibility for the Board to choose its Chairman in any way that it deems best for the Company at any given time. The Board periodically reviews the appropriateness and effectiveness of its leadership structure given numerous factors. Although the Company has in the past separated the roles of Chairman and CEO, the Board believes that having Mr. Hammergren serve as both Chairman and CEO, coupled with strong independent director leadership, is the most appropriate and effective Board leadership structure for the Company at this time.

 

A number of factors support the current leadership structure. Mr. Hammergren has nearly 30 years of experience in the healthcare industry, and has served as the Chairman and CEO of the Company for the past nine years. The Board believes that Mr. Hammergren’s in-depth knowledge of the healthcare industry and of the complex businesses and operations of the Company best equips him to lead Board meetings as the directors discuss key business and strategic matters and best equips him to focus the Board on the most critical issues. The current combined Chairman and CEO structure has promoted decisive leadership, ensured clear accountability and enhanced our ability to communicate with a single and consistent voice to stockholders, customers, employees and other stakeholders. During the nine years Mr. Hammergren has served as both Chairman and CEO, the Company has achieved outstanding financial results as displayed in the Compensation Discussion and Analysis below.

 

In addition, the Board believes that other aspects of the current leadership structure and Corporate Governance Guidelines ensure effective independent Board leadership and oversight of management. For example, the Board regularly meets in executive session without the CEO or any other members of management present, and an

independent director serves as the Presiding Director at such sessions. Additionally, in accordance with the Company’s Corporate Governance Guidelines, the Chairman consults with the Presiding Director regarding agenda topics, and consistent with the Guidelines, other directors are invited to, and in fact do, suggest items for inclusion on the Board and committee agendas. As a matter of practice, the Chairman regularly elicits input from all of the independent directors as to the matters they would like covered at the meetings and the information they would find most helpful in their deliberations and decision-making. Strong independent director leadership is also enhanced by the fact that all of the Board’s standing committees are composed solely of, and chaired by, independent directors.

 

In sum, the Company’s existing Board leadership structure strikes an effective balance between strong, strategically advantageous Chairman and CEO leadership, and appropriate oversight of management provided by strong independent directors. The combined Chairman and CEO structure has served the Company and its stockholders well, and remains the most appropriate leadership structure for the Company at this time.

 

Board of Directors’ Role in Risk Oversight

 

The Company’s management is responsible for the day-to-day management of the risks facing the Company, including macroeconomic, financial, strategic, operational, public reporting, legal, regulatory, political, compliance, and reputational risks. Management carries out this risk management responsibility through a coordinated effort among the various risk management functions within the Company.

 

Under the Corporation’s By-Laws and Corporate Governance Guidelines, the 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 reviews the Company’s enterprise risk management processes for identifying, ranking and assessing risks across the organization, as well as the output of that process. The Board as a whole also receives periodic reports from the Company’s management on various risks, including risks facing the Company’s businesses. Although the Board has ultimate responsibility for overseeing risk management, it has delegated to its committees certain oversight responsibilities. For example, in accordance with its charter, the Audit Committee engages in ongoing discussions regarding major financial risk exposures and the process and system employed to monitor and control such exposures. In addition, consistent with its charter, the Audit Committee engages in periodic discussions with management concerning the process by which risk assessment and management are undertaken. In carrying out these responsibilities the Audit Committee, among other things, regularly reviews with the head of Internal Audit the audits or assessments of significant risks conducted by Internal Audit personnel based on their audit plan; and the committee regularly meets in executive sessions with the head of Internal Audit. The Audit Committee also regularly reviews with the Controller the Company’s internal control over financial reporting, including any significant deficiencies. As part of the reviews involving Internal Audit and the Controller, the Audit Committee reviews steps taken by management to monitor, control and mitigate risks. The Audit Committee also regularly reviews with the General Counsel and Chief Compliance Officer significant legal, regulatory, and compliance matters that could have a material impact on the Company’s financial statements or business. Finally, from time to time executives who are responsible for managing a particular risk report to the Audit Committee on how the risk is being controlled and mitigated.

 

The Board has also delegated to other committees the responsibility to oversee risk within their areas of responsibility and expertise. For example, the Finance Committee exercises oversight with regard to the risk assessment and management processes related to, among other things, credit, capital structure, liquidity, insurance programs and the Company’s retirement and 401(k) plans. As noted in the section below entitled “Risk Assessment of Compensation Policies and Practices,” the Compensation Committee oversees risk assessment and management with respect to the Company’s compensation polices and practices.

 

In those cases in which committees have risk oversight responsibilities, the Chairs of the committees regularly 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.

 

Risk Assessment of Compensation Policies and Practices

 

We have reviewed our material compensation policies and practices and have concluded that these policies and practices are not reasonably likely to have a material adverse effect on the Company. Specifically, our compensation

programs contain many design features that mitigate the likelihood of inducing excessive risk-taking behavior. These features include:

 

 

Based on the foregoing, we believe that our compensation policies and practices do not create inappropriate or unintended significant risk to the Company as a whole. We also believe that our incentive compensation arrangements 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 executive compensation programs.

 

Communications with Directors

 

Stockholders and other interested parties may communicate with the Presiding Director, the non-management directors, or any of the directors by addressing their correspondence to the Board member or members, c/o the Corporate Secretary’s Department, McKesson Corporation, One Post Street, 35th Floor, San Francisco, California 94104, or via e-mail to presidingdirector@mckesson.com or to nonmanagementdirectors@mckesson.com. The Board has instructed the Corporate Secretary, prior to forwarding any correspondence, to review such correspondence and, in his discretion, not to forward certain items if they are irrelevant to or inconsistent with the Company’s operations, policies and philosophies, are deemed of a commercial or frivolous nature, or are otherwise deemed inappropriate for the Board’s consideration. The Corporate Secretary’s Department maintains a log of correspondence received by the Company that is addressed to members of the Board. Members of the Board may review the log at any time, and request copies of any correspondence received.

 

Indemnity Agreements

 

The Company has entered into separate indemnity agreements with its directors and executive officers that provide for defense and indemnification against any judgment or costs assessed against them in the course of their service. Such agreements do not, however, permit indemnification for acts or omissions for which indemnification is not permitted under Delaware law.

 

 

Your Board recommends a vote “FOR” reapproving the performance measures under the Company’s 2005 Stock Plan.

 

You are being asked to reapprove the performance measures under the amended and restated McKesson Corporation 2005 Stock Plan (the “2005 Stock Plan”). The purpose of asking our stockholders to reapprove the performance measures under the 2005 Stock Plan is to allow certain future equity incentive awards granted under the plan to qualify as exempt “performance-based compensation” pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). Code Section 162(m) generally disallows a corporate tax deduction for certain compensation paid in excess of $1,000,000 annually to each of the chief executive officer and the three other most highly paid executive officers (other than the chief financial officer) of publicly-held companies, unless compensation is performance-based and satisfies other conditions. To satisfy the performance-based exception, Code Section 162(m) generally requires, among other things, such performance measures to be approved by stockholders once every five years.

 

As further described below, on April 21, 2010, the Board approved an amendment to the 2005 Stock Plan to add seven new performance measures, with such amendment to be effective upon stockholder approval. If our stockholders approve this proposal, the amended and restated 2005 Stock Plan will govern awards after the Annual Meeting.

 

If the requisite stockholder approval of the performance measures is not obtained, we may continue to grant awards under the 2005 Stock Plan under its current terms. However, certain incentive awards under the plan may no longer constitute performance-based compensation under Code Section 162(m), and accordingly, these awards may not be tax deductible by the Company depending on the facts and circumstances.

 

The 2005 Stock Plan is an equity compensation plan for providing stock-based compensation to employees and non-employee members of the Board to promote close alignment between the interests of employees, directors and stockholders. The 2005 Stock Plan is the only plan for providing stock-based incentive compensation to employees and non-employee directors of the Company and its affiliates. The 2005 Stock Plan is an “omnibus” plan that provides for a variety of equity and equity-based award vehicles, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and other share-based awards.

 

Background of the Proposal

 

 

The 2005 Stock Plan was initially adopted by the Board on May 25, 2005, and attained stockholder approval on July 27, 2005. The 2005 Stock Plan was initially approved with a 13,000,000 share reserve. On October 27, 2006, the Compensation Committee retroactively amended and restated the 2005 Stock Plan to comply with proposed regulations issued under Code Section 409A. On May 23, 2007, the Board amended the 2005 Stock Plan to increase the share reserve by 15,000,000 shares, which was approved by stockholders on July 25, 2007. On July 23, 2008, the Board amended and restated the 2005 Stock Plan to modify the timing of the distribution of shares underlying grants of RSU awards to non-employee Board members, and effective retroactively, to comply with the final regulations issued under Code Section 409A. On May 26, 2009, the Compensation Committee approved an amendment of the 2005 Stock Plan regarding the circumstances under which a merger or consolidation involving the Company would constitute a “change in control.” On May 27, 2009, the Board amended and restated the 2005 Stock Plan to increase the share reserve by 14,500,000 shares, which was approved by stockholders on July 22, 2009. More recently, the Compensation Committee amended and restated the 2005 Stock Plan on April 20, 2010 to incorporate by reference the Company’s Compensation Recoupment Policy, which was adopted by the Board on January 20, 2010. In addition, the Board approved an amendment to the 2005 Stock Plan on April 21, 2010, subject to stockholder approval, to add seven new items for measuring performance.

 

We intend to administer the 2005 Stock Plan in a manner that will allow the Company to qualify certain awards, such as our performance-based restricted stock units referred to as “PeRSUs,” as “performance-based” under Code Section 162(m). As noted above, if the 2005 Stock Plan awards qualify as “performance-based” under Code Section 162(m), we will be able to fully deduct those awards as a compensation expense. The requirements that compensation must meet to qualify as “performance-based” under Code Section 162(m) include the following:

(i) payment of the compensation must be contingent upon achievement of performance goals that are established and administered in a manner specified under Code Section 162(m); (ii) the performance measures that may be used to establish the performance goals must be approved by stockholders; (iii) there must be a limit on the amount of compensation that may be paid to any participant during a specified period of time; and (iv) achievement of the pre-established performance goals must be substantially uncertain at the time the individual awards are approved. Code Section 162(m) also imposes certain independence requirements on the committee of the Board administering the performance-based compensation program.

