SCHEDULE 14A

(RULE 14A-101)

 

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934

(AMENDMENT NO.     )

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

 

 

þ  Definitive Proxy Statement

 

o  Definitive Additional Materials

 

 

CARDINAL HEALTH, INC.

(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

N/A

(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)

 

Payment of Filing Fee (Check the appropriate box):

 

þ  No fee required.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD NOVEMBER 7, 2007

 

 

 

Notice is hereby given that the Annual Meeting of Shareholders of Cardinal Health, Inc., an Ohio corporation (“Cardinal Health”), will be held at Cardinal Health’s corporate offices at 7000 Cardinal Place, Dublin, Ohio, on November 7, 2007 at 2:00 p.m., local time, for the following purposes:

 

1. To elect ten directors, each to serve until the 2008 Annual Meeting and until his or her successor is duly elected and qualified;

 

2. To ratify the selection of Ernst & Young LLP as Cardinal Health’s independent registered public accounting firm for the fiscal year ending June 30, 2008;

 

3. To approve the proposed amendment to Cardinal Health’s Code of Regulations to reduce the shareholder supermajority vote requirements to a majority vote;

 

4. To approve the Cardinal Health, Inc. 2007 Nonemployee Directors Equity Incentive Plan;

 

5. To vote on two proposals submitted by shareholders if properly presented at the meeting; and

 

6. To transact such other business as may properly come before the meeting or any adjournment or postponement thereof.

 

The Board of Directors recommends that you vote FOR the election of the ten directors listed in Proposal 1, FOR Proposal 2, FOR proposal 3, FOR proposal 4, AGAINST proposal 5 and AGAINST proposal 6.

 

Only shareholders of record at the close of business on September 10, 2007 are entitled to notice of and to vote at the meeting or any adjournment or postponement thereof.

 

Only persons with an admission ticket or proof of share ownership will be admitted to the Annual Meeting. If you are a registered shareholder, your admission ticket is attached to your proxy card. You will need to bring it with you to the Annual Meeting, together with photo identification. If your shares are not registered in your name, you must bring proof of share ownership (such as a recent bank or brokerage firm account statement, together with photo identification) in order to be admitted to the Annual Meeting.

 

By Order of the Board of Directors.

 

IVAN K. FONG, Secretary

 

September 28, 2007

 

Whether or not you expect to attend the Annual Meeting in person, you are urged to complete, date and sign the enclosed proxy and return it in the enclosed postage-paid envelope, or to vote by telephone or the Internet pursuant to instructions provided with the proxy.

 

TABLE OF CONTENTS

 

 

PROXY STATEMENT

 

This proxy statement is being furnished in connection with the solicitation of proxies on behalf of the Board of Directors of Cardinal Health, Inc., an Ohio corporation (“Cardinal Health,” “we” or “us”), for use at the Cardinal Health Annual Meeting of Shareholders (the “Annual Meeting”) to be held on Wednesday, November 7, 2007, at our corporate offices located at 7000 Cardinal Place, Dublin, Ohio 43017, at 2:00 p.m., local time, and at any adjournment or postponement thereof. This proxy statement and the accompanying proxy, together with our Annual Report to Shareholders for the fiscal year ended June 30, 2007, except for any exhibits to the Annual Report on Form 10-K for fiscal 2007 contained therein, and additional information are first being sent to Cardinal Health shareholders on or about October 1, 2007. Exhibits will be provided to any shareholder upon request to our Investor Relations department.

 

The close of business on September 10, 2007 has been fixed as the record date for the determination of Cardinal Health shareholders entitled to notice of and to vote at the Annual Meeting. On that date, we had outstanding 363,221,234 common shares, without par value. Except as set forth below, holders of common shares at the record date are entitled to one vote per share for the election of directors and upon all matters on which shareholders are entitled to vote.

 

The address of our principal executive office is 7000 Cardinal Place, Dublin, Ohio 43017.

 

References to our fiscal years in this proxy statement mean the fiscal year ended or ending on June 30 of such year. For example, “fiscal 2007” refers to the fiscal year ended June 30, 2007.

 

ELECTION OF DIRECTORS

 

Our Board of Directors currently consists of sixteen members, who were previously divided into three classes. At the 2005 Annual Meeting of Shareholders, the shareholders voted to amend our Code of Regulations to eliminate the classification of the Board, effective with the election of directors at the 2006 Annual Meeting. Directors elected at the 2005 Annual Meeting will serve out the remainder of their three-year terms before standing for re-election. Directors elected at the 2006 Annual Meeting and directors nominated for election at this Annual Meeting and at subsequent meetings will be elected to serve until the next Annual Meeting.

 

At the Annual Meeting, Cardinal Health shareholders will be asked to vote for the election of the ten nominees named below, each to serve until the next Annual Meeting and until his or her successor is duly elected and qualified. As we have previously announced, Robert L. Gerbig, a director of Cardinal Health since 1975 whose director term expires at this Annual Meeting, does not intend to stand for election at the Annual Meeting, and no person is being nominated at the Annual Meeting to fill the vacancy on the Board of Directors created by his departure. Instead, the directors expect to reduce the size of the Board to fifteen, effective when Mr. Gerbig ceases to be a director.

 

Common shares represented by proxies, unless otherwise specified, will be voted for the election of the ten nominees. If, by reason of death or other unexpected occurrence, any one or more of the nominees should not be available for election, the proxies will be voted for the election of any substitute nominee(s) as the Board of Directors may nominate. Proxies may not be voted at the Annual Meeting for more than ten nominees.

 

Under Ohio law, if notice in writing is given by any shareholder entitled to vote at the Annual Meeting to our President, any Vice President or Secretary, not less than 48 hours before the scheduled time of the meeting, that the shareholder desires the voting for election of directors to be cumulative, and if an announcement of the request for cumulative voting is made at the beginning of the meeting by the Chairperson or Secretary, or by or on behalf of the shareholder giving such notice, each shareholder entitled to vote at the Annual Meeting will have the right to cumulate such voting power as he or she possesses at such election and to give one nominee a number of votes equal to the number of directors to be elected multiplied by the number of shares he or she holds, or to distribute votes on the same basis among two or more nominees, as he or she sees fit. If voting for the election of directors is cumulative, the persons named in the enclosed proxy intend to vote the shares represented thereby and by other proxies held by them so as to elect as many of the ten nominees named below as possible.

Votes will be tabulated by or under the direction of inspectors of election, who will certify the results of the voting at the Annual Meeting. The ten nominees receiving the greatest number of votes will be elected directors. Abstentions and broker non-votes will not affect the results of the election. Votes that have been withheld from any nominee will not have any effect on the election of such nominee, but could trigger the policy set forth in our Corporate Governance Guidelines requiring any director who receives a greater number of votes withheld than for his or her election to tender his or her resignation. See “Corporate Governance—Resignation for Majority Withhold Vote” below.

 

Set forth below is the following information regarding those persons nominated for election as directors of Cardinal Health (each is currently a director of Cardinal Health) and of those persons serving as directors of Cardinal Health whose terms of office will continue after the Annual Meeting: their names, ages, principal occupations, and positions held during the past five years (unless otherwise stated, the positions listed have been held during the entire past five years); certain other board memberships (which are shown parenthetically); the year in which he or she first became a director of Cardinal Health; and the year in which his or her term as a director is scheduled to expire (information is provided as of September 10, 2007).

 

Nominees for Election at the 2007 Annual Meeting of Shareholders

 

 

 

 

Directors Whose Terms Will Continue after the Annual Meeting

 

 

 

 

Board of Directors and Committees of the Board

 

Our Board of Directors held four regular meetings and four special meetings during fiscal 2007. Each director attended 75% or more of the meetings of the Board and Board Committees on which he or she served. All of our directors attended our 2006 Annual Meeting of Shareholders, except Mr. Darden. Absent unusual circumstances, each director is expected to attend the Annual Meeting of Shareholders.

 

Committees and Committee Charters.  The Board has established the Audit Committee, the Nominating and Governance Committee, the Executive Committee and the Human Resources and Compensation Committee. The charters for each of these committees are available on our website, at www.cardinalhealth.com, under “Investors — Corporate Governance: Board Committees/charters.” This information also is available in print (free of charge) to any shareholder who requests it from our Investor Relations department at (614) 757-5222.

 

The Audit Committee.  Messrs. Finn (Chairman), Conrades, Francis, Kenny, Losh, O’Halleran and Raisbeck are the current members of the Board’s Audit Committee. The Board of Directors has determined that each of Messrs. Conrades, Finn, Francis, Kenny, Losh, O’Halleran and Raisbeck is an “audit committee financial expert” for purposes of the rules of the Securities and Exchange Commission (the “SEC”). In addition, the Board of Directors has determined that each of the members of the Audit Committee is independent, as defined by the rules of the New York Stock Exchange (“NYSE”) and in accordance with our Corporate Governance Guidelines discussed in more detail below. The Board of Directors also determined that Mr. Losh’s simultaneous service on the audit committees of more than two other public companies would not impair his ability to effectively serve on the Audit

Committee of our Board of Directors. In reaching this determination, the Board considered Mr. Losh’s ability to devote sufficient and substantial time to service on our Audit Committee. During fiscal 2007, the Audit Committee met eleven times and acted once by written action without a meeting.

 

The Audit Committee’s duties and responsibilities are stated in a written charter, which was adopted by our Board of Directors and was most recently amended on November 8, 2006. The Audit Committee’s primary responsibilities are to represent and assist the Board with the oversight of:

 

 

In performing its oversight role with respect to our financial statement and disclosure matters, the Audit Committee reviews quarterly and annual financial statements prior to filing or announcement and considers matters such as the judgment by the independent auditors as to the quality and appropriateness of the application of accounting principles, certain changes or alternatives in financial or accounting practices, proposed or pending changes in accounting or regulatory requirements and the adequacy and effectiveness of our internal control over financial reporting and disclosure controls and procedures.

