UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

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McKesson Corporation

(Name of Registrant as Specified In Its Charter)

 

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
OF McKESSON CORPORATION

 

The 2007 Annual Meeting of Stockholders of McKesson Corporation will be held on Wednesday, July 25, 2007 at 8:30 a.m. at the A.P. Giannini Auditorium, 555 California Street, San Francisco, California to:

 

 

Stockholders of record at the close of business on May 29, 2007 are entitled to notice of and to vote at the meeting or any adjournment or postponement of the meeting.

 

YOUR VOTE IS IMPORTANT. We encourage you to read the proxy statement and vote your shares as soon as possible. A return envelope for your proxy card is enclosed for your convenience. You may also vote by telephone or via the Internet. Specific instructions on how to vote using either of these methods are included on the proxy card.

 

By Order of the Board of Directors

 

Laureen E. Seeger
Executive Vice President,
General Counsel and Secretary

 

One Post Street

San Francisco, CA 94104-5296

June 13, 2007

 

 

CONTENTS

 

PROXY STATEMENT

 

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 25, 2007 (the “Meeting”), and at any adjournment or postponement of the Meeting. This proxy statement includes information about the matters to be voted upon at the Meeting.

 

On June 13, 2007, the Company began delivering these proxy materials to all stockholders of record at the close of business on May 29, 2007 (the “Record Date”). On the Record Date, there were approximately 296,896,901 shares of the Company’s common stock outstanding and entitled to vote. 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 (“PSIP”).

 

You can revoke your proxy at any time before the Meeting by sending a written revocation or a proxy bearing a later date. Stockholders may also revoke their proxies by attending the Meeting in person and casting a ballot.

 

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 set forth on the enclosed proxy card. The telephone and Internet voting procedures are designed to authenticate the stockholder’s identity and to allow the stockholders 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 via the Internet or telephone, 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 their instructions. Your stockholder vote is important. Brokers, banks and other nominees that have not received voting instructions from their clients cannot vote on their clients’ behalf on the proposals to amend the 2005 Stock Plan or the 2000 Employee Stock Purchase Plan, which could reduce the number of votes cast on these proposals. 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 no specification is made, the proxies will be voted FOR:

 

 

We know of no other matters to be presented at the Meeting. If any other matters properly come before the Meeting, it is the intention of the proxy holders to vote on such matters in accordance with their best judgment.

 

If you plan to attend the Meeting, you will need to bring your admission ticket. You will find an admission ticket attached to the proxy card if you are a registered holder or PSIP participant. If your shares are held in the name of a bank, broker or other holder of record and you plan to attend the Meeting in person, you may obtain an admission ticket in advance by sending a request, along with proof of ownership, such as a bank or brokerage account statement, to the Company’s Corporate Secretary, One Post Street, 33rd Floor, San Francisco, California 94104. Stockholders who do not have an admission ticket will only be admitted upon verification of ownership at the door.

 

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

 

The votes required and the method of calculation for the proposals to be considered at the 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,” or “abstain” from voting on the election as a director of one or more of the two nominees. 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 defined below), if any, will not count as votes cast. There is no cumulative voting with respect to the election of directors.

 

Item 2 — Amendments to the Restated Certificate of Incorporation to Declassify the Board of Directors. The affirmative vote of a majority of the outstanding shares of the Company’s common stock is required for the proposal to amend our Restated Certificate of Incorporation to declassify the Board of Directors.

 

You may vote “for” or “against,” or “abstain” from voting on, the proposal to approve the amendments to the Company’s Restated Certificate of Incorporation.

 

Item 3 — Amendment to the 2005 Stock Plan. Approval of the amendment to the Company’s 2005 Stock Plan to increase the number of shares available under the 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 Meeting.

 

You may vote “for” or “against,” or “abstain” from voting on, the proposal to approve the amendment to the Company’s 2005 Stock Plan.

 

Item 4 — Amendment to the 2000 Employee Stock Purchase Plan. Approval of the amendment to the Company’s 2000 Employee Stock Purchase Plan to increase the number of shares available under the 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 Meeting.

 

You may vote “for” or “against,” or “abstain” from voting on, the proposal to approve the amendment to the Company’s 2000 Employee Stock Purchase Plan.

 

Item 5 — 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 Meeting. Our 2008 fiscal year began on April 1, 2007 and will end on March 31, 2008 (“FY 2008”).

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 2008.

 

The Board of Directors recommends a vote “FOR” each nominee named in Item 1, and “FOR” each of items 2, 3, 4 and 5.

 

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 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 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 is not permitted to vote on a proposal without instructions from the beneficial owner, and instructions are not given.

 

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. Since the amendment to our Restated Certificate of Incorporation to declassify the Board of Directors for the annual election of all directors requires the affirmative vote of a majority of the outstanding shares of the Company’s common stock, shares not voted, including abstentions and broker non-votes, will have the effect of a vote against the proposal. With respect to the proposed amendment to the 2005 Stock Plan, the proposed amendment to the 2000 Employee Stock Purchase Plan and ratification of the appointment of Deloitte & Touche LLP, abstentions from voting will have the same effect as voting against such matters; however, broker non-votes, if any, will be disregarded and have no effect on the outcome of such vote.

 

Participants in the Company’s 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 separate PSIP voting instruction card for that purpose. In general, the PSIP provides that all other shares for which no voting instructions are received from participants and unallocated shares of common stock held in the leveraged employee stock ownership plan established as part of the PSIP, will be voted by the Trustee in the same proportion as shares as to 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 Meeting will be available at the Meeting and for ten days prior to the Meeting for any purpose germane to the Meeting, during ordinary business hours, at our principal executive offices at One Post Street, San Francisco, California, by contacting the Secretary of the Company.

 

The Notice of Annual Meeting, Proxy Statement and the Annual Report on Form 10-K for our fiscal year ended March 31, 2007 are available on our website at www.mckesson.com. Instead of receiving future copies of the Annual Report on Form 10-K and the proxy statement by mail, stockholders can elect to receive an e-mail that will provide electronic links to these documents.

 

Stockholders of Record: If you vote using the Internet, you may elect to receive proxy materials electronically next year in place of receiving printed materials. 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. If you used a different method to vote, sign up for electronic delivery anytime using your Stockholder Account Number, which you can locate on the accompanying proxy card, at the Internet website www.proxyconsent.com/mck.

 

Beneficial stockholders: If you hold your shares in a bank or brokerage account, you may also have the opportunity to receive copies of the Annual Report on Form 10-K and the proxy statement electronically. Please check the information provided in the proxy materials mailed to you by your bank or broker regarding the availability of this service or contact the bank, broker 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 e-mail at 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 one or more 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 and would like to request a separate copy of these materials, please: (1) mail your request to Investor Relations, Box K, McKesson Corporation, One Post Street, San Francisco, CA 94104; (2) send an e-mail to investors@mckesson.com; or (3) call our Investor Relations department toll-free at (800) 826-9260. Similarly, you may also contact us 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

 

The Board of Directors (the “Board”) is currently divided into three classes for purposes of election. One class is elected at each annual meeting of stockholders to serve for a three-year term. Directors hold office until the end of their terms and until their successors have been elected and qualified, or until their earlier death, resignation or removal. If a nominee is unavailable for election, your proxy authorizes the persons named in the proxy to vote for a replacement nominee if the Board names one. As an alternative, the Board may reduce the number of directors to be elected at the Meeting.

 

The terms of office of the directors designated as nominees, Ms. M. Christine Jacobs and Mr. John H. Hammergren, will expire at the upcoming Meeting. The Board has nominated each of these directors for reelection. As described below, the Board is recommending stockholder approval of its proposal to amend our Restated Certificate of Incorporation to eliminate the current classification of our directors. If that proposal is approved by our stockholders at the Meeting, our Board will be declassified, and the two nominees, if elected, will serve a one-year term that will expire at the 2008 Annual Meeting of Stockholders. If that proposal is not adopted, each of the two nominees, if elected, will serve a three-year term that will expire at the 2010 Annual Meeting of Stockholders. Furthermore, if that proposal is approved by our stockholders at the Meeting, all directors will be elected for a one-year term beginning with the 2008 Annual Meeting of Stockholders.

 

The other director whose term is expiring at the upcoming Meeting, Mr. Robert W. Matschullat, informed the Company on May 29, 2007 that he would not stand for reelection to the Board.

Accordingly, Mr. Mattschullat’s term as director will expire as scheduled on July 25, 2007. We anticipate that the Board will fill the upcoming vacancy following the Meeting.

 

All of the nominees have informed the Board that they are willing to serve as directors. If any nominee should decline or become unable to serve as a director for any reason, the persons named in the enclosed proxy will vote for another person as they determine in their best judgment.

 

Majority Voting Standard for Election of Directors.  In January 2007, the Board of Directors revised the Company’s Amended and Restated Bylaws to install a majority voting standard for the election of directors. The amendment states that in uncontested director elections, such as that being conducted this year, 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 continues to apply. This majority vote 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 for at least the past five years and major affiliations of each of the two nominees and the continuing directors.

 

Nominees

 

The Board of Directors recommends a vote FOR all Nominees.

