ZIMMER HOLDINGS, INC.

345 East Main Street

Warsaw, Indiana 46580

 

 

March 18, 2011

 

Dear Stockholder:

 

We look forward to your attendance either in person or by proxy at the 2011 Annual Meeting of Stockholders of Zimmer Holdings, Inc. We will hold the meeting at 9:00 a.m. Eastern Time on Monday, May 2, 2011 at the Conrad Indianapolis, 50 West Washington Street, Indianapolis, Indiana.

 

You will find information regarding the matters to be voted on in the attached Notice of Annual Meeting of Stockholders and Proxy Statement. We are sending many of our stockholders a notice regarding the availability of this proxy statement, our 2010 Annual Report and other proxy materials via the Internet. This electronic process gives you fast, convenient access to the materials, reduces the impact on the environment and reduces our printing and mailing costs. A paper copy of these materials can be requested using one of the methods described in the materials.

 

Your vote is important. Whether or not you plan to attend the meeting in person, it is important that your shares be represented. Please vote as soon as possible.

 

 

David C. Dvorak

President and

Chief Executive Officer

 

 

Zimmer Holdings, Inc.

345 East Main Street

Warsaw, Indiana 46580

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

 

By Order of the Board of Directors

 

Chad F. Phipps

Senior Vice President, General Counsel and Secretary

 

March 18, 2011

 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

ZIMMER HOLDINGS, INC.

 

PROXY STATEMENT

 

Why am I receiving these proxy materials?  Zimmer Holdings, Inc. (“Zimmer,” “we,” “us,” “our” or the “company”) has made this proxy statement available to you on the Internet or, upon your request, has delivered a printed version of this proxy statement to you by mail, in connection with the solicitation of proxies by our Board of Directors for use at our 2011 annual meeting of stockholders to be held on Monday, May 2, 2011 at 9:00 a.m. Eastern Time, and at any postponement(s) or adjournment(s) thereof. You are receiving this proxy statement because you owned shares of Zimmer common stock at the close of business on March 3, 2011, and that entitles you to vote at the annual meeting. By use of a proxy, you can vote whether or not you attend the annual meeting. This proxy statement describes the matters on which we would like you to vote and provides information on those matters so that you can make an informed decision.

 

The Notice of Annual Meeting of Stockholders and proxy statement were first made available or mailed to stockholders on March 18, 2011. If you requested printed versions of the proxy materials by mail, the materials also include the proxy card or vote instruction form.

 

What will I be voting on?

 

What are the Board’s recommendations?  The Board recommends that you vote your shares:

 

How many votes do I have?  You will have one vote for every share of Zimmer common stock that you owned at the close of business on March 3, 2011.

 

How many shares are entitled to vote?  There are 192,338,879 shares of Zimmer common stock outstanding as of March 3, 2011 and entitled to vote at the meeting. Each share is entitled to one vote.

 

What is the quorum requirement for the annual meeting?  The holders of a majority of the shares entitled to vote at the annual meeting must be present or represented by proxy at the annual meeting for the transaction of business. This is called a quorum. Your shares will be counted for purposes of determining if there is a quorum, whether representing votes for, against or abstained, if you:

 

If a quorum is not present, the annual meeting will be adjourned until a quorum is obtained.

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

What if I vote “abstain”?  A vote to “abstain” on the election of directors will have no effect on the outcome. A vote to “abstain” on the other proposals will have the effect of a vote against. If you vote “abstain,” your shares will be counted as present for purposes of determining whether enough votes are present to hold the annual meeting.

 

Why did I receive a notice in the mail regarding the Internet availability of proxy materials instead of a full set of proxy materials?  As allowed by Securities and Exchange Commission (“SEC”) rules, we have elected to provide access to our proxy materials via the Internet. Accordingly, we are sending a Notice of Internet Availability of Proxy Materials (the “Notice”) to our stockholders. All stockholders will have the ability to access the proxy materials on the website referred to in the Notice or request to receive a printed set of the proxy materials. The Notice provides instructions on how to access the proxy materials over the Internet or to request a printed copy. In addition, stockholders may request to receive proxy materials in printed form by mail or electronically by email on an ongoing basis. We encourage you to take advantage of the availability of the proxy materials on the Internet to help reduce the environmental impact of our annual meetings.

 

What is the difference between a stockholder of record and a beneficial owner of shares held in street name?

 

If I am a stockholder of record, how do I vote?  There are four ways to vote:

 

If I am a beneficial owner of shares held in street name, how do I vote?  There are four ways to vote:

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

Is my vote confidential?  Proxy instructions, ballots and voting tabulations that identify individual stockholders are handled in a manner that protects your voting privacy. Your vote will not be disclosed, except:

 

Occasionally, stockholders provide written comments on their proxy cards, which may be forwarded to management and the Board.

 

Can I change my vote?   Yes. At any time before your proxy is voted, you may change your vote by:

 

How are proxies voted?  All shares represented by valid proxies received prior to the annual meeting will be voted and, where a stockholder specifies by means of the proxy a choice with respect to any matter to be acted upon, the shares will be voted in accordance with the stockholder’s instructions.

 

What happens if a nominee for director declines or is unable to accept election?  If a nominee is unable or declines to serve as a nominee at the time of the annual meeting, the persons named as proxies may vote for a substitute nominee designated by the Board to fill the vacancy or for the balance of the nominees, leaving a vacancy, or, the Board may reduce its size. The Board has no reason to believe that any of the nominees will be unable or decline to serve if elected.

 

What happens if I do not give specific voting instructions?

 

Who will serve as the inspector of election?  A representative from Broadridge Financial Solutions, Inc. will serve as the independent inspector of election.

 

Where can I find the voting results of the annual meeting?  The preliminary voting results will be announced at the meeting. The final voting results will be tallied by the inspector of election and published in our Current Report on Form 8-K, which we are required to file with the SEC within four business days following the annual meeting.

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

Who is paying for the cost of this proxy solicitation?  We are paying the costs of the solicitation of proxies. We have retained Alliance Advisors LLC to assist in soliciting proxies for a fee of $7,500 plus out-of-pocket expenses. Alliance Advisors LLC may be contacted at (877) 503-8435. We must also pay brokerage firms and other persons representing beneficial owners of shares held in street name certain fees associated with:

 

In addition to soliciting proxies by mail, certain of our directors, officers and employees, without additional compensation, may solicit proxies personally or by telephone, facsimile or email on our behalf.

 

How can I attend the annual meeting?  Attendance at the annual meeting is limited to stockholders. Registration will begin at 8:30 a.m. Eastern Time on the date of the annual meeting, and each stockholder may be asked to present valid picture identification such as a driver’s license or a passport and proof of stock ownership as of March 3, 2011. The use of cell phones, smartphones, pagers, recording and photographic equipment and/or computers is not permitted in the meeting room at the annual meeting.

 

Is there a list of stockholders entitled to vote at the annual meeting?  A list of stockholders entitled to vote at the meeting will be available at the meeting and for ten days prior to the meeting, between the hours of 8:00 a.m. and 5:00 p.m. Eastern Time, at our offices at 345 East Main Street, Warsaw, Indiana. If you would like to view the stockholder list, please contact our Corporate Secretary to schedule an appointment.

 

I share an address with another stockholder, and we received only one paper copy of the proxy materials. How may I obtain an additional copy of the proxy materials?  We have adopted a procedure called “householding,” which the SEC has approved. Under this procedure, we are delivering a single copy of this proxy statement and our Annual Report to multiple stockholders who share the same address and who have previously requested printed proxy materials unless we have received contrary instructions from one or more of the stockholders. This procedure reduces our printing and mailing costs. Upon written or oral request, we will deliver promptly a separate copy of this proxy statement and our Annual Report to any stockholder at a shared address to which we delivered a single copy of these documents. To receive a separate copy of this proxy statement or the Annual Report, or to notify us that you wish to receive separate copies of the proxy materials in the future, please contact our Corporate Secretary at the address shown on the cover page of this proxy statement or by telephone at (574) 267-6131. Stockholders who hold shares in “street name” may contact their brokerage firm, bank, broker dealer or other similar organization to request information about householding.