 

We seek your approval of the performance measures identified in our 2005 Stock Plan because Code Section 162(m) requires that stockholders reapprove performance measures once every five years if the Compensation Committee may establish the actual performance goals for the specified performance period, or if there are material changes to the plan. The 2005 Stock Plan, as described below, has the same material provisions as those approved at the 2009 Annual Meeting of Stockholders, except for the proposed addition of seven new performance measures as follows: average invested capital; credit rating; gross margin; improvement in workforce diversity; operating expenses; operating expenses as a percentage of revenue; and succession plan development and implementation. The Board approved these additional performance measures at its April 21, 2010 meeting, subject to stockholder approval. All performance measures that the Compensation Committee may select are listed below under “2005 Stock Plan Basics.” Approval of this proposal will allow us to continue our practice of granting equity awards that qualify as Code Section 162(m) “performance-based” awards for the next five years.

 

Equity incentive awards under the 2005 Stock Plan will be made to our named executive officers and other selected Company employees. Our equity incentive program is described in more detail in our Compensation Discussion and Analysis under “Elements of Executive Officer Compensation — Long-term Compensation.” Your approval of this proposal will constitute approval of all material terms, including the performance measures, of the 2005 Stock Plan for purposes of Code Section 162(m).

 

If our stockholders do not approve this proposal, then the 2005 Stock Plan will continue in its current form. However, when the current stockholder approval of the performance metrics expires on July 28, 2010, awards granted under the 2005 Stock Plan to “covered employees” would no longer be tax deductible, except for stock options and stock appreciation rights granted at the fair market value or above.

 

2005 Stock Plan Summary

 

 

The following summary of the material features of our 2005 Stock Plan, including the proposed amendment, does not purport to be complete and is qualified in its entirety by reference to the specific language of our 2005 Stock Plan. A copy of our 2005 Stock Plan, including the text of our proposed amendment, is available to any of our stockholders upon request by: (i) writing to the Corporate Secretary, McKesson Corporation, One Post Street, 35th Floor, San Francisco, California 94104; (ii) sending an e-mail to corporatesecretary@mckesson.com; or (iii) calling the Corporate Secretary’s Department toll-free at (800) 826-9360.

 

The 2005 Stock Plan, including the text of our proposed amendment, may be viewed as Appendix B to the definitive proxy statement that was posted to the SEC’s website at www.sec.gov.

 

Purpose of the 2005 Stock Plan

 

The purpose of the 2005 Stock Plan is to: (i) provide employees of the Company or its affiliates and members of the Company’s Board of Directors the opportunity to receive equity-based long-term incentives so that the Company may effectively attract and retain the best available personnel; (ii) promote the success of the Company by motivating employees and directors to superior performance; and (iii) align employee and director interests with the interests of the Company’s stockholders.

2005 Stock Plan Basics

 

 

Options and Stock Appreciation Rights

 

 

Restricted Stock Awards; Restricted Stock Unit Awards; Performance Shares; and Other Share-Based Awards

 

 

 

All Stock Awards

 

 

Additional 2005 Stock Plan Terms

 

Administration. The 2005 Stock Plan may be administered by the Board, or the Board may delegate administration of the 2005 Stock Plan to a committee of the Board, or to an officer or officers of the Company under limited circumstances. Although the 2005 Stock Plan also permits the Governance Committee to administer the 2005 Stock Plan with respect to non-employee directors, in recent years, the Board has so administered the Plan. Currently, the Compensation Committee administers the 2005 Stock Plan with respect to all employees, including named executive officers. The Board may further delegate the authority to make option grants. The administrator determines who will receive stock awards and the terms and conditions of such awards. Subject to certain conditions and limitations of the 2005 Stock Plan, the administrator may modify, extend or renew outstanding stock awards.

 

Change in Control. Stock awards may be subject to additional acceleration of vesting and exercisability upon or after a “change in control” (as defined in the 2005 Stock Plan) as may be provided in the applicable stock award agreement as determined by the Compensation Committee on a grant-by-grant basis or as may be provided in any other written agreement between the Company or any affiliate and the participant; provided, however, that in the absence of such provision, no such acceleration will occur.

 

Tax Withholding. Tax withholding obligations may be satisfied by the eligible participant by: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of common stock from the shares of common stock otherwise issuable as a result of the exercise or acquisition of common stock under the stock award; (iii) delivering to the Company owned and unencumbered shares of common stock; or (iv) directing a securities broker to sell shares of common stock and delivering sufficient proceeds to the Company.

 

New Plan Benefits. The amount of awards payable, if any, to any individual is not determinable as awards are discretionary and have not yet been determined by the administrator. However, each July non-employee directors receive an annual grant of an RSU award under the 2005 Stock Plan with an approximate value, as of the grant date, equal to $150,000. The actual number of RSUs under the grant is determined by dividing $150,000 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 units, in accordance with the award limitations of our 2005 Stock Plan.

Amendment. The Board may suspend or discontinue the 2005 Stock Plan at any time. The Compensation Committee of the Board may amend the 2005 Stock Plan with respect to any shares at the time not subject to awards. However, only the Board may amend the 2005 Stock Plan and submit the plan to the Company’s stockholders for approval with respect to amendments that: (i) increase the number of shares available for issuance under the 2005 Stock Plan or increase the number of shares available for issuance pursuant to incentive stock options under the 2005 Stock Plan; (ii) materially expand the class of persons eligible to receive awards; (iii) expand the types of awards available under the 2005 Stock Plan; (iv) materially extend the term of the 2005 Stock Plan; (v) materially change the method of determining the exercise price or purchase price of an award; (vi) delete or limit the requirements regarding repricing options or stock appreciation rights or effectuating an exchange of options or stock appreciation rights; (vii) remove the administration of the 2005 Stock Plan from the administrator; or (viii) amend the provision regarding amendment of the 2005 Stock Plan to defeat its purpose.

 

Benefits to Directors, Named Executive Officers and Others. The table below shows, as to the Company’s directors, named executive officers and the other individuals and groups indicated, the number of shares of common stock subject to option grants and restricted stock unit grants under the 2005 Stock Plan since the plan’s inception through April 30, 2010.

 

 

Since its inception, no shares have been issued under the 2005 Stock Plan to any other nominee for election as a director, or any associate of any such director, nominee or executive officer, and no other person has been issued five percent or more of the total amount of shares issued under the 2005 Stock Plan.

 

Certain United States Federal Income Tax Information

 

The following is a summary of the effect of U.S. federal income taxation on the 2005 Stock Plan participants and the Company. This summary does not discuss the income tax laws of any other jurisdiction in which the recipient of the award may reside.

 

Incentive Stock Options (ISOs). Participants pay no income tax at the time of grant or exercise of an ISO, although the exercise is an adjustment item for alternative minimum tax purposes and may subject the option holder to the alternative minimum tax. The participant will recognize long-term capital gain or loss, equal to the difference between the sale price and the exercise price, on the sale of the shares acquired on the exercise of the ISO if the sale occurs at least two years after the grant date and more than one year after the exercise date. If the sale occurs earlier than the expiration of either of these holding periods, then the participant will recognize ordinary income equal to the lesser of the difference between the exercise price of the option and the fair market value of the shares on the exercise date or the difference between the sales price and the exercise price. Any additional gain or loss realized on

the sale will be treated as capital gain or loss. The Company may deduct the amount, if any, that the participant recognizes as ordinary income.

 

Nonstatutory Stock Options and Stock Appreciation Rights. There is no tax consequence to the participant at the time of grant of a nonstatutory stock option or stock appreciation right. Upon exercise, the excess, if any, of the fair market value of the shares over the exercise price will be treated as ordinary income. Any gain or loss realized on the sale of the shares will be treated as a capital gain or loss. The Company may deduct the amount, if any, that the participant recognizes as ordinary income.

 

Restricted Stock. No taxes are due on the grant of restricted stock, unless a Code Section 83(b) election is made. The fair market value of the shares subject to the award is taxable as ordinary income when no longer subject to a “substantial risk of forfeiture” (i.e., becomes vested or transferable). Unless an election pursuant to Code Section 83(b) is made (subjecting the value of the shares on the award date to current income tax), income tax is paid by the participant on the value of the shares at ordinary rates when the restrictions lapse and the Company will be entitled to a corresponding deduction. Any gain or loss realized on the sale of the shares will be treated as a capital gain or loss.

 

Restricted Stock Units and Performance Shares. No taxes are due upon the grant of the award. The fair market value of the shares subject to the award is taxable to the participant as ordinary income when the stock is distributed to the participant. The Company may be entitled to deduct the amount, if any, that the participant recognizes as ordinary income. Any gain or loss realized on the sale of the shares will be treated as a capital gain or loss.

 

Code Section 162(m). Code Section 162(m) denies a deduction for annual compensation in excess of $1,000,000 paid to “covered employees,” as defined under Section 162(m). “Performance-based compensation,” as defined under Code Section 162(m), is exempt from this deduction limitation. Stock option and stock appreciation rights granted under the 2005 Stock Plan, because the exercise price at the date of grant cannot be less than the fair market value of the Company stock, are also exempt from the Code Section 162(m) deduction limitation. Other awards will be “performance-based compensation” if the grant or vesting is subject to performance objectives that satisfy Code Section 162(m), including stockholder approval of the performance measures.

 

Deferred Compensation. Restricted stock awards, restricted stock unit awards and performance shares that may be deferred beyond the vesting date are subject to Code Section 409A. If Code Section 409A is violated, deferred amounts that are not subject to a substantial risk of forfeiture and have not been included in income will be subject to income tax in the year of the violation and to penalties equal to: (i) 20% of the amount deferred; and (ii) interest at a specified rate on the under-payment of tax that would have occurred if the amount had been taxed in the year it was first deferred or, if later, the year it was no longer subject to a substantial risk of forfeiture.