 

 

Mr. Hammergren, age 48, was named Chairman of the Board effective July 31, 2002 and was named President and Chief Executive Officer of the Company effective April 1, 2001. He was Co-President and Co-Chief Executive Officer of the Company from July 1999 until April 2001. He was Executive Vice President of the Company and President and Chief Executive Officer of the Supply Management Business from January 1999 to July 1999, Group President, McKesson Health Systems from 1997 to 1999 and Vice President of the Company since 1996. He is a director of Nadro, S.A. de C.V. (Mexico) and Verispan LLC, entities in which the Company holds interests, and a director of the Hewlett-Packard Company. He has been a director of the Company since 1999.

 

 

Ms. Jacobs, age 56, is the Chairman, President, Chief Executive Officer and director 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 1999. She is a member of the Compensation Committee and the Committee on Directors and Corporate Governance.

 

Directors Continuing in Office

 

Directors Whose Terms will Expire in 2008

 

 

Ms. Knowles, age 60, 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 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.

 

 

Dr. Shaw, age 68, 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 a director of Intel Corporation. Dr. Shaw has been a director of the Company since 1992. She is the Chair of the Committee on Directors and Corporate Governance and a member of the Audit Committee.

 

Directors Whose Terms Will Expire in 2009 if Stockholders Do Not Approve the Proposal to Declassify Our Board

 

 

Mr. Budd, age 65, 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 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, he was a Commissioner, United States Sentencing Commission and from 1993 to 1996, Mr. Budd was a senior partner at the law firm of Goodwin Procter. 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. Irby, age 66, is the founding partner of London Bay Capital, a privately held investment firm, since May 2006. He was 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 was 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 Catlin Group Limited. He is also a director of an indirect wholly-owned subsidiary of the Company, McKesson Information Solutions UK Limited. Mr. Irby has been a director of the Company since 1999. He is Chair of the Compensation Committee and a member of the Finance Committee.

 

 

Dr. Lawrence, age 66, retired as Chairman Emeritus 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 a director of Agilent Technologies, Dynavax Technologies Corporation and Raffles Medical Group, Inc. Dr. Lawrence has been a director of the Company since January 2004. He is a member of the Compensation Committee.

 

Mr. Napier, age 70, retired as Chairman of the Board, Scientific-Atlanta, Inc., a cable and telecommunications manufacturing company, in November 2000. He had been the Chairman of the Board since 1993. He is also a director of Vulcan Materials Company, Intelligent Systems, Inc. and WABTEC Corporation. Mr. Napier has been a director of the Company since 1999. He is a member of the Finance Committee.

 

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. Its goal is to build long-term value for the Company’s stockholders and to assure 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 Company 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 has a written charter approved by the Board in compliance with the applicable requirements of the Securities and Exchange Commission (the “SEC”) and the New York Stock Exchange (the “NYSE”) listing requirements (the “Applicable Rules”). Each of these charters requires an annual review by its committee. All of the members of the committees are independent, as determined by the Board, under the NYSE listing standards and the Company’s director independence standards. In addition, all of the members of the Audit Committee meet the additional, heightened independence criteria applicable to audit committee members. The members of each standing committee are elected by the Board each year for a term of one year or until his or her successor is elected. The members of the committees are identified in the table below.

 

Board and Meeting Attendance

 

During the fiscal year ended March 31, 2007 (“FY 2007”), the Board met eight times. No director attended fewer than 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 Annual Meeting of Stockholders, and seven directors attended the annual stockholders’ meeting held in calendar year 2006.

 

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 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; 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 intended to be in accordance with the Applicable Rules for corporate audit committees. The Audit Committee met seven times during FY 2007.

 

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 in accordance with the Company’s additional director independence standards.

 

Compensation Committee

 

The Compensation Committee has responsibility for, among other things, reviewing and approving the corporate goals and objectives relevant to the CEO’s compensation and evaluating, together with the Board the CEO’s performance in light of those objectives; making and annually reviewing decisions concerning cash and equity compensation, and other terms and conditions of employment for the CEO; 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; 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 the CEO the authority to grant options to employees other than directors or executive officers, provided that such grants are within the limits established by Delaware General Corporate 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 has engaged Compensation Strategies, Inc., an independent executive and director compensation consulting firm, to provide executive compensation consulting services to the Company. Additional information on the Compensation Committee’s process and procedures for consideration of executive compensation are addressed in the Compensation Discussion and Analysis below. The Compensation Committee met five times during FY 2007.

 

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 approving the principal terms and conditions of securities that may be issued by the Company. The Finance Committee met seven times during FY 2007.

 

Committee on Directors and Corporate Governance

 

The 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 committee composition; and advising the Board regarding director compensation and administering the 2005 Stock Plan with respect to directors’ equity awards. The Governance Committee met six times during FY 2007.

 

Nominations for Director

 

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 retained by the Governance Committee, Company executives and other stockholders. Stockholders who wish to propose a director candidate for consideration by the Governance Committee or who wish to nominate a candidate 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, San Francisco, CA 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 that 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 to

stand 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 his or her duties as a director, as well as have a commitment to diversity.

 

The Company believes that compensation for non-employee directors should be competitive and should encourage increased 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 award and per-meeting fees. The committee chairs also receive an additional annual retainer, and beginning July 2007, the Presiding Director will similarly receive an additional annual retainer.

 

Directors are also paid their reasonable expenses for attending Board and committee meetings. 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 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, the account balance will be paid in the form elected by the director. In the event of death, the account balance will be paid to the director’s designated beneficiary. 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 years 2006 and 2007 was 8.0%.

 

Following a comprehensive review of compensation practices and levels for non-employee directors, on October 27, 2006, the Board increased the annual retainer for non-employee directors from $50,000 to $75,000 and increased the annual retainer for each committee chair by $5,000, which resulted in a $20,000 annual retainer for the Chair of the Audit Committee and $10,000 for each of the Chairs of the Finance Committee and the Committee on Directors and Corporate Governance. The annual retainer for the Chair of the Compensation Committee was increased to $20,000 from $5,000. These changes became effective on October 1, 2006. Also, at the October 2006 Board meeting, an annual retainer of $10,000 was established for the Presiding Director effective July 25, 2007.

 

In addition to payment of an annual retainer, Board members are also entitled to meeting fees of $1,500 for each Board, Finance Committee, Compensation Committee or Committee on Directors and Corporate Governance meeting attended, and $2,000 for each Audit Committee meeting attended.

 

Each July directors receive an automatic annual grant of restricted stock units (“RSUs”) in an amount not to exceed 5,000 units, which is currently set at 2,500 RSUs. The RSUs vest immediately; however, under the terms of our 2005 Stock Plan, receipt of the underlying stock is deferred until such time as the director leaves the Board. Dividend equivalents on the RSUs are credited to an interest bearing cash account in the Company’s DCAP III and are not distributed until the director leaves the Board.

Directors who are employees of the Company or its subsidiaries do not receive any compensation for service on the Board. Alton F. Irby III is also a director of McKesson Information Solutions UK Limited, an indirect wholly-owned subsidiary of the Company, and currently receives meeting fees of $1,500 for each board meeting attended for his service as a Board member of that company. For the fiscal year ended March 31, 2007, Mr. Irby earned $1,500 in meeting attendance fees for his service as a board member of McKesson Information Solutions UK Limited.

 

Non-employee directors are eligible to participate in the McKesson Corporation Foundation’s Educational Matching Gifts Program. Under this program, directors’ gifts to schools and educational associations or funds will be matched by the foundation up to $5,000 per director for each fiscal year.

 

The following table sets forth information concerning the compensation earned during the last fiscal year by each individual who served as a director at any time during the last fiscal year:

 

Director Compensation

 

 

 

 

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 of 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, during the last fiscal year the Board undertook a comprehensive review of the Company’s current corporate governance practices, the corporate governance environment and current trends, and, as a result, instituted a number of important changes, including the

early termination of the Company’s stockholder rights plan, commonly known as a “poison pill,” such that it automatically expired at the close of business on January 31, 2007; amending the Company’s governing documents to implement a majority vote standard in uncontested director elections in place of the plurality vote standard, which will continue to apply for contested elections; and voting to declassify the Board, a change that is discussed in greater detail below as it is subject to approval by the Company’s stockholders at the upcoming Meeting. The Board has adopted independence standards for its members, Corporate Governance Guidelines, as well as the 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 “Governance” and are described more fully below. Printed copies of these documents may be obtained by any stockholder from the Corporate Secretary upon request, One Post Street, 33rd Floor, San Francisco, California 94104.

 

Majority Voting Standard

 

In January 2007, the Board approved amendments to the Company’s Amended and Restated By-Laws (the “By-Laws”) to adopt a majority voting standard for the election of directors in place of the plurality vote standard. 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 were amended to 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 proffered 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, explaining 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 continue to 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 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 “Governance,” or a printed copy may be obtained by any stockholder from the Corporate Secretary upon request. The Company intends to post any amendments to, or waivers from, its Senior Financial Managers’ Code on its website within four business days after such amendment or waiver.

 

Related Party Transactions Policy

 

The Company has a written Related Party Transactions Policy requiring approval or ratification of 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 Chief Executive Officer 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 Chief Executive Officer or holders of more than five percent of the Company’s common stock. 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 promptly notify the General Counsel 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.

 

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 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 its adequacy. The Board most recently approved revised Corporate Governance Guidelines on April 25, 2007, which can be found on the Company’s website at www.mckesson.com under the caption “Governance,” or a printed copy may be obtained by any stockholder from the Corporate Secretary upon request.