 

What is the deadline to propose actions for consideration or to nominate individuals to serve as directors at the 2012 annual meeting of stockholders?

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

PROPOSAL NO. 1:  ELECTION OF DIRECTORS

 

Based upon the recommendation of our Corporate Governance Committee, the Board has nominated the following eight directors to stand for re-election for a one-year term expiring at our 2012 annual meeting of stockholders and until his or her successor is elected and qualified, or until his or her earlier retirement, resignation, removal or death. After the election of eight directors at the meeting, there will be one vacancy on the Board. The Board plans to fill the vacancy in due course following the selection of a suitable candidate, in accordance with our Restated Certificate of Incorporation.

 

The Corporate Governance Committee, in recommending the nominees for election as directors, considered the knowledge, experience, integrity and judgment of each candidate; the potential contribution of each candidate to the diversity of backgrounds, experience and competencies which the Board desires to have represented; and each candidate’s ability to devote sufficient time and commitment to his or her duties as a director. The Corporate Governance Committee also took into account the specific core competencies or technical expertise necessary to staff Board committees. Since each nominee for director is currently on our Board, the Corporate Governance Committee also considered the significant contributions that each such individual has made to our Board and its committees during his or her tenure as a director. The Corporate Governance Committee believes that each of the nominees possesses the judgment and integrity necessary to make independent decisions and a willingness to devote adequate time to Board duties. In addition, the Corporate Governance Committee believes that each of the nominees brings his or her own particular experiences and set of skills, giving the Board, as a whole, competence and experience in a wide variety of areas.

 

The information set forth below states the name of each nominee for director, his or her age, a listing of present and previous employment positions, the year in which he or she first became a director of the company, other public company directorships held and the key qualifications, experiences, attributes or skills that led to the conclusion that he or she should serve as a director.

 

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

Unless otherwise instructed, the persons named as proxies will vote all proxies received for the election of each of the nominees.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR”
EACH OF THE EIGHT NOMINEES FOR DIRECTOR.

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

PROPOSAL NO. 2:  ADVISORY VOTE ON EXECUTIVE COMPENSATION

 

As required pursuant to Section 14A of the Exchange Act, we seek a non-binding advisory vote from our stockholders to approve the compensation of our executives as described under “Executive Compensation — Compensation Discussion and Analysis” and the tabular disclosure regarding named executive officer compensation (together with the accompanying narrative disclosure) in this proxy statement (see pages 24 to 58). This proposal, commonly known as a say-on-pay proposal, gives our stockholders the opportunity to express their views on our executive compensation. Because your vote is advisory, it will not be binding on the Board. However, the Compensation and Management Development Committee will take into account the outcome of the vote when making future executive compensation decisions.

 

As we discuss below in our Compensation Discussion and Analysis (“CD&A”), we believe that our executive compensation programs are designed to support our business strategies, are focused on pay-for-performance principles and are strongly aligned with the long-term interests of our stockholders. Key elements of our executive compensation program include the following:

 

 

The Compensation and Management Development Committee has and will continue to take action to structure our executive compensation practices in a manner that is performance-based with a view towards maximizing long-term stockholder value. The Board believes that the executive compensation as disclosed in the CD&A, tabular disclosures, and other narrative executive compensation disclosures in this proxy statement aligns with our peer group pay practices and our compensation philosophy.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR”
THE FOLLOWING ADVISORY RESOLUTION:

 

“RESOLVED, that the compensation paid to the company’s named executive officers as disclosed pursuant to Item 402 of Regulation S-K, including the CD&A, the compensation tables and narrative discussion, is hereby approved.”

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

PROPOSAL NO. 3:  ADVISORY VOTE ON THE FREQUENCY OF SAY-ON-PAY VOTES

 

As required pursuant to Section 14A of the Exchange Act, we seek a non-binding advisory vote from our stockholders regarding the desired frequency for holding future non-binding advisory votes to approve the compensation of our named executive officers as described in our annual proxy statement.

 

This proposal gives our stockholders the opportunity to express their views as to whether say-on-pay votes should occur every one, two or three years. Because your vote is advisory, it will not be binding on the Board. However, the Board will carefully consider the outcome of the frequency vote and other communications from stockholders when making future decisions regarding the frequency of say-on-pay votes.

 

After careful consideration of the various arguments supporting each frequency level, the Board believes that submitting the advisory vote on executive compensation to stockholders on an annual basis is the most appropriate alternative at this time.

 

The proxy card provides stockholders with four choices (every one, two, or three years, or abstain). Stockholders are not voting to approve or disapprove the Board’s recommendation.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR A FREQUENCY OF “1 YEAR.”

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

PROPOSAL NO. 4:  RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Audit Committee has appointed PwC to serve as our independent registered public accounting firm for 2011. PwC has served as our independent registered public accounting firm since 2001.

 

The affirmative vote of a majority of the shares present in person or by proxy and entitled to vote at the meeting is required to ratify the selection of PwC. If the stockholders do not ratify the selection, the Audit Committee will consider any information submitted by the stockholders in connection with the selection of the independent registered public accounting firm for the next year. Even if the selection is ratified, the Audit Committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if the Audit Committee believes such a change would be in our best interests and the best interest of our stockholders.

 

Representatives of PwC attended all meetings of the Audit Committee in 2010. We expect that a representative of PwC will be at the annual meeting. This representative will have an opportunity to make a statement and will be available to respond to appropriate questions.

 

Audit and Non-Audit Fees

 

The following table shows the fees that we paid or accrued for audit and other services provided by PwC for the years 2010 and 2009. All of the services described in the following fee table were approved in conformity with the Audit Committee’s pre-approval process, described below.

 

 

 

Audit Committee Pre-Approval of Services of Independent Registered Public Accounting Firm

 

The Audit Committee has adopted a policy for pre-approval of audit and permitted non-audit services by our independent registered public accounting firm. The Audit Committee will consider annually and, if appropriate, pre-approve the provision of audit and permitted non-audit services. The Audit Committee will also consider on a case-by-case basis and, if appropriate, pre-approve specific services that are not otherwise pre-approved. Any proposed engagement that does not fit within the definition of a pre-approved service may be presented to the Audit Committee for consideration at its next regular meeting or, if earlier consideration is required, to the Chairman of the Audit Committee between regular meetings. The Audit Committee Chairman has the delegated authority to pre-approve such services up to a specified aggregate fee amount. These pre-approval decisions are reported to the full Audit Committee at its next scheduled meeting.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR”
RATIFICATION OF THE APPOINTMENT OF PWC AS OUR INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM FOR 2011.

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

OTHER MATTERS

 

We do not know of any other matters that will be considered at the annual meeting. Nonetheless, in case there is an unforeseen need, the accompanying proxy gives discretionary authority to the persons named on the proxy with respect to any other matters that might be brought before the meeting. Those persons intend to vote that proxy in accordance with their best judgment.

SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

 

The following table sets forth certain information regarding the beneficial ownership of our common stock as of January 3, 2011 by (1) our current non-employee directors, each of whom, along with Mr. Dvorak, has been nominated for re-election; (2) our named executive officers; and (3) all of our current directors, named executive officers and other executive officers as a group.

 

 

 

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

 

Based on a review of publicly available statements of beneficial ownership filed with the SEC on Schedules 13D and 13G, there is no person or entity known to us to be the beneficial owner of more than five percent (5%) of our common stock as of March 3, 2011.

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Exchange Act requires our directors, executive officers and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership with the SEC. Based on our records, we believe that during 2010 all applicable Section 16(a) filing requirements were met.

 

CORPORATE GOVERNANCE

 

Our business is managed under the direction of the Board of Directors. The Board has responsibility for establishing broad corporate policies and for our overall performance.

 

Board Leadership Structure

 

Our Board is led by a non-executive Chairman of the Board selected from among the independent directors. Until 2007, the positions of chairman of the board and chief executive officer of our company were held by the same person. The Board separated this combined role into two roles — a Chairman who would be responsible for board leadership and a chief executive officer who is responsible for leading the management, operations and employees of our company — when it promoted David C. Dvorak to his current positions as our President and Chief Executive Officer in 2007. Later that year, the Board appointed John L. McGoldrick as non-executive Chairman. Mr. McGoldrick continues to hold this position. The Board believes that this leadership structure allows the Board to function efficiently and effectively and that it continues to be appropriate. However, the Board evaluates its leadership structure on an ongoing basis and may change it as circumstances warrant. The Board is not opposed in concept to combining these roles as it has done in the past.