 

The following table sets forth information as of March 31, 2010 with respect to the plans under which the Company’s common stock is authorized for issuance:

 

 

 

 

On July 27, 2005, the Company’s stockholders approved the 2005 Stock Plan which had the effect of terminating: (i) the 1999 Stock Option and Restricted Stock Plan, the 1998 Canadian Stock Incentive Plan and certain 1999 one-time stock option plan awards, which plans had not been submitted for approval by the Company’s stockholders; and (ii) the 1994 Stock Option and Restricted Stock Plan and the 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan, which had previously been approved by the Company’s stockholders. Prior grants under these plans include stock options, restricted stock and RSUs. Stock options under the terminated plans generally vest over four years and have a ten-year life, subject to earlier expiration in connection with certain events. Restricted stock contains certain restrictions on transferability and may not be transferred until such restrictions lapse. Each of these plans has outstanding equity grants, which are subject to the terms and conditions of their respective plans, but no new grants will be made under any of these terminated plans.

 

The material terms of all of the Company’s plans, including those not previously approved by stockholders, are described in accordance with the requirements of the Accounting Standards Codification issued by the Financial Accounting Standards Board, Topic 718, labeled “Compensation — Stock Compensation” (“ASC Topic 718”), in Financial Notes 1 and 3 of the Company’s consolidated financial statements, and in Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” of the Company’s Annual Report on Form 10-K filed with the SEC on May 4, 2010. This information is incorporated herein by reference.

 

 

Your Board recommends a vote “FOR” reapproving the performance measures under the Company’s amended and restated 2005 Management Incentive Plan.

 

You are being asked to reapprove the performance measures under the amended and restated McKesson Corporation 2005 Management Incentive Plan (the “MIP”). Similar to the proposal on the 2005 Stock Plan, the purpose of asking our stockholders to reapprove the performance measures under the MIP is to allow certain future cash incentive awards granted under the plan to qualify as exempt “performance-based compensation” pursuant to Code Section 162(m). That is, Code Section 162(m) generally disallows a corporate tax deduction for certain compensation paid in excess of $1,000,000 annually to each of the chief executive officer and the three other most highly paid executive officers (other than the chief financial officer) of publicly-held companies, unless compensation is performance-based and satisfies other conditions. To satisfy the performance-based exception, Code Section 162(m) generally requires, among other things, such performance measures to be approved by stockholders once every five years.

 

As further described below, on April 21, 2010, the Board approved an amendment to the MIP to add seven new performance measures, with such amendment to be effective upon stockholder approval. If our stockholders approve this proposal, the amended and restated MIP will govern awards after the Annual Meeting.

 

If the requisite stockholder approval of the performance measures is not obtained, we may continue to grant awards under the MIP Plan under its current terms. However, certain incentive awards under the plan may no longer constitute performance-based compensation under Code Section 162(m), and accordingly, these awards may not be tax deductible by the Company depending on the facts and circumstances.

 

The MIP is a performance-based bonus plan designed to exempt payments from the deduction limitations provided under Code Section 162(m).

 

Background of the Proposal

 

The MIP was initially adopted by the Board on May 25, 2005, and attained stockholder approval on July 27, 2005. On October 27, 2006, the Board retroactively amended and restated the MIP to comply with the proposed regulations issued under Code Section 409A. On October 24, 2008, the Compensation Committee retroactively amended and restated the MIP to comply with the final regulations issued under Code Section 409A. More recently, the Compensation Committee amended and restated the MIP on April 20, 2010 to incorporate by reference the Company’s Compensation Recoupment Policy, which was adopted by the Board on January 20, 2010. In addition, the Board approved an amendment to the MIP on April 21, 2010, subject to stockholder approval, to add seven new items for measuring performance.

 

We intend to administer the plan in a manner that will allow the Company to qualify MIP awards as “performance-based” under Code Section 162(m). As noted above, if the MIP awards qualify as “performance-based” under Code Section 162(m), we will be able to deduct MIP payments fully as a compensation expense. The requirements that compensation must meet to qualify as “performance-based” under Code Section 162(m) include the following: (i) payment of the compensation must be contingent upon achievement of performance goals that are established and administered in a manner specified under Code Section 162(m); (ii) the performance measures that may be used to establish the performance goals must be approved by stockholders; (iii) there must be a limit on the amount of compensation that may be paid to any participant during a specified period of time; and (iv) achievement of the pre-established performance goals must be substantially uncertain at the time the individual awards are approved. Code Section 162(m) also imposes certain independence requirements on the committee of the Board administering the performance-based compensation program.

 

We seek your approval of the performance measures identified in our MIP because Code Section 162(m) requires that stockholders reapprove the performance measures once every five years if the Compensation Committee may establish the actual performance goals for the specified performance period, or if there are material changes to the plan. The MIP, as described below, has the same material provisions as those approved at the 2005 Annual Meeting of Stockholders, except for the proposed addition of seven new performance measures as follows: average invested

capital; credit rating; gross margin; improvement in workforce diversity; operating expenses; operating expenses as a percentage of revenue; and succession plan development and implementation. The Board approved these additional performance measures at its April 21, 2010 meeting, subject to stockholder approval. All performance measures that the Compensation Committee may select are listed below under “Material Plan Terms.” Approval of this proposal will allow us to continue our practice of providing cash incentive awards that qualify as Code Section 162(m) “performance-based” awards for the next five years.

 

Cash incentive awards under the MIP will be made to our named executive officers and other selected Company employees. Our cash incentive program is described in more detail in our Compensation Discussion and Analysis under “Elements of Executive Officer Compensation — Short-term Compensation.” Your approval of this proposal will constitute approval of all material terms of the MIP, including the performance measures, for purposes of Code Section 162(m).

 

If our stockholders do not approve this proposal, then the MIP will continue in its current form. However, when the current stockholder approval of the performance measures expires on July 28, 2010, we will no longer be able to provide MIP awards to “covered employees” that qualify as performance-based compensation under Code Section 162(m).

 

2005 Management Incentive Plan Summary

 

The following summary of the material features of our MIP, including the proposed amendment, does not purport to be complete and is qualified in its entirety by reference to the specific language of the plan. A copy of our MIP, including the text of our proposed amendment, is available to any of our stockholders upon request by: (i) writing to the Corporate Secretary, McKesson Corporation, One Post Street, 35th Floor, San Francisco, California 94104; (ii) sending an e-mail to corporatesecretary@mckesson.com; or (iii) calling the Corporate Secretary’s Department toll-free at (800) 826-9360.

 

The MIP, including the text of our proposed amendment, may be viewed as Appendix C to the definitive proxy statement that was posted to the SEC’s website at www.sec.gov.

 

Purpose of the MIP

 

The purpose of the MIP is to advance and promote the interests of the Company and its stockholders by providing performance-based incentives to certain employees, and to motivate those employees to set and achieve above-average financial and non-financial goals.

 

Material Plan Terms

 

 

 

 

The Audit Committee of the Company’s Board of Directors 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, 2011. D&T has acted in this capacity for the Company for several years, 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 stockholders 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 stockholders for ratification as a matter of good corporate practice. If stockholders 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 stockholders. Representatives of D&T are expected to be present at the Annual Meeting to respond to appropriate questions and to make a statement if they desire to do so. For the fiscal years ended March 31, 2010 and 2009, 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 paid for those years were as follows:

 

 

Audit Fees. This category consists of fees billed 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 billed for services rendered in connection with the performance of an audit or reviews of the Company’s consolidated financial statements and is not reported under “Audit Fees.” This includes fees for employee benefit plan audits, accounting consultations, due diligence in connection with mergers and acquisitions, attest services related to financial reporting that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards.

 

Tax Fees. This category consists of fees billed for professional services rendered for U.S. and international tax compliance, including services related to the preparation of tax returns. For the fiscal years ended March 31, 2010 and 2009, no amounts were incurred by the Company for tax advice, planning or consulting services.

 

All Other Fees. This category consists of fees for products and services other than the services reported above. The Company paid no fees in this category for the fiscal years ended March 31, 2010 and 2009.

 

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.

 

The Audit Committee of the Company’s Board of Directors 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. The independent registered public accounting firm of Deloitte & Touche LLP (“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, the effectiveness of the Company’s internal control over financial reporting and management’s assessment of the 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, 2010; (ii) discussed with D&T the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T; (iii) received the written disclosures and the letter from D&T required by applicable requirements of the Public Company Accounting Oversight Board 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 examinations, the evaluation of the Company’s internal control over financial reporting and the overall quality of the Company’s accounting.

 

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, 2010 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

Andy D. Bryant

Wayne A. Budd

Jane E. Shaw, Ph.D.

PRINCIPAL STOCKHOLDERS

 

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, to be the beneficial owner of more than five percent of the outstanding shares of common stock:

 

 

 

 

The following table sets forth, as of June 1, 2010, except as otherwise noted, information regarding ownership of the Company’s outstanding common stock by: (i) each individual named in the 2010 Summary Compensation Table below (collectively, the “NEOs”); (ii) each director and director nominee; and (iii) all directors, director nominees, NEOs and executive officers as a group. The table also includes shares of common stock that underlie outstanding RSU awards and options to purchase common stock of the Company that either vest or become exercisable within 60 days of June 1, 2010:

 

 

 

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Our Compensation Philosophy and Objectives

 

Our executive compensation program is based on a philosophy of “pay for performance.” For an executive to receive compensation above his or her target amount, the Company must attain or surpass certain financial goals. In addition, the executive must be able to identify the ways he or she contributed to those results. To foster a performance-driven culture, we apply this philosophy to both short- and long-term compensation. This means that insufficient executive and corporate performance will result in little or no incentive-based compensation. Similarly, performance that surpasses established goals results in increased compensation.

 

An executive’s compensation is based on his or her level of experience, his or her individual performance, and the performance of the Company. As an executive’s ability to impact financial performance increases, so does the proportion of his or her “at-risk” compensation. In addition, long-term compensation grows proportionately as job responsibility increases.