 

Director Stock Ownership Guidelines

 

The Board has adopted Director Stock Ownership Guidelines pursuant to which directors are expected to own shares or share equivalents of the Company’s common stock equal to three times the annual board retainer, within three years of joining the Board. As of March 31, 2007, all of our directors were in compliance with the Company’s 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 of the 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. The Board has established standards to assist it in making a determination of director independence, which go beyond the criteria required by the NYSE. A director will not be considered independent if, within the preceding five years:

 

a) The director receives, or whose immediate family member receives, more than $100,000 per year in direct compensation from the Company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service);

 

b) The director is affiliated with or employed by, or whose immediate family member is affiliated with or employed in a professional capacity by, a present or former internal or external auditor of the Company;

 

c) The director is employed, or whose immediate family member is employed, as an executive officer of another company where any of the Company’s present executives serve on that company’s compensation committee;

 

d) The director is an executive officer or an employee, or whose immediate family member is an executive officer, of another company (A) that accounts for at least 2% of the Company’s consolidated gross revenues, or (B) for which the Company accounts for at least 2% or $1,000,000, whichever is greater, of such other company’s consolidated gross revenues;

 

e) The director is an executive officer of another company that is indebted to the Company, or to which the Company is indebted, and the total amount of either company’s indebtedness to the other is more than 2% of the respective company’s total assets measured as of the last completed fiscal year;

 

f) The director serves as an officer, director or trustee of a charitable organization and the Company’s discretionary charitable contributions are more than 5% of that organization’s total annual charitable receipts; (the Company’s matching of employee charitable contributions will not be included in the amount of the Company’s contributions for this purpose); and

 

g) For relationships not covered by the guidelines above, or for relationships that are covered, but as to which the Board believes a director may nonetheless be independent, the determination of independence shall be made by the directors who satisfy the NYSE independence rules and the guidelines set forth above. However, any determination of independence for a director who does not meet these standards must be specifically explained in the Company’s proxy statement.

 

These standards can also be found on the Company’s website at www.mckesson.com under the caption “Governance.” Provided that no relationship or transaction exists that would disqualify a director under the standards, and no other relationship or transaction exists of a type not specifically mentioned in the standards, that, in the Board’s opinion, taking into account all 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 those standards, and all other applicable laws, rules or regulations, the Board has determined that, with the exception of John H. Hammergren, each of the current directors, namely Wayne A. Budd, Alton F. Irby III, M. Christine Jacobs, Marie L. Knowles, David M. Lawrence, M.D., Robert W. Matschullat, James V. Napier and Jane E. Shaw, is independent.

 

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 and the position rotates annually each July among the committee chairs. 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. Robert W. Matschullat, Chair of the Finance Committee, is the current Presiding Director until his successor is chosen by the other independent directors at the Board’s meeting in July 2007.

 

Communications with Directors

 

Stockholders and other interested parties may communicate with the Presiding Director, the nonmanagement directors, or any of the directors by addressing their correspondence to the Board member or members, c/o the Corporate Secretary’s Office, McKesson Corporation, One Post Street, 33rd Floor, San Francisco, CA 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 her discretion, not to forward certain items if they are not relevant to and consistent with the Company’s operations, policies and philosophies, are deemed of a commercial or frivolous nature or otherwise inappropriate for the Board’s consideration. The Corporate Secretary’s office maintains a log of all 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 indemnity agreements with each of 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 permit indemnification for acts or omissions for which indemnification is not permitted under Delaware law.

 

The Board Of Directors recommends a vote FOR amending the Restated Certificate of Incorporation.

 

The Company’s Restated Certificate of Incorporation currently provides that the Board is divided into three classes, with each class being elected once every three years. In January 2007, on the recommendation of the Governance Committee, the Board unanimously adopted resolutions approving, declaring advisable and recommending to the stockholders for approval, amendments to declassify the Board of Directors.

 

If the proposed amendments to the Restated Certificate of Incorporation are approved by our stockholders, the classification of the Board will be eliminated, the current term of office of each director will end at the next annual meeting of stockholders and directors will thereafter be elected for one-year terms at each annual meeting of stockholders. Furthermore, any director chosen as a result of a newly created directorship, or to fill a vacancy on the Board, will hold office until the next annual meeting of stockholders and until his or her successor is elected and qualified.

 

If the proposed amendments to the Restated Certification of Incorporation are not approved by stockholders, the Board will remain classified, and if elected, the two nominees for director at the Meeting will each serve until the 2010 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified. All other directors will continue in office for the remainder of their full three-year terms and until their successors are duly elected and qualified. This proposal would not change the present number of directors, nor would it change the Board’s authority to change that number and to fill any vacancies or newly created directorship by resolution of the Board.

The text of the proposed amendment to the Restated Certificate of Incorporation is attached as Appendix A to this proxy statement. If approved, this proposal will become effective upon the filing of a Certificate of Amendment to the Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, which the Company intends to do promptly if stockholder approval is obtained.

 

Corresponding Amendment to the Company’s Amended and Restated By-Laws

 

In addition, in connection with the Board’s approval on January 4, 2007 of amendments to the Company’s Restated Certificate of Incorporation for purposes of declassifying the Board, the Board also approved amendments to Section 2 of Article III of the Amended and Restated By-Laws relating to declassification of the Board. Such amendments will become effective only if the stockholders approve the declassification of the Board, and only upon the filing of a Certificate of Amendment to the Corporation’s Restated Certificate of Incorporation relating to the declassification of the Board. Such amendments to the By-Laws would also change the number of directors from a fixed number of nine (which was historically modified by the Board upon approval of a By-Law amendment) to a range of three to fifteen, with the exact number to be fixed from time to time by resolution of the Board.

 

Background of Proposal

 

The proposal to declassify the Board is a result of a recent comprehensive review of current corporate governance practices by the Governance Committee and the Board, as described above under the subsection entitled “Election of Directors — Corporate Governance,” and following the passage of a stockholder proposal on the subject at the Company’s 2006 Annual Meeting of Stockholders.

 

The Board considered the various costs and benefits of retaining or eliminating the classified board structure. Additionally, the Board considered the current corporate governance environment and the trend by public companies to move to annual election of all directors. In light of our size and financial strength, the Board determined that the classification of the Board should be eliminated. On recommendation of the Governance Committee, the Board approved the proposed amendments to the Company’s Certificate of Incorporation to eliminate the classified Board structure and provide for the annual election of all directors, and determined to recommend that stockholders also approve such amendments to the Company’s Certificate of Incorporation.

 

The Board of Directors recommends a vote FOR amending the 2005 Stock Plan.

 

At the annual meeting, our stockholders will be asked to approve an amendment to the Company’s 2005 Stock Plan (the “2005 Plan”) to increase the number of shares of common stock reserved for issuance under the plan by 15,000,000 shares.

 

The Board approved the adoption of our 2005 Plan on May 25, 2005, subject to stockholder approval. The Company’s stockholders approved the 2005 Plan at their annual meeting held on July 25, 2005, which is the effective date of the 2005 Plan. On October 27, 2006, the Board retroactively amended and restated the 2005 Stock Plan to comply with proposed regulations issued under Section 409A of the U.S. Internal Revenue Code of 1986, as amended (the “Code”).

 

As of April 30, 2007, an aggregate of 4,738,729 shares of our common stock remained available for grant under the 2005 Plan. The Board believes it is important to the continued success of the Company that we have available an adequate reserve of shares under the 2005 Plan for use in attracting, motivating and retaining qualified employees. Accordingly, stockholders are being asked to approve an amendment to the 2005 Plan to increase the number of shares of the Company’s common stock reserved for issuance by 15,000,000 shares. The Board approved the proposed amendment to

the 2005 Plan to increase the share reserve on May 23, 2007, with such amendment to be effective upon stockholder approval.

 

The 2005 Plan is an “omnibus” plan that provides for a variety of equity and equity-based award vehicles, including the use of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and other share-based awards. Stockholders’ approval of the proposed amendment to the Company’s 2005 Plan will allow for the continued ability to grant share-based awards that qualify as “performance-based compensation,” thereby preserving the Company’s tax deduction under Section 162(m) of the Code.

 

Background of the Amendment

 

Current Equity Incentive Reserve is Insufficient.  The Company, as of April 30, 2007, had an aggregate of 4,738,729 shares remaining available for grant under the 2005 Stock Plan. Equity awards are an essential component of the Company’s long-term compensation program. The Company anticipates investing in new business opportunities and sustaining its revenue growth in FY 2008. To do this, the Company will need to recruit new talent and retain its current employees with offers of competitive equity compensation. Without additional shares in the 2005 Plan, the Company will be challenged in its employee recruitment and retention efforts. With additional shares in the 2005 Plan as a result of this amendment, the Company will be in a stronger position to recruit and retain those employees who are central to our continued success.

 

Prudent Management of Equity Incentive Programs.  Management believes that it has managed the Company’s equity incentive programs prudently, as can be measured by reference to the Company’s “run-rate” and “equity overhang,” each described further below.

