James Reda thought he was beyond surprise when it came to executive pay.

But then Reda, a New York–based compensation consultant who sometimes puts together mega-pay packages on behalf of publicly traded behemoths, learned about John Hammergren, the CEO of the McKesson Corp., a giant medical-supply company in California. Hammergren is the $145 million man, top dog on the latest listing of the country’s highest-paid chief executives.

But so what if he made $145 million in a single year? The lion’s share of that money was the slew of stock options Hammergren cashed out after holding them for years. “That’s what you want,” Reda says. A new CEO gets a fat basket of stock options, and if the company does well, the CEO also prospers. “As long as the original stock-award amounts were reasonable, it makes no difference if it ends up providing a huge payoff,” Reda says.

Then I read him Hammergren’s annual total compensation payouts, taken from the company’s public filings with the Securities and Exchange Commission: $46 million in 2011; $55 million in 2010; $37 million in 2009; another $41 million in 2008. Hammergren hadn’t founded the company. Wall Street analysts covering McKesson can tell you of the disappointments and miscues that have marked his tenure. But his haul in the 13 years he has been running McKesson? More than $500 million, according to data provided by Equilar, an executive-compensation data firm.

For a moment, Reda is silent. “$40 million, $50 million a year is excessive, no matter what the yardstick,” he says. The average pay package for a CEO running a top 100 company these days, Reda says, is around $12 million. That includes everything, from salary to stock awards to contributions to a retirement account. Yet last year McKesson contributed more than $13 million just to Hammergren’s pension, according to company documents. Among the other perks he enjoys: a chauffeur to drive his company car, free use of the corporate jet for personal travel, and an extra $17,000 a year to pay for a financial planner because handling all those hundreds of millions is no doubt complicated stuff.

“He doesn’t leave anything on the table, does he?” Reda asks.

***

John Hammergren isn’t necessarily the highest-paid CEO in America. Sure, he topped the list when GMI, a well-regarded research firm, published its 2011 annual CEO survey in December. But that’s because he cashed out $112 million in accumulated stock options in a single year, according to GMI. He ranked 14th on Forbes’s 2011 executive-pay list and 22nd on its 2010 ranking. And of course there are CEOs like Oracle’s Larry Ellison and Google’s Larry Page. Page has a net worth north of $15 billion, and Ellison is worth more than $30 billion, but then each was a cofounder of the company he runs.

McKesson dates back to 1833, when Charles McKesson and a partner started importing therapeutic herbs and chemicals. It was more than 150 years later, in 1996, that Hammergren arrived at the company’s San Francisco headquarters. He had been hired to run the division that sells prescription drugs to hospitals, but then scandal rocked the company. Those behind a recently acquired company had inflated its sales numbers, and top McKesson executives were accused of conspiring to hide the fraud. (In 2005, the company paid $960 million to settle the resulting class-action lawsuit filed by shareholders.) “They had to give the CEO job to somebody, and basically he was the last man standing,” said an analyst who has been covering McKesson and its competitors since the 1990s. Many in the industry had never heard of Hammergren when he took over as president and co-CEO in 1999, this analyst said, “but I guess it’s better to be lucky than good.” Hammergren became sole CEO in 2001.

McKesson’s stock had hit a high of just under $95 a share but fell below $20 after the scandal broke. Hammergren deserves credit for stabilizing the company—some might even say he rescued McKesson—but a long-term shareholder could be forgiven for feeling that the company’s board of directors has been overly generous to its chief executive. As of Friday, the stock was trading at $78 a share—still off its 1998 high. Factoring in the regular dividends the company has paid over the years, a shareholder’s investment would be worth slightly more than it was 13 years ago.

Hammergren’s early compensation packages were fat but made sense, at least within the Alice in Wonderland world of executive compensation. The board kept his salary relatively low ($692,000 in his first year as president and co-CEO) but loaded his compensation package with stock options that would vest slowly over time. That’s Exec Comp 101. A board of directors dangles millions of stock options in front of a CEO, who in turn signs away his life in the hopes that he will grow extraordinarily, gloriously rich.

In this case, the board kept giving him more stock and more options. The premise of options is that they give nonfounders a sense of ownership in an enterprise, yet boards of directors at companies like McKesson hand them out liberally as compensation rather than a motivational tool. The company spells it all out in a document that by law it must file annually with the Securities and Exchange Commission. Called the “proxy statement,” it discloses what McKesson and other publicly traded companies pay their top executives. In 2011, McKesson awarded Hammergren $12 million in stock and another 300,000 stock options—a reward the company valued at more than $7 million. The year before, it was 400,000 options and $11 million in stock. The proxy statement shows that Hammergren holds nearly 1 million options that have yet to vest on top of $129 million in McKesson stock.