 

The Board selects the non-executive Chairman of the Board in accordance with our Restated By-Laws and upon the criteria that the Board deems appropriate. The non-executive Chairman of the Board has the following duties and responsibilities:

 

If the positions of Chairman of the Board and CEO are combined in the future, the Board will designate one of the non-management directors as “Lead Independent Director.” The Lead Independent Director would have all of the duties and responsibilities of the current non-executive Chairman of the Board, except for the duty to preside at meetings of the Board and stockholders.

 

Board Role in Risk Oversight

 

The Board of Directors oversees the risk management processes that have been designed and are implemented by our executives to determine whether those processes are functioning as intended and are consistent with our business and strategy. The Board executes its oversight responsibility for risk management directly and through its committees. The Board’s role in risk oversight has not affected its leadership structure.

 

The Audit Committee is specifically tasked with overseeing our compliance with legal and regulatory requirements, discussing our risk assessment and risk management processes with management and receiving information on material legal and regulatory affairs, including litigation. Our Vice President, Global Internal and Compliance Audit, who reports directly to the committee, coordinates our global enterprise risk

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

assessment process. We use this process to identify, assess and prioritize internal and external risks, to develop processes for responding to, mitigating and monitoring risks and to inform the development of our internal audit plan, our annual operating plan and our long-term strategic plan. The committee receives detailed reports regarding our enterprise risk assessment process and the committee’s meeting agendas include discussions of individual risk areas throughout the year. Members of our management who have responsibility for designing and implementing our risk management processes regularly meet with the committee. The committee discusses our major financial risk exposures with our Chief Financial Officer and Chief Accounting Officer. The committee also receives reports from our General Counsel, Chief Information Officer, Chief Compliance Officer and other persons who are involved in our risk management processes.

 

The Board’s other committees oversee risks associated with their respective areas of responsibility. For example, the Compensation and Management Development Committee assesses risks relating to our compensation policies and practices.

 

The full Board considers specific risk topics, including risk-related issues pertaining to laws and regulations enforced by the U.S. Food and Drug Administration and foreign government regulators and risks associated with our strategic plan and our capital structure. In addition, the Board receives detailed regular reports from members of our executive operating committee and other personnel that include discussions of the risks and exposures involved with their respective areas of responsibility. Further, the Board is routinely informed of developments that could affect our risk profile or other aspects of our business.

 

Policies on Corporate Governance

 

We are committed to maintaining the highest standards of business conduct and corporate governance, which we believe are essential to running our business efficiently, serving stockholders well and maintaining our integrity in the marketplace. We have adopted a Code of Business Conduct that applies to all directors, officers and employees and a Code of Ethics for Chief Executive Officer and Senior Financial Officers (the “finance code of ethics”), a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and Corporate Controller, and other finance organization employees. The Board of Directors has adopted Corporate Governance Guidelines, which, in conjunction with our Restated Certificate of Incorporation, Restated By-Laws, Board committee charters and key Board policies, form the framework for our governance. The current version of the Code of Business Conduct, the finance code of ethics, the Board’s Corporate Governance Guidelines and the charters for each of the Audit Committee, Compensation and Management Development Committee, Corporate Governance Committee and Science and Technology Committee, as well as the Board’s policies on auditor ratification and stockholder rights plans, are available in the Investor Relations/Corporate Governance section of our website, www.zimmer.com. If we make any substantive amendments to the finance code of ethics or grant any waiver, including any implicit waiver, from a provision of the code to our Chief Executive Officer, Chief Financial Officer, or Chief Accounting Officer and Corporate Controller, we will disclose the nature of that amendment in the Investor Relations section of our website. The Board regularly reviews corporate governance developments and modifies its Corporate Governance Guidelines, committee charters and key practices as warranted.

 

Director Independence

 

The Board’s Corporate Governance Guidelines, which are available on our website as described above, include criteria adopted by the Board to assist it in making determinations regarding the independence of its members. The criteria are consistent with the NYSE listing standards regarding director independence. To be considered independent, the Board must determine that a director has no material relationship, directly or indirectly, with us. In assessing independence, the Board considers all relevant facts and circumstances. The Board has determined that each of our non-employee directors, Betsy J. Bernard, Marc N. Casper, Larry C. Glasscock, Robert A. Hagemann, Arthur J. Higgins, John L. McGoldrick and Cecil B. Pickett, Ph.D., meets these standards and is independent. The Board has determined that David C. Dvorak, who is an employee, is not independent.

 

In making its determination with respect to Mr. Casper, the Board considered his position as President and Chief Executive Officer of Thermo Fisher, a leading provider of analytical instruments, equipment, software

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

and services for research, manufacturing, analysis and diagnostics from which we purchase certain products. During 2010, the amount we paid Thermo Fisher exceeded $1,000,000 but represented less than one percent of Thermo Fisher’s gross revenues. After reviewing the terms of our transactions with Thermo Fisher, the Board determined that Mr. Casper does not have a direct or indirect material interest in the transactions and that our business relationship with Thermo Fisher does not diminish the ability of Mr. Casper to exercise his independent judgment on issues affecting our business.

 

Majority Vote Standard for Election of Directors

 

Our Restated By-Laws require directors to be elected by the majority of the votes cast with respect to that director in uncontested elections (the number of shares voted “for” a director must exceed the number of votes cast “against” that director). In a contested election (a situation in which the number of nominees exceeds the number of directors to be elected), the standard for election of directors will be a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors. If a nominee who is serving as a director is not elected at the annual meeting, under Delaware law the director would continue to serve on the Board as a “holdover director.” However, under our Restated By-Laws, any director who fails to be elected must tender his or her resignation to the Board. The Corporate Governance Committee would then make a recommendation to the Board whether to accept or reject the resignation, or whether other action should be taken. The Board will act on the Corporate Governance Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date the election results are certified. The director who tenders his or her resignation will not participate in the Board’s decision. If a nominee who was not already serving as a director is not elected at the annual meeting, under Delaware law that nominee would not become a director and would not serve on the Board as a “holdover director.” In 2011, all nominees for election as directors are currently serving on the Board.

 

Nominations for Directors

 

The Corporate Governance Committee will consider director nominees recommended by stockholders. A stockholder who wishes to recommend a director candidate for consideration by the Corporate Governance Committee should send such recommendation to our Corporate Secretary at the address shown on the cover page of this proxy statement, who will then forward it to the committee. Any such recommendation should include a description of the candidate’s qualifications for board service, the candidate’s written consent to be considered for nomination and to serve if nominated and elected, and addresses and telephone numbers for contacting the stockholder and the candidate for more information. A stockholder who wishes to nominate an individual as a candidate for election, rather than recommend the individual to the Corporate Governance Committee as a nominee, must comply with the advance notice requirements set forth in our Restated By-Laws. (See “What is the deadline to propose actions for consideration or to nominate individuals to serve as directors at the 2012 annual meeting of stockholders?” on page 4 for more information on these procedures.)

 

In considering candidates for the Board, the Corporate Governance Committee considers the entirety of each candidate’s credentials and does not have any specific minimum qualifications that must be met by a committee-recommended nominee. The committee is guided by the following basic selection criteria for all nominees: independence; highest character and integrity; experience and understanding of strategy and policy-setting; reputation for working constructively with others; and sufficient time to devote to Board matters. The committee does not have a policy with regard to the consideration of diversity in identifying director candidates, but the committee generally gives consideration to the diversity of backgrounds, viewpoints, experiences and specialized expertise, as well as the diversity of race, gender and international experience, and other various factors relevant to any particular candidate and the needs of the Board as a whole, in identifying candidates for director. When the Board has a vacancy or is otherwise looking to add one or more members, the committee typically engages a third-party search firm to assist the committee in identifying and evaluating potential director candidates. If the committee is seeking director candidates with particular experience, qualifications, attributes or skills, it will so instruct the search firm. In the past, the committee has, for example, instructed the search firm to identify candidates who could bring diversity of race, gender and/or international experience to the Board.

