Leadership Rewards FY 2007 Overview September 15, 2006.

Leadership RewardsFY 2007 Overview

September 15, 2006

For Internal Use ONLYCardinal Health Confidential

• To drive annual and sustainable year-over-year growth by:

– Aligning our business and individual performance goals to the Cardinal Health Strategic Themes and Management Agendas

– Measuring our progress using a consistent set of metrics

– Providing a consistent, results-based process for performance assessment

– Delivering a competitive bonus opportunity for leaders

Our objective

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Establishing a clear line of sight

Strategic Themes

Balanced Scorecard

Management Agenda

Individual MBOs


Establishing a clear line of site

It starts with our three Strategic Themes

• Customer-driven organic growth through innovation, expanding product offerings, and international expansion

• Leveraging our scale and operational excellence to drive superior customer value, expand our margins, and reduce non-value added costs

• Unleashing the power of our employees to achieve their full potential through thoughtful career planning, skill and capability building, in an engaging and inclusive work environment

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How we measure our success

Employee engagement (CW)Representation:

% Females Mgr & up (CW)% Minorities Mgr & up (CW)

International Profit Growth (RM)% Revenue from New Offerings (JH)Hospital Customer Loyalty (GD)

NOPAT Benefit of Completed Projects (GD)

Revenues ($M)SG&A ($M)NOPAT ($M)ROTCROICROE

x%

x%x%

x%x%xx

xx

YTD

xxxxxxx%x%x%

TBD%

TBD%TBD%

Goal

TBD%TBD%TBD

TBD

xxxxxxx%x%x%

Variance to Goal

x%x%xx

xx

xxxxxxx%x%x%

Prior YTD

x%x%xx

xx

xxxxxxx%x%x%

Variance to Prior YTD

x%x%xx

xx

xxxxxxx%x%x%

x%

x%x%

x%

x%x%

x%

x%x%

Unleashing the Power of Our Employees

Customer-driven Organic Growth

Leveraging Scale and Op. Excellence

Financial Outcomes

6For Internal Use ONLY

Cardinal Health Confidential6


Our Management Agenda

Strategic Themes

Balanced Scorecard

Management Agenda

Individual MBOs


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1. Unleash the power of our employees

2. Supply chain advantage

3. Hospital market leadership

4. Generic market opportunities

5. Patient point of care leadership

6. Pharma and biotech business models

7. International growth

Strategic Agenda

FY ’07

Cardinal Health Management Agenda

Capabilities Agenda

1. Setting and aligning purpose, vision, values and “tag line”

2. Disciplined strategic management

3. Operational excellence

4. Innovation development

5. Leadership development and diversity

Operating Agenda

1. Supply chain services model

2. IPS national roll-out

3. Initial offerings for Bedside strategy

4. Generics execution

5. Integrated financial SAP process-integrated customer management

6. Ops Excellence implementation

7. OCH – shared services, strategic sourcing, SG&A

8. Set foundation for employee empowerment (Becoming One Cardinal Health, Career Roadmap)

9. Launch international strategy

Units have clear agendas, aligned with their value goals, strategies, and action plans

10.


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FY ’07

Business/Function Management Agenda

Insert yours here.


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Your individual MBOs

Strategic Themes

Balanced Scorecard

Management Agenda

Individual MBOs


Leadership RewardsMBOs: Setting your goals


Setting your goals

• The Cardinal Health MBO process remains largely the same as last year. We will align our goals to the Cardinal Health Strategic Themes and Management Agenda. We will do this in two steps:

– Identify business/function Management Agenda action items that align with the Strategic Themes and will deliver on the Balanced Scorecard measures.

– Measure progress through quarterly Management Agenda results update.

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A few tweaks to the process for FY ’07

• The MBO process remains largely the same as last year.– A Leadership Development and Diversity goal is still

expected

– The number of MBOs is flexible

• 6 to 8 is an acceptable range

• Objectives should be aligned with the Cardinal Health Strategic Themes and should include business and/or financial results the individual is expected to deliver.



The MBO form

Setting your goals

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A new MBO form has been created to help you align your business andIndividual performance goals to the Cardinal Health Strategic themes.If you have already begun to write your goals using last year’s form, you do not have to do rework. Simply use this form as a guide.

For Internal Use ONLYCardinal Health Confidential 14

October 29, 2002

Leadership Rewards ’07MIP: Rewarding Performance

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MIP: Rewarding annual results

• Eligibility is based on position level– Participants have direct and quantifiable impact on business results

• Individual’s target payout is calculated as a percentage of base salary. Actual payout has a direct correlation with “pay for performance”

• Cash bonus payout is based on:– Companywide results

– Business segment/unit performance

– Individual performance against Management By Objectives (MBOs)


16

FY ’07 MIP enhancements

• Core plan design remains the same

• New features include:– Return On Tangible Capital (ROTC) factor in funding

– Performance “schedule” showing how NOPAT and ROTC will drive funding for the enterprise-wide pool

– Enterprise-wide bonus pool funded at 115 percent if we hit our budget numbers

– Business segment assessments prepared by the business leaders; (financial metric results to be confirmed with Corporate Finance)


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Funding metrics

• NOPAT and ROTC (a balance sheet metric) will be used.

• Using a balance sheet metric in conjunction with an income sheet metric ensures balanced focus.


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What is ROTC?

ROTC = NOPAT (excluding special items) / Tangible Capital

Total Assets– Total Liabilities (excluding debt) – Goodwill and Intangibles – Cash

Tangible Capital


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Why ROTC?ROTC (Return on Tangible Capital) measures the direct connection between earnings or NOPAT generated by the segment and the capital deployed to support that earnings stream. Here’s what else it does:

• Encourages wise use of tangible capital to support earnings, thus maximizing cash flow.

