Compensation Highlights

LEADING PRACTICES IN COMPENSATION PROGRAMS

Our pay practices align with and support our core compensation principles. They also demonstrate our commitment to sound compensation and governance practices

Our executive compensation program motivates executive officers to take personal responsibility for the performance of CVS Health  Core Executive Compensation Principles Designed to Promote Company Growth
  Performance Measures Aligned with Stockholder Interests
 Majority of the Total Compensation Opportunity is Performance-Based
  Long-Term Incentive Plan (LTIP) Awards Settled in Common Stock that is Subject to Retention Requirement (Holding Period)
  Stock Ownership Guidelines
We apply leading executive compensation practices     No Excise Tax Gross-Ups
  No Option Repricing
  No Recycling of Shares
  Recoupment Policy
  Broad Anti-Pledging and Hedging Policies
  Executive Severance Policy
  Limited Perquisites and Personal Benefits
  SERP Closed to New Participants
  Double Trigger Vesting of Equity Awards
  Board Committee Oversight of Comprehensive Annual Compensation Program Risk Assessment
New this year    Dividend Equivalents on RSUs Paid Only When Awards Vest
 Reduced Maximum Annual EIP Award to Align with Broad-Based MIP
 Limited Positive Discretion on Annual Incentive Awards
 Revised Total Shareholder Return (TSR) Modifier for 2017-2019 LTIP to Adjust Above or Below the 50th Percentile Relative Ranking
Our executive compensation program motivates executive officers to take personal responsibility for the performance of CVS Health  Core Executive Compensation Principles Designed to Promote Company Growth
  Performance Measures Aligned with Stockholder Interests
 Majority of the Total Compensation Opportunity is Performance-Based
  LTIP Awards Settled in Common Stock that is Subject to Retention Requirement (Holding Period
  Stock Ownership Guidelines
We apply leading executive compensation practices   No Excise Tax Gross-Ups
  No Option Repricing
  No Recycling of Sharess
  Recoupment Policy
  Broad Anti-Pledging and Hedging Policies
  Executive Severance Policy
  Limited Perquisites and Personal Benefits
  SERP Closed to New Participants
  Double Trigger Vesting of Equity Awards
  Board Committee Oversight of Comprehensive Annual Compensation Program Risk Assessment
New this year  Dividend Equivalents on RSUs paid when Awards vest
 Reduced maximum annual EIP award to align with broad-based Management Incentive Plan
 Limited positive discretion on annual incentive awards
 Revised TSR modifier for 2017-2019 LTIP to adjust above or below the 50th percentile relative ranking

Our 2016 Executive Pay

The following shows the breakdown of reported 2016 compensation for our CEO and our other named executive officers, or NEOs.

For more information on our executive compensation practices, please refer to the Compensation Discussion and Analysis section, beginning on page 35 of the proxy statement.

COMPENSATION DISCUSSION AND ANALYSIS — SUMMARY

Our 2016 compensation programs:

Are tailored to our short- and long-term business strategies and drive performance,
Reflect the rapidly changing health care landscape,
Drive sustainable performance in an era where human, social, natural, and intellectual capital are joining financial and operating capital as performance drivers, and
Operate within strong governance parameters.

Our business performance showcases our financial discipline, conservative management, strong track record and focus on stockholder returns. In 2016 we delivered:

15.8%

net revenue growth

9.3%

growth in
operating profit

GAAP EPS
growth of

6.2%

Return of

>$6 billion

to stockholders
through dividends and
share repurchases

Return on
net assets

that exceeded target by

22%

Outperformed the
S&P 500 and
Dow Jones
Industrial Average

for the prior
5 and 10 years

The rapidly changing health care landscape includes uncertainties concerning health care policy and the exclusion of CVS Pharmacy from certain health plan retail networks, resulting in the loss of prescription volume beginning in late 2016. Together, these have created a headwind for 2017. Our compensation, both the cash component and the value of our outstanding stock awards, is — and should be — affected by such factors, whether or not those factors are within management’s ability to influence.

We are committed to helping people on their path to better health. Our values of innovation, collaboration, caring, integrity and accountability affect how we drive performance. We are strongly committed to evaluating and incenting management to remain focused on drivers of sustainable performance, even though we recognize that this focus is not always reflected in the stock price. Our annual stockholder outreach to holders of over 50 percent of our shares confirms strong support for this commitment and for the value we place on other forms of capital—including human, natural, social and intellectual:

We include retail service and client satisfaction in our pay calculations.
Our decision to remove tobacco from pharmacy stores continues to show positive results by reinforcing the value of our brand in health care.
We value the recruiting and reputation advantages of placing first in our sector of World’s Most Admired Companies, of placing third in Fast Money’s list of 50 Most Innovative Companies, and of being one of Forbes’ Most Admired Brands.

