Proxy published: 3/27/2015

Annual meeting:  5/7/2015

It is easiest to critique pay when performance is down, and easiest to accept it when short term performance is up.  Much trickier is making the distinction as to whether increases in pay are proportional to performance, and appropriate.  For 2014, CVS had a good year, with increases in net revenue, net income and operating income, and pay for CEO Larry Merlo increased to $32,350,733.

The major component of the total increase for CEO Larry Merlo was in the annual non-equity incentive pay which increased from $8.5 million to $11.4 million (of which $4.6 million was that annual cash incentive award, and the remainder was cash portion of the 2012 – 2014 LTIP cycle.)

For its Executive Incentive Plan (EIP) CVS creates a maximum pool that can be used to pay annual incentives to named executive officers. For 2014, the pool formula was 0.5% of Adjusted Net Income from Continuing Operations Attributable to CVS Health.  Then to evaluate how much to awards executives, the committee uses a Management Incentive plan (MIP) based 80% on operating profit and 20% on customer service and client satisfaction.  Given the company’s results the compensation committee used “MIP funding of 141% as its starting point for evaluating actual payments.”

For Merlo target as percent of salary was 200%; the maximum as percentage of pool was 30% (next highest 15%).  The maximum as percent of salary 500%.  This represents an increase in the maximum from last year when the maximum amount based on performance level was 400% of salary. Last year’s proxy also discloses a threshold, whereas this one does not. It is hard to know exactly what to make of this change.  In neither year did the company pay the maximum, though in both years it paid above the target.  Did having a higher maximum in place inspire the committee to increase the subjective portion of the analysis to a higher level?