 

Run-Rate.  The Company has reduced the size of employee share-based awards from prior years, and thereby reduced the Company’s run-rate to lower levels. The “run-rate” is the level of net share-based awards made by the Company (i.e., actual grants less cancellations, terminations or forfeitures for any given period) divided by the shares outstanding for the period. For the last five fiscal years, the amounts were as follows:

 

 

 

 

For the past five fiscal years, the Company has maintained its run-rate below two percent. The lower run-rate for FY 2007 reflects management’s greater reliance on full value share grants, such as restricted stock units, subsequent to the adoption of Statement of Financial Accounting Standards No. 123(R), “Share-based Compensation” on April 1, 2006. Management believes this lower run-rate is indicative of future practice. Under the share counting method used in the 2005 Plan, as described in the plan summary below, the award of a stock option for one share of common stock requires the deduction of only one share from the eligible plan share reserve. However, pursuant to the terms of

the 2005 Plan, for any one share of common stock issued in connection with a stock-settled stock appreciation right, restricted stock award, restricted stock unit award, performance share or other share-based award, two shares must be deducted from the shares available for future grant. Through the continued emphasis on full value shares, such as restricted stock units, we expect that we will be able to continue to contain our run-rate while still attracting and retaining our employees.

 

Equity Overhang.  The Company also has been focused on reducing the dilution caused by the grant of share-based awards, which is referred to as our “Equity Overhang.” The Company’s Equity Overhang is calculated by dividing (A) the sum of all share-based awards outstanding and available for grant as of the end of each fiscal year (the “Total Awards”) by (B) the sum of the total number of shares of the Company’s common stock outstanding as of the end of each fiscal year plus Total Awards. For the last five fiscal years, the amounts were as follows:

 

 

Conclusion.  The Board believes that the proposed amendment to the 2005 Plan is in the best interests of the Company because of its continuing need to provide share-based compensation to attract and retain quality employees. The current hiring environment is more competitive than in the recent past. Moreover, since FY 2005, the total number of employees has increased by more than 6,000. Having additional equity compensation available to grant under the 2005 Plan will enable the Company to recruit the top talent necessary to enable our Company to achieve continued success. We will continue to monitor changes in the marketplace relating to equity compensation and respond appropriately. We have periodically revised our equity award guidelines in response to evolving market practices and will continue to be vigilant in this regard so that our efforts to provide competitive equity compensation matches, but does not significantly exceed, prevailing market standards.

 

2005 Stock Plan Summary

 

The following summary of the material features of our 2005 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 Plan. A copy of our 2005 Plan is available to any of our stockholders upon request by: (1) writing to the Corporate Secretary, McKesson Corporation, One Post Street, 33rd Floor, San Francisco, CA 94104; (2) sending an e-mail to corporatesecretary@mckesson.com; or (3) calling the Corporate Secretary’s Office toll-free at (800) 826-9260. The 2005 Plan may also be viewed without charge on the SEC’s website at www.sec.gov.

 

Purpose of the 2005 Plan

 

The purpose of the 2005 Plan is to provide employees, affiliates and members of the Company’s board of directors the opportunity to: (i) 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 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 Plan Terms

 

Administration.  The 2005 Plan may be administered by the Board, or the Board may delegate administration of the 2005 Plan to a committee of the Board, to an officer or officers of the Company under limited circumstances. Currently, the Governance Committee administers the 2005 Plan with respect to non-employee directors; whereas, the Compensation Committee administers the 2005 Plan with respect to employees. 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 the conditions and limitations of the 2005 Plan, the administrator may modify, extend or renew outstanding stock awards. In connection with the Code Section 409A proposed regulations, a provision was added to the 2005 Plan in October 2006, which restricted modification, extension or renewal of options and stock appreciation rights to limit exercisability beyond the later of: (i) the fifteenth day of the third month following the date on which the option or stock appreciation right otherwise would have expired if the option or stock appreciation right had not been extended; or (ii) December 31 of the calendar year in which the option or stock appreciation right otherwise would have expired if the option or stock appreciation right had not been extended, based on the terms of

the option or stock appreciation right on the date of grant. The amendment was adopted to avoid the application of penalty taxes on certain grants. The Compensation Committee will review this amendment in light of the issuance of the Code Section 409A final regulations and adopt changes as it deems appropriate.

 

Change-in-Control.  Stock awards may be subject to additional acceleration of vesting and exercisability upon or after a “change-in-control” 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 shall 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; or (iii) delivering to the Company owned and unencumbered shares of common stock.

 

New Plan Benefits.  The amount of awards payable, if any, to any individual is not determinable as awards have not yet been determined by the administrator. However, under the 2005 Plan, each July non-employee directors receive an annual grant of restricted stock units in an amount not to exceed 5,000 units, which is currently set at 2,500 restricted stock units. The restricted stock units vest immediately, but receipt of the underlying stock is deferred until such time as the director leaves the Board.

 

Amendment.  The Board may suspend or discontinue the 2005 Plan at any time. The Compensation Committee of the Board may amend the 2005 Plan with respect to any shares at the time not subject to awards. However, only the Board may amend the 2005 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 Plan or increase the number of shares available for issuance pursuant to incentive stock options under the 2005 Plan; (ii) materially expand the class of persons eligible to receive awards; (iii) expand the types of awards available under the 2005 Plan; (iv) materially extend the term of the 2005 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 Plan from the administrator; or (viii) amend the provision regarding amendment of the 2005 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 May 1, 2007.

 

 

Since its inception, no shares have been issued under the 2005 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 Plan.

 

Our executive officers have a financial interest in this proposal because it would increase the number of shares available for issuance under the 2005 Plan to executives and other employees.

 

Certain United Stated Federal Income Tax Information

 

The following is a summary of the effect of U.S. federal income taxation on the 2005 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 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 realized on the sale will be treated as capital gain. The Company can deduct the amount 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. 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 when the stock is distributed to the participant, subject to the limitations of Code Section 409A. The Company may be entitled to deduct the amount, if any, that the participant recognizes as ordinary income.

 

Code Section 162(m).  Code Section 162(m) denies a deduction for annual compensation in excess of $1,000,000 paid to “covered employees.” “Performance-based compensation” is disregarded for this purpose. Stock option and stock appreciation rights granted under the 2005 Plan qualify as “performance-based compensation.” Other awards will be “performance-based compensation” if their grant or vesting is subject to performance objectives that satisfy Code Section 162(m).

 

Deferred Compensation.  Stock appreciation rights that are settled in cash, restricted stock awards, restricted stock unit awards and performance shares that may be deferred beyond the vesting date are subject to Code Section 409A limitations. If Code Section 409A is violated, deferred amounts will be subject to income tax immediately 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.

 

The Board Of Directors recommends a vote FOR amending the 2000 Employee Stock Purchase Plan.

 

At the annual meeting, our stockholders will be asked to approve an amendment to the Company’s 2000 Employee Stock Purchase Plan (the “ESPP”) to increase the number of shares of common stock reserved for issuance under the plan by 5,000,000 shares.

 

The ESPP was adopted by the Board of Directors of HBO & Company (“HBOC”) prior to January 12, 1999, the date when the Company acquired HBOC (the “Acquisition”). The ESPP was amended and restated by the Board effective as of the closing of the Acquisition, and further amended by the Board on January 27, 1999, April 26, 1999, August 25, 1999, October 27, 1999, March 27, 2002 and November 1, 2004.

 

On May 23, 2007, the Board of Directors, approved an increase in the number of shares of common stock available for issuance under the ESPP from 11,100,000 to 16,100,000 shares, subject to the approval of the Company’s stockholders. As of May 1, 2007, approximately 1,206,236 shares of common stock were available for issuance under the ESPP.

 

ESPP purchases occur each January, April, July and October on behalf of participants, and at the last purchase approximately 218,622 shares were issued to participants. Therefore, to assure that sufficient shares will be available to permit the ESPP to continue to operate, the Board has approved an increase in the number of shares of common stock reserved for issuance under the plan from 11,100,000 to 16,100,000 shares (subject to adjustment for any stock split, stock dividend or other relevant change in the Company’s capitalization). The Company’s forecast indicates that the addition of 5,000,000 shares will allow continued employee participation for approximately four to five years. If

this amendment to the ESPP is not approved by the stockholders, the Board will suspend employee participation in the ESPP once the currently available shares are purchased.

 

A vote in favor of this proposal will increase by 5,000,000 the number of shares available for purchase under the ESPP. A vote not to approve will mean that the number of shares reserved for issuance under the ESPP will remain at 11,100,000.

 

The ESPP is designed to provide employees, including officers, with an opportunity to purchase shares of the Company’s common stock on favorable terms by means of an automatic payroll deduction mechanism. The purpose of the ESPP is to advance and promote the interests of the stockholders of the Company by making available to eligible employees of the Company and participating subsidiaries and related entities the opportunity to acquire a proprietary interest, or to increase their existing proprietary interest, in the Company. The Board believes that employee ownership of the ESPP shares serves as an incentive to motivate and retain employees and encourage superior performance.

 

The Board believes that the proposed amendment to the ESPP is in the best interests of the Company because of its continuing need to provide share-based compensation to attract and retain quality employees. The current hiring environment is more competitive than in the recent past. Since FY 2005, the total number of Company employees eligible to participate in the ESPP has increased by more than 6,000. Having additional equity compensation available to grant under the ESPP will enable the Company to recruit the top talent necessary to enable our Company to achieve continued success.