“As far as I’m concerned, a board that keeps loading up its chief executive with more stock and options each year is, from a shareholder perspective, basically committing theft,” says Albert Meyer, a former accounting professor who runs a money-management firm called Bastiat Capital. It’s all legal, of course, but to Meyer you can tell if an enterprise exists for the benefit of shareholders or insiders by the number of options it awards its top executives. Options aren’t free; they dilute the worth of everyone’s shares. And the practice hurts more than the privileged few. Anyone who owns an index fund of the country’s 500 largest companies owns shares in McKesson, a Fortune 500 company. “It’s nothing short of a massive wealth transfer from the retirement accounts of middle-class Americans to a privileged few,” hidden in the guise of stock-option programs like McKesson’s, Meyer argues.

Options and stock, of course, are only two components of the pay package enjoyed by today’s imperial CEO, “who gets paid in a dozen different flavors,” says Broc Romanek, the editor of CompensationStandards.com, which bills itself as a "resource for responsible executive compensation practices."

Hammergren’s salary is $1.66 million a year—$32,000 a week. His annual cash bonus has ranged between $10 million and $13 million since 2007, according to company filings. Those stock grants he receives vest over time, but that doesn’t mean he misses out on the dividends McKesson pays its shareholders; the company threw in another $483,000 in 2011 to cover the dividends he isn’t receiving because technically the stock isn’t yet his.

Then there are the assorted perks he gets each year at an annual cost of $1 million or so. Choose the perk that makes you the most jealous. Maybe it’s this line found in McKesson’s most recent proxy statement: “For security, protection, and privacy reasons, the Board has directed our CEO to use the corporate aircraft for both business and private travel.” Or maybe it’s the bounty that awaits Hammergren on the other side of his retirement. The company discontinued its pension program for ordinary employees in 1997 but not for top executives. If Hammergren quit tomorrow, according to company filings, he would receive a pension valued at $125 million.

The party won’t stop once the 52-year-old Hammergren retires. Among his lifetime benefits: a personal assistant and office, which the company figures will cost more than $200,000 a year, and the services of a financial counselor—a perk that will eat up $350,000 in profits, according to company estimates. The goodies keep coming even after he dies. If his wife survives him, she will continue receiving his base salary for six months and will also get $2 million in cash. That cash bonus would actually cost the company nearly twice that amount, as it's promised to cover the widow’s cost of paying taxes on that money.

And then there’s a provision so outsize it’s drawn the attention of corporate-governance watchdogs like GMI, the research group that put Hammergren in the top spot of its latest survey of CEO salaries. If Hammergren loses his job due to a change in ownership, he receives an immediate $469 million payout, GMI found—giving him perverse incentive to see it happen.

All in all, an extraordinary pay package, says Greg Ruel, a GMI researcher. “You have to ask why they paid him so much in each and every category,” Ruel says. But Hammergren, through a spokeswoman, declined to comment for this article. And the company declined to make any employee or board member available for an interview.

***

America’s newest poster boy for the sense of entitlement rampant among the top 1 percent is thin and bespectacled, a studious, blue-eyed man from a small town in Minnesota. He has a “quiet confidence,” says a business acquaintance, who describes Hammergren as anything but a back-slapping, big-personality CEO. He’s rarely out on the hustings, wooing investors and showing big clients a good time like his biggest rivals—mainly, this acquaintance says, because that’s not his style. He much prefers golf (he had a 12 handicap, according to a 2006 Golf Digest ranking of the top CEOs who play) and spending time at a second home he apparently keeps in New Hampshire. His main place is in Orinda, a tony suburb of San Francisco. Viewed via Google Earth, it appears more resort than house. “I really get the impression he really thinks he’s worth the money,” says the analyst who has been following McKesson since the 1990s.

By all accounts, Hammergren has done a topnotch job managing the company’s core business: the delivery of prescription drugs and other medicines to hospitals, nursing homes, and large retail chains like Walmart and Rite Aid. Less impressive, though, have been his efforts to broaden the company’s offerings, starting with the lucrative health-technology business. Hammergren seems to have a great personal interest in technology. He wrote (“with Phil Harkin,” according to the cover) Skin in the Game, a book published in 2008 that explores ways technology is set to revolutionize health care. But whether this has translated into big wins for the company is another question. A “horrific job,” one Wall Street analyst said of McKesson’s attempts to emerge as a tech leader in the health field. “This is a company that has thrown billions of dollars at a health-technology unit that has missed its targets probably 80 to 90 percent of the time over the last 10 years.” In December, the company announced it was pulling the plug on another of its big tech initiatives, declaring a billion-dollar do-over.

Equally disappointing, says a second analyst (both requested anonymity, fearing reprisals from the company), have been McKesson’s failed attempts to grow into a big player in the surgical-supply business—a natural growth area given the company’s existing business. “Basically, they lost money for eight years,” the second analyst says—until selling the business to a rival a few years ago. Another blow to the company’s bottom line: the $442 million it has set aside to settle a class-action lawsuit that health plans brought against it, charging that McKesson was part of a scheme to drive up the price of prescription drugs. (Despite a settlement a consumer-health-care site describes as “one of the largest” in drug-litigation history, McKesson denied any wrongdoing.)