 

Our executive compensation program has three key goals: aligning management interests with those of stockholders, attracting and retaining highly qualified individuals, and creating long-term value without promoting excessive risk-taking. To this end, compensation is comprised of five primary components: base salary, performance-based annual cash bonus, performance-based long-term cash bonus, performance-based short-term equity incentive and a performance-based long-term equity incentive. Other benefits and perquisites are added to attract and retain talented executives to the degree such benefits are competitively necessary, or to the degree that such benefits are in the best interest of the Company and its stockholders.

 

Overview of 2010 Executive Compensation Program

 

Financial and Operational Results: Performance Above and Beyond

 

Over the last five years, the Company’s financial results have been outstanding. During this period, the Company has made significant progress growing total revenue and earnings per share, and over the last fiscal year, we have continued to do so despite the economic slowdown that has affected many parts of the broader economy. Since March 31, 2006, our revenues increased from $87.0 billion to $108.7 billion, a compound annual growth rate of 5.7%; and diluted earnings per share, excluding adjustments for litigation charges (credits) net (“EPS”), increased from $2.48 to $4.58, a compound annual growth rate of 16.6%. The following table displays the Company’s total revenue and EPS growth over the last five fiscal years as it is reviewed by the Board and Compensation Committee when assessing the performance of the organization, our operating segments and our senior management.

Five-Year EPS and Total Revenue
— Fiscal year results through March 31, 2010 —

 

 

 

 

Over the same five-year period, we have centralized operations and services to gain efficiencies of scale while increasing the quality of our products and services, improved operating processes using Six Sigma, introduced innovative new solutions to drive customer satisfaction, and increased employee engagement and retention. We have also deployed approximately $10.1 billion of capital, including $800 million in FY 2010 to:

 

 

Our progress has been fueled by strong operating cash flows, which over the past five years has totaled more than $8.8 billion. As a result, at the end of the most recent fiscal year we have amassed more than $3.7 billion in cash and cash equivalents, which will serve as a catalyst for future growth.

 

We were also very proud of two non-financial accomplishments that were acknowledged in early March 2010. In an annual survey conducted by FORTUNE magazine and the Hay Group, we were recognized as the “World’s Most Admired” company in the healthcare wholesaler category. FORTUNE magazine’s “World’s Most Admired” award measures corporate reputation and performance against nine key attributes: innovation, people management, use of corporate assets, social responsibility, quality of management, financial soundness, long-term investment, quality

of products and services, and global competitiveness. McKesson Corporation was ranked number one in all nine categories. The Company was also named one of the “100 Best Corporate Citizens” by Corporate Responsibility Magazine.

 

Both awards highlight our excellence in corporate social responsibility, employee engagement, service quality and financial performance. Throughout the course of FY 2010, we have continued to build upon our long-standing record of strong financial performance and good corporate citizenship — from our H1N1 vaccine distribution partnership with the Centers for Disease Control and Prevention, to the expansion of our environmental councils and diversity initiatives, to our donations of medical supplies to support the relief effort in Haiti.

 

Our Executive Leadership Team: Driving Superior Stockholder Returns

 

Over the past decade, the Company’s success has been driven by the management team assembled by John H. Hammergren, our Chairman, President and CEO. Appointed by the Board as co-chief executive officer in July 1999, Mr. Hammergren provided strong leadership during a difficult transitional period. At that time, the discovery of accounting improprieties in our newly acquired healthcare information technology business unit had brought about the termination of the unit’s senior management team, leading eventually to the resignation of our former chief executive officer and chief financial officer.

 

To secure the leadership necessary to guide the Company through these challenging times, the Board and Mr. Hammergren entered into an employment agreement with substantially the same terms as his predecessor. It is essentially this same employment agreement that we honor today, and it serves as the foundation of certain compensation matters addressed in the tables that follow. In April 2001, Mr. Hammergren was named by the Board as the Company’s sole chief executive officer. It was from this starting point that Mr. Hammergren and the executive management team he assembled produced the outstanding business results described in this analysis.

 

Since Mr. Hammergren was promoted to the role of sole chief executive officer in April 2001, the Company has enjoyed tremendous growth and success that has translated into superior value for stockholders. The table below illustrates the respective total stockholder return for our Company, the S&P 500 Index and the Value Line Healthcare Sector Index, focusing on our relative performance over the last one, three, five and nine fiscal years. As shown, the Company has substantially outperformed both indexes.

 

Total Stockholder Return*
— Results over the last one, three, five and nine fiscal years —

 

 

 

 

Executive Compensation Program: Always Evolving to Align Executives’ Interests with Stockholders’ Interests

 

At the beginning of last year, we faced a new economic environment, characterized by a general slowdown that affected nearly all sectors of the domestic and international economy. To allow the Company to thrive in such unstable times, at the start of FY 2010 our executive management and Compensation Committee agreed to do the following:

 

 

 

To further align executive incentives and stockholder expectations, during the last year we adjusted the Company’s corporate governance and executive compensation programs by doing the following:

 

 

Since early 2007, we have taken other measures to refine our executive compensation program, including:

 

 

Additional detail regarding each of these changes, especially those made during the last fiscal year, is provided below. Our program changes reflect the continuing commitment of executive management and the Compensation Committee to good pay practices.

 

Oversight of Executive Officer Compensation

 

The Compensation Committee has responsibility for overseeing all forms of compensation for our executive officers, including the named executive officers listed in the 2010 Summary Compensation Table below (collectively, the Company’s “NEOs”). For FY 2010, our NEOs and their respective titles were as follows:

 

 

All of the above listed NEOs currently serve as executive officers of the Company. The Compensation Committee directly employs its own independent compensation consultant, Compensation Strategies, Inc., and independent legal counsel, Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. Compensation Strategies, Inc. also provides consulting services to the Governance Committee in the area of director compensation. These advisors do not provide any other services to the Company, except as to matters related to the activities mentioned above and as further described below.

 

Use and Selection of the Peer Group

 

In order to attract and retain highly qualified individuals, a key objective of our executive compensation program is to ensure that the total compensation package for our executive officers is competitive with the companies against whom we compete for executive talent. To that end, the Compensation Committee’s independent compensation consultant annually develops information that captures the levels of total compensation and individual components of pay (base salary and short- and long-term incentive potential) for executives at a diverse group of public companies with duties and responsibilities similar to the Company’s executives. Information sources used by the independent compensation consultant include the Hewitt Associates Total Compensation Database and compensation information published by other public companies. From this larger sampling, the Compensation Committee and our independent compensation consultant derive a list of peer group companies against whom the Company historically competes for executive talent. We believe this diverse selection of peer group companies, as identified in the chart below, provides us with a better understanding of the evolving and competitive marketplace for executive talent.

 

The Compensation Committee uses data derived from the peer group as a guideline to assist the committee in its decisions about overall compensation, the elements of compensation, the amount of each element of compensation and the relative competitive landscape of our executive compensation program. Although the Compensation Committee uses various metrics derived from the peer group to provide context for its own determinations and strategies, it does not advocate a specific percentile relationship of target compensation to market compensation derived from the peer group; that is, it does not strive for any individual compensation component or compensation in the aggregate to be at any specific level (for instance, at the 75th percentile). Rather, using the 50th and 75th percentiles as reference points, the Compensation Committee reviews the mix of our compensation components with respect to fixed versus variable, short-term versus long-term and cash versus equity-based pay in order to set target compensation. Ultimately, due to a number of variables including share price, individual performance and company performance, total compensation delivered to our executive officers may be higher or lower than the 50th and 75th percentiles of our peer group.

 

As part of its annual review process, the Compensation Committee and its independent compensation consultant endeavor to design the Company’s peer group such that the addition or removal of any single company would not have a material impact on the survey results. Because the size of the peer group companies varies considerably, regression analysis may be used to adjust the compensation data for differences in company revenues. For example, at $108.7 billion, the Company’s FY 2010 revenues were substantially higher than the median revenues of the peer group of $27.4 billion. The adjusted values are used as the basis of comparison of compensation between our executives and those of the Company’s peer group.

For the fiscal year ended March 31, 2010, the following companies were members of the Company’s peer group as selected by the Compensation Committee:

 

 

 

 

For purposes of its FY 2011 market analysis, the Compensation Committee reevaluated the Company’s slate of peer group companies at its January and April 2010 meetings. Due to their recent acquisition by Merck & Company, Inc. and Xerox Corporation, respectively, the Compensation Committee removed Schering-Plough Corporation and Affiliated Computer Services, Inc. from the Company’s FY 2011 peer group. No other changes to the peer group were approved by the Compensation Committee.

 

Our Compensation Review and Determination Process

 

The Compensation Committee has responsibility for setting performance targets and payout scales for all incentive compensation programs for all executive officers. While performance targets and payout scales are initially developed by senior management, and reflect the one-year operating plan and three-year strategic plan reviewed with the Board, the Compensation Committee in its sole discretion approves, modifies or amends management’s target and scale recommendations. When reviewing management’s target and scale recommendations, the Compensation Committee generally selects performance measure targets that are consistent with both the operating and strategic plans as reviewed by the Board, and that are routinely communicated to investors by management.

 

The executive compensation review process is one part of a detailed annual performance review process that begins with the April meeting of the Board and the Compensation Committee. At the beginning of each fiscal year, all members of the Company’s senior management team are required to prepare a written analysis of their performance goals for the upcoming fiscal year. These individual performance goals are established by senior management with reference to the Company’s annual budget and strategic planning processes. The process includes face-to-face meetings between our CEO and each of the other executive officers at which both strategic and tactical priorities for the upcoming fiscal year are established.

 

Concurrent with establishing performance goals for the upcoming year, each member of senior management reviews with our CEO his or her actual performance against the goals established for the prior fiscal year. For employees in the senior management ranks, including our NEOs, this review includes an examination of their leadership abilities, financial performance, strategic performance and their professional development and mentoring of subordinates. Each executive is also evaluated on his or her commitment to the Company’s “ICARE” principles, which serves as a guide to all our employees enterprise-wide. These principles are

integrity, customer first, accountability, respect and excellence. ICARE is the cultural foundation of the Company, and the principles unify the Company and guide individuals’ behavior toward each other, customers, vendors and other stakeholders.