 

The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Code Section 423. In March 2002, the Board amended the ESPP to allow for participation in the plan by employees of certain of the Company’s international and certain other subsidiaries. As to those employees, the ESPP does not so qualify under the Code.

 

The following summary of the material features of our ESPP (including the proposed amendment) does not purport to be complete and is qualified in its entirety by reference to the specific language of our ESPP. A copy of our ESPP is available to any of our stockholders upon request by: (1) writing to the Corporate Secretary, McKesson Corporation, One Post Street, 33rd Floor, San Francisco, CA 94104; (2) sending an e-mail to corporatesecretary@mckesson.com; or (3) calling the Corporate Secretary’s Office toll-free at (800) 826-9260. The ESPP may also be viewed without charge on the SEC’s website at www.sec.gov.

 

Plan Administration

 

The ESPP is administered by the Compensation Committee, which has the authority to make rules and regulations governing the ESPP.

 

Offering Periods

 

The ESPP is implemented through a continuous series of three-month offerings beginning on the first trading day on or after each February 1, May 1, August 1, and November 1 (the “Offering Dates”), and ending on the last trading day of the month which is three months later (the “Offering Periods”), during which contributions may be made toward the purchase of common stock under the plan. For purposes of determining the purchase price of a share of common stock, the last trading day of each Offering Period is used.

 

Once an employee participant is enrolled in the ESPP for an Offering Period, participation in the plan will continue until: (i) the date the participant withdraws from the plan; (ii) the participant is no longer an eligible employee; (iii) no further shares are authorized for purchase under the plan; or (iv) the Compensation Committee discontinues the plan.

Eligible Employees

 

Each employee of the Company (and subsidiaries and related entities designated by the Compensation Committee) who has been employed for 60 days or more prior to the beginning of an Offering Period and who customarily works at least 20 hours per week and more than five months in any calendar year is eligible to participate in the ESPP. However, no employee is eligible to participate in the ESPP to the extent that, immediately after the grant, the employee would own 5% of either the voting power or the value of the Company’s common stock. As of May 1, 2007, approximately 23,166 employees were eligible to participate in the ESPP and 6,583 employees had elected to participate.

 

Payroll Deductions

 

Each eligible employee may become a participant in the ESPP by making an election, at least ten days prior to any Offering Date, authorizing regular payroll deductions during the next succeeding Offering Period, the amount of which may not exceed 15% of a participant’s compensation for any payroll period. A participant may increase or decrease his or her rate of contributions or withdraw from participation at any time.

 

Payroll deductions are credited to a cash account for each participant. At the end of each Offering Period, the funds will be used to purchase shares of the Company’s common stock, which are then held in a stock account. A participant has the right to vote the shares credited to his or her stock account, and may withdraw these shares at any time.

 

Purchase Price

 

The purchase price of each share of the Company’s common stock will be 85% of the fair market value of such share on the last trading day of the applicable Offering Period. The fair market value is the closing price for the Company’s common stock on the applicable date. On June 8, 2007, the closing price per share of the Company’s common stock was $61.88 per share. The purchase price is subject to adjustment to reflect certain changes in the Company’s capitalization.

 

The maximum number of shares of common stock that a participant may purchase during any calendar year is $25,000, which is determined based on the fair market value of the Company’s common stock on the Offering Date.

 

Effect Of Termination of Employment of Participant

 

If a participant terminates employment with the Company, its subsidiaries and related entities during a Offering Period, the balance of the participant’s cash account will either be returned to the participant without interest, or in the event of death, to the person or persons entitled to the participant’s cash account.

 

Non-Transferability of Purchase Rights

 

Rights to acquire the Company’s common stock under the ESPP are not transferable by any participant and may in general be exercised only by the participant.

 

Capitalization Adjustments

 

In the event of any stock dividend, stock split, spin-off, recapitalization, merger, consolidation, exchange of shares or other change in capitalization, the number of shares then subject to purchase and the number of authorized shares remaining available to be sold shall be increased or decreased appropriately, with other adjustment as may be deemed necessary or equitable by the plan administrator, including adjustments to the price per share.

Amendment and Termination

 

The Board of Directors may amend the ESPP in any respect. However, an amendment that increases the number of shares reserved under the ESPP (other than adjustments upon changes in capitalization or a corporate transaction) or changes in the designation of corporations whose employees may be eligible to participate in the ESPP, other than a parent or subsidiary corporation, requires stockholder approval.

 

The ESPP will terminate when the number of shares available for issuance under the ESPP has been substantially exhausted, or at any earlier time by action of the Board.

 

Number of Shares Purchased by Certain Individuals and Groups

 

The actual number of shares that may be purchased by any individual under the ESPP is not determinable in advance since the number is determined, in part, on the contributed amount and the purchase price. The following table sets forth (1) the aggregate number of shares of Company common stock that was purchased under the ESPP by the listed persons and groups since its inception through the most recent purchase date, April 30, 2007, and (2) the average per share purchase price paid for such shares.

 

 

None of our directors who are not executive officers are eligible to participate in the ESPP. Since its inception, no shares have been issued under the ESPP 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 ESPP.

 

Our executive officers have a financial interest in this proposal because it would increase the number of shares available for issuance under the ESPP to executives and other employees.

 

Certain United Stated Federal Income Tax Information

 

The information provided below is only a summary of the effect of United States federal income taxation upon the ESPP participants and the Company with respect to the shares purchased under the ESPP. It does not purport to be complete, and does not discuss the tax consequences arising in the context of a participant’s death or the income tax laws of any municipality, state or foreign country in which the participant’s income or gain may be taxable.

 

Taxation of Shares Acquired Upon Exercise of Purchase Rights.  For employees of the Company and its subsidiaries (as defined in Section 424(f) of the Code), the plan is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423(b) of the Code. For employees of

other subsidiaries and participating entities, the ESPP cannot so qualify, so the taxation rules are different.

 

Employees of the Company and Code Section 424(f) subsidiaries.  A participant will pay no Federal income tax upon enrolling in the ESPP or upon purchase of shares under the plan. A participant may recognize income and/or capital gain or loss upon the sale or other disposition of shares purchased under the plan, the amount and character of which will depend on whether the shares are held for at least two years after the first day of the Offering Period in which the shares were purchased and at least one year after the last day of the Offering Period in which the shares were purchased (the “Required Holding Period”).

 

If the participant sells or otherwise disposes of the shares before expiration of the Required Holding Period, the participant will recognize ordinary income in the year of the sale in an amount equal to the excess of: (i) the fair market value of the shares on the purchase date; over (ii) the purchase price paid by the participant for the shares. The Company or applicable subsidiary will be entitled to a Federal income tax deduction in the same amount.

 

In contrast, if the participant holds the shares until after the Required Holding Period expires, the participant will generally recognize ordinary income at the time of sale in an amount equal to the lesser of: (i) 15 percent of the fair market value of the shares on the first day of the Offering Period in which the shares were purchased; or (ii) the excess of the fair market value of the shares at the time the shares were sold over the purchase price of the shares. The Company will not in this case be entitled to any deduction for Federal income tax purposes.

 

Employees of other subsidiaries and participating entities.  A participant will not realize taxable income at the time a purchase right is granted under the ESPP. When the shares are actually purchased, the participant will realize taxable income in the amount of the difference between the fair market value of the shares and the purchase price paid under the ESPP. (As described under “Purchase Price,” the price paid for shares purchased under the ESPP will always be at least 15% less than the fair market value of the shares on the Purchase Date). The basis of the shares will be increased by the amount includible as ordinary income. When the shares are sold, the gain or loss on the shares will be treated as capital gain or loss.

 

Capital Gain or Loss.  When the shares acquired through participation in the ESPP are sold, the gain or loss on the shares will be treated as a capital gain or loss. Net capital gain (i.e., generally, capital gain in excess of capital losses) recognized by the participant from the sale of shares that have been held for more than 12 months will generally be subject to long-term capital gain rates. Net capital gain recognized from the sale of shares held for 12 months or less will be subject to tax at ordinary income tax rates.

 

The following table sets forth information as of March 31, 2007 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 that had the effect of terminating the 1999 Stock Option and Restricted Stock Plan, the 1998 Canadian Stock Incentive Plan, the Stock Option Plans adopted in January 1999 and August 1999, which plans had not been submitted for approval by the Company’s stockholders, 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 have a ten-year life and vest over four years. 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 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 Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” in Financial Notes 1 and 19 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 Form 10-K filed on May 9, 2007. This information is incorporated herein by reference.

 

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, 2008. 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 Meeting to respond to appropriate questions and to make a statement if they desire to do so. For the fiscal years ended March 31, 2007 and 2006, 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 assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under “Audit Fees.” These services include fees related to employee benefit plan audits, accounting consultations and 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 tax compliance, tax advice and tax planning (federal, state and international). Fees in this category include international corporate income tax return preparation and related services, U.S. expatriate tax return preparation and assistance, U.S. corporate income tax preparation software and consulting services.

 

All Other Fees.  This category consist 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, 2007 and 2006.