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

Stockholder Communication with the Board

 

The Board has implemented a process whereby our stockholders may send communications to the Board’s attention. Any stockholder desiring to communicate with the Board, or one or more specified members thereof, should communicate in a writing addressed to Zimmer Holdings, Inc., Board of Directors, c/o Corporate Secretary, 345 East Main Street, Warsaw, Indiana 46580. The Board has instructed our Corporate Secretary to promptly forward all such communications to the specified addressees thereof.

 

Certain Relationships and Related Person Transactions

 

On an annual basis, each director and executive officer is obligated to complete a director and officer questionnaire which requires disclosure of any transactions with us in which the director or executive officer, or any member of his or her immediate family, has an interest. Under our Audit Committee’s charter, which is available on our website at www.zimmer.com, our Audit Committee must review and approve all related person transactions in which any executive officer, director, director nominee or more than 5% stockholder of the company, or any of their immediate family members, has a direct or indirect material interest. The Audit Committee may not approve a related person transaction unless (1) it is in or not inconsistent with our best interests and (2) where applicable, the terms of such transaction are at least as favorable to us as could be obtained from an unrelated third party. No related person transaction in an amount exceeding $120,000 occurred during 2010.

 

Under our Code of Business Conduct, which is available on our website at www.zimmer.com, our General Counsel or Chief Compliance Officer is charged with reviewing any conflict of interest involving any other employee.

 

Board Meetings, Attendance and Executive Sessions

 

The Board meets on a regularly scheduled basis during the year to review significant developments affecting us and to act on matters requiring Board approval. It also holds special meetings when an important matter requires Board action between scheduled meetings. Members of senior management regularly attend meetings of the Board and its committees to report on and discuss their areas of responsibility. Directors are expected to attend Board meetings, meetings of committees on which they serve and stockholder meetings. Directors are expected to spend the time needed and meet as frequently as necessary to properly discharge their responsibilities. During 2010, the Board held 8 meetings and committees of the Board held a total of 25 meetings. All directors attended 75% or more of the meetings of the Board and committees on which they served. Seven of our eight directors attended the annual meeting of stockholders in May 2010.

 

Each regularly scheduled Board meeting normally begins with a session between the CEO and the independent directors. This provides a platform for discussions outside the presence of the non-Board management attendees, as well as an opportunity for the independent directors to go into executive session (without the CEO) if requested by any director. The independent directors may meet in executive session, without the CEO, at any time, and are scheduled for such non-management executive sessions at each regularly scheduled Board meeting. Mr. McGoldrick, in his capacity as non-executive Chairman, presides at these meetings of non-management directors.

 

Communication with Non-Management Directors

 

The Board has adopted a method for communicating directly with the non-management directors and has designated Mr. McGoldrick to receive such communications. Interested parties may contact Mr. McGoldrick via e-mail at john.mcgoldrick@zimmer.com.

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

COMMITTEES OF THE BOARD

 

Our Restated By-Laws provide that the Board may delegate certain of its responsibilities to committees. During 2010, the Board had four standing committees: an Audit Committee, a Compensation and Management Development Committee, a Corporate Governance Committee and a Science and Technology Committee. The membership of each of the Audit Committee, the Compensation and Management Development Committee and the Corporate Governance Committee is composed entirely of independent directors. In addition, the members of the Audit Committee meet the heightened standards of independence for audit committee members required by SEC rules and NYSE listing standards. The membership of the Science and Technology Committee is composed of three independent directors and one employee representative, and the committee works together with an Advisory Board of Science and Technology.

 

The table below shows the current membership of each Board committee and the number of meetings held during 2010.

 

 

Audit Committee.  The principal functions of the Audit Committee include:

 

 

The Board of Directors has determined that Betsy J. Bernard, Larry C. Glasscock, Robert A. Hagemann, Arthur J. Higgins and John L. McGoldrick qualify as “audit committee financial experts” as defined by SEC rules. See pages 5-9 for a description of their respective business experience. Stockholders should understand that this designation is an SEC disclosure requirement related to these directors’ experience and understanding with respect to certain accounting and auditing matters. The designation does not impose upon these directors any duties, obligations or liabilities that are greater than are generally imposed on them as members of the Audit Committee and the Board, and their designation as audit committee financial experts pursuant to this SEC requirement does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board.

 

The report of the Audit Committee appears on pages 19-21.

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

Compensation and Management Development Committee.  The duties of the Compensation and Management Development Committee include:

 

 

None of the members of the Compensation and Management Development Committee during 2010 or as of the date of this proxy statement is or has been our officer or employee or had any relationship requiring disclosure under Item 404 of Regulation S-K of the Exchange Act. None of our executive officers served on the compensation committee or board of any company that employed any member of the Compensation and Management Development Committee or the Board or otherwise under circumstances requiring disclosure under Item 404 of Regulation S-K.

 

The report of the Compensation and Management Development Committee appears on pages 39-40.

 

Corporate Governance Committee.  The duties of the Corporate Governance Committee include:

 

 

Science and Technology Committee.  The duties of the Science and Technology Committee include:

 

AUDIT COMMITTEE REPORT

 

The Audit Committee is responsible for monitoring the integrity of the company’s financial statements, the qualifications, performance and independence of the independent registered public accounting firm, the performance of the company’s internal audit function and compliance with certain legal and regulatory requirements. The committee is directly responsible for the appointment, compensation, retention and oversight of the work of the independent registered public accounting firm.

 

Management is responsible for the financial reporting process, including the system of internal control, for the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States and for management’s report on internal control over financial reporting. The independent registered public accounting firm is responsible for auditing the consolidated financial statements and expressing an opinion as to their conformity with accounting principles generally accepted in the United States as well as rendering an opinion on the company’s internal control over financial reporting. The committee’s responsibility is to oversee and review the financial reporting process and to review and discuss management’s report on internal control over financial reporting. Committee members are not, however, professionally

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

engaged in the practice of accounting or auditing and do not provide any expert or other special assurance as to such financial statements concerning compliance with laws, regulations or accounting principles generally accepted in the United States or as to the independence of the independent registered public accounting firm. The committee relies, without independent verification, on the information provided to it and on the representations made by management and the independent registered public accounting firm.

 

The committee held 12 meetings during 2010. The meetings were designed, among other things, to facilitate and encourage communication among the committee, management, the internal auditor and the independent registered public accounting firm, PricewaterhouseCoopers LLP, or PwC.

 

The committee discussed with the internal auditor and PwC the overall scope and plans for their respective audits. The committee met with the internal auditor and PwC, with and without management present, to discuss the results of their examinations and their evaluations of the company’s internal control over financial reporting. The committee reviewed and discussed compliance with Section 404 of the Sarbanes-Oxley Act of 2002, including consideration of the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard No. 5, An Audit of Internal Control over Financial Reporting That is Integrated With an Audit of Financial Statements.

 

The committee discussed major financial risk exposures with management and the steps management has taken to monitor and control such exposures, including risk assessment and risk management policies.

 

Management has represented to the committee that the consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States, and the committee has reviewed and discussed the consolidated financial statements with management and PwC. The committee reviewed and discussed with management, the internal auditor and PwC management’s report on internal control over financial reporting and PwC’s report on internal control over financial reporting. The committee also discussed with management and the internal auditor the process used to support certifications by the Chief Executive Officer and Chief Financial Officer that are required by the Securities and Exchange Commission and the Sarbanes-Oxley Act of 2002 to accompany periodic filings with the Securities and Exchange Commission and the processes used to support management’s report on internal control over financial reporting.

 

The committee also discussed with PwC all matters required to be discussed by that firm’s professional standards, including, among other things, matters related to the conduct of the audit of the consolidated financial statements and the matters required to be discussed by AU Section 380, Communication With Audit Committees, as adopted by the Public Company Accounting Oversight Board in Rule 3200 T.