 

Our CEO, in consultation with the Compensation Committee’s independent compensation consultant and the Executive Vice President, Human Resources, will then develop compensation recommendations for each executive officer. Factors that our CEO weighs in making individual target compensation recommendations include: (i) the performance review conducted by our CEO; (ii) value of the job in the marketplace; (iii) relative importance of the position within our executive ranks; (iv) individual tenure and experience; and (v) individual contributions to the Company’s results.

 

At its April or May meeting, the Board conducts a performance review of our CEO on the same basis described for all other executive officers. In advance of this meeting, our CEO distributes to the Board a written analysis of his accomplishments keyed to the business and individual goals established for the prior fiscal year. At the Board meeting, our CEO presents his individual performance results for the prior fiscal year and individual goals for the new fiscal year, and responds to any questions that may arise. Upon completion of his performance review, the Board discusses in executive session our CEO’s performance for the prior fiscal year and approves, modifies or amends his individual goals for the new fiscal year.

 

At its May meeting, the Compensation Committee reviews and evaluates compensation matters for all executive officers of the Company, including our CEO. At this meeting, Mr. Hammergren presents his findings and compensation recommendations for each executive officer for the Compensation Committee’s review and consideration. In addition to our CEO’s findings and recommendations, the Compensation Committee examines a compensation “tally sheet” for each executive officer, including our CEO. This tally sheet is prepared with the assistance of the Compensation Committee’s independent compensation consultant and details for each executive officer, by element of compensation, the actual compensation delivered in the prior fiscal year, and the compensation that is proposed for the upcoming fiscal year. At the same meeting, the Compensation Committee reviews a compilation of each executive officer’s total holdings, which includes the status of all stock option grants, current unvested grants of full-value shares (such as RSUs) and outstanding awards under the Company’s cash long-term incentive plan. In connection with the preparation of our annual proxy statement, at its May meeting the Compensation Committee reviews a display detailing the elements of current compensation and estimated benefits on separation from service due to voluntary and involuntary termination, and termination coincident with a change in control, for each of our NEOs. The Compensation Committee finds tools like tally sheets and displays of total holdings helpful in its analysis of the Company’s executive compensation program, but in determining the specific levels of compensation, the Compensation Committee is generally more focused on individual elements of our executive compensation program and the measurement of these elements against similarly situated executives in the peer group of companies. The Compensation Committee, in its sole discretion, then determines the level of payout to each executive officer under our short- and long-term compensation programs for the completed fiscal year, and establishes for each executive officer the base salary, the individual target and the Company performance measures for performance-based compensation for the new fiscal year.

 

At the May meeting, the Compensation Committee meets in executive session, without our CEO present, to determine our CEO’s compensation with input from the Compensation Committee’s independent compensation consultant. The Compensation Committee’s assessment of CEO compensation is completed on the same basis described above for all other executive officers, and incorporates the Board’s evaluation of our CEO’s performance that was previously conducted. In addition to the tally sheets and assessment of total holdings that are presented with regard to all executive officers, the Compensation Committee’s independent compensation consultant prepares and presents to the Compensation Committee a display of the three-year history of compensation delivered to our CEO.

 

Finally, in October of each year, the Compensation Committee conducts a detailed review of all elements of executive compensation, including review of individual tally sheets for each executive officer, including our NEOs. This second set of tally sheets displays the elements of current compensation and estimated benefits on separation from service due to voluntary and involuntary termination and termination coincident with a change in control with

respect to the then-current fiscal year. At the same October meeting, management updates the Compensation Committee on actual performance against the pre-established goals for all outstanding performance-based compensation programs.

 

Elements of Executive Officer Compensation

 

There are four basic elements of our executive compensation program, which are short-term compensation, long-term compensation, other compensation and benefits, and severance and change in control benefits. To this end, the five primary components utilized are: base salary, performance-based annual cash bonus, performance-based long-term cash bonus, performance-based short-term equity incentive and a performance-based long-term equity incentive. Other benefits and perquisites are added to attract and retain talented executives to the degree such benefits are competitively necessary, or to the degree that such benefits are in the best interest of the Company and its stockholders. Annually, the Compensation Committee reviews the components of both short- and long-term compensation to determine the relative competitiveness of the Company’s compensation program, which is examined in relation to the 50th and 75th percentiles of our peer group of companies.

 

The Compensation Committee’s objective is to target executive pay at levels that are competitive with similarly situated executives within our peer group of companies. Short-term compensation, which includes both a fixed base salary and annual at-risk performance-based compensation, is reviewed in relation to the 50th percentile for that position within the Company’s peer group. In turn, long-term compensation is reviewed in relation to the 50th and 75th percentiles of the Company’s peer group.

 

Focused on At-risk Performance-Based Compensation

 

Our current compensation program for NEOs is primarily based on an at-risk, long-term approach that uses a combination of short- and long-term performance incentives. The following charts show the percentages of the total target 2010 compensation value established by the Compensation Committee for the CEO, our other NEOs and for our senior leadership team, as split between short- and long-term compensation and between at-risk and fixed compensation. While there may be year-to-year adjustments made to the relative composition of target compensation, the percentages for each component remain generally consistent with the charts below.

 

 

As shown above, the Compensation Committee believes that at-risk, long-term compensation should represent a high percentage of an executive’s total compensation package and that exceptional performance should result in

correspondingly higher levels of compensation. During the process of determining the composition of each NEO’s compensation package, the Compensation Committee evaluated many factors, including the following:

 

 

Short-term Compensation

 

Short-term compensation is delivered in cash with a substantial portion at-risk and contingent on the successful accomplishment of pre-established performance goals. We believe it is important to have at-risk compensation that can be focused on short-term Company and individual goals.

 

Base Salary. Base salary for executive officers is assessed the same way base salary is determined for all employees — base salary for a fully functioning employee is reviewed in relation to the 50th percentile for that position within the Company’s peer group.

 

The 2010 Summary Compensation Table below displays base salaries for each NEO over the last fiscal year. Base salaries were reviewed by the Compensation Committee at its May 2009 meeting, and as described above, were left unchanged for FY 2010. The Compensation Committee noted each officer’s base salary versus comparable positions at peer group companies, and reaffirmed its decision, consistent with management’s recommendation, to forego FY 2010 increases to base salary for all executive officers.

 

Base salaries were again reviewed by the Compensation Committee at its May 2010 meeting. Consistent with prior practice, the Compensation Committee approved FY 2011 base salary increases for the NEOs, including our CEO, effective May 25, 2010. The increase resulted both from the performance evaluations described above, and in response to market data from the Company’s peer group analyzed by the Compensation Committee with the assistance of its independent compensation consultant. In addition, after consideration of our strong operational and financial performance during FY 2010 and the success of our cost control austerity measures, we believed it was appropriate to resume market rate increases to base salary for eligible employees enterprise-wide.

 

FY 2011 base salaries for all NEOs, including our CEO, are consistent with the peer group reference point selected by the Compensation Committee for short-term compensation. Differences in NEOs’ base salaries and base salary increases occur because the Compensation Committee considers a number of factors when evaluating base salaries in relation to the peer group data, including job performance, skill set, prior experience, the executive’s time in his or her position and/or with the Company, internal consistency regarding pay levels for similar positions or skill levels within the Company, external pressures to attract and retain talent, and market conditions generally. Base salary increases for FY 2011 ranged from 6.0% to 7.0% for all NEOs, including our CEO, whose base salary was increased by 6.3%.

 

Annual Incentive. The Management Incentive Plan is an annual cash incentive program with payment conditioned on the achievement of individual and Company performance goals. The MIP, like base salary, is designed to generally deliver short-term cash incentive compensation at the 50th percentile of the Company’s peer group when performance meets objectives. For FY 2010, our NEOs were eligible for MIP target award opportunities that ranged from 75% to 150% of their base salaries. The aggregate cash value delivered to each NEO can range from zero to 300% of the target award amount, which is determined in reference to the Company’s fiscal year EPS performance and the results of each NEO’s performance review, as described below.

 

In May 2009, the Compensation Committee approved an EPS goal of $4.28 as the MIP performance target for FY 2010. The Compensation Committee utilizes EPS as the primary performance measure because it is a key metric used by management to direct and measure the Company’s business performance, and the basis upon which we communicate forward-looking financial information to the investment community. Moreover, we believe that EPS

measures are clearly understood by both our employees and stockholders, and that incremental EPS growth leads to the creation of long-term stockholder value.

 

As described in the narrative following the 2010 Summary Compensation Table, MIP payouts are conditioned on the achievement of a minimum EPS goal below which no award is earned, and conversely, payouts are subject to a maximum EPS goal above which no additional award is earned. The Compensation Committee has the authority to adjust the EPS result scale to reflect unusual events, including acquisitions, divestitures and abnormal stock buybacks.

 

Unlike programs for prior years, the FY 2010 MIP EPS target was configured such that the Company must have substantially exceeded its operating plan for FY 2010, which aligned with the May 4, 2009 EPS guidance, for an executive officer to receive a 100% payout of his or her MIP target bonus amount, before factoring in his or her individual performance modifier for the same period. For FY 2010, the Company’s actual EPS performance of $4.58 from continuing operations, excluding litigation charges (credits) net, exceeded the pre-established EPS target goal noted above by thirty cents per share. The Compensation Committee determined that a downward net adjustment of nineteen cents per share to reported EPS was appropriate to reflect certain events that were not included in the Company’s FY 2010 operating plan, that is, the favorable impact of a litigation settlement and the gain on sale of a business unit, such that all corporate employee participants would be eligible to receive 133% of their initial MIP target cash award.

 

The Compensation Committee has the discretion to further adjust the MIP to reflect the result of each NEO’s individual performance review. As previously described, individual performance goals are established at the beginning of the fiscal year and reviewed by the Board in the case of our CEO, or by our CEO in the case of all other executive officers. The adjustment can result in no MIP payment being made for the applicable fiscal year. Specifically, to reflect the employee’s individual impact on achieving the Company’s short-term financial results and long-term strategic objectives, assuming achievement of the maximum EPS goal, the Compensation Committee applies the individual performance modifier to adjust the maximum limit so that, as a result, no payout may be made or the payout may be as high as 300% of the target award. The individual personal modifier is used to recognize the executive officer’s performance against non-financial objectives and initiatives. These include but are not limited to the following metrics: (i) employee satisfaction, as measured annually and compared against norms established by global high performing companies; and (ii) customer satisfaction, as measured annually. Applying the individual personal modifiers to the FY 2010 financial results noted above, our NEOs other than our CEO achieved MIP payouts ranging from 179.5% to 199.5% of the initial targeted amounts, and our CEO achieved a MIP payout of 199.5% of the initial targeted amount. The FY 2010 MIP cash payout for each of our NEOs is reflected in the 2010 Summary Compensation Table below.