 

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 which requires it to pre-approve all audit and permissible non-audit services, including audit-related and tax services to be provided by Deloitte & Touche and 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 “Governance.” The Audit Committee is composed exclusively of directors who are independent under the applicable SEC and NYSE rules. 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 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 reviewed and discussed the audited financial statements of the Company for the year ended March 31, 2007 (the “Audited Financial Statements”) with management. In addition, the Audit Committee has discussed with D&T the matters required to be discussed by Statement on Auditing Standards No. 61 (Communications with Audit Committees), as amended.

 

The Audit Committee also has received the written disclosures and the letter from D&T required by the Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and has discussed with that firm 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 the 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 be included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007 for filing with the SEC.

 

Audit Committee of the Board

 

Marie L. Knowles, Chair

Wayne A. Budd

Robert W. Matschullat

Jane E. Shaw

 

The following table sets forth information regarding ownership of the Company’s outstanding common stock by any entity or person, to the extent know 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 May 31, 2007, except as otherwise noted, information regarding ownership of the Company’s outstanding common stock by: (i) each executive officer named in the “Summary Compensation Table” below; (ii) each director, including the nominee directors; and (iii) all directors and executive officers as a group. The table also includes the number of shares subject to outstanding options to purchase common stock of the Company that are exercisable within 60 days of May 31, 2007:

 

 

 

EXECUTIVE COMPENSATION

 

Our compensation program is designed to motivate our officers and other key employees to achieve short- and long-term corporate goals that enhance stockholder value and enable the Company to attract and retain exceptionally talented individuals. To meet these objectives, we seek to foster a pay for performance culture by setting challenging performance goals for our executives and conditioning a significant proportion of their overall compensation on the achievement of those goals. To foster a culture where performance is highlighted in everything we do, the Company’s pay for performance philosophy applies to both short- and long-term compensation elements.

 

Our compensation program is shaped by the highly competitive nature of the healthcare industry, and also by the highly competitive market for exceptional management talent. The amount of compensation for each named executive officer is intended to reflect the officer’s experience, his or her individual performance and the performance of the Company. Consistent with our goal to pay for performance, as an executive officer’s responsibility and ability to impact the Company’s financial performance increases, the individual’s at risk performance based compensation increases as a proportion of his or her total compensation. Moreover, the percentage of long-term relative to short-term compensation increases proportionately with job responsibility. Ultimately, our executive compensation program is designed to provide above-market compensation for achieving above-market financial results, and below-market compensation for when the Company’s and/or individual performance fails to meet expectations.

 

At risk performance based pay for all executives is determined from the results of their annual performance review and the Company’s performance against pre-established financial objectives. Beginning with FY 2006, the Compensation Committee established diluted earnings per share (“EPS”) as the Company’s primary performance measure for both short- and long-term compensation programs. As described in more detail below, performance based awards were designed such that payouts would occur only if the Company achieved superior levels of EPS growth.

 

Achievement of Performance Based Compensation

 

Over the last seven years, the Company’s strategic and financial results have been excellent. The Company has made significant progress growing revenues, earnings per share and stockholder value. During the seven-year period between FY 2000 and FY 2007, our revenues increased from $37 billion to $93 billion, a compound annual growth rate of 14%, earnings per diluted share from continuing operations (excluding adjustments for the securities litigation reserve) increased from 65 cents to $2.89, a compound annual growth rate of 24%, and market capitalization increased from $6.0 billion to $17.3 billion, a compound annual growth rate of 17%. As shown in the stock performance chart below, over this same seven-year period, our total stockholder return outperformed both the S&P 500 Index and the Value Line Healthcare Sector Index.

Comparison of Seven-Year Cumulative Total Return (*)

- Performance results through March 31, 2007 -

 

 

 

 

Over the same seven-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 products and services to drive customer satisfaction and margin expansion, and increased employee satisfaction and retention. As described in our FY 2007 Annual Report on Form 10-K, we also made a series of important acquisitions designed to expand our product offering and increase market penetration.

 

This progress has come under the leadership of the executive management team assembled by John H. Hammergren, our Chairman, President and Chief Executive Officer. Mr. Hammergren was appointed by the Board as the Company’s co-chief executive officer in July 1999 following the resignation of our former chief executive officer. This action accompanied the resignation of the Company’s chief financial officer and termination of the senior management team at our newly acquired healthcare information technology business unit after the discovery of accounting improprieties in that unit two months earlier. At that time, the Company was in distress. To secure the leadership necessary to guide the Company through these challenging times, and in light of the terminations of the preceding month, the Board and Mr. Hammergren agreed to an employment agreement on the same terms as his predecessor. 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. In April 2001, Mr. Hammergren was named by the Board as the Company’s sole chief executive officer.

 

The compensation reported in this proxy statement primarily reflects performance during two periods: FY 2007 and the three-year period of FY 2005 to FY 2007. During this period, as explained above,

the Company’s financial performance has been excellent. As a result, short- and long-term performance related compensation for all named executive officers was superior. Moreover, based upon the terms of his employment agreement and due to increases in his performance related compensation, Mr. Hammergren’s FY 2007 total compensation includes a significant performance based payment in his short- and long-term incentive compensation, as described in the subsections below entitled Summary Compensation Table and Grants of Plan Based Awards. In turn, Mr. Hammergren’s FY 2007 cash compensation directly affects his pension benefits as displayed in the tables below.

 

Oversight and Authority Over 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 Summary Compensation Table below (collectively, the Company’s “NEOs”). For FY 2007, our NEOs and their respective titles were as follows:

 

 

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 Board compensation. These advisors do not provide any other services to the Company, except as to matters related to the above mentioned activities.

 

At the beginning of each fiscal year the Compensation Committee’s independent compensation consultant presents 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 compensation consultant include the Hewitt Associates Total Compensation Database and compensation information published by other public companies. From this larger sampling of companies, the Compensation Committee’s review of salary data focuses on a smaller group of companies similar in both size and complexity (based on sales, revenues and other financial measures) that represent the types of companies with which the Company historically competes for executive talent. This diverse comparison group of companies, as identified in the chart below, provides the Compensation Committee with a broad picture of the market for executive talent. Composition of the compensation comparison group is reviewed by the Compensation Committee and its independent consultant every other year. As part of their review process, the Compensation Committee and its independent consultant endeavor to design the Company’s compensation comparison group such that the addition or removal of any single company would not have a material impact on the survey results.

 

 

 

 

Annually, each element of executive officer compensation is reviewed by the Compensation Committee to determine the relative competitiveness of the Company’s compensation program, which is compared against the 50th and 75th percentile of the compensation comparison group listed above. Each element of compensation and total compensation is then reviewed across our executive ranks to ensure internal consistency.

 

The Compensation Committee’s objective is to target executive pay at levels that are comparable to similarly situated executives at the companies in our compensation comparison group. Short-term compensation, which includes both a fixed base salary and annual at risk performance based compensation, is generally targeted to provide compensation at the median (50th percentile) of the compensation comparison group when both the Company’s and executive officer’s performance reach predetermined target levels — which, we refer to as performance at “target.” In turn, long-term compensation is generally targeted to provide compensation between the 50th and 75th percentile of the compensation comparison group when both the Company’s and executive officer’s performance reaches or exceeds predetermined target levels.

 

At the beginning of each fiscal year, our Chief Executive Officer (“CEO”) evaluates the financial and strategic results of executive officers against the strategic operating plan for the prior fiscal year. The CEO’s evaluation of individual performance focuses on executive officers’ leadership abilities, including

their professional development and mentoring of subordinates. Each executive officer is also evaluated on their commitment to the Company’s “ICARE” principles, which guide all employees. These principles are:

 

 

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.

 

The CEO, in consultation with the Compensation Committee’s independent compensation consultant and the Executive Vice President, Human Resources, then develops compensation recommendations for executive officers. Factors that the CEO weighs in making individual target compensation recommendations include:

 

• the performance review conducted by the CEO;

 

 

In May, the CEO presents his findings and compensation recommendations to the Compensation Committee for its review and consideration. In addition to the CEO’s findings and recommendations, the Compensation Committee reviews a compensation “tally sheet” for each executive officer. The tally sheet presents the total value of compensation when both individual and Company performance is at target, and presents an estimate of the compensation that would be delivered should the executive officer’s employment be terminated voluntarily, involuntarily or as a result of a change-in-control. The Compensation Committee finds tools like tally sheets helpful in its analysis of the executive compensation program, but in determining the specific levels of compensation, the Compensation Committee is generally more focused on individual elements of the Company’s executive compensation program and its measurement against similarly situated executives in the compensation comparison group. The Compensation Committee, in its sole discretion, determines the level of payout to each executive officer under our short- and long-term compensation programs for the completed fiscal year, and the individual and Company performance targets for the new fiscal year.

 

At the beginning of each fiscal year, the Board conducts a performance review of the CEO on the same basis described above for all other executive officers. For the Board’s review, the CEO prepares a written analysis of his accomplishments keyed to the business and individual goals established for the prior fiscal year. At the Board’s April meeting, the CEO presents his personal performance results for the prior fiscal year, goals for the new fiscal year and responds to any questions that may arise. At the completion of his performance review, the Board discusses the CEO’s performance review in executive session prior to delivering their additional input and feedback to the Compensation Committee. In May, in executive session without the CEO present, the Compensation Committee determines the CEO’s compensation with input from the Compensation Committee’s independent consultants.

 

The Compensation Committee has responsibility for setting performance targets and payout scales for all incentive compensation programs. While performance targets are initially developed by management, and reflect the one-year and three-year strategic business operating plans reviewed with the

Board, the Compensation Committee in its sole discretion may approve or amend management’s recommendations.