 

PwC provided to the committee the written disclosures and the letter required by applicable Public Company Accounting Oversight Board requirements and represented that PwC is independent from the company. The committee also discussed with PwC its independence from the company. When considering PwC’s independence, the committee considered if services PwC provided to the company beyond those rendered in connection with its audit and related reviews of the consolidated financial statements and the company’s internal control over financial reporting, were compatible with maintaining its independence. The committee concluded that the provision of such services by PwC has not jeopardized PwC’s independence.

 

Based on the reviews and discussions described above, and subject to the limitations on the committee’s role and responsibilities referred to above and in the charter of the Audit Committee, the committee recommended to the Board of Directors, and the Board approved, that the audited consolidated financial statements for the year ended December 31, 2010 be included in the Annual Report on Form 10-K for filing with the Securities and Exchange Commission.

 

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The members of the committee have also confirmed there have been no new circumstances or developments since their respective appointments to the Audit Committee that would impair any member’s ability to act independently.

 

Audit Committee

 

Robert A. Hagemann, Chairman
Betsy J. Bernard
Larry C. Glasscock
Arthur J. Higgins
John L. McGoldrick

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

COMPENSATION OF DIRECTORS

 

2010 DIRECTOR COMPENSATION TABLE

 

The following table sets forth information regarding the compensation we paid to our non-employee directors for 2010. Mr. Dvorak is not included in this table because he received no additional compensation for his service as a director.

 

 

 

 

The following table sets forth the grant date fair value of annual grants of RSUs and DSUs awarded to each director during 2010 as well as DSUs granted to each of Messrs. Casper and Hagemann, Dr. Pickett and Ms. Bernard during 2010 pursuant to the mandatory deferral provisions of the Deferred Compensation Plan.

 

 

The following table sets forth, as of December 31, 2010, the aggregate number of RSUs held by each director and the aggregate number of DSUs that will be settled in shares of our common stock held by each director.

 

 

 

 

For a discussion of the assumptions made in the valuation of our stock options, see Note 3 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

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The following table sets forth the aggregate number of shares of our common stock underlying unexercised stock options held by each director as of December 31, 2010.

 

 

 

The Board of Directors believes that providing competitive compensation is necessary to attract and retain qualified non-employee directors. The key components of director compensation include annual retainers, committee chair annual fees, meeting fees and equity-based awards. It is the Board’s practice to provide a mix of cash and equity-based compensation to more closely align the interests of directors with our stockholders.

 

Retainers and Meeting Fees. During 2010, we paid each non-employee director an annual retainer of $50,000 subject to mandatory deferral requirements as described below. We also paid each non-employee director a fee of $1,500 for attending each Board meeting and each Board committee meeting. We also paid each Board committee chair an additional annual fee of $7,500 and we paid an additional annual retainer of $30,000 to the non-executive Chairman of the Board. We pay non-employee directors one-fourth of their annual retainers and committee chair annual fees and fees for attending Board and committee meetings held during the prior three months at the end of each calendar quarter.

 

Equity-Based Compensation and Mandatory Deferrals. During 2010, we awarded each non-employee director 500 DSUs as of the date of the annual meeting of stockholders with an initial value based on the price of our common stock on that date. We require that these annual DSU awards be credited to a deferred compensation account under the provisions of the Deferred Compensation Plan. DSUs represent an unfunded, unsecured right to receive shares of our common stock or the equivalent value in cash, and the value of DSUs varies directly with the price of our common stock. We also require that 50% of a director’s annual retainer be deferred and credited to his or her deferred compensation account in the form of DSUs with an initial value equal to the amount of fees deferred until the director holds a total of at least 5,000 DSUs. Non-employee directors may elect to defer receipt of compensation in excess of their mandatory deferral and annual DSU award. Elective deferrals are credited to the director’s deferred compensation account in the form of either treasury units, dollar units or DSUs with an initial value equal to the amount of fees deferred. The value of treasury units and dollar units does not change after the date of deferral. Amounts deferred as treasury units are credited with interest at a rate based on the six-month U.S. Treasury bill discount rate for the preceding year. Amounts deferred as dollar units are credited with interest at a rate based on the rate of return of our invested cash during the preceding year. All treasury units, dollar units and DSUs are immediately vested and payable following termination of the non-employee director’s service on the Board. We settle annual DSU awards and mandatory deferral DSUs in shares of our common stock. We pay the value of treasury units, dollar units and elective deferral DSUs in cash. Directors may elect to receive the cash payment in a lump sum or in not more than ten annual installments. Non-employee directors may also elect to convert all or a portion of their annual retainer not subject to mandatory deferral into stock options using a ratio of an option to purchase three shares of common stock for each DSU the director would have received if he or she had elected to defer such compensation. These stock options become fully exercisable on the last day of the calendar year in which the options are granted if the director continues as a non-employee director throughout that year.

 

During 2010, we also awarded each continuing non-employee director RSUs as of the date of the annual meeting of stockholders with an initial value of $100,000 based on the price of our common stock on that date. These awards were made under the Stock Plan for Non-Employee Directors. The RSUs vested immediately and are subject to mandatory deferral until May 3, 2013 or, if later, the director’s retirement or other termination of service from the Board. We will settle the RSUs in shares of our common stock.

 

Insurance, Expense Reimbursement and Director Education. We provide non-employee directors with travel accident insurance and reimburse reasonable expenses they incur for transportation, meals and lodging when on Zimmer business. We also reimburse non-employee directors for reasonable out-of-pocket expenses, including tuition costs incurred in attending director education programs.

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

EXECUTIVE COMPENSATION

 

In this section of the proxy statement we discuss and analyze the compensation of our principal executive and financial officers and our three other most highly compensated executive officers for 2010 (the “named executives”). The “Executive Officer Compensation Tables and Notes” section presents compensation earned by the named executives in 2010, 2009 and 2008.

 

Summary

 

Executive compensation for 2010 aligned well with our performance, driven by these factors:

 

 

 

Executive compensation for 2010 also aligned well with the objectives of our pay-for-performance compensation philosophy, as demonstrated by the following:

 

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

Executive Compensation Philosophy

 

Our employees are critical to the success of our business strategy. We seek to compensate them in a manner that will drive the success of the business, and, in turn, increase stockholder value on a long-term, sustainable basis. Consistent with this philosophy, we design our executive compensation program to accomplish the following:

 

 

Executive Compensation for 2010

 

For 2010, the Compensation and Management Development Committee of the Board (the “committee”) generally maintained the same pay elements and mix as in 2009. The 2010 executive compensation program consisted of base salary, a cash incentive opportunity and two forms of long-term equity-based incentives: performance-based RSUs and stock options. In addition, we offer retirement plans and welfare benefits that are generally available to all employees and we provide a very limited range of perquisites or other benefits. The committee’s intention is to provide a total pay opportunity that is comparable to our closest peer group and industry competitors, but which also places a greater emphasis on at-risk equity-based compensation. The committee believes that when the actual pay of the named executives is dependent upon our financial and stock price performance, the interests of the executives are better aligned with those of our stockholders.

 

In December 2010, the committee reviewed an analysis of our 2010 compensation elements relative to market and peer group practice. The analysis revealed that, while our mix of pay is generally aligned with median peer group practice, it is weighted less heavily towards base salary and more heavily towards long-term incentive compensation, which is consistent with our overall design philosophy that emphasizes at-risk and equity-based incentives to drive performance.

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

Mix of Pay - CEO

 

 

Mix of Pay - Top 5 Executive Average

 

 

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

Target compensation for individual executives may vary from the percentiles noted above based on a variety of factors, such as experience and time in the position, the nature of the executive’s responsibilities, criticality of the role and difficulty of replacement, internal equity, retention concerns, individual performance and expected future contributions, readiness for promotion to a higher level, and, in the case of externally recruited executives, compensation earned at a prior employer.

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

Base Salary

 

In setting executives’ base salaries for 2010, the committee considered our 2010 employee merit increase guidelines, market data based on peer group and published compensation survey benchmarking data, and internal equity. The 2010 merit increase guideline for U.S.-based employees was 2.75%. The 2010 base salary increases for Messrs. Dvorak and Crines include a market adjustment to bring their base salaries more in line with our philosophy of targeting base pay at the 50^th percentile of market. Mr. Paulsen joined the company in December 2009 and was not eligible for a 2010 base salary increase.