 

In May 2010, the Compensation Committee selected EPS and individual performance as MIP modifiers for the fiscal year ending March 31, 2011. The EPS target approved by the Compensation Committee for FY 2011 is consistent with the guidance published by the Company on May 3, 2010, which disclosed a projected earnings range of $4.72 to $4.92 per share. The Company and the Compensation Committee believe that the EPS goal for a target MIP payout can be characterized as ambitious but attainable, meaning that based on historical performance this payout level is not assured but can reasonably be anticipated, while equally providing strong motivation for executives to strive to exceed the EPS goal in a way that balances short- and long-term stockholder value creation. For FY 2011, identical to the Company’s prior practice, our NEOs are eligible for MIP target cash award opportunities of 75% to 150% of their base salaries, which equate to $2,520,000, $761,400, $1,149,500, $534,400 and $493,500, for Messrs. Hammergren, Campbell, Julian and Owen and Ms. Seeger, respectively.

 

Long-term Compensation

 

We believe that a significant portion of compensation for executive officers should be contingent on delivering long-term value to all stockholders. We also believe that long-term compensation is a critical component of any executive compensation program because of the need to foster a long-term focus on the Company’s financial results. Long-term compensation is an incentive tool that management and the Compensation Committee use to align the financial interests of executives and other key contributors to sustained stockholder value creation.

The Company’s long-term compensation program includes three primary components: namely, a three-year cash incentive program, an annual stock option award and an annual award of performance-based restricted stock units, referred to as “PeRSUs.” We believe retention value is generated by the three-year performance cycle for our cash incentive program, and by the vesting requirements of equity awards.

 

The Compensation Committee reviews long-term compensation for NEOs in reference to the 50th and 75th percentiles of the Company’s peer group. Primarily in recognition of the exceptionally strong individual and Company performance over the prior fiscal year, the May 2009 award targets established for our NEOs for the FY 2010 and FY 2010 — FY 2012 performance periods were consistent with the peer group reference points selected by the Compensation Committee. Similar to base salary, differences in targeted amounts for NEOs’ long-term compensation occur because the Compensation Committee considers a number of individual factors when selecting a benchmark. For long-term compensation, these factors include job performance, skill set, prior experience, the executive’s time in his or her position and/or with the Company, internal consistency regarding pay levels for similar positions or skill levels within the Company, external pressures to attract and retain talent, and market conditions generally.

 

Cash. The cash portion of the Company’s long-term incentive compensation program is designed to motivate executives to exceed multi-year financial goals. The performance targets used in this program directly reflect the Company’s long-term strategic plan that is regularly reviewed with the Board. The cash opportunities under the Company’s Long-term Incentive Plan span a three-year performance cycle. A new three-year cycle with new target incentives and performance goals begins each fiscal year. This portion of the long-term incentive compensation program has three, three-year performance cycles running concurrently. As described in the narrative following the 2010 Summary Compensation Table, participants may earn zero to 300% of their LTIP target opportunity depending on the Company’s actual performance versus pre-established goals. Performance is assessed and payments that may be earned are approved in May following the close of the third fiscal year of the performance cycle.

 

The FY 2008 — FY 2010 LTIP performance period, which ended March 31, 2010, was aligned with a cumulative EPS goal of $10.87 per share. The actual three-year result for the FY 2008 — FY 2010 period was a cumulative EPS of $11.70, using for each of the three fiscal years the same adjusted EPS that the Compensation Committee used to determine the payout for the MIP. Therefore, at its May 2010 meeting, the Compensation Committee approved a payout for the FY 2008 — FY 2010 LTIP at 300% in accordance with the cash performance target and scale adopted in May 2007. The FY 2008 — FY 2010 LTIP cash payout for each of our NEOs is reflected in the 2010 Summary Compensation Table below.

 

At its May 2010 meeting, the Compensation Committee established FY 2011 — FY 2013 LTIP targets of $2,700,000, $675,000, $1,375,000, $400,000 and $400,000 for Messrs. Hammergren, Campbell, Julian and Owen and Ms. Seeger, respectively. For the FY 2011 — FY 2013 performance period, payouts were conditioned on achievement of two performance goals, namely EPS and operating cash flow (“OCF”), with the weighting 75% for EPS and 25% for OCF. In addition to EPS, the Compensation Committee utilizes OCF as a performance metric because it places a greater emphasis on cash management and profitable deployment of capital. Both the three-year cumulative EPS and OCF targets approved by the Compensation Committee for the FY 2011 — FY 2013 LTIP are consistent with the FY 2011 guidance published by the Company on May 3, 2010 and the three-year strategic plan reviewed by the Board. The Company and the Compensation Committee believe that the EPS and OCF goals for a target FY 2011 — FY 2013 LTIP payout can be characterized as challenging and difficult to achieve, but attainable with significant effort and skill on the part of the executive officer participants. The FY 2011 — FY 2013 LTIP target amounts were selected by the Compensation Committee based on its target allocation of long-term compensation, evaluation of each NEO’s individual performance, and in response to market data derived from the Company’s peer group as reviewed by the Compensation Committee with its independent compensation consultant.

 

Stock Options. Since stock option awards provide value to executive officers only if the Company’s stock price appreciates, the use of such incentives directly aligns the interests of executives and stockholders. Stock option grants are awarded each fiscal year at the May meeting of the Compensation Committee, generally vest in four equal annual installments over a four-year period and have a seven-year term. Consistent with its review of stock option

awards granted to executives by companies within the Company’s peer group, during FY 2010 the Compensation Committee awarded a stock option to Messrs. Hammergren, Campbell, Julian and Owen and Ms. Seeger for 611,000, 214,000, 339,000, 116,000 and 140,000 shares, respectively. The corresponding aggregate grant date fair value of the stock option award opportunities for each NEO is reflected in the 2010 Summary Compensation Table below. For FY 2010, year-over-year stock option awards increased for all NEOs other than our CEO in a range of 87,000 shares to 30,000 shares, and our CEO’s stock option award increased by 211,000 shares. The year-over-year increase for FY 2010 resulted from a recalibration to the Company’s peer group, as described above, and an adjustment for market price changes. Similarly, for FY 2011, the Compensation Committee awarded a stock option to Messrs. Hammergren, Campbell, Julian and Owen and Ms. Seeger for 402,000, 149,000, 224,000, 76,000 and 91,000 shares, respectively.

 

Performance-Based Restricted Stock Units. PeRSUs are awards conditioned on the achievement of individual and Company performance goals, which after completion of a one-year performance period, are converted into RSUs that fully vest upon completion of a subsequent three-year holding period. The Company’s use of PeRSUs focuses executives’ attention on annual financial goals, individual contributions to the Company’s success and stock price appreciation.

 

PeRSU target award opportunities are set at the beginning of each fiscal year and the actual number of RSUs granted is determined one year later, depending on the achievement of the applicable performance goals based on EPS and any adjustments resulting from the application of the individual performance modifier. Similar to the MIP, the Compensation Committee has the authority to adjust the PeRSU payout based upon the NEO’s individual performance review to reflect the employee’s individual impact on achieving the Company’s short-term financial results and long-term strategic objectives. Therefore, assuming achievement of the maximum EPS goal, the Compensation Committee applies the individual performance modifier to adjust the maximum limit so that no payout may be made, or the payout may be as high as 225% of the target award. The FY 2010 PeRSU target award opportunities for each of our NEOs is provided in the 2010 Grants of Plan Based Awards Table below, and the corresponding aggregate grant date fair value of these award opportunities is reflected in the 2010 Summary Compensation Table below.

 

In May 2009, the Compensation Committee approved an EPS goal of $3.97 as the Company’s PeRSU performance target for FY 2010. For FY 2010, the Company’s actual EPS performance of $4.58 from continuing operations, excluding litigation charges (credits) net, exceeded the pre-established EPS target goal noted above by sixty-one cents per share. The Compensation Committee determined that a downward net adjustment of nineteen cents per share to reported EPS was appropriate to reflect certain events that were not included in the Company’s FY 2010 operating plan, that is, the favorable impact of a litigation settlement and the gain on sale of a business unit, such that all executive officers would be eligible to receive 144% of their initial PeRSU target award. Identical to the MIP, the results were further modified based on the individual performance of each NEO. Accordingly, at its May 2010 meeting, the Compensation Committee awarded Messrs. Hammergren, Campbell, Julian and Owen and Ms. Seeger a total of 416,880, 151,200, 231,120, 77,760 and 87,480 RSUs, respectively, for the FY 2010 performance period.

 

In May 2010, the Compensation Committee selected EPS and individual performance as PeRSU modifiers for the fiscal year ending March 31, 2011. The EPS target approved by the Compensation Committee for FY 2011 is consistent with the guidance published by the Company on May 3, 2010, which disclosed a projected earnings range of $4.72 to $4.92 per share. Similar to the FY 2011 — FY 2013 LTIP, the Company and the Compensation Committee believe that the EPS goal for a target FY 2011 PeRSU payout can be characterized as challenging and difficult to achieve, but attainable with significant effort and skill on the part of the executive officer participants. At its May 2010 meeting, the Compensation Committee established a FY 2011 PeRSU target award opportunity of 127,000, 47,000, 70,000, 24,000 and 30,000 shares for Messrs. Hammergren, Campbell, Julian and Owen and Ms. Seeger, respectively. The FY 2011 PeRSU target awards were selected by the Compensation Committee based on its target allocation of long-term compensation and evaluation of each NEO’s individual performance, and in response to market data derived from the Company’s peer group as reviewed by the Compensation Committee with its independent compensation consultant.