 

With respect to our independent auditor, the Audit Committee pre-approves all services provided by the independent auditor and is responsible for its appointment, compensation and retention and the oversight of its work, including any disagreements with management, its independence from Cardinal Health and any regulatory or peer review matters. The Audit Committee also reviews our internal audit plan and the functions and structure of our internal audit department and reviews our compliance with and oversight and enforcement of our Standards of Business Conduct and other legal and regulatory matters, such as our insider trading policy and whistleblower policy.

 

The Nominating and Governance Committee.  Messrs. Conrades (Chairman), Finn, McCoy and Notebaert are the current members of the Board’s Nominating and Governance Committee. The Board of Directors has determined that each of the members of the Nominating and Governance Committee is independent, in accordance with the definition of “independent director” in our Corporate Governance Guidelines described in more detail below and consistent with the rules of the NYSE. During fiscal 2007, the Nominating and Governance Committee met five times.

 

The Nominating and Governance Committee’s duties and responsibilities are stated in a written charter adopted by the Board of Directors and most recently amended on August 8, 2007. The Nominating and Governance Committee’s primary responsibilities are:

 

 

In fulfilling this role, the Nominating and Governance Committee considers and recommends criteria to the Board for identifying and evaluating potential Board candidates, identifies and reviews the qualifications of such candidates, establishes procedures for the consideration of Board candidates recommended by our shareholders, assesses the contributions and independence of individual incumbent directors, recommends to the Board changes in the structure, composition and function of the Board’s committees and oversees the evaluation of the Board’s effectiveness and performance. The Nominating and Governance Committee will consider director nominees recommended by shareholders as described under “Corporate Governance — Shareholder Recommendations for Director Nominees” below.

The Executive Committee.  Messrs. R. Walter (Chairman), Clark, Conrades, Finn, McCoy and Notebaert are the current members of the Board’s Executive Committee. The Executive Committee must have at least three members, a majority of whom must be independent in accordance with the definition of “independent director” in our Corporate Governance Guidelines. In addition, the Chairman of the Board, Chief Executive Officer, the chairpersons of each of the Audit, Nominating and Governance and Human Resources and Compensation Committee and the Presiding Director are to be members of the Executive Committee. During fiscal 2007, the Executive Committee met six times and acted three times by written action without a meeting.

 

The Executive Committee operates under a written charter adopted by the Board of Directors on May 2, 2007. The Executive Committee is empowered to exercise substantially all powers and perform all duties of the Board of Directors when the Board is not in session, other than the authority to fill vacancies on the Board or on any committee of the Board, to declare dividends, to elect our Chief Executive Officer, to submit matters for shareholder approval and to act on matters specifically reserved for full Board authority. The Executive Committee acts only when specific authority is delegated to it by the Board or when, in the intervals between meetings of the Board, it is necessary to consider or act promptly.

 

Human Resources and Compensation Committee.  The members of the Human Resources and Compensation Committee (the “Compensation Committee”) are Ms. Arnold, Messrs. Darden, Gerbig, McCoy and Notebaert and Dr. Spaulding. Mr. Notebaert is the Compensation Committee Chairman. The Board of Directors has determined that each member of the Compensation Committee is independent, in accordance with the definition of “independent director” in our Corporate Governance Guidelines and consistent with the rules of the NYSE. During fiscal 2007, the Compensation Committee met six times and acted three times by written action without a meeting.

 

Role of the Compensation Committee.  The Compensation Committee’s duties and responsibilities are stated in a written charter. This charter was adopted by our Board of Directors and most recently amended on January 31, 2007. The Compensation Committee’s primary duties and responsibilities are to:

 

 

Compensation decisions for the executive officers of Cardinal Health are made by the Compensation Committee. The details of the processes and procedures involved in making these compensation decisions, including the role of management, are described under “Compensation Discussion and Analysis” beginning on page 18. The Compensation Committee also acts as the administrator with respect to our equity and non-equity incentive plans covering executive officers and other senior management. The Compensation Committee may delegate authority for administration of the plans, including selection of participants, determination of award levels within plan parameters, and approval of award documents, to officers and other key employees of Cardinal Health. However, the Compensation Committee may not delegate any authority under those plans for selection of participants, determination of award amounts or amendments or modifications of awards with respect to our executive officers.

The Compensation Committee’s Compensation Consultant.  During fiscal 2007, the Compensation Committee retained and was advised by Towers Perrin with respect to executive compensation matters. Towers Perrin is one of the three largest diversified human resources consulting firms in the world. In addition to consulting with the Compensation Committee on executive compensation, Towers Perrin, directly or through an affiliate, has the following working relationships with us: (a) Towers Perrin provides executive compensation and other consulting services to management; and (b) Towers Perrin is a 15% partner in a joint venture to which we have outsourced our human resources administrative processes.

 

Towers Perrin confirmed to us that it has implemented policies and processes to mitigate potential issues of independence when providing consulting services to the Compensation Committee and providing services to us in other areas. These include the following:

 

 

The Compensation Committee considered these relationships, the level of fees paid to Towers Perrin and its affiliates, and the Towers Perrin policies described above before retaining Towers Perrin to provide executive compensation consulting services to the Compensation Committee during fiscal 2007 and fiscal 2008. The Compensation Committee also considered the quality of the services Towers Perrin provided to the Compensation Committee in the past, and the anticipated ability of Towers Perrin personnel to provide objective and independent assistance and advice to the Compensation Committee.

 

During fiscal 2007, the Towers Perrin consultant attended all but one of the Compensation Committee’s meetings. The nature and scope of Towers Perrin’s engagement and the material elements of their instructions consisted primarily of the following:

 

 

 

 

CORPORATE GOVERNANCE

 

Shareholder Recommendations for Director Nominees

 

In nominating candidates for election as director, the Nominating and Governance Committee will consider candidates recommended by shareholders. Shareholders who wish to recommend a candidate may do so by writing to the Nominating and Governance Committee in care of the Corporate Secretary, Cardinal Health, Inc., 7000 Cardinal Place, Dublin, Ohio 43017. Recommendations submitted for consideration by the Committee in preparation for the 2008 Annual Meeting of Shareholders should be received no later than June 3, 2008, and must contain the following information:

 

 

Director Qualification Standards

 

The Nominating and Governance Committee reviews with the Board from time to time the appropriate skills and characteristics required of Board members in the context of the make up of the Board and in developing criteria for identifying and evaluating qualified candidates for the Board. Candidates recommended by shareholders are evaluated based on the same criteria as candidates from other sources. These criteria, as described in our Corporate Governance Guidelines, include an individual’s business experience and skills (including skills in core areas such as operations, management, technology, healthcare industry knowledge, accounting and finance, leadership, strategic planning and international markets), independence, judgment, integrity and ability to commit sufficient time and attention to the activities of the Board, as well as the absence of potential conflicts with Cardinal Health’s interests. The Nominating and Governance Committee considers these criteria in the context of an assessment of the perceived needs of the Board as a whole and seeks to achieve diversity of occupational and personal backgrounds on the Board. If the Nominating and Governance Committee believes that a potential candidate may be appropriate for recommendation to the Board, there is generally a mutual exploration process, during which the committee seeks to learn more about the candidate’s qualifications, background and interest in serving on the Board, and the candidate has the opportunity to learn more about Cardinal Health, the Board and its governance practices. The final selection of the Board’s nominees is within the discretion of the Board of Directors. From time to time, the Nominating and Governance Committee engages and pays fees to a search firm to assist with identifying, screening and referring potential candidates.

 

During fiscal 2007, the Nominating and Governance Committee engaged and paid fees to a search firm to assist with identifying and screening potential candidates, which referred such candidates to the Chairman of the Nominating and Governance Committee. Ms. Arnold was initially identified by such search firm; Mr. Kenny was initially identified by our Chief Executive Officer; and Mr. Francis was initially identified by our Executive Chairman for consideration by the Nominating and Governance Committee as candidates to become members of our Board of Directors.

 

Communicating with the Board

 

The Board of Directors has established procedures by which shareholders and other interested parties may communicate with the Board, any committee of the Board, any individual director or the independent or non-management directors as a group. Such parties can send communications by e-mail to bod@cardinalhealth.com or by mail to the Board of Directors in care of the Corporate Secretary, Cardinal Health, Inc., 7000 Cardinal Place, Dublin, Ohio 43017. This centralized process will assist the Board in reviewing and responding to communications. The name or title of any specific intended Board recipient should be noted in the communication. Communications from shareholders are summarized for or provided to the directors, and in all cases the actual communications are made available to the directors upon request.

 

Corporate Governance Guidelines

 

We have adopted Corporate Governance Guidelines, the full text of which is available on our website, at www.cardinalhealth.com, under “Investors — Corporate Governance: Corporate governance guidelines.” This information also is available in print (free of charge) to any shareholder who requests it from our Investor Relations department.

 

Director Independence

 

The Board has established categorical standards to assist it in making its determination of director independence. As embodied in our Corporate Governance Guidelines, under standards that the Board has adopted to assist it in assessing independence, the Board defines an “independent director” to be a director who:

 

 

 

The Board assesses on a regular basis and at least annually the independence of directors and, based on the recommendation of the Nominating and Governance Committee, makes a determination as to which members are independent. References to “us,” “we” or “Cardinal Health” above would include any subsidiary in a consolidated group with Cardinal Health.

 

In addition to the independence standards applicable to directors generally, Audit Committee members may not accept, directly or indirectly, any consulting, advisory or other compensatory fee from us, other than director fees and any regular benefits that other directors receive for services on the Board or Board committees. In addition, no Audit Committee member can be an affiliated person of Cardinal Health.

