Annual Meeting: July 26, 2017 McKesson CEO John Hammergren has been as “consistently one of America’s highest paid executives” as noted an article in Fortune and has appeared repeatedly on our overpaid CEOs list. Equilar calculates that he’s received over $368 million in realizable pay since 2012. Hammergren’s $20 million dollar 2017 pay is in the spotlight, under an effort by Teamsters pension funds to encourage votes against pay and in favor of a governance shareholder proposal and that also focuses on the role the medical distribution company has played in the opioid crisis.
“Recent pay decisions send completely the wrong message to shareholders, regulators and lawmakers and the public about executive accountability,” wrote the Teamsters in a letter to fellow shareholders.
One issue the Teamsters highlighted stood out to me as I am currently looking at changes made by companies in response to low votes on pay (stay tuned). McKesson was such a company. By 2013 shareholders had had enough of the repeated high pay packages: 80% of shares were voted against. The company engaged with shareholders and made a number of changes as a response, many of which were announced in the 2014 proxy.
“A centerpiece of reforms enacted,” note the Teamsters, “was the introduction of an award based on total shareholder return.” The award based on relative to Health Care Index 2015 “as sole performance metric in new TSRU (Total Shareholder Return Units) program.” This is the sort of change shareholders applaud, and indeed support for advisory votes at McKesson increased. In 2016, 95% of shareholders votes in favor of the company’s pay package.
However, as the Teamsters have pointed out, this year the company made a subtle reversal on that commitment. Going forward, rather than just relying on TSR compared to peers, the so-called TSR units now include “three-year Cumulative Adjusted EPS” as a factor. Why? Well, while the company has its own explanation, it seems more than a coincidence that the new feature was added after the first set of TRSUs failed to pay out.
The first performance cycle covered under the changes was FY 2015 to FY 2017. As the company notes, “no payouts were provided due to stock price.” This is unusual at McKesson. According to the Teamster review, “This year was the first time in over a decade that any award, short- or long-term has not paid out at least at target (indeed, it is only the second time an award did not vest above target.”
In order to achieve threshold level of payout the company only had to perform at the 35th percentile relative to these peers, which in itself is a significantly low threshold. However, as the company reports, “Our TSR was at the 7th percentile relative to the S&P 500 Health Care Index over the three-year period ending March 31, 2017.”
This underperformance compared to peers did not seem to be an impediment to another angle that Teamsters zeroed in on, the boards again this year increased Hammergren’s annual cash bonus pay by using an “individual performance modifier.” This increased his bonus by $1.1 million (out of a total bonus of $6,000,000). The Teamsters note, “This customary lift to his annual bonus has continued even as earnings and share performance have disappointed over the past two years; but perhaps more significantly, even as the company has become embroiled in the prescription opioid controversy.”
McKesson is among the largest drug distributors in the country, and the roll of the firm and focus on these firms role in in the opioid crisis has shown a stark light in several investigative reports. As detailed in several reports pain pills were shipped disproportionately to West Virginia as the opioid crisis grew. In the Charleston-Gazette Pulitzer-Prize winning series Don Perdue, a former delegate of West Virginia is quoted as saying, “Distributors have fed their greed on human frailties and to criminal effect.”
In January of 2017 McKesson settled with the Department of Justice for $150 million claims that it had failed in its duty to report suspicious orders of opioids to the Drug Enforcement Agency. The company continues to face multiple lawsuits related to these and similar claims.
An in-depth story on McKesson in Fortune noted that, “It certainly wasn’t all McKesson’s fault. But you can’t have a drug epidemic without a distributor.”
As clear from recent news and legislative efforts, the United States has a mammoth and treacherously complicated health care economy. Part of the problem with the system is that profit is extracted at every step. Pension funds like the Teamsters -- who care for the well-being of their members as well as the well-being of the stock price of investments – have many reasons to vote against the excessive pay at McKesson.