Amid growing pressure from investors and proxy advisory firms to strengthen the connection between pay and performance, drug and medical supply distributor McKesson last week become the latest company to make sweeping changes to its executive compensation program.

McKesson Chief Executive Officer John Hammergren, who took home $51.7 million in compensation for fiscal year 2013, said in a Feb. 27 letter to Jane Shaw, chair of the compensation committee, that he was voluntarily reducing his pension benefit, because it had become a “source of distraction for McKesson in its relationships with certain stakeholders.” Effective immediately, Hammergren's pension benefit was reduced by $45 million, bringing his new pension benefit down to a fixed cash lump sum of $114 million.

Hammergren is not the only McKesson executive, however, whose compensation will change. In a Form 8-K filed Feb. 27 with the Securities and Exchange Commission, McKesson also announced that it has made changes to the design of the company's primary long-term equity program.

Starting with fiscal year 2015, payouts to executive officers under McKesson's restricted stock unit program will be determined solely by comparing McKesson's total stockholder return (TSR) over a three-year period against TSR for the S&P 500 Health Care Index for the same period.

The company's compensation committee also changed the performance period from one to three years; the first payout under this new program will occur in May 2017. Financial metrics used in the company's annual and long-term cash incentive programs have also been adjusted.

"These changes address feedback received from some of the company's stockholders, and are part of the committee's continuing process of evaluating and refining the company's incentive programs," the company stated.

New Compensation Peer Group

In addition to making changes to its executive compensation program, the compensation committee has also adopted a new peer group. As part of those changes, the compensation committee said it has eliminated about half of the companies in the previous peer group and added six new companies. The new compensation peer group focuses on companies that may compete with McKesson for executive talent, including healthcare companies.

McKesson said it made the changes following a comprehensive review of its peer group by the compensation committee and its new independent compensation consultant.

Starting in fiscal year 2015, McKesson said it will use the new peer group as a reference point when making decisions about overall compensation, the elements of compensation, the amount of each element of compensation, and the relative competitive landscape of the company's executive compensation program. 

Growing Trend

As Compliance Week previously reported, numerous companies are increasingly taking sweeping measures to increase the at-risk portion of executive pay.

Intel, for example, announced this month in a letter to shareholders that it will be making numerous changes to its compensation structure for executives and its broader employee base, with more emphasis on pay-for-performance. For top executives, 90 percent of pay will be based on performance under the new compensation plan. The goal, Intel says, is to better align its executive compensation with stockholders' interests.

Among the biggest changes to compensation at the chipmaker is that performance-based equity awards for senior executive officers no longer have a “floor” value. If relative total shareholder return over a three-year period falls below threshold levels, the payout will be zero.

Intel additionally redesigned its annual cash bonus program for all employees, with greater emphasis on operational objectives. “These changes are designed to help drive positive business results by further increasing accountability and enhancing the link between individual pay and company performance,” Intel stated.

In addition to McKesson and Intel, other companies that have recently made significant changes to their executive pay programs include Air Products & Chemicals, Disney, IBM, Johnson & Johnson, OM Group, Quest Diagnostics, Smithfield Foods, and many more.

 

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