 

 

 

 

Annual Cash Incentives

 

Annual cash incentives for executives are determined under the Zimmer Holdings, Inc. Executive Performance Incentive Plan (“EPIP”). When establishing 2010 target EPIP awards, the committee considered the following:

 

Target EPIP award percentages. The committee determined target EPIP award percentages based on job responsibilities, market data based on peer group and published compensation survey benchmarking data, and internal equity. After considering these factors, the committee established a 2010 target percentage for each named executive that is generally consistent with the 65^th percentile of market. The 2009 and 2010 target percentages for each named executive are shown below. Mr. Paulsen joined the company in December 2009 and was not eligible for an EPIP award in 2009.

 

 

Financial performance measures. As in recent years, the committee selected consolidated revenue, adjusted diluted earnings per share (“EPS”) and consolidated free cash flow as the financial measures on which to assess our 2010 performance for purposes of the EPIP. The relative weight assigned to each of these measures was 25%, 50% and 25%, respectively, for each of the last several years. The committee established specific goals for each of the measures in early 2010 based on the annual operating plan approved by the Board.

 

The committee selected consolidated revenue and adjusted EPS, as those are of primary interest to stockholders and are the two measures as to which we provide guidance to the market. They also focus executives appropriately on improving both top-line sales and bottom-line earnings, with special emphasis on

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

earnings in order to tie rewards directly to productivity improvements. Adjusted EPS is weighted most heavily because the committee believes it is the performance measure that correlates most closely with stockholder value. The committee selected consolidated free cash flow as the third performance measure, as that measure focuses executives appropriately on cash, inventory, receivables and payables management. The performance measures, targets, our actual performance against the targets and the resulting achievement and payout percentages were as follows for 2010:

 

 

 

 

 

 

 

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

Individual performance. Once the EPIP payout percentage was computed based on our financial performance as described above, the committee took into account its view of how well each named executive performed during 2010 to determine the actual cash incentive payments. The committee met in executive session to review our CEO’s performance based on his achievement of goals and objectives agreed upon at the beginning of the year, his contribution to our overall performance and other leadership accomplishments. The committee’s assessment of other officers requires significant input from the CEO. The committee receives a performance assessment from the CEO and also exercises its judgment based on its interactions with the officer. As with the CEO, the officer’s performance evaluation is based on the achievement of established goals and objectives, the officer’s contributions to our performance and other leadership attributes and accomplishments. The goals set for each named executive for 2010 reflected the wide range of responsibilities that are attributed to each and included goals covering financial performance, corporate strategy, innovation, research and development, quality and regulatory, operational excellence, leadership development, succession planning and constituent relations, among other areas. Based on its assessment of the named executives’ individual performance, the committee exercised negative discretion to reduce each named executive’s cash incentive payment below the 107% of target determined as described above. As a result, the actual EPIP payouts for the named executives for 2010 were as follows:

 

 

 

 

Equity-Based Incentives

 

When establishing 2010 target long-term equity-based incentive awards, the committee considered the following:

 

Target grant values. In determining the target grant values to be awarded to each named executive, the committee reviewed market data based on peer group and published compensation survey benchmarking data. This review focused on how much equity should be granted to each executive in order to be competitive with equity awards provided to similarly situated officers in our peer group and in the broader market represented by the survey data. For 2008 through 2010, target grant values to our named executives ranged from the 49^th to 82^nd percentiles of the peer group on average. For 2010, the committee issued equity awards toward the higher end of this range as part of a long-term compensation plan to motivate, incentivize and retain executives who are critical to our success over the coming years, through compensation that must be earned through performance. Following the 2010 grants at the higher end of the range, the committee reduced target grant values to named executives in 2011 by approximately 10% on average. For 2010, in addition to

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

reviewing market data, the committee took into consideration its expectations of each executive’s future contributions to the company, his 2009 performance (except in the case of Mr. Paulsen, who was hired in December 2009), internal equity principles, total shares available to be granted and potential stockholder dilution, and set equity grant targets for the named executives that were consistent with to slightly below the 75^th percentile of the peer group and above the 75^th percentile of the broader market. The total target grant value for each executive was then allocated approximately one-half to stock options that vest over four years and one-half to performance-based RSUs that are earned if financial performance goals are achieved. Earned RSUs vest on the second through fourth anniversaries of the grant date. The committee considered these equity awards in connection with its determination of each named executive’s total compensation for 2010.

 

Performance-based RSUs – financial performance measure. Beginning in 2009, the committee changed the mix of equity-based awards granted to the named executives from stock options only to a mix of stock options and performance-based RSUs that combine achievement of an objective performance goal with multi-year vesting requirements. This change was influenced by market data that showed that companies were shifting away from stock options in favor of alternative performance-based awards. The committee retained a mix of stock options and performance-based RSUs for 2010, but weighted the mix more heavily toward performance-based RSUs to better align the grant with our pay-for-performance philosophy and stockholder interests. In 2009, the mix (based on grant date fair value) was approximately 60% stock options and 40% performance-based RSUs. In 2010, the mix was approximately 50% stock options and 50% performance-based RSUs. The committee selected adjusted EPS as the financial measure on which to assess 2010 performance for purposes of the performance-based RSU grant. The committee believes adjusted EPS is the performance measure that correlates most closely with stockholder value and believes it is appropriate to underscore its importance in both the annual and long-term incentive plans. In addition, adjusted EPS is one of the measures for which we provide guidance and it is broadly communicated to the public. The committee set target performance at $4.28/share based upon our operating plan approved by the Board. Possible payouts for the performance-based RSUs ranged from zero if actual 2010 adjusted EPS was less than 85 percent of target performance to 150 percent if actual 2010 adjusted EPS was at least 115 percent of target. Based on actual adjusted EPS of $4.30, the named executives earned approximately 101.6% of the target number of RSUs granted. One-third of these earned RSUs will vest in each of 2012, 2013 and 2014, contingent on the executive’s continued employment through the applicable vesting date.

 

 

 

 

 

 

 

Stock options. While the committee changed the mix of equity-based grants beginning in 2009 to introduce performance-based RSUs, it has retained stock options as a component of the annual long-term incentive grant so that a portion of the award will have value only to the extent our stock price rises after the grant date.

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

Other stock and option awards. Awards of restricted stock, RSUs and stock options granted or approved in previous years were also outstanding during 2010. For example, in December 2009, the committee approved grants of RSUs and stock options to Mr. Paulsen as part of the compensation package negotiated when he joined the company as Group President, Global Businesses. These grants to Mr. Paulsen were intended to induce him to join Zimmer and to align his interests with those of our stockholders. The grants have a grant date of January 4, 2010 and are reported as 2010 compensation in the Summary Compensation Table. The RSUs vest over five years and the stock options vest over four years, contingent on Mr. Paulsen’s continued employment. Similarly, in November 2008, the committee approved grants of restricted stock and stock options to Mr. McCaulley as part of the compensation package negotiated when he joined the company as President, Zimmer Reconstructive. These grants to Mr. McCaulley were intended to induce him to join Zimmer, to compensate him for equity of his former employer that he forfeited when he joined Zimmer and to align his interests with those of our stockholders. The grants have a grant date of December 1, 2008. The number and market value of outstanding shares and units and the number and exercise price of outstanding stock options, along with the awards’ vesting schedules, appear in the Outstanding Equity Awards at 2010 Fiscal Year-End table and the notes accompanying that table.

 

Equity incentive grant practices. The committee has traditionally approved equity-based awards to named executives at approximately the same time each year. For 2010, the committee established a mid-March grant date for annual equity grants to all eligible employees. The committee established this date in early February. The mid-March grant date timing is driven by these considerations:

 

 

The committee approves target grant values for stock options and performance-based RSUs prior to the grant date. On the grant date, those values are converted to a number of options and RSUs based on:

 

 

The committee typically delegates authority to our CEO to grant a limited number of equity-based awards for purposes of attracting new employees, rewarding superior employee performance and recognizing exceptional effort and commitment as he deems appropriate from time to time. He is not authorized to grant awards to executive-level employees or new hires for executive-level positions. The aggregate number of shares underlying all such grants by Mr. Dvorak during 2010 was limited to 350,000. He subsequently reports any such grants he makes to the committee. Grants to new hires and other off-cycle grants are effective on the first trading day of the month following the later of Mr. Dvorak’s approval of the grant or the new hire’s start date.