 

Consistent with the Company’s pay for performance culture, the Compensation Committee allocates a majority of each NEO’s compensation to at risk components contingent on the successful accomplishment of pre-determined performance goals. Most recently, when measured at target, more than 90% of the Company’s CEO’s compensation for FY 2007 was at risk and subject to future performance. Similarly, for FY 2007, approximately 75% to 88% of compensation for the Company’s other NEOs was at risk and subject to future performance.

 

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.

 

Short-term Compensation

 

Short-term compensation is delivered in cash with a substantial portion at risk and contingent on the successful accomplishment of pre-determined performance goals. We believe it is important to have at risk compensation that can be focused on short-term Company and individual goals. For executive officers, including the Company’s CEO and other NEOs, depending on the officer’s seniority level, the proportion of total short-term compensation at risk ranges from approximately 40% to 60%.

 

Base Salary.  Base salary for executive officers is determined the same way base salary is determined for all employees — base salary for a fully functioning employee should approach the 50th percentile for that position within the compensation comparison group. Base salary may be set above the 50th percentile, depending on the employee’s experience, long-term performance in the job, financial results and his or her individual performance review.

 

The Summary Compensation Table below reflects FY 2007 base salary for each NEO. These salaries were reviewed by the Compensation Committee at its May 2006 meeting, at which salaries were increased effective May 28, 2006. Increases in FY 2007 salaries for NEOs were the result of the Compensation Committee’s evaluation of their individual performance, and in response to market data derived from the compensation comparison group as reviewed annually by the committee with its independent compensation consultant.

 

Base salaries were again reviewed by the Compensation Committee at its May 2007 meeting. Consistent with prior year practice, effective May 27, 2007, the Compensation Committee approved FY 2008 base salary increases for the Company’s NEOs based on the evaluation and review process described above.

 

Annual Incentive.  The Management Incentive Plan (“MIP”) is an annual cash incentive program with payments determined by performance against measurable annual financial goals. The MIP, like base salary, is designed to deliver short-term cash incentive compensation on average at the 50th percentile of the compensation comparison group.

 

In May 2006, the Compensation Committee approved EPS of $2.62 as the MIP performance target for FY 2007. EPS was chosen as the relevant 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. Therefore, since FY 2006, both short- and long-term performance compensation programs employed by the Company have used EPS as a performance target. As such, a large percentage of NEO cash and equity opportunities are tied to the achievement of EPS growth.

For FY 2007, our NEOs were eligible for MIP target award opportunities that ranged from 75% to 135% of their base salary. The Company’s actual financial performance can result in a MIP payout range of zero to 200% of the NEO’s pre-established target. In FY 2007, based on the performance targets established in May 2006, actual performance exceeded the predetermined EPS target goal by more than 10%. As described in greater detail below in the narrative following the Summary Compensation Table, MIP payouts are conditioned on the achievement of a minimum EPS goal below which no award would be earned, and conversely, payouts are subject to a maximum EPS goal above which no additional award would be earned. The Compensation Committee has the authority to adjust EPS targets to reflect unusual events, such as acquisitions, divestures and unusual stock buybacks.

 

The Compensation Committee has the authority to further adjust the amount earned under MIP based upon the NEO’s individual performance review. Individual performance targets are established at the beginning of the fiscal year and approved by the Board in the case of the CEO, or by the CEO in the case of the other executive officers. The individual performance modifier can adjust individual payouts to zero, or increase the payout by an additional 50%, to reflect the employee’s individual impact on achieving the Company’s financial results. The CEO makes a recommendation to the Compensation Committee for each executive officer’s personal modifier, which ultimately is decided solely by the committee, whereas the committee will determine the personal modifier for the CEO based on his performance review before the full Board.

 

In May 2007, the Compensation Committee decided to continue using EPS and individual performance as the MIP modifiers for the fiscal year ending March 31, 2008. The FY 2008 EPS target approved by the Compensation Committee is consistent with the guidance published by the Company on May 7, 2007, which disclosed an earnings range between $3.15 and $3.30 per diluted share. The Company and the Compensation Committee believe that the EPS goal for a target MIP payout is realistic and achievable while 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 2008, consistent with the Company’s prior year practice, our NEOs are eligible for MIP target award opportunities of 75% to 135% of their base salary, which may be adjusted based on the Company and individual performance modifiers described above.

 

Long-term Compensation

 

We believe that a significant portion of compensation should be contingent on delivery of value to all stockholders. We 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.

 

In FY 2006, we restructured our long-term compensation program for executive officers in order to create a stronger correlation between Company performance and long-term compensation. Specifically, we reduced our reliance on stock options by introducing a new element of equity compensation — grants of performance restricted stock units, which we call “PeRSUs.” As explained further below, PeRSUs are awards conditioned on the achievement of individual and Company performance targets, which after completion of a one-year performance period, are settled in RSUs that vest over a subsequent three-year period. We believe the use of PeRSUs focuses executives’ attention on annual financial goals, individual contributions to the Company’s success and stock price appreciation. The Company’s deliberate move away from the broad use of stock options to PeRSUs as a performance motivating tool also reflects changes in market practice and the financial accounting treatment of share-based compensation. Starting in FY 2007, long-term compensation was delivered to NEOs using a combination of cash incentives, stock options and PeRSUs.

 

We believe retention value is generated by the three-year performance cycle for our cash incentive program, and vesting requirements of equity grants. In addition to using the survey results of our

compensation comparison group, the Compensation Committee annually reviews the compensation at risk versus the vested value in hand for each executive officer which can be used in setting individual long-term compensation targets.

 

Generally, within long-term compensation, the Compensation Committee seeks to allocate awards on the basis of 20% cash, 40% stock options and 40% PeRSUs. Since final compensation awards are subject to future performance, long-term compensation that is actually paid to our executive officers may reflect a different relative allocation.

 

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 operating plan that is reviewed with the Board. The cash opportunities under the Company’s Long Term Incentive Plan (“LTIP”) generally span a three-year performance cycle. A new three-year cycle with new target incentives and performance goals begins each fiscal year. When mature, this portion of the long-term incentive compensation program will have three, three-year performance cycles running concurrently. As described in greater detail below in the narrative following the 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 2005 — FY 2007 LTIP performance period, which ended March 31, 2007, was aligned with a cumulative EPS goal of $4.41 per share and with return on committed capital of 22.5%. Due to the restructuring of executive officer compensation in FY 2006, the FY 2005 — FY 2007 LTIP EPS goal was based upon EPS earnings for only a two-year period (FY 2006 through FY 2007) as opposed to the typical three year goal. Also, the FY 2005 — FY 2007 LTIP payout is the last to include a “return on committed capital” performance component. Since FY 2006, the Compensation Committee has used EPS as the Company’s primary performance measure for both short- and long-term compensation programs. The actual LTIP cash payouts for the FY 2005 — FY 2007 performance period for each of our NEOs is reflected in the Summary Compensation Table below.

 

At its May 2007 meeting, the Compensation Committee established a FY 2008 — FY 2010 LTIP performance target of $2,700,000, $675,000, $1,375,000, $400,000 and $675,000 for Messrs. Hammergren, Campbell, Julian, Owen and Ms. Pure, respectively. The FY 2008 — FY 2010 LTIP target amounts were selected by the Compensation Committee based on its evaluation of each NEO’s individual performance, and in response to market data derived from the compensation comparison group as reviewed by the Compensation Committee with its independent compensation consultants.

 

Stock Options.  We believe stock options align executive officer financial interests directly with stockholders via stock price appreciation. Stock option grants are made at the beginning of each fiscal year and generally vest in four equal annual installments over a four year period with a seven-year life. The grant date fair value is targeted to be approximately 40% of the total long-term compensation for the fiscal year. Consistent with its review of stock option awards by companies within the compensation comparison group, during FY 2007 the Compensation Committee awarded a stock option to Messrs. Hammergren, Campbell, Julian, Owen and Ms. Pure for 285,000, 63,000, 142,000, 42,000 and 55,000 shares, respectively. Similarly, for FY 2008, the Compensation Committee awarded a stock option to Messrs. Hammergren, Campbell, Julian, Owen and Ms. Pure for 300,000, 75,000, 145,000, 44,000 and 75,000 shares, respectively.

 

Performance Restricted Stock Units.  PeRSU target award opportunities are set at the beginning of each fiscal year. The actual number of RSUs granted one year later upon settlement of PeRSUs can range from zero to 200% of the initial target amount, depending on both individual and Company accomplishment of pre-determined performance goals. Vesting of the RSUs issued upon settlement occurs in two phases, with fifty percent vested in the second and fourth years after the PeRSU target performance awards are established. For the fiscal year ended March 31, 2007, the Compensation Committee approved an EPS target of $2.62 as the Company’s performance target. Since the

Company’s actual EPS performance for the FY 2007 performance period was $2.89, executive officers’ PeRSUs target awards were increased by 14% over the initial target amount. Similar to the MIP, the results were further modified based on the individual performance of each NEO. Accordingly, at its May 2007 meeting, the Compensation Committee awarded Messrs. Hammergren, Campbell, Julian, Owen and Ms. Pure a total of 188,100, 37,950, 87,780, 29,070 and 37,620 shares, respectively. The final PeRSU awards earned by each NEO for the FY 2007 performance period is reflected in the footnotes to the Grants of Plan Based Awards Table below.