Finally, our compensation program is implemented by a board that maintains good corporate governance practices. For example:

We have an independent board chair,
We do not have a staggered board, poison pill, supermajority voting requirements, or a dual class capitalization structure,
Our stockholders have proxy access, special meeting, written consent and majority voting rights,
Our Board is characterized by diversity of background, race, gender and ethnicity, and
We engage in regular stockholder engagement and are responsive to stockholder input.

We seek your voting support for our pay programs. We encourage you to consider this summary in the context of the important details that follow in the 2017 proxy statement.

EXECUTIVE COMPENSATION

What is your executive compensation philosophy?

Our executive compensation program is governed by five core principles that drive our executive compensation philosophy:

Support,
Communicate and
Drive Achievement
Of our business strategies and goals.
Attract and Retain The highest-caliber executive officers by providing compensation opportunities comparable to those offered by other companies with which we compete for business and talent.
Motivate High
Performance
From executive officers in an incentive-driven culture by delivering greater rewards for superior performance and reduced awards for underperformance.
Align Interests Of our executive officers and our stockholders, and foster an equity ownership environment.
Reward Achievement Of short-term results as well as long-term stockholder value creation.

Management and the Committee believe these principles motivate our executive officers to take personal responsibility for the performance of the business, continually improve our results and operations and deliver long-term stockholder value, consistent with our core values. Our pay practices align with our core compensation principles and facilitate our implementation of those principles. They also demonstrate our commitment to sound compensation and governance practices.

What were the specific elements of compensation for 2016?

The main compensation elements of our executive compensation program remained unchanged in 2016:

competitive base salaries,
annual cash incentives, and
long-term incentive plan awards.

The majority of our executive compensation program is at risk; no more than 15% of any named executive officer’s target compensation is fixed.

Were there any changes in the Company’s executive compensation program in 2016?

Meaningful dialogue with our stockholders continues to contribute to our decisions on compensation. Last fall, we contacted our top institutional stockholders who collectively own more than 50 percent of our shares and spoke with representatives of many large institutional stockholders to get their views on our compensation program. Based on these discussions and other input, we have made a number of enhancements to further link the Company’s compensation programs with the Company’s business and talent strategies and the long-term interests of our stockholders, such as:

reducing the maximum award levels under our EIP,
adopting guardrails for using positive discretion,
improving disclosure around plan metrics and discretionary elements of compensation
adopting vesting schedules for dividend equivalents commencing with grants made in 2017, and
revising the TSR modifier for the 2017-2019 LTIP to reduce payouts for performance below the 50th percentile.

Did your NEOs get raises for 2016?

No, after consideration of competitive market rates, the base salaries for our executive officers in 2016 remain unchanged from 2015 levels.

How do you determine bonuses under the Executive Incentive Plan?

Our short-term bonus plan pool under the Executive Incentive Plan (EIP) was equal to 0.5% of Adjusted Income from Continuing Operations. However, actual awards were made with reference to our broad-based plan (MIP), that relates payment to achievement with respect to three performance metrics: (1) MIP Adjusted Operating Profit (weighted at 80%) and a combination of (2) retail customer service and (3) PBM client satisfaction (weighted together at 20%). Although our financial and service results were strong in 2016, we did not meet our challenging internal targets for short-term awards. As a result of stringent performance targets and lagging retail results, the MIP funded at 81.2% of target. When approving bonuses for 2016, the Committee considered the Company’s strong consolidated financial performance during 2016 in earnings growth, cash flow from operations and value returned to stockholders in the form of dividends and share repurchases. However, the Committee also considered that earnings performance fell shy of the higher mid-year financial goals announced during our quarterly earnings call in August 2016. Finally, the Committee adjusted bonuses for executives in reflection of the individual performance of each NEO together with the subjective achievement of strategic and operational goals.

The annual bonus payments for the NEOs were, on average, 15% below the MIP funding formula and 38% lower than they were in 2015.

Do you limit the amount by which an award can exceed MIP funding?

Yes. The EIP is a pool-based plan for tax deductibility purposes. As part of its determination of individual awards, the Committee reviews all EIP awards with reference to the formula-driven results of the broad-based MIP applied to each executive’s target award expressed as a percent of salary: [salary × target % × MIP funding %]. Just as for our other colleagues, individual awards may vary based on performance, but for our NEOs, awards are limited to no more than 25% above MIP funding and no more than 200% of target.

Do the 2016 equity grants reflect 2016 performance?

No, the equity grants reported in the Summary Compensation Table were made in April 2016 and reflect strong company and individual results in 2015. During 2015, the Company achieved superior financial results and completed the acquisitions of Omnicare, Inc. and the pharmacies and clinics of Target Corporation. Additional information about the 2016 equity awards for each of our NEOs, including stock option exercise price and the number of shares subject to each award, is shown in the Grants of Plan-Based Awards Table on page 59. Additional information about the 2015 performance of each NEO can be found in our 2016 Proxy Statement.

What was the payout for the 2014-2016 LTIP cycle?

Our 2014-2016 long-term incentive awards paid out at the maximum level of 200% as a result of our exceeding the performance target for return on net assets for the three year period. TSR over the same period was 35% resulting in a modifier of 1.0. We are currently estimating a payout below target for the 2015-2017 award cycle. In addition, beginning with the 2017-2019 cycle, the TSR modifier prorates for performance above and below the 50th percentile.

Why can’t we find the stock portion of the 2016-2018 LTIP in the Summary Compensation Table?

As we discussed in last year’s proxy, during our fall 2015 stockholder outreach, our stockholders indicated a preference that, on a going forward basis, our LTIP awards pay out in shares, rather than cash and shares as had been our historical practice. After considering this stockholder feedback, the MP&D Committee made this change prospectively, beginning with the 2016-2018 LTIP performance cycle. We noted in last year’s proxy that this change would result in different reporting of the LTIP awards in this year’s Summary Compensation Table. The change results from the application of the SEC disclosure rules to an LTIP award that is fully denominated in cash until it vests and is then settled in stock. Specifically,

The value of the LTIP award for the three-year cycle beginning in 2016 (at threshold, target and maximum performance levels) appears in the Grants of Plan-Based Awards Table on page 59.
The value of the actual vested award for that same threeyear cycle will appear in the Summary Compensation Table in the proxy reporting 2018 compensation, which will be the year the award vests and the final performance-based payout is calculated.
The full amount paid upon vesting (in the form of shares of common stock subject to a two-year holding requirement) will appear under the Non-Equity Incentive Compensation column of the Summary Compensation Table in the proxy reporting 2018 compensation. The LTIP award is a cash denominated award even though it is settled in shares. Under SEC disclosure rules, the award is reported upon vesting, not at grant.

Why is the reporting different?

Historically, the LTIP awards were bifurcated in the Summary Compensation Table with half, the stock portion, being reported at the time of grant (i.e., at the beginning of the cycle), and the remaining half, the cash portion, reported three years later upon vesting (i.e., at the conclusion of the cycle). This reporting – although performed in accordance with the SEC rules – did not fully reflect either the structure of the grants as cash denominated awards or the results of the performance metrics and TSR modifier for the stock portion of the LTIP reported at the time of grant. By reporting the value of the LTIP award when it is actually paid, the Summary Compensation Table will reflect the full value received by the executives in the year of payment. We believe this insight is beneficial to our stockholders. To assist you with a year over year comparison, we have included a footnote to the Summary Compensation Table that identifies the additional amounts that would have been reported for each NEO if no change to the LTIP structure had been made to the 2016-2018 award.

Why do you award equity and LTIP?

Our long-term executive compensation for NEOs is split evenly between options and RSUs that vest over time, and the LTIP that vests based on the attainment of internal performance measures modified by TSR. This is consistent with the Committee’s desire to balance the types and amounts of awards to support the Company’s strategy, drive the creation of long-term value, ensure that a substantial portion of longterm incentives are performance-based, and promote the retention of key talent. See pages 46-52 for more information about the elements of compensation and how they support the Company’s long-term strategy.

Why is Return on Net Assets an appropriate metric for the Company?

Return on net assets is driven by generating strong net operating profit after taxes, while efficiently managing cash, inventory and accounts receivable. For the 2014-2016 cycle, net operating profit was largely driven by strong earnings over the performance period, record increases in PBM net new sales, strong PBM client retention, and improvements in tax rates. Net assets were efficiently managed over the period including through strong performance of SilverScript (our Medicare Part D prescription drug plan) and efficient cash management practices. These operational and financial goals are directly aligned with the creation of long-term stockholder value over the performance period by driving stockholder return, controlling costs, and generating cash flow, which is then used in our capital allocation strategy.

How is the compensation program aligned with stockholder interests?

The value of our NEOs’ compensation is significantly influenced by the value of our stock. Approximately 70% of target total compensation is provided through stock-based pay (stock options, RSUs and LTIP awards). As a result of our long vesting periods and the two-year holding requirement for net shares issued under the LTIP, the members of our executive team, like our stockholders, have been affected by the decrease in stock price and only ultimately achieve the full value of their equity compensation by creating long-term stockholder value. In 2016, our performance against operational and financial goals was strong, shown in our solid earnings, record cash flow from operations and significant cash returned to stockholders. However, we set challenging internal goals which resulted in below-target level annual bonus payments. Strong performance and our disciplined approach to capital allocation contributed to the satisfaction of the maximum performance levels under the 2014-2016 long-term performance awards, despite a decline in our stock price due to industry-wide pressures on reimbursement, drug pricing and headwinds created by restricted networks adopted by payors in 2016.

We believe the above supports our belief that our compensation program drives the right behaviors and that this benefits our stockholders by driving our business strategies and goals. We believe our stockholders’ interests are best served over time by a balanced compensation program that takes a long-term, holistic view of our business strategy and emphasizes the drivers of long-term value creation.