 

Under the terms of our management stock incentive plan and corresponding award agreements, the vesting of stock options held for at least one year accelerates upon the employee’s retirement or reaching age 60. In the case of retired employees, the options remain exercisable for the original option term. For employees 60 or older, if the employee’s employment ends for a reason other than retirement as defined in the plan, the employee will have three months from the date of termination to exercise. We believe these practices enhance the effectiveness of stock options granted to more experienced employees. The committee does not consider these accelerated vesting practices when it determines the type or number of awards granted to a particular employee in any given year.

 

As explained below under the heading “Executive Compensation Recoupment Policy,” cash and equity incentives paid to our executive officers may be subject to recoupment. We also require all employees, including the named executives, to sign a non-competition agreement as a condition of receiving an equity award. If the employee breaches the non-competition agreement, the committee may require the employee to

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

forfeit his or her award, even if vested. To the extent an award has previously been exercised or becomes non-forfeitable, the committee may require the employee to return any shares of common stock he or she received upon the exercise or cash proceeds received upon sale.

 

Executive stock ownership guidelines and hedging prohibition. The named executives must meet stock ownership guidelines set by the Board. The committee oversees compliance with these guidelines and periodically reviews the guidelines. The guidelines require our CEO to own shares with a value equal to at least five times his base salary and the other named executives to own shares with a value equal to at least three times their base salaries. All shares owned by the executive count toward these guidelines, including shares owned indirectly, shares held in our employee stock purchase plan, as well as restricted shares, RSUs and performance-based RSUs (at the target award level). In addition, one-half of the unrealized gain on vested stock options is counted toward these guidelines. Executives subject to the guidelines may not sell shares acquired through option exercises or vesting of restricted stock or RSUs until the minimum ownership requirements have been satisfied. All named executives are currently in compliance with the guidelines or are pursuing plans that will enable them to achieve compliance within the five-year time frame prescribed in the guidelines. We have approved procedures by which every executive officer must obtain clearance prior to selling any shares of our common stock, in part to ensure no executive falls out of compliance with the stock ownership guidelines.

 

In addition, we have policies in place to prevent executive officers from hedging the economic risk of ownership of our common stock.

 

 

 

 

Market Review of 2010 Compensation

 

To assess whether our 2010 compensation was consistent with the target levels described above, the committee reviewed an analysis of 2010 compensation for each executive officer, including base salary, annual cash incentive, annual cash compensation (base salary plus annual cash incentive) and long-term incentive compensation. This information was then compared to competitive pay level compensation information collected from our peer group and from published compensation surveys. The market review revealed that the base salaries of our executive officers for 2010 were generally consistent with the published survey medians, while our CEO’s and CFO’s base salaries were below the peer group median. The market review also found that the target total cash compensation of our executive officers for 2010 was generally consistent with the 65^th percentile of the published survey data, while our CEO’s and CFO’s target total cash compensation was below the 65^th percentile of the peer group. Finally, the market review showed that the target long-term incentive grants to each of our named executives, based on grant date fair value, was above the 75^th percentile of the published survey data and at or above the 75^th percentile of the peer group.

 

In addition, a three-year assessment conducted during 2010 by the committee’s consultant, Towers Watson & Co. (“Towers Watson”), confirmed that the potentially realizable pay of our named executives for the period from 2007 through 2009 was strongly aligned with our financial performance during that period. This analysis demonstrates the committee’s history of designing and administering our executive compensation program in a manner that aligns pay and performance.

 

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Other Compensation

 

Retirement and other post-employment benefits. Named executives based in the U.S. may be eligible to participate in our 401(k) savings and investment plan, or SIP, the benefit equalization plan, or BEP/SIP, that supplements the SIP, our defined benefit pension plan, or RIP, and the benefit equalization plan, or BEP/RIP, that supplements the RIP. These plans are available to all eligible employees. We originally established these plans in 2001 to maintain levels of benefits consistent with those of our former parent. We have continued to offer these plans in an effort to remain competitive with market practices, retain talented employees, assist employees in preparing for retirement, provide income to employees following retirement and, in the case of the benefit equalization plans, provide benefits to eligible employees that are comparable, as a percentage of compensation, to benefits provided to employees whose compensation is not subject to limits under U.S. law. We believe that the total retirement benefits we provide are comparable to the retirement benefits provided by other companies within the medical device and biotech industries. The RIP and the BEP/RIP are only available to employees hired before September 2, 2002. This was taken into account when we determined to provide enhanced benefits to affected employees under our SIP. Additionally, the cost of providing retirement benefits generally affects decisions regarding the types and amounts of other compensation and benefits that we may offer our employee population as a whole, but the provision of, or a named executive’s accumulated benefit under, our retirement plans generally does not affect decisions regarding the types or amounts of other compensation paid to that named executive in a given year. These plans are discussed in greater detail in the narrative following the Pension Benefits in 2010 table.

 

Employment and change in control severance agreements. We do not have employment agreements with any of our named executives. However, we have entered into change in control severance agreements with each of them. These agreements are intended to maintain continuity of management, particularly in the context of a transaction in which we undergo a change in control. These agreements are “double triggered,” which means that an executive is only entitled to severance payments if (1) we experience a change in control as defined in the agreement and (2) the executive’s employment with us is terminated. The committee believes that it is appropriate to provide the named executives with the specified severance in the event that their employment is terminated in connection with a change in control or their position is modified in such a way as to diminish their compensation, authority or responsibilities. See “Change in Control Arrangements” in the narrative discussion following the Potential Payments upon Termination of Employment table for a more detailed description of the material terms of these agreements.

 

In 2009, the committee decided that any change in control severance agreement that we enter into with newly hired or promoted executive officers after July 2009 will not contain any tax gross-up provisions. Accordingly, our agreement with Mr. Paulsen contains no tax gross-up provisions.

 

Severance benefits (unrelated to a change in control). We maintain a severance plan generally applicable to all U.S.-based full-time employees, including executives. The plan provides compensation to employees in the event of an involuntary termination without cause, based primarily on the employee’s years of service with us. Employees must sign a general release of claims as a condition to receipt of severance benefits and continue to be bound by the terms of their non-competition agreements with us. A former employee who breaches his or her non-competition agreement with us must repay all severance benefits received under the plan. In addition, if facts are later discovered that would have warranted an employee’s termination for cause (rather than without cause), the employee must repay to us all severance benefits received under the plan. The severance plan does not discriminate in favor of executives.

 

Disability compensation. Named executives based in the U.S. may participate in the Restated Zimmer, Inc. Long-Term Disability Income Plan for Highly Compensated Employees. This plan is funded from our general assets and individual disability insurance policies we pay for. The plan provides disability benefits, as a percentage of total compensation, that are comparable to benefits provided to employees whose compensation is not limited for purposes of determining benefits payable under our base long-term disability insurance plan.

 

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Perquisites. We provide executive officers with a limited range of perquisites or other benefits not generally available to all salaried employees. These include the BEP/SIP, the BEP/RIP and the long-term disability income plan discussed above. We do not provide executives with company cars or car allowances unless they are living overseas and such practices are consistent with local market practice. Non-business use of our aircraft is limited and infrequent. No named executive used our aircraft for non-business purposes during 2010.

 

In 2010, at the committee’s request, Towers Watson reviewed our existing perquisite program in light of current market practices and emerging trends. This review revealed that, compared to our compensation peer group and general market practice, our perquisites were minimal and consistent with current market trends of decreased perquisite offerings. The committee believes that our executive compensation program’s emphasis on performance-based compensation, rather than on entitlements such as perquisites, is consistent with our compensation philosophy.