 

The Board of Directors has determined that each of Messrs. Conrades, Darden, Finn, Francis, Gerbig, Kenny, Losh, McCoy, Notebaert, O’Halleran and Raisbeck, Ms. Arnold and Dr. Spaulding is independent under the listing standards of the NYSE and our Corporate Governance Guidelines.

 

In determining that the directors listed above are independent, the Nominating and Governance Committee and Board of Directors considered the following transactions, relationships or arrangements. The Board of Directors determined that none of these transactions, relationships or arrangements conflicts with the interests of Cardinal Health or would impair the relevant director’s independence or judgment. These transactions were also reviewed by the Audit Committee and/or our Chief Legal Officer, as applicable, pursuant to our Related Party Transaction Policy and Procedures, as discussed in more detail below under “Certain Relationships and Related Transactions — Policies and Procedures.” Under this policy, these transactions were not determined to constitute related party transactions.

 

All of the transactions, relationships or arrangements of the types listed below were entered into, and payments were made or received, by us in the ordinary course of business and on competitive terms. Aggregate payments to each of the relevant organizations did not exceed the greater of $1 million or 1% of that organization’s consolidated gross revenues for 2004, 2005 or 2006 or neither the relevant director nor any of his or her family members held an executive officer position or significant ownership interest in such entity.

 

Business Relationships between Cardinal Health and Entities Related to a Director.

 

 

 

Compensation for Services Previously Provided to Cardinal Health.  We issued an option to purchase Cardinal Health common shares to Mr. Losh in connection with his services as our interim Chief Financial Officer during the fiscal year ended June 30, 2005. The option is currently exercisable and expires on July 27, 2014.

 

Service as Trustee.  Mr. Gerbig serves as the trustee of a foundation established by one of our executive officers.

 

Presiding Director

 

An independent director selected annually by the remaining independent directors presides at meetings of the non-management directors and independent directors, and serves as the Presiding Director in performing such other functions as the Board may direct, including advising on the selection of committee chairs and advising management on the agenda for Board meetings. Mr. McCoy is currently the Presiding Director. During fiscal 2007, the independent directors held four meetings in executive session.

 

Policies on Business Ethics; Chief Ethics and Compliance Officer

 

All of Cardinal Health’s employees, including our senior executives and directors, are required to comply with our Standards of Business Conduct to ensure that our business is conducted in a consistently legal and ethical manner. The Sarbanes-Oxley Act of 2002 requires companies to have procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters and to allow for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. Our procedures for these matters are set forth in the Standards of Business Conduct.

 

The full text of the Standards of Business Conduct is posted on our website, at www.cardinalhealth.com, under “Investors — Corporate Governance: Ethics and Compliance Program.” This information also is available in print (free of charge) to any shareholder who requests it from our Investor Relations department. Any waiver of the Standards of Business Conduct for directors or executive officers must be approved by the Audit Committee of the Board of Directors. We will disclose future amendments to our Standards of Business Conduct, or waivers from our Standards of Business Conduct for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, on our website within four business days following the date of the amendment or waiver. In addition, we will disclose any waiver from our Standards of Business Conduct for our other executive officers and our directors on our website.

 

We have a Chief Ethics and Compliance Officer who reports to both the Chief Executive Officer and the Audit Committee of the Board of Directors. The Chief Ethics and Compliance Officer is responsible for supporting the Board in its responsibility to evaluate, review and enhance our corporate ethics and compliance program and ensuring senior leadership responsibility and accountability for compliance and ethical business conduct.

 

Resignation for Majority Withheld Vote

 

As provided in our Corporate Governance Guidelines, any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “for” his or her election (a “Majority Withheld Vote”) must promptly tender his or her resignation. The Nominating and Governance Committee will recommend to the Board whether to accept or reject the tendered resignation no later than 60 days following the date of the shareholders’ meeting at which the election occurred. In considering whether to accept or reject the tendered resignation, the Nominating and Governance Committee will consider factors deemed relevant by the committee members including, without limitation, the director’s length of service, the director’s particular qualifications and contributions to us, the reasons underlying the Majority Withheld Vote (if known) and whether these reasons can be cured, and compliance with NYSE listing standards and our Corporate Governance Guidelines. The Board will act on the Nominating and Governance Committee’s recommendation no later than 90 days following the date of the

shareholders’ meeting. We will promptly publicly disclose the Board’s decision whether to accept the resignation as tendered, providing a full explanation of the process by which the decision was reached and, if applicable, the reasons for rejecting the tendered resignation.

 

If one or more directors’ resignations are accepted by the Board, the Nominating and Governance Committee will recommend to the Board whether to fill such vacancy or vacancies or to reduce the size of the Board. The Board will make the final determination whether to fill any vacancy or to reduce the size of the Board. The Majority Withheld Vote provision does not apply to contested elections or elections governed by cumulative voting.

 

Other Corporate Governance Changes

 

Our Board of Directors also has implemented the following policies and procedures to enhance our corporate governance:

 

 

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Policies and Procedures

 

In May 2007, the Board of Directors adopted a written Related Party Transaction Policy and Procedures. This policy requires the approval or ratification by the Audit Committee of any transaction or series of transactions exceeding $120,000 in any calendar year, in which Cardinal Health is a participant and any related person has a direct or indirect material interest. Related persons include our directors, nominees for election as a director, persons controlling over five percent of our common shares and executive officers and the immediate family members of each of these individuals.

 

Once a transaction has been identified as requiring such approval, the Audit Committee will review all of the relevant facts and circumstances and approve or disapprove of the transaction. The Audit Committee will take into account such factors as it considers appropriate, including whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related person’s interest in the transaction.

 

If advance Audit Committee approval of a transaction is not feasible, the transaction will be considered for ratification at the Audit Committee’s next regularly scheduled meeting. If a transaction relates to a director, that director will not participate in the Audit Committee’s deliberations. In addition, the Audit Committee Chairman may pre-approve or ratify any related party transactions in which the aggregate amount is expected to be less than $1 million.

 

The following types of transactions have been deemed by the Audit Committee to be pre-approved or ratified, even if the aggregate amount involved will exceed $120,000:

 

 

Related Party Transactions

 

Since July 1, 2006, there have been no transactions, or currently proposed transactions, in which Cardinal Health was or is to be a participant and the amount involved exceeds $120,000, and in which any related person had or will have a direct or indirect material interest, except for those described below. Each of these transactions was ratified by our Audit Committee in compliance with the Related Party Transaction Policy and Procedures described above.

BoundTree Medical Products, Inc.  One of our directors, Mr. Matthew Walter, and his two brothers own a majority of BoundTree Medical Products, Inc. (“BMP”), a company engaged in the emergency medical supply business. Matthew Walter is Chairman and Chief Executive Officer and a director of BMP and he and his brothers are sons of our Executive Chairman of the Board, Mr. Robert Walter. During fiscal 2007, BMP and its affiliates (i) purchased approximately $2,360,000 of product from Cardinal Health and our subsidiaries, and (ii) sold products to Cardinal Health and our subsidiaries totaling approximately $535,000. Such purchases and sales, which are expected to continue in the future, were in the ordinary course of business and represented less than 5% of BMP’s consolidated gross revenues during such period.

 

Employment of Family Members.  The sister-in-law of Carole S. Watkins, our Chief Human Resources Officer, was employed as a senior vice president of Cardinal Health until March 3, 2006. Ms. Watkins’ sister-in-law’s status as an active employee terminated on June 30, 2006 pursuant to a severance agreement that, among other things, provided that she would receive severance payments until June 30, 2007 and a fiscal 2006 bonus. She received payments of approximately $350,000 in fiscal 2007.

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to us during fiscal 2007 and written representations regarding the same, we believe that all officers and directors of Cardinal Health and all beneficial owners of 10% or more of any class of our registered equity securities timely filed all reports required under Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during fiscal 2007.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information regarding the beneficial ownership of our common shares as of September 10, 2007 (unless otherwise indicated below), and the percentage of our common shares outstanding on September 10, 2007 represented by such ownership, by:

 

 

Except as otherwise described in the notes below, the listed beneficial owners have sole voting and investment power with respect to all common shares set forth opposite their names:

 

 

 

 

 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Introduction

 

Fiscal 2007 was a year of strong performance for Cardinal Health on a range of financial and non-financial measures. We achieved or exceeded consolidated financial targets through strong performance in three of our four reportable segments and a disciplined capital deployment approach that included repurchases of $3.8 billion of Cardinal Health shares during the year.

 

Our key financial goals for fiscal 2007 were set forth in our publicly-announced fiscal 2007 Financial Targets and Goals as modified for the divestiture of substantially all of our Pharmaceutical Technologies and Services segment (the “PTS divestiture”). These goals included several non-GAAP financial measures, which are measures prepared in accordance with generally accepted accounting principles and adjusted to eliminate the effect of special items and impairment charges and other items. Our results for fiscal 2007 against these goals were as follows:

 

 

 

In addition, for fiscal 2007, our total shareholder return was 10.4%.

 

We also made considerable strategic and long-term progress as we divested non-strategic businesses, including the $3.2 billion PTS divestiture; completed the acquisition of VIASYS Healthcare Inc. (the “VIASYS acquisition”), which establishes Cardinal Health as a leader in the $4 billion respiratory care market; integrated various internal organizations for greater efficiency; and launched more rigorous career and succession planning and a comprehensive review of job levels and titles across Cardinal Health.

