This excerpt taken from the CVS DEF 14A filed Mar 28, 2008.
On or about November 19, 2007, the Company received the following proposal from The American Federation of State, County and Municipal Employees, AFL-CIO (AFSCME), 1625 L Street, N.W., Washington, D.C. 20036, beneficial owners of 2,174 shares of the Companys stock. In accordance with SEC rules, we are reprinting the proposal and supporting statement (the AFSCME Proposal) in this proxy statement as they were submitted to us:
RESOLVED, that stockholders of CVS/Caremark [sic] Corporation (CVS/Caremark or the Company) urge the compensation committee of the board of directors to adopt a policy that the Company will not make or promise to make to its senior executives any tax gross-up payment (Gross-up), except for Gross-ups provide pursuant to a plan, policy or arrangement applicable to management employees of the Company generally, such as a relocation or expatriate tax equalization policy. For purposes of this proposal, a Gross-up is defined as any payment to or on behalf of the senior executive whose amount is calculated by reference to an actual or estimated tax liability of the senior executive. The policy should be implemented in a way that does not violate any existing contractual obligation of the Company or the terms of any compensation or benefit plan currently in effect.
As long-term CVS/Caremark stockholders, we support compensation programs that tie pay closely to performance and that deploy company resources efficiently. In our view, tax gross-ups for senior executives reimbursing a senior executive for tax liability or making payment to a taxing authority on a senior executives behalf are not consistent with these principles. At CVS/Caremark, Chairman and CEO Lewis Campbell [sic] is entitled to receive $13,841,501 in gross-ups on excise taxes in the event of a termination without cause or constructive termination without cause after a change in control.
Because the amount of gross-up payments depends on a variety of external factors such as the tax rate and not on company performance tax gross-ups sever the pay/performance link. Moreover, a company may incur a large gross-up obligation in order to enable a senior executive to receive a relatively small amount of compensation. That fact led Paula Todd of compensation consultant Towers Perrin to call gross-ups an incredibly inefficient use of shareholders money. (When Shareholders Pay the CEOs Tax Bill, Business Week (Mar. 5, 2007))
The amounts involved in tax gross-ups can be sizeable, especially gross-ups relating to excess parachute payment excise taxes, which apply in a change-of-control context. Michael Kesner of Deloitte Consulting has estimated that gross-up payments on executives excess golden parachute excise taxes can account for 8% of a mergers total cost. (Gretchen Morgenson, The CEOs Parachute Cost What? The New York Times (Feb. 4, 2007))
This proposal does not seek to eliminate gross-ups or similar payments that are available broadly to the Companys management employees. Gross-ups that compensate employees for taxes due on certain relocation payments or to equalize taxation on employees serving in expatriate assignments, for example, which are extended to a large number of employees under similar circumstances, are much smaller and do not raise concerns about fairness and misplaced incentives.
We urge stockholders to vote FOR this proposal.
Statement of The Board Recommending a Vote AGAINST the AFSCME Proposal
The Companys Board of Directors unanimously recommends that you vote against the AFSCME Proposal because it is unnecessary and it is not in the best interests of the Company or its stockholders.
The Board and its Management Planning and Development Committee (the Committee) are committed to designing, implementing and administrating a compensation program for senior executives that aligns with and supports our business strategy while ensuring an appropriate link between pay,
company performance, and results for stockholders. Any tax gross-up arrangement for a senior executive is subject to review and approval of the Committee. The Committee analyzes the need for a gross-up arrangement and considers the possible alternatives and the costs and benefits of each. The Committee determines on a case-by-case basis whether a tax gross-up is appropriate and in the best interest of the Company and its stockholders.
We believe that our executives should pay their own income taxes and we do not have a policy of providing tax gross-ups for income taxes. Tax gross-ups are used to address limited situations where the compensation intended for an executive might be unavoidably impacted by tax rules. In these situations, tax gross-ups are often the only effective way to provide the intended benefit to an executive without paying the executive too much or too little. It is critical that the Committee retain the ability to offer gross-up protections in the limited scenarios where they make sense.
Like many companies, CVS Caremark provides certain change in control protections to its executives, and as with many companies, these protections include tax gross-ups to offset the added excise taxes that might apply in a change in control scenario. For example, a large portion of our senior executives compensation is in the form of incentive awards which vest over multiple years of service and seek to reward long-term performance. Unless protections were offered, in the event of a change in control it is possible, if not likely, that members of senior management would lose their jobs and forfeit the intended benefits of the awards. Like many companies, CVS Caremark has provided protections for these awards, but applicable tax rules can impose excise taxes when awards vest in connection with a change in control or a termination of employment coincident to a change in control. Thus, for reasons beyond an executives control, the executive can be placed in the position of either losing an award or retaining the award but paying a significant excise tax which depletes the intended benefit of the award.
The rules for determining the application and amount of the change in control excise tax are arcane and often produce arbitrary results which severely penalize some executives while not affecting other executives at all. We believe that it is appropriate to provide protections that address the inequities produced by the excise tax rules and retain the incentive value of the awards we have granted to our executives. We want to continue to provide our senior executives with incentives tied to the long-term performance of the Company and we want to design these awards so that if the time comes when a change in control might be in the best interest of the Company and its stockholders, our senior management will have all the right incentives, and no unintended disincentives, to remain with the Company through the process with a full focus on the interests of the CVS Caremark and its stockholders.
The Board believes that it is essential that the Committee have access to the full range of compensation tools to enable CVS Caremark to compete for the best executive talent available and to retain that talent, both in the ordinary course and during any critical phase of strategic change that the Company might face.
The Board believes that the AFSCME Proposal would inappropriately limit the Companys ability to offer fair and competitive protections to current and prospective senior executives and would therefore be contrary to the best interests of the Company and its stockholders.
Accordingly, the Board recommends a vote AGAINST the AFSCME Proposal.