– Tangible capital contains the capital components that are most directly controlled by segment decisions – fixed assets and net working capital.

• Encourages efficient capital investments while seeking incremental earnings

• Serves as a long-term measure and drives sustainable year-over-year growth


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Driving to ROTC targets

To improve Return on Tangible Capital, you can:

• Increase Net Operating Profit After Taxes (NOPAT).

• Decrease tangible capital.

• Invest in value-creating projects to drive organic growth.

Our Operational Excellence projects have an impact on both earnings and the balance sheet.


• Segment or function leaders deliver business assessments to Kerry Clark that will include financial results and QBR Balanced Scorecard results. Kerry determines final segment allocation. (Segments are Corporate, CTS, MPM, PTS and SCS)

• Manager applies individual performance factor to determine individual payout

• Segment Leader determines allocation to units

• Zero sum game

• Pool funded according to published schedule for NOPAT/ROTC targets

Financial metrics:-- NOPAT/ROTC results-- Year-over-year growth-- Performance vs. budgetBalanced Scorecard metrics based on our three strategic priorities: -- Organic growth-- Leveraging scale/Ops Ex-- Unleashing the power of employeesBusiness performance assessment

Cardinal Health NOPAT/ROTC results

Corporate* and segment allocation delivers a total pool to respective functions and units

Individual evaluation drives individual payouts

Step 1.Overall(Funding)

Step 2.Segment-level(Allocation)

Step 3.Business Unit(Allocation)

Step 4.Individual(Payout)

FY ’07 MIP plan design

*Corporate allocation based on enterprise-wide award percentageFor Internal Use ONLY

Cardinal Health Confidential

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ROTC 34% 75% 95% 110% 125% 145% 180% 200%

32% 70% 90% 105% 120% 135% 165% 185%

30% 65% 85% 100% 115% 125% 150% 170%

28% 60% 75% 85% 95% 110% 135% 150%<28%

NOPAT <$1,528 $1,529 $1,571 $1,601 $1,625 $1,675 $1,738 $1,785

NOPAT Growth 6.8% 6.8% 9.8% 11.9% 13.6% 17.1% 21.5% 24.7%

1,427$ (1) Discretionary not greater than 50%

MIP Payouts vs. Target

Discretionary (1)

Dis

cret

iona

ry(1

)

FY 2007 MIP – Corporate Funding schedule

Matrix determines funding of the MIP enterprise-wide pool at varying ROTC and NOPAT levels.

MIP step 1

FY06 NOPAT: $1,431M

FY06 ROTC: 28.6%


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ROTC 34% 75% 95% 110% 125% 145% 180% 200%

32% 70% 90% 105% 120% 135% 165% 185%

30% 65% 85% 100% 115% 125% 150% 170%

28% 60% 75% 85% 95% 110% 135% 150%<28%

NOPAT $1,528 $1,529 $1,571 $1,601 $1,625 $1,675 $1,738 $1,785

NOPAT Growth 6.8% 6.8% 9.8% 11.9% 13.6% 17.1% 21.5% 24.7%

1,427

MIP Payouts vs. Target

Discretionary

Dis

cret

iona

ry

FY 2007 MIP – Corporate Funding schedule MIP step 1

This schedule allows for consistent tracking against our targets.

FY06 NOPAT: $1,431M

FY06 ROTC: 28.6%


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MIP step 2 Segment/Corporate allocation

Allocation from enterprise-wide bonus pool to the business segment considers:

• Financial results

• QBR balanced scorecard results

Business segments are defined as:

• Corporate (Shared Services, Integrated Provider Solutions, International Leadership)

• Clinical Technologies and Services

• Medical Products Manufacturing

• Pharmaceutical Technologies and Services

• Supply Chain Services (SCS-P and SCS-M)


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Employee engagement (CW)Representation:

% Females Mgr & up (CW)% Minorities Mgr & up (CW)

International Profit Growth (RM)% Revenue from New Offerings (JH)Hospital Customer Loyalty (GD)

NOPAT Benefit of Completed Projects (GD)

Revenues ($M)SG&A ($M)NOPAT ($M)ROTCROICROE

x%

x%x%

x%x%xx

xx

YTD

xxxxxxx%x%x%

TBD%

TBD%TBD%

Goal

TBD%TBD%TBD

TBD

xxxxxxx%x%x%

Variance to Goal

x%x%xx

xx

xxxxxxx%x%x%

Prior YTD

x%x%xx

xx

xxxxxxx%x%x%

Variance to Prior YTD

x%x%xx

xx

xxxxxxx%x%x%

Financial Outcomes

x%

x%x%

x%

x%x%

x%

x%x%

Unleashing the Power of Our Employees

Leveraging Scale and Op. Excellence

Our measures of success

The Balanced Scorecard

Customer-driven organic growth


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MIP step 3

Business unit allocation

After the president and CEO has allocated the enterprise-wide funding pool to each segment…

• Segment leaders determine allocation of their portion of the overall bonus pool to their relevant business units

• Allocation is based on performance

• The allocation of funds cannot exceed the overall allocation to the business segment


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MIP step 3

Business unit list

(Insert your business unit’s list here.)


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MIP step 4

Individual MIP payouts

• Eligible individuals prepare self assessments and submit them to their managers for review.

• Managers assess individual performance and apply Individual Performance Multiplier, an outcome of the annual performance review. This measures what individuals achieved and how they achieved it.

• As in the past, managers have to work within a pre-established total budget for the bonus payouts.


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• MIP cash bonuses are delivered on a common timetable in the first quarter of the company’s fiscal year.

• FY ’07 results will be rewarded in the first quarter of FY ’08.

MIP step 4

Individual MIP payouts


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Leadership Rewards FY 2007 Overview September 15, 2006.

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