McKesson’s stock has performed well, despite these setbacks. Shares in McKesson jumped 22 percent during its most recent fiscal year, ending March 2011. That beats a 19 percent rise generally for health-care stocks and a 16 percent gain for the S&P. It’s true, as the proxy statement claims, that shareholders investing in McKesson under Hammergren’s tenure would have done very well financially. But then compare McKesson’s stock performance with that of its fellow behemoths. It placed 275th when Fortune, in its annual rankings of the country’s 500 biggest companies, looked at stock performance in 2010. The company fared better in a comparison of the 10-year performance of the country’s largest 500 corporations; the 7.7 percent annual return to McKesson shareholders between 2000 and 2010 ranked it 172nd. Still, that lagged behind the 11.3 percent annual return enjoyed by investors in AmerisourceBergen, one of McKesson’s main competitors in the drug-distribution business.

AmerisourceBergen is run by R. David Yost, who has served as the company’s CEO since 2001. Like Hammergren, Yost earns the kind of outsize compensation package that had people taking to the streets this fall. A base salary of $1.26 million ($24,000 a week), $600,000 in stock awards, $1 million in stock options, a cash bonus of $3.5 million. His pension increased in value by $800,000, and he received $155,000 worth of perks—mainly additions to his 401(k) but also a $10,000 car allowance and $315 toward “airline club and other dues." All in, $7.4 million. Hammergren, by contrast, hasn’t been paid less than $9 million a year since the late 1990s, before he became CEO, according to the company’s proxy statement.

***

Others at McKesson are receiving equally generous pay packages, according to the company’s proxy statements. Paul Julian, an executive vice president who started there around the same time as Hammergren, received $20 million in total compensation in 2011 and $23 million in 2010. (He, too, has the board’s blessings to use the company plane whenever he wants for personal travel.) The company’s chief financial officer, Jeff Campbell, received $12 million in 2011 and $14 million in 2010. Two other McKesson executives have pulled in between $7 million and $9 million a year during that same period.

Ultimately, it’s the people who populate a company’s board of directors who are responsible for these payouts. But the McKesson board is not talking. The company declined to arrange any interviews, and efforts to reach individual board members didn’t turn up any takers. Perhaps they see nothing out of the ordinary. For instance, one director, Andy Bryant, received $8.5 million in stock and salary last year as a top Intel executive; another, Edward Mueller, until recently the CEO of Qwest, was paid $65.8 million in 2010, earning him second place on Forbes’s ranking of that year’s best-paid CEOs. “These board members are immune to these big numbers,” says CompensationStandards.com’s Broc Romanek. A private-equity maven named Alton F. Irby III chairs the four-member compensation committee, which also includes Edward Mueller and a venture capitalist trying to make his fortune later in life. Reached on his cellphone, Irby said that everything that needed to be said about executive compensation is laid out in the company's proxy statement. He then hung up.

The McKesson proxy statement is 100-plus pages of quicksand. “Amounts shown reflect the aggregate grant date fair value of stock-based awards granted May 2010 computed in accordance with ASC Topic 718, excluding the impact of estimated forfeitures related to service-based vesting conditions”—so reads a sample sentence. The bottom line is that the board annually establishes a set of benchmarks for Hammergren and his team to beat—and then, year after year, they invariably exceed those goals by so wide a margin that they’re qualifying for a doubling of their cash bonus and a multimillion bump in their annual stock allotment.

It helps Hammergren’s cause that since 2002 he’s also served as chairman of the board, meaning he runs the body that decides what the company pays him and his top people. The proxy statement makes clear that he leaves the room when the board decides on his compensation package, but James Reda, the compensation consultant, doesn’t think that’s enough. “Holding both positions gives you too much power to stack the board and control the agenda,” Reda says. It might sound paranoid to suggest that the board member who asks hard questions about compensation will be told his or her services are no longer wanted, but Reda has seen it happen. “I’ve been involved with boards,” he says. “The squeaky wheel doesn’t get the grease; they’re kicked off the compensation committee, if not kicked off the board altogether.”

Big deal, you might say. McKesson pays its directors an annual cash retainer of $75,000. As chair of the compensation committee, Irby gets an extra $20,000, and every director receives $1,500 (above and beyond expenses) every time he or she shows up at a meeting. Irby probably doesn’t need the extra cash, even if it’s only for a few weeks' work each year, but there’s also the director’s annual stock grant to consider. Irby cashed out $2 million worth of McKesson stock in 2010 alone.

“I find that any time you’ve got lots of money involved, even when the people don’t need the money it doesn’t seem to make a difference,” James Reda says. That’s because money is the way many in the upper reaches of the top 1 percent measure success. “You have a guy already worth $500 million and they have a chance to make $50 million rather than $20 million—they go for the 50, at least most of the time,” Reda says. “These are type-A personalities. You don’t end up the CEO of one of these big companies leaving money on the table.”