 

As a result of the progress made and objectives achieved during the year, we funded our Management Incentive Plan (“MIP”) at 116% of target. Our MIP cash awards were determined based on performance against goals established at the beginning of fiscal 2007 (and modified to reflect the PTS divestiture in January 2007) for net operating profit after tax (“NOPAT”) and return on tangible capital (“ROTC”). We exceeded the target 100% award performance goals established for both measures.

 

Objectives of Our Compensation Program

 

The primary objective of our executive compensation program is to deliver a competitive package to attract, motivate and retain key executives and align their compensation with our overall business goals, core values and shareholder interests. To this end, the Human Resources and Compensation Committee, or Compensation Committee, of our Board of Directors has established an executive compensation philosophy that includes the following considerations:

 

 

The Design of Our Compensation Program

 

Our compensation for the executive officers who are named in the tables beginning on page 33 and who we refer to as our “named executives,” includes the following elements:

 

 

 

 

With minor variations, we rely on these same compensation elements for our other executive officers.

 

When making compensation-related decisions, we believe it is important to be informed about the current practices of similarly-situated public companies. The Compensation Committee has developed a comparator group (the “Comparator Group”), as discussed at “Compensation Discussion and Analysis — Our Policies, Guidelines and Practices Related to Executive Compensation — Our Comparator Group” on page 30. We define total direct

compensation as base salary, and target annual cash incentives and long-term incentives. Our goal for our named executives is to provide total direct compensation that approximates the 60-65th percentile of the Comparator Group, and for fiscal 2007 and fiscal 2008, the actual total direct compensation for each of our named executives was within this range. When the Compensation Committee established this compensation target, it considered that we do not provide wealth accumulation for retirement through pensions or supplemental executive retirement plans (“SERPs”). Our emphasis on long-term incentives and our 401(k) Savings Plan and Deferred Compensation Plan (“DCP”) delivers a competitive package for wealth accumulation and retirement, and also serve to motivate and retain our named executives.

 

A significant majority of a named executive’s total direct compensation is in the form of annual and long-term performance-based compensation. We consider our annual cash incentive, long-term performance cash incentive and stock options to be performance-based compensation. The charts below show the fiscal 2008 base salary, target annual cash incentive and grant date target long-term incentive value, and performance-based compensation as a percentage of total direct compensation:

 

 

Our Compensation Decisions

 

The Compensation Committee makes compensation decisions after reviewing comparative compensation data from the Comparator Group for similarly-situated executives provided by the Compensation Committee’s compensation consultant and considering overall company, segment and individual performance, employment agreement terms and other factors discussed below. Certain decisions are more formula-driven, while others require more judgment and discretion. For instance, the Compensation Committee considers market data and performance in determining a named executive’s base salary. Target annual and long-term incentive compensation are calculated as a multiple of base salary. The Compensation Committee uses quantitative and qualitative metrics and exercises some judgment in determining achievement of the overall company, segment and function performance goals and assessing the named executive’s individual performance for a fiscal year. The Compensation Committee uses an evaluation of individual performance in determining increases to base salary and awarding annual incentive compensation and equity grants. We have entered into employment agreements with our Chief Executive Officer and Executive Chairman that limit the Compensation Committee’s discretion with respect to some compensation decisions until those employment agreements expire in 2013 and 2008, respectively, as discussed in more detail on page 27.

 

Base Salary.  Base salary is an important element of compensation because it provides the named executive with a base level of income. In determining base salaries for our named executives, the Compensation Committee considers:

 

 

The following table and notes reflect the annualized base salaries of the named executives at the end of fiscal 2007 and the annualized base salaries of the named executives for fiscal 2008 through the date of this proxy statement:

 

 

 

 

Annual Cash Incentive Compensation.  The Compensation Committee grants our named executives annual cash incentive awards under our MIP based on corporate, segment, function and individual performance. The target amounts are based upon competitive market data for similar positions, targeting the 75th percentile of the Comparator Group, because we believe the performance goals we establish are challenging and, as noted above, a greater portion of our executive compensation is performance-based.

In August 2006, the Compensation Committee established the fiscal 2007 annual incentive targets for our named executives set forth below. In August 2007, the Compensation Committee approved the fiscal 2007 annual incentive cash awards for our named executives (based upon the factors discussed below) and established the fiscal 2008 annual incentive targets for our named executives set forth below:

 

 

 

 

At the beginning of each fiscal year, the Compensation Committee reviews and approves overall company performance goals. In addition, the Compensation Committee establishes individual performance objectives for our Chief Executive Officer, such as recruitment and development of leaders within our organization, success at leveraging our scale, organic growth and identification and completion of merger and acquisition opportunities. Our Chief Executive Officer also establishes individual performance goals for our Chief Financial Officer and the Chief Executive Officers of our two business sectors.

 

In August 2006, the Compensation Committee established performance goals for fiscal 2007, based upon the achievement of a specified level of growth in NOPAT and ROTC. The objective is to drive annual and sustainable year-over-year growth. NOPAT, which is designed to measure profitable enterprise growth, is calculated as: (a) earnings from continuing operations, as disclosed on our statement of earnings, excluding (1) “special items” and “impairment charges and other” line items from our statement of earnings, and (2) other adjustments approved by the Compensation Committee; and then (b) adjusted for taxes. ROTC, a balance sheet metric, was selected for fiscal 2007 as an additional financial performance metric in order to incorporate and drive value creation. ROTC is calculated as NOPAT divided by net tangible capital. Net tangible capital is calculated as total assets less (total liabilities, goodwill and intangibles, cash and equivalents, short term investments available for sale and assets held for sale and discontinued operations) plus (current portion of long-term obligations and short-term borrowings, liabilities from businesses held for sale and discontinued operations, and long-term obligations), adjusted to exclude the after-tax impact on net tangible capital of (a) “special items” and “impairment charges and other” line items from our statement of earnings; and (b) other adjustments approved by the Compensation Committee. In January 2007, the Compensation Committee adjusted the performance goals as a result of our reclassification of substantially all of our Pharmaceutical Technologies and Services (“PTS”) segment as discontinued operations and the discussion below refers to the adjusted goals.

 

A named executive can receive a cash award of 0-200% of the executive’s annual incentive target, with a threshold cash award level of 60% if a minimum level of both NOPAT and ROTC is obtained. The Compensation

Committee established a schedule of potential cash award percentages based upon achievement of varying NOPAT and ROTC levels. The cash award percentage from the schedule determines the total pool for cash awards under the MIP. The Compensation Committee then allocates a portion of the cash award pool to the four business segments and the corporate function, based upon actual performance relative to performance goals. If we do not achieve the minimum performance goals with respect to either NOPAT or ROTC, but we do satisfy the Section 162(m) overall company performance criterion described on page 32, then any cash awards are in the discretion of the Compensation Committee. The table below shows our performance goals at minimum, target and maximum performance levels, our actual overall company performance for fiscal 2007 and our performance goals for target performance for fiscal 2008:

 

 

Based upon our actual overall performance for fiscal 2007, and pursuant to the schedule of potential cash award percentages established by the Compensation Committee for fiscal 2007, the Compensation Committee funded the fiscal 2007 MIP at 116%. The Compensation Committee then allocated the cash award pool to the four business segments and the corporate function and exercised discretion to determine the actual amount of the named executive’s annual incentive compensation. The Compensation Committee considered the following factors in addition to overall company performance in determining annual incentive compensation awards for 2007 performance:

 

segment performance, the Compensation Committee awarded Mr. Parrish an annual cash incentive award slightly less than the MIP funding level.

 

Long-Term Incentive Compensation.  Our long-term incentive compensation program in fiscal 2007 provided grants of stock options and RSUs. The plan under which these awards are made is our 2005 Long-Term Incentive Plan, which is sometimes referred to as our LTIP. These grants were designed to provide our executives with multiple equity awards over a number of years. For fiscal 2007, named executives received 70% of long-term incentive compensation in the form of stock options and 30% in the form of RSUs. For fiscal 2008, we have added a three-year performance cash program as an element of our long-term incentive compensation program. The Compensation Committee determined that the long-term incentive program should continue to be composed of 70% performance-based awards, with a portion awarded in the form of performance cash. Based on comparative market data and management’s recommendation, the Compensation Committee established the relative weighting of the long-term incentive compensation awards for fiscal 2008 as 45% to be delivered in stock options, 30% in RSUs and 25% in the form of a three-year performance cash award. The awards to Mr. Walter for fiscal 2008 remained at 70% stock options and 30% RSUs, as provided for under his employment agreement.

 

The Compensation Committee determined the total long-term incentive target multiplier of base salary for each named executive, targeting the 65th percentile of the Comparator Group, aligning with our philosophy of driving wealth accumulation through long-term incentives rather than pensions. The Compensation Committee may adjust the size of equity grants based upon the individual’s past and expected future performance; however, the grants under the three-year performance cash program beginning with fiscal 2008 will be determined based solely upon overall company performance and will not be adjusted based upon individual performance. The Compensation Committee does not consider the equity awards made to an individual in previous years or the amount of stock then owned by the named executive in making equity grants.

 

The following table sets forth the values of awards for fiscal 2007 and grants for fiscal 2008 (through the date of this proxy statement) and the fiscal 2008 long-term incentive target multiple of base salary under our long-term incentive plan for our named executives. For purposes of the table, we have included the grant date value of the stock options and RSUs (as determined for financial reporting purposes) and target award of performance cash. As discussed in the footnotes to the table, the Compensation Committee, from time to time, has made equity grants as compensation for periods longer than one year. For additional information, see “Executive Compensation — Grants of Plan-Based Awards for Fiscal Year 2007.”

 

 

 

 

Stock Options.  Stock options are intended to motivate our named executives by providing upside potential, but do have more risk to the executive than RSUs. We view stock options as an element of performance-based compensation because a stock option provides no realizable value to a recipient until the vesting requirements have been met and will increase in value only as the trading price of our common shares increases. Vesting periods are intended to require long-term focus on our overall company performance for the named executive to realize any value from the exercise of stock options. Stock option awards also are granted with an exercise price equal to the market price for our common shares on the date of grant, and provide no cash benefit if the price of the stock does not exceed the grant price during the option’s term. Options awarded in fiscal 2007 vest 25% annually over four years, with a seven-year term. Stock options awarded in fiscal 2008 vest 331/3% annually over three years, with a seven-year term.

 

RSUs.  While stock options motivate executives by providing larger potential value, RSUs assist us in retaining executives because RSUs have value even when the share price declines or remains flat, and are used for wealth accumulation since we do not provide pensions. Our RSU awards vest 331/3% annually over three years. While there is a performance element to RSUs since the value of the award will increase as the trading price of our common shares increase, we do not consider RSUs to be performance-based compensation when making our compensation decisions.

 

Performance Cash.  In August 2007, the Compensation Committee approved the long-term incentive performance cash program as a component of our long-term incentive compensation, after reviewing and considering comparative market data. All of our named executives (other than Mr. Walter) participate in this program, which is designed to reward performance over a three-year period. In establishing this program, the Compensation Committee determined that the introduction of a performance cash component would strengthen the performance component of our long-term incentive program, providing a clear link between pay and overall company performance. A new three-year performance cycle with new performance goals will begin each fiscal year. At the end of the three-year cycle, an executive can receive a cash award of 0-200% of his or her target grant, with a threshold cash award level of 60% if a minimum level of the performance goals and criteria described below

is obtained. To facilitate transition to the new plan, the Compensation Committee designed the proposed award structure under the first three-year cycle to include a two-year and a three-year goal, so that a potential award of 40% could be made at the end of the second year, and a potential award of 60% could be made at the end of the third year.

 

For the fiscal 2008-2010 performance period, the performance goals established for the two- and three-year performance periods will reward management for attaining specified cumulative economic profit, measured as NOPAT less a capital charge. Economic profit may be adjusted for the following types of specific transactions: (1) non-recurring events, such as divestitures, changes in accounting standards or policies, or asset impairments; (2) certain acquisitions; and (3) financing transactions, such as selling accounts receivable. The Compensation Committee chose economic profit as the performance metric because this metric captures profitable enterprise growth and efficient capital usage.

 

For the fiscal 2008-2010 performance period, the Compensation Committee established the performance goal for target awards (a) for the two-year period of cumulative economic profit equal to $31 million, and (b) for the three-year period of cumulative economic profit equal to $322 million.

 

Separate from the foregoing programs, in August 2005 the Compensation Committee established an over-achievement award program for fiscal 2006-2008 that was in addition to the awards we made in fiscal 2006 under our long-term incentive compensation program. Participants are eligible to earn up to 200% of their aggregate target annual incentive compensation over the three-year period of the program. Any payout as a result of meeting the performance goals established for the three-year performance period will reward management for attaining aggressive compound growth in annual NOPAT. At June 30, 2007, and based upon fiscal 2006 and fiscal 2007 performance, our growth in annual NOPAT is not expected to meet the minimum over-achievement performance goal established for the fiscal 2006-2008 three-year performance period, and we have not accrued any payouts under this program. See the section of this proxy statement entitled “Executive Compensation — Compensation Plans” for more information regarding target and maximum cash awards under the fiscal 2006-2008 performance cash program.

 

Deferred Compensation and Savings Plans.  We maintain a 401(k) Savings Plan and a DCP that permit certain management employees to defer payment and taxation of a limited portion of salary and bonus into any of several investment alternatives. In addition, we typically make additional matching or fixed contributions to the deferred balances of employees, including the named executives, subject to limits discussed at “Executive Compensation — Nonqualified Deferred Compensation in Fiscal Year 2007.” Contributions made with respect to our named executives are disclosed in footnote (4) to the Summary Compensation Table. The investment options available under the DCP are substantially the same investment options that are available in our 401(k) Savings Plan, but not including Cardinal Health common shares for our named executives. We also permit our named executives to defer the settlement of RSUs from the vesting date to a later date.

 

Other Benefits and Perquisites.  For some of our named executives, perquisites include the personal use of Cardinal Health-owned aircraft and in some cases, reimbursement for income taxes on taxable benefits. The Compensation Committee has authorized Messrs. Clark and Walter to use our aircraft for personal travel. The Compensation Committee believes that the personal use of Cardinal Health-owned aircraft is an important part of the compensation for Messrs. Clark and Walter, and also provides enhanced safety and security. The Compensation Committee believes that the personal use of our aircraft by Mr. Clark provides him with flexibility and increases travel efficiencies, allowing more productive use of his time and greater focus on Cardinal Health-related activities. We also provide a tax reimbursement with respect to income attributed to them with respect to their personal travel. When Mr. Clark or Mr. Walter are using Cardinal Health-owned aircraft, their spouse and/or dependent children are also permitted to accompany them, but we do not provide a tax reimbursement with respect to the personal travel of the spouse and dependent children. In May 2007, we entered into aircraft timesharing agreements with Messrs. Clark and Walter, pursuant to which each will reimburse us for some of the costs of guests other than spouses and dependent children who accompany them on our aircraft. As a result of Mr. Walter’s transition from Executive Chairman of the Board to Executive Director, Mr. Walter has agreed that he will no longer be eligible to use our aircraft for personal travel effective November 8, 2007.

 

Other than the personal use of our aircraft, the perquisites we provide are minimal. When an executive officer is relocated for business reasons, we provide an executive relocation program and temporary housing. In addition,

we pay home security services for certain named executives. We also pay for spousal travel costs to a few Cardinal Health activities and costs for annual physical examinations for our executive officers who are not in our medical plan. For more detailed information regarding benefits and perquisites provided to our executive officers, see the section of this proxy statement entitled “Executive Compensation — Summary Compensation Table.”

 

We maintain a tax-qualified employee stock purchase plan (the “ESPP”), generally available to all employees including our named executives, that allows participants to acquire Cardinal Health shares at a discount price. For a discussion of our ESPP, see “Executive Compensation — Compensation Plans.”

 

Employment Agreements and Offer Letters.  We have entered into employment agreements or employment offer letters with each of our named executives, in order to attract and retain these qualified individuals to serve as executive officers. Our practice is to enter into a multi-year employment agreement only with our Chief Executive Officer (including Mr. Walter, our former Chief Executive Officer). With our other named executives, we enter into offer letters to document employment terms, including initial base salary and target incentive amounts and on-going severance benefits, but do not make commitments to maintain salary and target incentive amounts at or above those initial levels in future years. You can find additional information regarding terms of the employment agreements and offer letters at “Executive Compensation — Employment Agreements and Other Employment Arrangements.”

 

When we hired Mr. Clark as our President and Chief Executive Officer in April 2006, we entered into an Employment Agreement with Mr. Clark (the “Clark Employment Agreement”) providing for him to serve as our President and Chief Executive Officer until June 30, 2009. In connection with the Board’s succession plan, on September 21, 2007, we amended our Employment Agreement with Mr. Clark pursuant to which he will serve as our Chairman of the Board and Chief Executive Officer until February 28, 2013. The Board and Compensation Committee believed it was important to seek a five-year commitment from Mr. Clark to provide continuity and stability in leadership for the organization and to provide the opportunity to identify potential successors for Mr. Clark. For retention and succession planning purposes, the amended Clark Employment Agreement is a five-year contract; however, the Board may terminate Mr. Clark’s employment without cause at any time with a cash severance payment to Mr. Clark in the amount of two times the sum of his of annual base salary and target annual cash incentive, continued vesting of some unvested equity awards and pro rata payments of other cash awards.

 

The amended Clark Employment Agreement also provides a significant incentive for Mr. Clark to remain with the Company through at least February 28, 2013. As described in more detail beginning on page 52, if Mr. Clark terminates his employment after February 28, 2013, he will receive, among other things, continued vesting of some unvested equity awards with the ability to exercise vested options through the original term of the options as well as receiving a pro rata portion of his target payments under the long-term incentive performance cash program and target annual cash incentive compensation. These benefits are comparable to those that we provide to employees of the Company who retire after attaining age 55 with at least 10 years of service with the Company. In addition, Mr. Clark will receive continued vesting of all of his unvested equity awards that were granted at least six months prior to termination if he terminates employment either (i) after February 28, 2013 and prior to November 30, 2014 with the consent of the Board or (ii) after November 30, 2014. The Compensation Committee and Board determined that the combination of these benefits provided appropriate incentive to retain Mr. Clark while maintaining appropriate flexibility to the Board as it plans for Chairman and Chief Executive Officer succession.

 

In setting Mr. Clark’s compensation under the initial contract, the Compensation Committee considered Mr. Clark’s experience and skills, including his prior responsibilities as an officer and director of Procter & Gamble, his international and other experience in his 32 years at Procter & Gamble, his then-current compensation at Procter & Gamble and incentive as well as other compensation he would forfeit by joining us, and recent compensation packages for new chief executive officers of other large public companies. In setting Mr. Clark’s compensation under the amended contract, the Compensation Committee agreed to pay Mr. Clark a minimum base salary of $1,400,000 per year and total direct compensation (then-current annual base salary, target annual cash incentive award and annual long-term incentive grants) for each fiscal year with an expected value in the range of the 65^th percentile of total direct compensation for individuals serving as both chairman and chief executive officer of companies in the Comparator Group. The Compensation Committee and the Board approved this compensation arrangement based on our goal described above for all executives of providing target total direct compensation that approximates the 60-65^th percentile of our Comparator Group. The amended Clark Employment Agreement limits

the Compensation Committee’s discretion with respect to reducing Mr. Clark’s base salary until it expires in 2013. The Clark Employment Agreement does not guarantee the value of equity awards or payouts of cash awards, other than a minimum annual incentive payout for fiscal 2007 in the amount of $1,120,000.

 

In April 2006, in connection with the Board’s succession plan, we appointed Mr. Walter, who until that date had served as our Chief Executive Officer, as our Executive Chairman of the Board. On September 21, 2007, we entered into the Second Amendment to the Second Amended and Restated Employment Agreement with Mr. Walter (the “Walter Employment Agreement”). Pursuant to the amendment and the Board’s succession plan, Mr. Walter will serve as Executive Director from November 8, 2007 until June 30, 2008, when he will retire as an employee but remain on the Board of Directors.. We entered into and have continued this multi-year commitment to ensure continuity of leadership and to permit us to obtain the advice and counsel of Mr. Walter with respect to strategic business development, mergers and acquisitions, corporate values and industry matters. In setting compensation for Mr. Walter at the time of the Walter Employment Agreement, the Compensation Committee considered, among other factors, Mr. Walter’s three decades of unique experience and long-term performance as founder and chief executive officer of Cardinal Health, his new responsibilities as Executive Chairman, and his vision and skills in strategic business development and entrepreneurial leadership as demonstrated through our 35 years of growth while Mr. Walter was chief executive officer. The Walter Employment Agreement also requires that Mr. Walter provide certain consulting services to us for five years after he ceases to be Executive Chairman of the Board and that we pay him $1 million per year as compensation for such services. The Compensation Committee believed the provisions with respect to consulting services would permit us to retain continuity and access to Mr. Walter’s judgment, industry knowledge and experience beyond 2008. The Walter Employment Agreement limits the Compensation Committee’s discretion with respect to reducing Mr. Walter’s base salary, target annual incentives and target long-term incentives until he retires on June 30, 2008. The contract does not include guarantees of the value of equity awards or payouts of cash incentive awards.

 

Jeffrey W. Henderson was appointed as Executive Vice President, effective April 18, 2005, and as the Chief Financial Officer, effective May 15, 2005. Mr. Henderson was hired from outside our organization. In connection with his appointment, we entered into an offer letter with Mr. Henderson, which was amended on August 5, 2006 (the “Henderson Offer Letter”).

 

Mark W. Parrish was appointed as Chief Executive Officer — Healthcare Supply Chain Services, effective November 8, 2006. In connection with Mr. Parrish’s promotion, we entered into an offer letter with Mr. Parrish (the “Parrish Offer Letter”), which replaced our previous employment agreement with Mr. Parrish.

 

David Schlotterbeck, Chief Executive Officer — Clinical and Medical Products, joined us when we acquired Alaris in July 2004. Alaris entered into a retention agreement with him, dated August 31, 2004 and amended on November 2, 2005 (the “Schlotterbeck Agreement”).

 

Severance Agreements.  In August 2006, in response to a shareholder proposal and after consulting with several of our large investors and reviewing comparative market data, our Board of Directors adopted a policy requiring us to obtain shareholder approval before entering into severance agreements with covered executives that provide certain cash severance benefits that exceed 2.99 times base salary and bonus. If the Board determines that it is not practical to obtain shareholder approval in advance, the Board may seek shareholder approval after entering into a severance agreement covered by this policy. The policy covers new severance agreements entered into after the effective date of the policy and existing severance agreements if severance benefits are materially modified after the effective date.

 

The employment agreements and offer letters discussed above provide for benefits payable upon termination events or a change of control, which are detailed in this proxy statement under “Potential Payments on Termination or Change in Control” at page 46. With respect to the severance benefits provided to our named executives, we believe that these severance benefits allow us to attract and retain these individuals. We also believe that the change of control severance benefits provided to these named executives align executive and shareholder interests by enabling the named executive to consider corporate transactions that are in the best interests of our shareholders and other constituents without undue concern over whether the transactions may jeopardize the named executive’s own employment. In establishing these arrangements, we considered that we do not provide pension or SERP benefits.

Our employment arrangements are double-triggered and require cash severance payments on a change of control only if the named executive’s employment terminates in connection with or following the change of control.

 

Our equity awards under our incentive compensation plans and the grants under our long-term incentive cash program are “single trigger” awards, and vest upon a change of control. This is generally the only benefit obtained automatically upon a change of control. We adopted the single trigger treatment for our long-term compensation plan for the following reasons:

 

 

The Clark Employment Agreement provides for severance payments and benefits if Mr. Clark’s employment is terminated (other than a termination by us with “cause” as defined in the Clark Employment Agreement), including the accelerated vesting of equity awards. Mr. Clark has agreed to non-competition and non-solicitation covenants which, among other things, prohibit him from being employed by an entity that competes with us for a period of two years after termination of his employment. The severance payments and benefits provided in the initial Clark Employment Agreement were based upon the benefits that we had provided to his predecessor. On September 21, 2007, we amended the Clark Employment Agreement, including the severance payments and benefits to be provided to Mr. Clark. Based on advice from its compensation consultant regarding severance payments and benefits, the Compensation Committee believes that the amended severance payments and benefits are consistent with those generally made available in the market. In addition, the Compensation Committee’s executive compensation consultant determined that the revised severance arrangements would not require shareholder approval under the policy described above. The Compensation Committee believed that the amended severance payments and benefits were important to obtain a multi-year commitment from Mr. Clark to serve as our Chairman of the Board and Chief Executive Officer.

 

The Walter Employment Agreement provides for severance payments and benefits if Mr. Walter’s employment or consulting arrangement is terminated (other than a termination by us with “cause” or by Mr. Walter without “good reason,” as these terms are defined in the Walter Employment Agreement), including the accelerated vesting of equity awards. Mr. Walter has agreed to non-competition and non-solicitation covenants which, among other things, prohibit Mr. Walter from being employed by an entity that competes with us for a period of two years after termination of his employment. The Compensation Committee believed these severance benefits would retain Mr. Walter to ensure continuity through the period of the Board’s succession plan, and would enable us to retain the services of Mr. Walter to provide advice and counsel on strategic business development and industry matters. In 1999, when we entered into the employment agreement with Mr. Walter, we believed the severance payments and benefits were consistent with those generally made available in the market. When we entered into the amended Walter Employment Agreement in April 2006, the Compensation Committee retained substantially the same severance benefits provided in Mr. Walter’s then-current employment agreement.

 

If any severance payments or benefits provided to Mr. Clark or Mr. Walter would be subject to the excise tax imposed on “parachute payments” by the Code, we will “gross-up” his compensation for all such excise taxes and any federal, state and local taxes applicable to such gross-up payment (including any penalties and interest). The Compensation Committee agreed to provide this benefit for the following reasons:

 

 

Our Policies, Guidelines and Practices Related to Executive Compensation

 

Role of Our Named Executives.  Our Chief Executive Officer, Chief Human Resources Officer, Chief Legal Officer and Executive Chairman participate in Compensation Committee meetings, during which the Compensation Committee discusses and makes executive compensation decisions. One or more of these executive officers may be asked to leave for a portion of the meetings. At various meetings of the Compensation Committee, the Compensation Committee and the Executive Chairman reviewed and discussed the performance of and compensation for the Chief Executive Officer, including base salary, annual incentive compensation and long-term incentive compensation. In addition, the Compensation Committee reviewed and discussed in executive session the performance of and compensation for the Executive Chairman, including the compensation recommendations made by the Compensation Committee’s compensation consultant.

 

During fiscal 2007, the Chief Executive Officer presented compensation recommendations to the Compensation Committee for each of the named executives, other than Mr. Walter and himself. In preparing these compensation recommendations, the Chief Executive Officer received and reviewed market data from the Compensation Committee’s compensation consultant and self-assessments from each of the named executives. The Chief Human Resources Officer met separately with the Chairman of the Compensation Committee and the Executive Chairman to discuss these compensation recommendations prior to the Compensation Committee meeting.

 

With respect to establishing the fiscal 2007 performance targets under the MIP, the Chief Executive Officer, the Chief Financial Officer and the Chief Human Resources Officer prepared and recommended NOPAT and ROTC performance goals to the Compensation Committee in June and August 2006. In January 2007, the Chief Executive Officer, the Chief Financial Officer and the Chief Human Resources Officer prepared and recommended adjustments to the performance goals as a result of our reclassification of substantially all of our Pharmaceutical Technologies and Services segment as discontinued operations. The Executive Chairman, Chief Executive Officer, Chief Human Resources Officer, and Chief Legal Officer also participated in discussions with the Compensation Committee regarding the performance goals and adjustments to the performance goals.

 

With respect to determining the overall company performance against MIP performance goals and segment and function performance, the Chief Executive Officer, Chief Human Resources Officer and Chief Financial Officer met to review quantitative and qualitative information regarding overall company and segment and function performance to provide a recommendation to the Compensation Committee with respect to the funding of the MIP for the fiscal year. The Chief Executive Officer, Chief Human Resources Officer, Chief Financial Officer and Executive Chairman met with the Compensation Committee to provide preliminary and final recommendations. Prior to these meetings, the Chief Executive Officer met with the Chairman of the Compensation Committee, and the Chief Human Resources Officer met with the Executive Chairman and the Chairman of the Compensation Committee, to discuss these recommendations.

 

Our Comparator Group.  In February 2004, the Compensation Committee retained Towers Perrin to provide compensation consulting services to the Compensation Committee. In February 2005, the Compensation Committee and Towers Perrin developed a compensation Comparator Group. Because of the relatively small number of direct competitors that have a business mix and scope comparable to ours, Towers Perrin evaluated a broader set of large, complex companies with which we might compete for executive talent. The Comparator Group includes other large, diverse organizations that have characteristics similar to us, including industry peers, companies with distribution businesses, manufacturers and high-performance organizations. To provide for ready access to compensation data, the Comparator Group consists of those companies that participate in Towers Perrin’s executive

compensation database. At the time we made fiscal 2007 compensation decisions, the Comparator Group consisted of 38 companies. The companies that comprised the Comparator Group included:

 

 

 

 

Guidelines for Share Ownership and Holding Periods for Equity Awards.  In an effort to directly link executive officers’ and directors’ financial interests with those of shareholders, we have implemented Guidelines for Share Ownership for executive officers and non-employee directors (the “Guidelines”). The Guidelines specify a dollar value of shares that executive officers and non-employee directors must accumulate and hold by the later of three years after joining Cardinal Health or the Board. We have determined that, as of June 30, 2007, all named executives and non-employee directors were in compliance with the Guidelines. The specific share ownership requirements are:

 

 

In addition to the share ownership guidelines, beginning with the fiscal 2007 equity awards (granted in August 2006), all of our executive officers on the grant date must hold (a) in the case of stock options, his or her after-tax net profit in common shares until the earlier of (i) the first anniversary of the option exercise or (ii) termination of employment and (b) in the case of RSUs, the after-tax common shares received at settlement until the earlier of (i) the first anniversary of vesting or (ii) termination of employment.

 

Stock Option Grant Practices.  The Compensation Committee made fiscal 2007 and fiscal 2008 annual grant determinations at its August 2006 and August 2007 meetings. In line with its current annual compensation cycle, the Compensation Committee expects to make annual grant determinations for future fiscal years at its meeting in August of each year, and to set the annual grant date for equity awards on August 15, or the first business day to follow August 15. The Compensation Committee expects this annual grant to follow the release of earnings for the fiscal year in late July or early August, without regard to whether we are in possession of material non-public information. In the event of grants related to new hires, promotions, or other off-cycle grants, the grants are effective on the 15th day of the month, or the first business day to follow the 15th day of the month.

 

Equity Dilution Policy.  As we have publicly disclosed, we intend to continue to set forth our capital deployment plans and the dilutive effect of our equity compensation program. Our share buyback decisions are based upon our publicly disclosed capital deployment strategy, and not solely to reduce the dilutive effect of our equity compensation program. Our fiscal 2007 annual equity run rate, which is a measure of dilution that shows how rapidly we are depleting the shares reserved for equity compensation plans, was 1.23% of our outstanding shares (excluding the options granted during fiscal 2007 to employees who were terminated in connection with the divestiture of our Pharmaceutical Technologies and Services segment). We calculate our equity run rate as the total

number of shares subject to grants awarded in the fiscal year under our equity compensation plans, less forfeitures, divided by the total number of our common shares outstanding at the end of the fiscal year.

 

Potential Impact on Compensation from Executive Misconduct.  Under our benefit plans, the Compensation Committee or Cardinal Health has the authority to require repayment, or subject outstanding awards to forfeiture, in certain instances of executive misconduct. These provisions are designed to prevent detrimental behavior, and permit us to recoup certain benefits in the event an executive has engaged in certain misconduct. Under our incentive cash plan and MIP, we may seek to recover cash incentive compensation paid to executive officers when the payment was based on the achievement of certain financial results that were subsequently restated if the executive officer caused or contributed to the need for the financial statement restatement.

 

Under our standard stock option agreement, an unexercised option is forfeited if the holder has engaged in specified conduct, described below, while employed by Cardinal Health or for three years after termination of employment, and we may require the holder to repay the gross option gain realized from the exercise of the options exercised within two or three years prior to such conduct. Under our standard RSU agreement, unvested RSUs and RSUs that vested within the look-back period of the RSU agreement and have been deferred are forfeited if the holder has engaged in specified conduct, described below, while employed by Cardinal Health or for three years after termination of employment, and we may require the holder to repay the value of the RSUs settled within three years prior to such conduct (or two years, in the case of competitive actions). The specified conduct includes:

 

 

We may also terminate all vested stock options if the executive’s employment is terminated for cause. We may also seek damages for breach of contract or seek other equitable relief. The remedies contained in our standard benefit plans and equity award agreements are subject to exceptions and different negotiated definitions and terms in individual employment agreements with named executives.

 

Tax Deductibility.  Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), places a limit of $1,000,000 on the amount of compensation that we may deduct in any one year with respect to our Chief Executive Officer and each of our three most highly paid executive officers (not including our Chief Financial Officer). There is an exception to the $1,000,000 limitation for performance-based compensation meeting certain requirements. Annual cash incentive compensation, long-term cash incentive compensation, and stock option awards are designed generally to qualify as performance-based compensation meeting those requirements and, as such, to be fully deductible. For our fiscal 2007 annual incentive compensation, the Compensation Committee established the overall company performance criterion of a 5% return on shareholders’ equity (“ROE”) during fiscal 2007 for Section 162(m) purposes. For fiscal 2007, we achieved a 10.2% ROE. The Compensation Committee established the overall company performance criterion of a 8% ROE during fiscal 2008 for Section 162(m) purposes. Under our fiscal 2008-2010 long-term incentive cash program, awards to certain executives must satisfy performance criteria for purposes of Section 162(m) related to the achievement over the two- and three-year performance period of an average annual ROE of 8%.

 

It is the Compensation Committee’s general policy to endeavor to minimize the adverse effect of Section 162(m) on the deductibility of our compensation expense; however, the Compensation Committee maintains flexibility in compensating executive officers in a manner designed to promote varying company goals. In fiscal 2007, since Mr. Clark’s salary is above the $1,000,000 threshold, a portion of his salary and the Internal Revenue Service value of his perquisites are not deductible by Cardinal Health, to the extent not deferred. In addition, a portion of Mr. Clark’s bonus was guaranteed, and therefore the award does not qualify as performance-based

compensation. RSUs are also not performance-based and, as such, are not deductible unless settlement is deferred to a period when compensation of the named executive is no longer subject to Section 162(m). During fiscal 2007, the settlement of RSUs were deferred by Messrs. Clark, Henderson and Walter, as described in detail at “Executive Compensation — Option Exercises and Stock Vested for Fiscal Year 2007.”

 

The Code limits our deduction of aircraft expenses for certain non-business flights. The difference between the actual cost of personal use flights and the amount included in the individual’s income is disallowed as a deduction by Cardinal Health. The deduction disallowance for our named executive officers was $829,298 in fiscal 2007.

 

EXECUTIVE COMPENSATION

 

Human Resources and Compensation Committee Report

 

We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on our review and discussion with management, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and in Cardinal Health’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

 

Submitted by the Human Resources and Compensation Committee of the Board.

 

Richard C. Notebaert, Chairman
Calvin Darden
Robert L. Gerbig
John B. McCoy
Jean G. Spaulding, M.D.

 

Executive Compensation Tables

 

We are providing the following information with respect to the persons serving as our Chief Executive Officer and Chief Financial Officer during fiscal 2007, and each of our three other most highly compensated executive officers at June 30, 2007.

 

Summary Compensation Table

 

 

 

 

Grants of Plan-Based Awards for Fiscal Year 2007

 

The following table supplements our Summary Compensation Table by providing additional information about our plan-based compensation for fiscal 2007.

 

 

 

 

Employment Agreements and Other Employment Arrangements

 

During fiscal 2007, we were a party to employment agreements with Mr. Clark and Mr. Walter, offer letters with Mr. Henderson and Mr. Parrish, and our subsidiary, ALARIS Medical Systems, Inc. (“Alaris”), was party to a retention agreement with Mr. Schlotterbeck. Messrs. Clark, Walter, Schlotterbeck, and Parrish have agreed to comply with non-compete (except in the case of Mr. Schlotterbeck) and non-solicitation covenants during the term of their employment and generally for a period ranging from one to three years thereafter as described below in “Potential Payments on Termination or Change of Control of Cardinal Health.” In addition, Messrs. Clark, Walter, Schlotterbeck, and Parrish are obligated to keep our proprietary information and trade secrets confidential. The employment agreements and offer letters we have entered into with our named executive officers provide for payments and other benefits upon various termination events, as discussed below in “Potential Payments on Termination or Change of Control of Cardinal Health.”

 

Clark Employment Agreement.  On April 17, 2006, our Board of Directors appointed R. Kerry Clark as our President and Chief Executive Officer. In connection with the appointment of Mr. Clark, we entered into the Clark Employment Agreement. On September 21, 2007, we entered into an amendment to the Clark Employment Agreement pursuant to which Mr. Clark will serve as our Chairman of the Board and Chief Executive Officer. The Clark Employment Agreement, as amended, has an employment term from April 17, 2006 through February 28, 2013.

 

Mr. Clark will receive an annual base salary of not less than $1,400,000 and for fiscal 2007, he received a minimum bonus of $1,120,000 pursuant to the agreement. He also received an initial grant of 110,600 RSUs (vesting equally over three years) and an option to purchase 665,000 common shares at an exercise price of $70.00 per share (vesting ratably over four years and expiring on April 17, 2013), with approximately 45,000 RSUs and options to purchase 270,000 shares relating to his annual equity incentive grant for the 15-month period from April 2006 until the fiscal 2008 equity grant. In August 2007, Mr. Clark received annual long-term incentive grants for fiscal 2008 with a grant date expected value of not less than 600% of his annual salary, as required by the Clark Employment Agreement. Mr. Clark participates in the 2006-2008 performance cash program, prorated for his time with Cardinal Health, and receive other benefits and perquisites on a basis that is commensurate with his position.

Pursuant to the amended Clark Employment Agreement, Mr. Clark will receive total direct compensation (consisting of annual base salary, target annual cash incentive award and target long-term incentive awards) in an amount in the range of the 65th percentile of total direct compensation for individuals serving as both chairman and chief executive officer of companies in the Comparator Group. Under the amended agreement, Mr. Clark received additional fiscal 2008 long-term incentive grants with an aggregate expected value of $700,000, including $175,000 in performance cash, $315,000 in stock options and $210,000 in RSUs. The amended Clark Employment Agreement does not require the Company to provide Mr. Clark with specific minimum amounts of any element of compensation other than base salary.

 

Walter Employment Agreement.  On April 17, 2006, the Board of Directors appointed Robert D. Walter as our Executive Chairman of the Board. In connection with that appointment, we amended and restated the Walter Employment Agreement. The Walter Employment Agreement provided generally that Mr. Walter will be Executive Chairman of the Board until June 30, 2008 and receive an annual base salary of not less than $900,000. On September 21, 2007, we amended the Walter Employment Agreement to provide that Mr. Walter will cease to be Executive Chairman of the Board, effective November 8, 2007, and will be Executive Director from November 8, 2007 until June 30, 2008. Under his agreement, he is eligible to receive a target annual bonus of 150% of his annual base salary and he received annual stock incentive grants in August 2006 and August 2007, consistent with the timing of annual stock incentive grants to our other named executives, each with a grant date expected value of not less than 700% of his new annual base salary, with 70% in stock options and 30% in RSUs. Mr. Walter will continue to receive other benefits and perquisites generally applicable to our most senior executives. Mr. Walter is entitled to personal use of Company-owned aircraft and related tax gross-up until he ceases to be Executive Chairman of the Board.

 

Schlotterbeck Agreement.  Alaris entered into the Schlotterbeck Agreement following our acquisition of Alaris in July 2004. This agreement replaced the change in control agreement entered into by Mr. Schlotterbeck and Alaris prior to the acquisition. In connection with entering into the Schlotterbeck Agreement, Mr. Schlotterbeck signed a release and waiver of all claims arising in connection with his employment by Alaris prior to the date of the agreement. In June 2006, Mr. Schlotterbeck was appointed Chief Executive Officer — Clinical and Medical Products, giving him leadership responsibility at that time for our Pharmaceutical Technologies and Services and Medical Products Manufacturing segments in addition to his leadership responsibility for the Clinical Technologies and Services segment, and his annual base salary was increased from $580,000 to $725,000.

 

Under the Schlotterbeck Agreement, since Mr. Schlotterbeck has remained an employee through June 28, 2006, he earned a retention bonus (the “Retention Bonus”) of $2,320,000, which is equal to the sum of (i) 200% of his then annual base salary ($580,000), and (ii) 200% of his then target bonus (100% of base salary). The Retention Bonus will be paid (with interest accruing from June 28, 2006 through the deferred payment date at the rate of 6.0%) as soon as practicable following the first to occur of (x) Mr. Schlotterbeck’s death, or (y) within 15 days following the first date after June 30, 2008 on which Mr. Schlotterbeck could be paid the Retention Bonus without subjecting us to the limitations on deductibility imposed by Section 162(m) of the Code.

 

Henderson Offer Letter.  Jeffrey W. Henderson was appointed as our Executive Vice President, effective April 18, 2005, and as our Chief Financial Officer, effective May 15, 2005. In connection with such appointment, we entered into the Henderson Offer Letter, which was amended on August 5, 2006, providing for an annual base salary of $550,000 (which was increased by the Compensation Committee to $675,000 effective September 4, 2006) and a target annual bonus of 100% of his base salary.

 

Parrish Offer Letter.  Mark W. Parrish was promoted to the position of Chief Executive Officer — Healthcare Supply Chain Services on November 8, 2006. In connection with his promotion, we entered into the Parrish Offer Letter, which replaced his existing employment agreement dated September 2, 2005, providing for an annual base salary of $700,000 and a target annual bonus of 100% of his base salary. His salary and incentive for fiscal year 2007 has been ratably adjusted to reflect the compensation paid to Mr. Parrish before and after his promotion.

 

Mr. Parrish also received an award of 35,000 stock options, vesting ratably over four years, and 5,000 RSUs, vesting ratably over three years, under the LTIP, which, together with the equity grants made to Mr. Parrish in August 2006, represent the fiscal year 2007 awards. Mr. Parrish also received a special equity award of 35,000 RSUs, which will vest in full on the third anniversary of the grant date. A total of 30,000 RSUs from this special

equity award are subject to deferred payment until six months after termination of employment with Cardinal Health.

 

Compensation Plans

 

Management Incentive Plan or “MIP.”  On August 14, 1996, the Board of Directors established and approved the MIP, which was approved initially by shareholders on October 29, 1996, and most recently approved by our shareholders on December 8, 2004. Key executive employees are eligible to receive cash awards under the MIP, including our named executives. The primary purposes of the MIP are to (i) advance the interests of Cardinal Health and our shareholders by providing employees in leadership positions with an annual cash incentive to achieve our strategic objectives; (ii) focus management on key measures that drive superior financial and management performance and that result in enhanced value of Cardinal Health; (iii) provide compensation opportunities that are externally competitive and internally consistent with our strategic objectives and total reward strategies; and (iv) provide opportunities that reward executives who are in positions to make significant contributions to the overall success of Cardinal Health.

 

As discussed in “Compensation Discussion and Analysis,” on August 1, 2006, the Compensation Committee established the performance goals for cash incentive awards for the fiscal year ending June 30, 2007 under the MIP. We achieved NOPAT of $1.487 billion and a 38.0% ROTC for fiscal 2007. The actual payout amounts are disclosed in Compensation Discussion and Analysis and in the Summary Compensation Table under “Non-Equity Incentive Plan Compensation.”

 

See “Potential Payments on Termination or Change of Control of Cardinal Health” for information on the effect of termination or a change of control.

 

2005 Long-Term Incentive Plan or “LTIP.”  On November 2, 2005, our shareholders approved the 2005 Long-Term Incentive Plan. Under the LTIP, we may grant stock options, stock appreciation rights, stock awards, other stock-based awards and cash awards to employees. As discussed in “Compensation Discussion and Analysis,” during fiscal 2007 we granted nonqualified stock options to our named executives. The stock options vest in equal amounts over four years and have a seven year term. During fiscal 2007, we also granted RSUs to our named executives. The RSUs vest ratably over three years. We granted awards to our executive officers under the Amended and Restated Equity Incentive Plan, as amended, or “EIP,” prior to the adoption of the LTIP. We made no awards under the EIP during fiscal 2007. In June 2006, we adopted a policy regarding the payment of cash dividends on RSUs that have not yet vested. Beginning with RSUs that were awarded after August 1, 2006, we will accrue dividends on RSUs and pay the accumulated cash dividends upon vesting of the RSUs. If a participant terminates employment before vesting, the dividends will be forfeited.

 

In August 2007, the Compensation Committee approved the long-term incentive cash program under the LTIP. This program is designed to reward outstanding performance over a three-year period. A new three-year performance cycle with new performance goals will begin each fiscal year. At the end of the three-year cycle, potential payouts may range from 0% to 200% of the executive’s aggregate annual incentive target based solely on achievement of the overall company performance metrics. To facilitate transition to the new plan, the proposed payout structure under the first three-year cycle includes a two-year and a three-year goal, so that a potential payout of 40% could be made at the end of the second year, and a potential payout of 60% could be made at the end of the third year.

 

See “Potential Payments on Termination or Change of Control of Cardinal Health” for additional information on the effect of termination or a change of control.

 

Long-Term Incentive Cash Program for Fiscal Years 2006 — 2008. On August 1, 2006, the Compensation Committee approved a written plan governing the terms of our Long-Term Incentive Cash Program for fiscal 2006-2008. The fiscal 2006 — 2008 performance cash program was established pursuant to the LTIP as an over-achiever plan. Key executive employees are eligible to receive cash awards under the fiscal 2006 — 2008 performance cash program, including certain of our named executives. The Compensation Committee made awards under the fiscal 2006 — 2008 performance cash program during fiscal 2006 for the three-year performance period beginning July 1, 2005 and ending June 30, 2008. The primary objective of the fiscal 2006-2008 performance

cash program is to build additional momentum and focus on attaining the goals of our One Cardinal Health strategy and accelerating earnings growth.

 

As discussed in “Compensation Discussion and Analysis,” at June 30, 2007, and based upon fiscal 2006 and fiscal 2007 performance, our growth in annual NOPAT is not expected to meet the minimum over-achievement performance goal established for the fiscal 2006-2008 three-year performance period, and we have not accrued any payouts under this program. However, the following table provides information concerning the award opportunities made under our fiscal 2006 — 2008 performance cash program for the three-year performance period beginning July 1, 2005 and ending June 30, 2008.

 

 

 

 

See “Potential Payments on Termination or Change of Control of Cardinal Health” for information on the effect of termination or a change of control.

 

Employee Stock Purchase Plan or “ESPP.”  We also maintain a tax-qualified employee stock purchase plan, generally available to all employees including executive officers, that allows participants to acquire Cardinal Health shares at a discount price. This plan allows participants to buy Cardinal Health shares at a 15% discount to the lower of the closing price of our shares on the first or last market trading day of an offering period with up to 15% of their salary and incentives (subject to IRS limits), with the objective of allowing employees to profit when the value of Cardinal Health shares increases over time. Under applicable tax law, no plan participant may purchase more than

$25,000 in market value (based on the market value of Cardinal Health shares on the last trading day before the beginning of the enrollment period for each subscription period) of Cardinal Health shares in any calendar year.

 

Outstanding Equity Awards at Fiscal Year-End for Fiscal Year 2007

 

The following table shows the number of shares covered by exercisable and unexercisable stock options and unvested RSUs held by our named executives on June 30, 2007.