 

At its May 2007 meeting, the Compensation Committee established a FY 2008 PeRSU target award opportunity of 110,000, 22,000, 44,000, 17,000 and 22,000 shares for Messrs. Hammergren, Campbell, Julian, Owen and Ms. Pure, respectively. The FY 2008 PeRSU target amounts were selected by the Compensation Committee based on its evaluation of each NEO’s individual performance, and in response to market data derived from the compensation comparison group as reviewed annually by the Compensation Committee with its independent compensation consultant.

 

Other Compensation and Benefits

 

The Company provides a broad array of benefits to all employees. These broad based benefits are comparable to those offered by other employers in our industry and geographic locations. A limited number of additional benefits are also provided to executive officers as part of the total compensation package because we believe that it is customary to provide such benefits, or otherwise in our best interest to do so. 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 programs is included in the All Other Compensation Table, which follows the Summary Compensation Table.

 

The Company has four benefit plans under which participation is restricted to executive officers with approval of the Compensation Committee. These benefit plans are reviewed periodically to ensure that they continue to meet their objectives. The four executive officer benefit plans are as follows:

 

 

At its May 2007 meeting, the Compensation Committee concluded that it was appropriate to continue to offer such executive officer benefit plans. These benefits were deemed necessary since without these programs, restrictions and caps generally imposed on insured plans would result in curtailment of benefits to executive officers.

 

At the same meeting, the Compensation Committee concluded that the EBRP has been a valuable tool in attracting mid-career executive talent, including some of our current NEOs. However, with the change in the accounting treatment of share-based awards, the Compensation Committee determined there are other benefit programs that are equally effective as the existing EBRP. Therefore, effective May 22, 2007, the Compensation Committee closed future participation in the EBRP to the current roster of executive officers.

 

The Company also offers two voluntary nonqualified deferred compensation plans:

 

 

These plans are not tax-qualified plans under the Internal Revenue Code. DCAP III is offered to all employees eligible for the MIP, including all executive officers and other select highly compensated employees. The SPSIP II is offered to all employees who may be impacted by the compensation limits that restrict participation in the Company’s qualified 401(k) plan, the Profit Sharing Investment Plan (“PSIP”), including executive officers.

 

The Company’s executive officers are offered other benefits, including reimbursement for financial counseling, estate planning and tax preparation services. The CEO has been directed by the Board to use corporate aircraft for all travel. He may authorize the use of the corporate aircraft for personal use by Mr. Julian and Ms. Pure and their families generally in conjunction with business related activities. The Company provides security services for Mr. Hammergren, Mr. Julian and Ms. Pure. A car and driver are available for use by Mr. Hammergren and Mr. Julian and other executive officers.

 

Severance and Change-in-Control Benefits

 

Selected senior executives, including the NEOs, are covered by the Company’s Change-in-Control Policy for Selected Executive Employees (the “CIC Policy”), which was updated effective November 1, 2006. We believe the protection afforded under the CIC Policy is in line with current market practice. Specific change-in-control language, consistent with the new CIC Policy, is included in Ms. Pure’s and Mr. Julian’s employment agreements. All contracts, policies and plans with change-in-control protections require an individual’s termination, a so-called “double trigger,” to invoke the protection. Coverage by the CIC Policy is managed by the Compensation Committee.

 

Each of the Company’s stockholder approved equity compensation plans includes change-in-control provisions consistent with current market practice and the Company’s CIC Policy. These plans generally provide that there is no change in the timing of vesting unless there is an involuntary or constructive termination of employment following a change-in-control.

 

Mr. Hammergren’s agreement provides for severance benefits in the case of voluntary, involuntary and constructive termination with or without a “change-in-control,” as it is defined in his employment 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-CEO in 1999. The severance provisions of that employment agreement were not materially different from the agreement of his predecessor, including provisions regarding pension rights.

 

The aggregate value of change-in-control, severance and termination benefits for each NEO is summarized below under the subheadings, “Post-Employment Compensation and Benefits” and “Executive Employment Agreements.”

 

Information on Other Compensation-Related Topics

 

Stock Ownership Guidelines

 

In January 2007, the Company revised its guidelines for stock ownership by executive officers, which had been originally adopted in 2002. The Company’s stock ownership guidelines were revised to include MIP as a measuring component, such that the guideline is now 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 revised stock ownership guideline for our CEO is four times his combined base salary and target MIP, whereas the Company’s remaining NEOs must achieve three times their combined base salary and target MIP. In light of this increase, our executive officers are allowed five years from January 2007 to meet the stock ownership guideline. However, as of May 31, 2007, each of our NEOs has satisfied the Company’s revised stock ownership guideline.

 

The stock ownership guideline may be met with common stock owned outright, shares owned in their PSIP (the Company’s 401(k) plan), and any shares of restricted stock or RSUs. Stock options,

whether vested or unvested, do not count towards meeting the stock ownership guideline. Progress toward the guideline is reviewed each May as part of the executive’s total compensation review.

 

The Company’s directors are also subject to a stock ownership guideline, which is summarized above in the subsection entitled “Corporate Governance — Director Stock Ownership Guidelines.”

 

Equity Grant Practices

 

Stock options are awarded at an exercise price equal to the closing price of the Company’s common stock reported on 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 will delay setting the equity grant date to the third business day following the date the Company’s earnings are released to the investment community. Stock option re-pricing is not permitted.

 

Tax Deductibility

 

Section 162(m) of the Internal Revenue Code limits the Company’s tax deduction to $1,000,000 for compensation paid to NEOs, unless the compensation is “performance based” within the meaning of that section and regulations.

 

The Compensation Committee’s intention is and has 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. The Company believes that payments made under its MIP and LTIP programs, and the grants of RSUs made under its PeRSU program, qualify as performance based compensation eligible for an exception from the deduction limitation of Code Section 162(m).

 

Clawback Policy

 

As described in the Company’s standard award documentation, the Compensation Committee may seek to recoup any economic gains from equity grants from any employee who engages in conduct which is not in good faith and which disrupts, damages, impairs or interferes with the business, reputation or employees of the Company or its affiliates.

 

We, the Compensation Committee of the Board of Directors of McKesson Corporation, 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, 2007.

 

Compensation Committee of the Board of
Directors

 

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

 

The following table sets forth information concerning the compensation for the fiscal year ended March 31, 2007 by our Chief Executive Officer, our Chief Financial Officer, and our three other most highly-compensated executive officers (collectively, our “NEOs”):

 

 

 

 

 

 

 

 

Narrative to the Summary Compensation Table

 

Long Term Incentive Plan

 

The Summary Compensation Table above reflect the amounts earned for the FY 2005 - FY 2007 LTIP performance period. The performance measures approved by the Compensation Committee for the FY 2005 - FY 2007 LTIP performance period were cumulative EPS over the period FY 2006 through FY 2007 and return on committed capital (“ROCC”) for FY 2007. As previously mentioned, due to the restructuring of executive officer compensation in FY 2006, the FY 2005 - FY 2007 LTIP EPS goal was based upon EPS earnings for only a two-year period (FY 2006 through FY 2007) as opposed to the typical three year goal. The two measures, cumulative EPS and ROCC, are additive in their impact on the final result; in other words, each can increase the target by 150%. As initially set by the Compensation Committee, cumulative EPS of $4.41 and ROCC of 22.5% would produce a modifier of 50%, so when combined, accomplishment of these performance measures would produce a payment at 100% of target. Equally, other combinations of EPS and ROCC could also produce payment at target. As designed, the NEOs would not be entitled to any additional award under the Company’s FY 2005 - FY 2007 LTIP for achievement of a performance measure greater than EPS of $4.75 and ROCC of 25%.

 

At its meeting in May 2007, during its annual review of compensation for executive officers, the Compensation Committee assessed the Company’s performance versus the performance measures approved for the FY 2005 - FY 2007 LTIP performance period. Reported cumulative EPS was $5.29, excluding special items, resulting in targets being adjusted by 150%. ROCC for FY 2007 was 56.6%, resulting in targets being adjusted by 150%. As reflected in the Summary Compensation Table above, the overall result was therefore 300% of the target amount.

 

Management Incentive Plan

 

At its meeting in May 2006, 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 2007 MIP. Targets for the NEOs for FY 2007 are displayed below in the Grants of Plan Based Awards Table. The Compensation Committee approved an EPS target for FY 2007 of $2.62. Each penny of EPS below the approved target reduced the resulting award by two and one-half percent. Earnings below $2.42 would have resulted in no MIP payout. Each penny of EPS above the approved target, up to an EPS of $2.72, increased the resulting award by two and one-half percent. Each penny of EPS above $2.72 increased the resulting award by five percent, up to a maximum award of 200% of target.

 

At its meeting in May 2007, 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 2006. Reported EPS for FY 2007 was $2.89, resulting in an adjustment of awards to NEOs of 200% of target. The Compensation Committee further adjusted the results to reflect individual contributions to the overall results.

All Other Compensation Table

 

Totals for amounts reported as All Other Compensation in the preceding Summary Compensation Table are described below:

 

 

 

 

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, 2007 to our NEOs: