This excerpt taken from the CVS DEF 14A filed Mar 24, 2009.
On or about November 24, 2008, the Company received the following proposal from the Office of the Treasurer of the State of Connecticut, 55 Elm Street, Hartford, Connecticut 06106-1773, as the principal fiduciary of the Connecticut Retirement Plans and Trust Funds (CRPTF), beneficial owners of 625,302 shares of the Companys stock. In accordance with SEC rules, we are reprinting the proposal and supporting statement (the CRPTF Proposal) in this proxy statement as they were submitted to us:
RESOLVED, that shareholders of CVS Caremark Corporation (CVS Caremark) request the board of directors to adopt a policy that provides shareholders the opportunity at each annual shareholder meeting to vote on an advisory resolution, proposed by management, to ratify the compensation of the named executive officers (NEOs) set forth in the proxy statements Summary Compensation Table (the SCT) and the accompanying narrative disclosure of material factors provided to understand the SCT (but not the Compensation Discussion and Analysis). The proposal submitted to shareholders should make clear that the vote is non-binding and would not affect any compensation paid or awarded to any NEO.
We are concerned about the significant disparity between the compensation of the CVS Caremarks CEO and that of the second highest compensated named executive officer (NEO). According to CVS Caremarks 2008 Compensation Discussion and Analysis, CEO Thomas Ryans 2007 total compensation of $26,097,790 was roughly 3.30 times the total compensation of the next-highest-paid NEO. A recent Harvard study shows that greater executive pay inequity is associated with lower firm value and greater CEO entrenchment. (Bebchuk, Lucian et a1., Pay Distribution in the Top Executive Team (February 2007).) Large CEO to NEO pay ratios also may indicate inadequate succession planning, since large disparities may be seen as reflecting significant differences in contribution and ability.
We believe that existing U.S. corporate governance arrangements, including SEC rules and stock exchange listing standards, do not provide shareholders with sufficient mechanisms for providing input to boards on senior executive compensation. In contrast to U.S. practice, in the United Kingdom, public companies allow shareholders to cast an advisory vote on the directors remuneration report, which discloses executive compensation. Such a vote isnt binding, but gives shareholders a clear voice that could help shape senior executive compensation.
Currently U.S. stock exchange listing standards require shareholder approval of equity-based compensation plans; those plans, however, set general parameters and accord the compensation committee substantial discretion in making awards and establishing performance thresholds for a particular year. Shareholders do not have any mechanism for providing ongoing feedback on the application of those general standards to individual pay packages.
Similarly, performance criteria submitted for shareholder approval to allow a company to deduct compensation in excess of $1 million are broad and do not constrain compensation committees in setting performance targets for particular senior executives. Withholding votes from compensation committee members who are standing for reelection is a blunt and insufficient instrument for registering dissatisfaction with the way in which the committee has administered compensation plans and policies in the previous year.
Accordingly, we urge the board to allow shareholders to express their opinion about senior executive compensation by establishing an annual referendum process. The results of such a vote could provide CVS Caremark with useful information about shareholders views on the companys senior executive compensation, as reported each year, and would facilitate constructive dialogue between shareholders and the board.
We urge shareholders to vote for this proposal.
Statement of The Board Recommending a Vote AGAINST the CRPTF Proposal
The Board recognizes that executive compensation is an important issue in corporate governance and has considered the proposal and the issues associated with a stockholder advisory vote on executive compensation. The Management Planning and Development Committee (MPD Committee), consisting entirely of independent directors, operates under a written charter adopted by the Board and is responsible for maintaining an executive compensation program designed to identify, recruit, develop and retain key management and business talent. This program is discussed in detail in this Proxy Statement in the section entitled Executive Compensation and Related Matters - Compensation Discussion and Analysis. The MPD Committee has considered the CRPTF Proposal and the issues associated with a stockholder advisory vote on executive compensation, and reported its findings to the Board. Those findings are reflected below.
The Board values the input of its stockholders, but the proposed advisory vote would benefit neither the Company nor its stockholders because it would not provide the MPD Committee with any clear indication of the meaning of the vote. The results of such a vote would not communicate stockholder views of the merits, limitations or preferred enhancements of CVS Caremarks executive compensation. A negative vote could signify that stockholders do not approve of the amount or of the type of compensation awarded - or alternatively, that stockholders do not approve of the format or level of disclosure in the Summary Compensation Table and accompanying narrative disclosure. A ratification vote is a blunt and impractical mechanism when more effective means of communicating concerns to the MPD Committee are available to stockholders.
As described in Contact with the Lead Director and Other Non-Management Directors, stockholders have the means and opportunities to raise any issues or concerns affecting the Company, including executive compensation matters. These communications have the benefit of allowing stockholders to voice their views about executive compensation prior to decisions being made, as opposed to simply voting on the results of those decisions.
Adopting this practice could negatively affect stockholder value by hindering the Companys ability to attract and retain executives, since the Companys executive compensation practices could be viewed as more restricted than the practices at the Companys competitors for executive talent who do not seek advisory votes. The proposal states that public companies in the United Kingdom allow stockholders to cast an advisory vote on executive compensation, but in that jurisdiction the advisory vote process is mandated by law and therefore applies to all public companies, eliminating the risk of companies being placed at a competitive disadvantage. In the United States, the issue of a stockholder vote on executive compensation decisions may be the subject of legislative initiatives in the near term. Passage of this stockholder proposal prior to the resolution of any such proposed legislation may inappropriately subject the Company to standards that differ from the standards that may apply to our competitors.
The Board exercises great care in determining and disclosing executive compensation. The Board does not believe the advisory vote will enhance governance practices or improve communication with stockholders, nor is it in the best interest of the Companys stockholders.
Accordingly, the Board recommends a vote AGAINST the CRPTF Proposal.