Other Compensation and Benefits

 

The Company provides a broad array of benefits to all employees that are comparable to those offered by other employers in our industry and geographic footprint, including a competitive suite of health, life and retirement benefits. In addition, our employees are eligible to participate in the McKesson Foundation’s Matching Gifts Program. Under this program, employees’ gifts to schools, educational associations or funds, and other public charitable organizations are eligible for a match by the foundation up to $2,500 per employee for each fiscal year. Since the foundation had excess funds in its Matching Gift FY 2010 budget, the $2,500 cap was lifted in late January 2010 for all employees, including each of our NEOs. A limited number of additional benefits are also provided to executive officers because we believe that it is customary to provide such benefits, or otherwise in the best interest of the Company and its stockholders. In providing such benefits, both management and the Compensation Committee determined that these elements are appropriate for the attraction and retention of executive talent. In addition to the discussion of benefits below, the compensation associated with these items is described in footnote (6) to the 2010 Summary Compensation Table, entitled “All Other Compensation.”

 

The Company has two benefit plans under which participation is restricted to executive officers with approval of the Compensation Committee. These benefit plans, reviewed periodically to ensure that they continue to meet their objectives, are as follows: (i) the Executive Survivor Benefits Plan (the “ESBP”), 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 (the “EBRP”), a final pay pension plan. In tandem with our new executive death benefits policy, as described below, the Board approved an amendment to the Company’s ESBP such that no new executive may be designated to participate in the plan effective January 20, 2010. Moreover, upon management’s recommendation, effective June 1, 2007, the EBRP was frozen with participation restricted to the then-current roster of executive officers.

 

In October 2007, the Compensation Committee discontinued the Company’s Executive Medical Plan and Executive Salary Continuation Program, effective January 1, 2008. In the absence of an Executive Medical Plan, at its April 2008 meeting the Compensation Committee approved a policy allowing for the reimbursement of expenses associated with the annual physical examination of executive officers and their spouses, effective January 1, 2008.

 

The Company also offers two voluntary nonqualified deferred compensation plans: (i) the Deferred Compensation Administration Plan III (“DCAP III”); and (ii) the Supplemental Profit-Sharing Investment Plan II (“SPSIP II”). These plans are not tax-qualified plans under the U.S. Internal Revenue Code of 1986, as amended (the “Code”). The DCAP III is offered to all employees eligible for the MIP with a bonus target of at least 15%, including all executive officers and other select highly compensated employees. The SPSIP II is offered to all employees, including executive officers, who may be impacted by the compensation limits that restrict participation in the Company’s tax qualified 401(k) plan, the Profit-Sharing Investment Plan (“PSIP”).

 

Guided by the Company’s Executive Officer Security Policy for security, protection and privacy reasons, the Board has directed our CEO to use the corporate aircraft for both business and personal travel. By providing a confidential and productive environment for conducting business without the scheduling constraints imposed by commercial airline service, the aircraft allows our employees, including the CEO, to be more productive than if commercial flights were utilized. For these same reasons, during FY 2010 our CEO authorized the use of the corporate aircraft for personal use by Mr. Julian, trips that occurred by and large in conjunction with business-related activities. Likewise, as directed by the Company’s Executive Officer Security Policy, during FY 2010 the Company provided security services for Mr. Hammergren, including reimbursement of reasonable expenses related to installation and maintenance of home security. A car and driver are available for use by Mr. Hammergren, Mr. Julian and other executive officers.

 

Severance and Change in Control Benefits

 

Our Change in Control Policy for Selected Executive Employees (the “CIC Policy”) allows selected senior executives, including the NEOs, to receive additional benefits. The CIC Policy is administered by the Compensation Committee, and we believe its protection is in line with current market practice. Invoking the protection requires a so-called “double trigger;” that is, the occurrence of an individual’s termination in conjunction with an underlying change in control of the Company. Specific change in control language, consistent with the

CIC Policy, is included in Mr. Julian’s employment agreement. A detailed description of our CIC Policy is provided below under the subsection entitled “Executive Employment Agreements — Change in Control Policy.”

 

Consistent with current market practice and the Company’s CIC Policy, each of the Company’s stockholder-approved equity compensation plans includes change in control provisions, providing for no change in the timing of vesting unless there is an involuntary or constructive termination of employment following a change in control.

 

The Company has a Severance Policy for Executive Employees (“Executive Severance Policy”) that affords protection in line with current market practice. The policy applies if an executive officer is terminated by the Company for reasons other than for “Cause,” as defined in the Executive Severance Policy, and the termination is not covered by the Company’s CIC Policy. The Executive Severance Policy is not applicable to Mr. Hammergren or Mr. Julian as it is superseded by their individual employment agreements. A detailed description of the Executive Severance Policy is provided below under the subsection entitled “Executive Employment Agreements — Executive Severance Policy.”

 

Mr. Hammergren’s employment agreement provides for severance benefits in the case of voluntary, involuntary and constructive termination with or without a “change in control,” as defined in his agreement and summarized below under “Executive Employment Agreements.” Mr. Hammergren’s employment agreement, in substantially its current form, was extended to him when he was offered the position of co-chief executive officer in 1999. The agreement’s severance provisions, including provisions regarding pension rights, were not materially different from the agreement of his predecessor.

 

Information on Other Compensation-Related Topics

 

Executive Employment Agreements

 

Generally, we do not provide our executive officers with an employment agreement. However, an agreement may be offered in those situations when it is deemed in the best interest of our stockholders and necessary for the attraction and/or retention of a highly qualified candidate. It was precisely for these reasons that the Company entered into an employment agreement with Messrs. Hammergren and Julian. Both agreements stem from 1999, and as described above, were extended to secure the leadership necessary to guide the Company through challenging times, and in the case of Mr. Hammergren’s agreement, represents substantially the same agreement terms extended to his predecessor. These are the only two employment agreements in place among our current roster of executive officers. Consistent with the Company’s ICARE principles, we continue to honor our legacy contractual commitments.

 

Stock Ownership Policy

 

In January 2007, the Company revised its guidelines for stock ownership by executive officers (the “Stock Ownership Policy”), which had been originally adopted in 2002. The Company’s stock ownership policy was revised to include the MIP as a measuring component, such that the ownership requirement was expressed as a multiple of base salary and target MIP. The effect of such amendment was to substantially increase the ownership requirement for each of the Company’s executive officers. The ownership requirement for our CEO under the revised stock ownership guidelines was four times his combined base salary and target MIP, whereas each of the Company’s remaining NEOs had to achieve stock ownership equal in value to three times his or her combined base salary and target MIP. In light of this increase, our executive officers were allowed five years from January 2007 to meet the stock ownership guidelines.

 

Recognizing the continuing importance of aligning executives with the interests of stockholders, on January 20, 2010 the Board strengthened and clarified a number of provisions in the Company’s Stock Ownership Policy. Specifically, in order to increase program clarity, the Stock Ownership Policy was restated such that the CEO’s holding requirement is now expressed as ten times his base salary, and the holding requirement for each of the Company’s remaining executive officers is now expressed as six times his or her base salary. As shown in the table below, as of June 1, 2010 each of our NEOs has satisfied the Company’s revised stock ownership guidelines. All other provisions in the Stock Ownership Policy remain the same, except for the addition of a new enforcement feature. Effective January 20, 2010, each affected equity incentive award now includes language that the Company reserves the right to impose a sell restriction on the underlying shares of common stock delivered when these awards vest, should the executive fail to meet his or her ownership requirement as specified in the Stock Ownership Policy.

The target ownership requirements, and the NEOs’ compliance with these requirements, are set forth in the table below.

 

 

 

 

In all circumstances, stock options and performance-based restricted stock units (i.e., PeRSUs) do not count towards meeting the required stock ownership.

 

 

The Company’s directors are also subject to stock ownership guidelines, which are summarized above in the subsection entitled “Director Stock Ownership Guidelines.”

 

Equity Grant Practices

 

The Company has adopted a written policy stating that stock options will be awarded at an exercise price equal to the closing price of the Company’s common stock reported on the date of the grant. In most situations, the date of grant is the same day that the Compensation Committee meets to approve the grant. From time to time, the Compensation Committee’s meeting occurs shortly before or after the Company’s earnings are released to the investment community. When this occurs, the Compensation Committee delays setting the equity grant date to the third trading day following the date the Company’s earnings are released to the investment community. Under the terms of our 2005 Stock Plan, stock option re-pricing is not permitted without stockholder approval.

 

Tax Deductibility

 

Section 162(m) of the Internal Revenue Code generally provides 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. However, performance-based compensation in excess of $1,000,000 is deductible if specified criteria are met, including stockholder approval of the materials terms of applicable plans. The Compensation Committee’s intention is, and has always been, to comply with the requirements of Code Section 162(m) unless the Compensation Committee concludes that adherence to the limitations imposed by these provisions would not be in the best interest of the Company or its stockholders. While base salary in excess of $1,000,000 is not deductible, payments made under our MIP and LTIP programs, and the grant of RSUs made under our PeRSU program, are intended to qualify for deductibility under Code Section 162(m) as performance-based compensation.

 

For purposes of compliance with the Code, awards under these programs will not be made to individuals subject to Section 162(m), which includes our NEOs, unless minimum performance targets are first attained. In the

event of attainment of the minimum performance goals under these programs, the Compensation Committee will then exercise negative discretion to adjust awards downwards from a potential maximum amount in order to satisfy requirements under Code Section 162(m), while still providing for awards based on Company and individual performance in accordance with the MIP, LTIP and PeRSU program description provided above under the subheading “Elements of Executive Officer Compensation.”

 

Compensation Recoupment Policy

 

The Board is dedicated to maintaining and enhancing a culture that is focused on integrity and accountability, and that discourages conduct detrimental to the Company’s sustainable growth. To that end, on January 20, 2010 the Board approved an updated Compensation Recoupment Policy (the “Recoupment Policy”) that both expands on and clarifies the previous “clawback” policies embedded in the Company’s various incentive plans and programs. The updated Recoupment Policy applies to any Company employee who receives a cash or equity incentive award after January 20, 2010.

 

Under the Recoupment Policy, and consistent with the Company’s core values, the Board determined that it may be appropriate to recover annual or long-term incentive compensation provided to certain employees in the event that these individuals engage in conduct that is detrimental to the Company. Specifically, the Company may recoup incentive compensation from any employee if: (i) he or she engages in intentional misconduct pertaining to any financial reporting requirement under the Federal securities laws resulting in the Company being required to prepare and file an accounting restatement with the SEC as a result of such misconduct, other than a restatement due to changes in accounting policy; (ii) there is a material negative revision of a financial or operating measure on the basis of which incentive compensation was awarded or paid to the employee; or (iii) he or she engages in any fraud, theft, misappropriation, embezzlement or dishonesty to the material 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 profits realized from the sale of the Company’s common stock within the last 12 months.

 

As described in the Company’s standard incentive plan award documentation, the Compensation Committee may also seek to recoup any 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.

 

Excise Tax Gross-Up Policy

 

To further align executive incentives and stockholder expectations, on July 14, 2009 the Compensation Committee approved a policy prohibiting a new employment agreement with an executive officer, or a material amendment of an existing executive officer employment agreement, which provides for payment or reimbursement by the Company of excise taxes that are payable by such executive officer under Code Section 4999 as a result of a change in control of the Company.

 

Executive Death Benefits Policy

 

To lead with contemporary best-practices, on January 20, 2010 the Board approved a new executive death benefits policy such that effective the same day, the Company will not enter into a new plan, program or agreement (a “Benefit Agreement”) with any executive officer, as defined by the Federal securities laws, or a material amendment of an existing Benefit Agreement with any executive officer, which provides for a death benefit that is not generally provided to all employees, including salary continuation upon the death of an executive officer, unless such Benefit Agreement or material amendment thereto is approved by the Company’s stockholders pursuant to an advisory vote.

 

Executive Survivor Benefits Plan

 

In tandem with the new executive death benefits policy, the Board approved an amendment to the Company’s Executive Survivor Benefits Plan (the “ESBP”) such that no new executive may be designated to participate in the plan, effective January 20, 2010. Therefore, participation in the Company’s ESBP was frozen to the current roster of beneficiaries, which includes all current executive officers. For those that remain as plan participants, the ESBP will continue to provide a supplemental death benefit in addition to the voluntary and company-provided life insurance plan afforded to all employees. A detailed description of the ESBP is available below under the subheading, “Potential Payments upon Termination or Change in Control.”

 

We have reviewed and discussed the Compensation Discussion and Analysis contained in this proxy statement with management. Based on such review and discussion, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and in McKesson Corporation’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

 

Compensation Committee of the
Board of Directors

 

Alton F. Irby III, Chair
M. Christine Jacobs
David M. Lawrence, M.D.
Edward A. Mueller

 

The following table sets forth information regarding compensation and benefits earned by: (i) our President and Chief Executive Officer; (ii) our Executive Vice President and Chief Financial Officer; and (iii) the three other most highly compensated executive officers as of March 31, 2010 (collectively, our “NEOs”):

 

 

 

 

 

 

Defined Contribution Benefits, Nonqualified Plan Earnings and Dividend Equivalents

 

For FY 2010, the aggregate value of the Company’s contribution to each NEO’s PSIP retirement account (the Company’s 401(k) plan) was $14,455.

 

As described below in the subsection entitled “Narrative Disclosure to the 2010 Nonqualified Deferred Compensation Table,” the Company provides a matching contribution to each NEO’s SPSIP II and DCAP III accounts. For FY 2010, the amounts contributed by the Company to each NEO’s SPSIP II accounts were as follows: Mr. Hammergren, $310,930; Mr. Campbell, $105,610; Mr. Julian, $161,837; Mr. Owen, $61,124; and Ms. Seeger, $8,373. For FY 2010, the Company did not contribute to the NEOs’ DCAP III accounts, other than $16,461 for Mr. Owen.

 

All recipients of RSU awards are entitled to dividend equivalents at the same dividend rate applicable to the Company’s common stockholders, and upon vesting, dividend equivalents are to be settled in cash. For FY 2010, the amounts of dividend equivalents credited for outstanding RSUs held by our NEOs were as follows: Mr. Hammergren, $240,492; Mr. Campbell, $54,072; Mr. Julian, $109,360; Mr. Owen, $37,053; and Ms. Seeger, $25,715.

 

Perquisites and Other Personal Benefits

 

The value of financial counseling services, which include tax preparation services, received by our NEOs for FY 2010 was as follows: Mr. Hammergren, $16,285; Mr. Campbell, $15,325; Mr. Julian, $16,285; Mr. Owen, $16,285; and Ms. Seeger, $16,285.

 

The Company did not provide the NEOs with a housing allowance for FY 2010, other than $22,173 to Mr. Campbell pursuant to his employment offer letter.

 

The value provided to NEOs as a consequence of the Company’s Executive Officer Security Policy for FY 2010 was as follows: Mr. Hammergren, $217,922; Mr. Campbell, $0; Mr. Julian, $121,299; Mr. Owen, $0; and Ms. Seeger, $0. These amounts represent reimbursement of reasonable expenses related to installation and maintenance of home security, the incremental cost of the personal use of the Company-provided aircraft, and the incremental cost of the personal use of the Company-provided car and driver. Each of these items is provided at the Board’s direction and in accordance with the Company’s Executive Officer Security Policy. For the second consecutive year, during FY 2010 the Company did not reimburse NEOs for taxes due on the personal income imputed with regard to items or services provided under the Executive Officer Security Policy.

 

 

 

The value of items or services provided in connection with the annual Board retreat and two annual employee award programs attended by executive officers and their spouses was as follows: Mr. Hammergren, $6,796; Mr. Campbell, $792; Mr. Julian, $7,597; Mr. Owen, $2,331; and Ms. Seeger, $2,242.

 

Narrative Disclosure to the 2010 Summary Compensation Table

 

Management Incentive Plan

 

The 2010 Summary Compensation Table above reflects the amounts earned under the Company’s MIP, which are reported under the column entitled “Non-Equity Incentive Plan Compensation.” At its meeting in May 2009, during its annual review of compensation for executive officers, the Compensation Committee approved target awards (expressed as a percent of annual base salary), the performance measure and the award scale for the FY 2010 MIP. The threshold, target and maximum payouts for the FY 2010 MIP are displayed below in the 2010 Grants of Plan Based Awards Table, based on the Compensation Committee’s approval in May 2009 of an EPS target for FY 2010 of $4.28.

 

At its meeting in May 2010, during its annual review of compensation for executive officers, the Compensation Committee assessed the Company’s performance versus the MIP performance measures approved in May 2009. For FY 2010, the Company’s actual EPS performance of $4.58 from continuing operations, excluding litigation charges (credits) net, exceeded the pre-established EPS target goal noted above by thirty cents per share. The Compensation Committee determined that a downward net adjustment of nineteen cents per share to reported EPS was appropriate to reflect certain events that were not included in the Company’s FY 2010 operating plan, that is, the favorable impact of a litigation settlement and the gain on sale of a business unit, such that all corporate employee participants would be eligible to receive 133% of their initial MIP target cash award, in accordance with the following payout scale:

 

As is the case for all of the Company’s performance-based payout scales, for an EPS result that falls between the above-identified reference points, the modifier is adjusted ratably along the slope selected by the Compensation Committee at the beginning of each fiscal year. As described in the Compensation Discussion and Analysis under “Short-term Compensation — Annual Incentive,” the Compensation Committee further adjusted MIP awards to reflect individual contributions to the overall results.

 

Long-term Incentive Plan

 

The 2010 Summary Compensation Table above reflects the amounts earned under the Company’s LTIP, which are reported under the column entitled “Non-Equity Incentive Plan Compensation.” The performance measure approved by the Compensation Committee for the FY 2008 — FY 2010 LTIP performance period was cumulative EPS of $10.87 over the three-year period ended March 31, 2010. At its meeting in May 2010, during its annual review of compensation for executive officers, the Compensation Committee assessed the Company’s performance versus the performance measure approved for the FY 2008 — FY 2010 LTIP performance period. Reported cumulative EPS was $11.70 for the FY 2008 — FY 2010 LTIP performance period, using for each of the three fiscal years the same adjusted EPS that the Compensation Committee used to determine the payouts for the MIP, resulted in targets being approved at 300% in accordance with the following payout scale:

 

 

Performance-Based Restricted Stock Units

 

The 2010 Summary Compensation Table above reflects the amounts earned under the Company’s PeRSU program, which are reported under the column entitled “Stock Awards.” At its meeting in May 2009, during its annual review of compensation for executive officers, the Compensation Committee approved target awards, the EPS performance measure and the award scale for the FY 2010 PeRSU awards. The threshold, target and maximum payouts for FY 2010 PeRSU awards are displayed below in the 2010 Grants of Plan Based Awards Table, and the Compensation Committee approved an EPS target for FY 2010 of $3.97.

 

At its meeting in May 2010, during its annual review of compensation for executive officers, the Compensation Committee assessed the Company’s performance versus the PeRSU performance measures approved in May 2009. For FY 2010, the Company’s actual EPS performance of $4.58 from continuing operations, excluding litigation charges (credits) net, exceeded the pre-established EPS target goal noted above by sixty-one cents per share. The Compensation Committee determined that a downward net adjustment of nineteen cents per share to reported EPS was appropriate to reflect certain events that were not included in the Company’s FY 2010 operating plan, that is, the favorable impact of a litigation settlement and the gain on sale of a business unit, such that all executive officers would be eligible to receive 144% of their initial PeRSU target award, in accordance with the following payout scale:

 

 

As is the case for all of the Company’s performance-based payout scales, for an EPS result that falls between the above-identified reference points, the modifier is adjusted ratably along the slope selected by the Compensation Committee at the beginning of each fiscal year. As described in the Compensation Discussion and Analysis under “Long-term Compensation — Performance-Based Restricted Stock Units,” the Compensation Committee further adjusted PeRSU awards to reflect individual contributions to the overall results.

 

The following table sets forth certain information with respect to stock and option awards and other plan based awards granted during the fiscal year ended March 31, 2010 to our NEOs: