This excerpt taken from the CVS DEF 14A filed Apr 4, 2007.
COMPENSATION DISCUSSION AND ANALYSIS
CVS Corporation (the Company or CVS) is a leader in the retail drug industry in the U.S., operating approximately 6,200 retail and specialty pharmacy stores in 43 states and the District of Columbia. The Company serves the healthcare needs of its customers through its CVS/pharmacy stores; its online pharmacy, CVS.com; its retail-based health clinic subsidiary, MinuteClinic; and its pharmacy benefit management, mail order and specialty pharmacy subsidiaries, which comprise the PharmaCare business. Due to the breadth and scope of its businesses, the Company faces a wide range of competitive challenges including, but not limited to, other retail drugstore chains, supermarkets, convenience stores, pharmacy benefit managers and other mail order prescription providers, Internet pharmacies and ambulatory care health providers. A primary component of the Companys human resources strategy to ensure high caliber leadership is the identification, recruitment, development and placement of key management and business talent. The CVS Board of Directors (the Board) and executive management team believe that a crucial aspect of executing this strategy is a comprehensive, integrated and straightforward executive compensation platform that provides competitive and differentiated levels of pay based on corporate and individual performance while reinforcing the alignment of executive interests with those of stockholders.
All compensation and benefits programs at CVS are within the purview of the Management Planning and Development Committee (the Committee) of the Board. In 2006, Committee membership comprised Mr. W. Don Cornwell as Chair, Ms. Marian Heard, Ms. Sheli Rosenberg, and effective in May 2006, Mr. David Dorman and Mr. Terrence Murray. Mr. Cornwell retired from the Board effective January 2, 2007; Ms. Rosenberg assumed the role of Chair of the Committee effective January 10, 2007. Consistent with the listing requirements of the New York Stock Exchange (NYSE), the Committee is composed entirely of independent, non-employee members of the Board. No Committee member participates in any of the Companys employee compensation programs and none is a current or former officer or employee of CVS or its subsidiaries. Each year, the Companys Nominating and Corporate Governance Committee reviews any and all material relationships that each director may have with the Company and makes independence recommendations to the Board based on that review. The Board has affirmatively determined that none of the Committee members has any material business relationships with CVS and that all are independent directors under NYSE rules.
The Committees responsibilities are specified in its charter, which is reviewed on an annual basis. The amended charter, as approved by the full Board, may be viewed at the CVS website at http://investor.com.com. These responsibilities fall into five broad categories. Pursuant to its charter the Committee: (i) oversees the Companys compensation and benefits policies and programs generally; (ii) evaluates the performance of designated senior executives, including the Chief Executive Officer (CEO), and reviews the Companys management succession plan; (iii) in consultation with the other independent directors of the Company, oversees and sets compensation for the CEO; (iv) oversees and sets compensation for the Companys designated senior executives; and (v) reviews and recommends to the Board compensation (including cash and equity-based compensation) for the Companys directors.
The Committee meets regularly, but no less frequently than five times per year. At its meetings, non-members such as the CEO, the Senior Vice President of Human Resources, the Chief Financial Officer (CFO), the Chief Legal Officer, other senior human resources and legal officers, or external consultants, may be invited to provide information, respond to questions and provide general staff support. However, no CVS officer is permitted to be present during any discussion of his or her compensation or performance, and the Committee may exercise its prerogative to meet in executive session with no non-members present.
To assist the Committee with its responsibilities, it continues to engage the services of Mercer Human Resource Consulting (Mercer), an external compensation consulting firm. During fiscal 2006, Mercer:
As provided in its charter, the Committee has the authority to determine the scope of the external compensation consultants services and may terminate the engagement at any time. The external compensation consultant reports to the Committee Chair.
The executive compensation services performed for the Committee are by far the most significant component of the relationship that CVS has with Mercer; fees for those services accounted for over 87% of the total services provided by Mercer to CVS in 2006. On occasion, CVS human resources department uses Mercer for general human resources and compensation consulting. In 2006, CVS engaged Mercer for organizational development and design consulting and to collect and organize competitive market data for key non-executive positions, such as pharmacists and information systems professionals.
For additional information on the members of the Committee, see Item I Election of Directors Biographies of our Board Nominees beginning on page 52. For additional information on the structure, scope of authority and operation of the Committee, see Corporate Governance and Related Matters Committees of the Board beginning on page 7.
Per its charter, the Committee is charged with the establishment and oversight of CVS executive compensation strategies and practices. The Committee has identified five core principles, discussed in detail below, that are designed to provide the framework for and define the required objectives of these activities. These principles are intended to motivate the executive officers to improve the financial and operating position of the Company, to be personally accountable for the performance of the business, and to make decisions about the Companys business that will deliver stockholder value.
In the aggregate, the following five core principles reflect the objectives of CVS executive compensation philosophy. Each of the components of our executive compensation programs, which will be discussed later in this Discussion and Analysis, must contribute to the furtherance of one or more of these principles. A CVS executive compensation program will: