COLUMBUS, Ohio (COLUMBUS BUSINESS FIRST)–Based on a “listening tour” of shareholders, Cardinal Health Inc. cut CEO Mike Kaufmann‘s bonus by $1.4 million because of the impact on the bottom line and share price from settling thousands of lawsuits over the opioid crisis.
“We took a set of actions that … recognize the impact of the litigation on company performance and better align our executives’ interests with those of our shareholders,” according to the Dublin healthcare distributor’s proxy statement for its November annual meeting.
Kaufmann would have qualified for a $2.2 million bonus, higher than the $1.9 million goal based on performance for the year ended June 30, the proxy said. But the board eliminated the portion related to operating earnings, resulting in a bonus of $780,000.
Bonuses for other top executives decreased by 20%, even though none was in the C-suite when the first lawsuits were filed in 2017, and some weren’t even at Cardinal. Their incentives are partly because of ongoing uncertainty caused by the pandemic.
Kaufmann’s total compensation, most of it in stock awards, has declined two consecutive years, according to the proxy: $12.5 million for fiscal 2021, down from $14.2 million last year and $15.6 million in 2019.
Ohio’s largest public company, Cardinal (NYSE: CAH) for several years has asked for shareholders’ non-binding advisory approval of the year’s executive pay package, as determined by the board’s compensation committee. Approval has been as high as 90%, but last November was a “disappointing” 61%, according to the shareholder letter from Chairman Greg Kenny.
In response, Kenny and Carrie Cox, the committee’s chairwoman, went on a “listening tour” with investors last winter and this summer. The shareholders largely support the company’s pay structure, including the performance goals, the proxy said. But they told directors the fiscal 2020 proxy did not explain how the year’s litigation-related net loss affected bonuses.
The three largest drug distributors have proposed settlements to some 3,000 lawsuits by states and municipal governments over their costs to combat the opioid crisis. Cardinal recorded accounting charges for a combined $6.7 billion over the past two years for its share, but the cash would actually be paid out in installments over 18 years.
Legal costs were about $113 million for 2021. It also expects a two-year tax savings of $523 million because of the reported loss.
It’s common in the industry to exclude litigation expenses from bonus calculations, the proxy said. “This practice ensures that executives have incentives to efficiently resolve litigation when it is in the best interest of the company,” it said. Also, the board waited “until the progress of the settlement reached a more definitive stage before acting.”
As of Sept. 3, enough states had signed on to the proposed settlement that the distributors moved on to the next phase of finalizing it. “With the settlement process at this stage, we have reached the time to take action,” the proxy said.
Kaufmann was paid the $780,000 bonus for beating goals for corporate expense reduction for three consecutive years, it said, and his leadership on increasing diversity, equity, and inclusion in Cardinal’s workforce, top management – and throughout Central Ohio through his work on the Columbus Partnership.
Other actions around executive pay:
- No increases in base salary.
- Defer half of Kaufmann’s stock awards to pay out over two years after vesting, increased his targets for how much stock to own, and further tied calculation of stock awards to shareholder return.
- Defer a portion of other executives’ stock awards.
- Add more metrics related to diversity for calculating future incentives.
- Put some of the savings on executive bonuses into bonuses for all employees not already in an incentive program, to reward their work during the pandemic.
“We believe that the program is sound and competitive in the marketplace,” the proxy said. “It rewards performance through pay tied to financial, operational, and individual results, and it emphasizes retention and alignment with shareholders.”
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