 

We provide all management-level employees who relocate their principal residence at our request with benefits provided under our relocation assistance program, including, for example, reimbursement of temporary housing and moving expenses. We provided relocation assistance to Mr. Paulsen in connection with his relocation from Michigan to Indiana when we hired him as Group President, Global Businesses in December 2009. Significant declines in home values had occurred since the time Mr. Paulsen purchased his Michigan residence. Under these circumstances and, to facilitate his hiring and prompt relocation to Indiana, the committee approved a special loss-on-sale benefit not to exceed $150,000 to compensate Mr. Paulsen for a portion of the loss he incurred on the sale of his Michigan residence. This amount was approved by the committee after consultation with Towers Watson and as part of the negotiation of Mr. Paulsen’s compensation package. This amount is reflected in the “All Other Compensation” column of the Summary Compensation Table for 2010. Mr. Paulsen did not receive tax gross-up assistance related to this payment and is responsible for all applicable taxes. Mr. Paulsen must repay this loss-on-sale benefit to us in the event he voluntarily resigns or is terminated for cause within two years of receipt of the benefit.

 

In addition, the committee approved the payment of a special “bonus loss reimbursement” benefit in an amount not to exceed $250,000 to Mr. Paulsen to facilitate his hiring and to mitigate the financial loss associated with his forfeiting the bonus he otherwise would have received from his former employer for the period January 1, 2009 through his date of termination to join Zimmer. The committee approved this benefit after consultation with Towers Watson and as part of the negotiation of Mr. Paulsen’s compensation package. The amount paid, $244,000, was subject to our receipt of documentation from Mr. Paulsen’s former employer substantiating the amount of the bonus he forfeited and is reflected in the “All Other Compensation” column of the Summary Compensation Table for 2010. We did not provide Mr. Paulsen with tax gross-up assistance related to this payment and he is responsible for all applicable taxes. Mr. Paulsen must repay this bonus loss reimbursement benefit to us in the event he voluntarily resigns or is terminated for cause within one year of receipt of the benefit.

 

The Committee’s Processes and Analyses

 

Role of Committee and Input from Management

 

The committee is responsible for determining our executive compensation strategies, structure, policies and programs and must specifically approve compensation actions relating to our named executives. When setting compensation for our executives, the committee receives input from management and from Towers Watson.

 

The committee gives significant consideration to the recommendations of management when setting compensation for our named executives other than our CEO. Management’s recommendations include specific amounts for base salaries, target cash incentive opportunities and equity-based awards. These recommendations are developed initially by our human resources personnel. We consider such factors as compensation history, tenure, internal equity, responsibilities and retention concerns to maintain consistency among our executives. These recommendations are then reviewed, and may be changed, by Mr. Dvorak, who also considers his own assessment of the performance of each executive officer other than himself.

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

Mr. Dvorak, our Senior Vice President, Global Human Resources and our Vice President, Global Compensation, Benefits and HRIS participate in committee meetings, at the request of the committee, to provide background information and explanations supporting compensation recommendations.

 

The committee itself is responsible for reviewing Mr. Dvorak’s performance, without his participation, and determining his compensation. The committee considers the company’s performance on an operational and financial basis and the committee’s assessment of Mr. Dvorak’s contributions during the year and overall performance. The committee receives input and recommendations with respect to Mr. Dvorak’s compensation from Towers Watson.

 

The committee also reviews and approves actions related to other aspects of compensation that affect employees below the senior executive level, including annual incentive plan performance goals, equity award design, equity value ranges and share pools.

 

Use of Peer Group Data

 

The committee utilizes compensation data for a peer group of eleven U.S. headquartered publicly traded companies, including companies with whom we compete for business and for executive talent and other large medical device manufacturers, to assess executive compensation levels, equity usage and incentive plan design and for performance comparisons. The peer group data is used as one of several inputs the committee considers when making compensation determinations. The following companies make up the peer group:

 

The committee reviewed the continuing relevancy of the companies in the peer group in May 2010, taking into consideration business focus, market capitalization, revenues and the public availability of compensation and financial performance information, and made no changes in the peer group’s composition. The market capitalizations and revenues of all peer companies fell within a range between approximately one-half to two and one-half times our market capitalization and revenues, with the exception of Medtronic. The committee continued to include Medtronic, despite its size, because it competes directly with us for talent at all management levels.

 

Internal Equity Considerations

 

The committee believes that the position of CEO has the greatest opportunity to impact our performance and to ensure that our most senior executives exhibit the behavior necessary to meet our business and strategic objectives. Accordingly, the committee has historically set CEO compensation higher than the compensation of the next most highly compensated executive officer.

 

As part of the market review of 2010 compensation described above, the committee reviewed a comparison of our CEO pay multiple (relative to the next most highly compensated executive officer) to the CEO pay multiple of each of the companies in our peer group. This comparison revealed that our CEO pay multiple using target total cash compensation (base salary plus target cash incentive opportunity) and target total direct compensation (target total cash compensation plus target long-term incentive grant value) was consistent with the 50^th percentile of the peer group. The committee also reviewed a comparison of our CEO pay multiple (relative to the average compensation of the other four named executives) to the CEO pay multiple of our peer companies. This comparison revealed that our CEO pay multiple using target total cash compensation was below the 25^th percentile of the peer group, while our CEO pay multiple using target total direct compensation was consistent with the 50^th percentile of the peer group.

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

 

Use of Tally Sheets

 

The committee annually reviews tally sheets for each of our named executives. These tally sheets detail the value of each element of the executive’s compensation for the current and four previous years. The tally sheets serve as a concise historical summary of total compensation and benefits. They also reflect the current realizable value of vested equity awards as well as the value of unvested equity awards. The tally sheets assist the committee in understanding the levels of executive compensation that have been, and are being, received by our named executives. They also assist the committee in analyzing the potential wealth creation of long-term incentive awards and the retentive value of unvested equity awards.

 

Role of Compensation Consultant

 

The committee has instructed Towers Watson to provide advice and guidance to the committee on compensation proposals, including changes to compensation levels, the design of incentive plans, the setting of performance goals, and the design of other forms of compensation and benefits programs, as well as relevant information about market practices and trends. Typically, Towers Watson attends committee meetings, reviews existing compensation programs to ensure consistency with our compensation philosophy and current market practices and produces the comparative information derived from peer group and published survey data that the committee reviews when setting compensation. With respect to 2010, Towers Watson’s major activities included:

 

 

For many years, we have used the services of health and welfare benefit plan consultants with the firm of Towers Perrin. As a result of the merger of the Watson Wyatt and Towers Perrin consulting firms effective as of January 1, 2010, our longstanding health and welfare consultants are now associated with the same firm as the committee’s compensation consultant.

 

For 2010, the committee applied the factors outlined in Section 952 of the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) to help it determine the extent to which Towers Watson’s work has raised conflicts of interest, the nature of the conflicts and how the conflicts are being addressed. The committee considered the following:

 

The provision of other services to Zimmer by the advisor’s firm: The following table shows the fees that we paid or accrued for consulting services related to executive or director compensation and all other services

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT

provided by Towers Watson in 2010. All of the services described in the following fee table were approved by the committee:

 

 

The amount of fees received by the advisor’s firm from Zimmer as a percentage of the total revenue of the firm: The total fees we paid to Towers Watson ($1.102 million) represent less than one-tenth of one percent of Towers Watson’s revenue for its 2010 fiscal year end ($3.2 billion).

 

The policies and procedures of the advisor’s firm that are designed to prevent conflicts of interest:

 

 

No personal relationship of the advisor with a member of the committee: Neither the lead compensation consultant nor any members of his team has any such relationship with any member of the committee.

 

No Zimmer stock owned by the advisor (not the advisor’s firm): The lead compensation consultant does not directly own any Zimmer stock.

 

The committee has adopted a policy under which the committee must approve in advance all consulting services provided to us by Towers Watson and its affiliates. Pursuant to the policy, the Towers Watson fee budget for all services to be provided during the following fiscal year is presented to the committee for review and approval at its December meeting. Having this authority permits the committee to make real time assessments of the magnitude of fees being charged by Towers Watson for other work and, to the extent those fees could give rise to a potential conflict of interest, to disapprove that work. The following additional protocols govern all of Towers Watson’s engagements with us:

 

 

The committee believes that the policies and procedures described above effectively mitigate any conflicts of interest that may be perceived to exist by virtue of Towers Watson’s provision of services to us and to the committee.

 

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Executive Compensation Recoupment Policy

 

In February 2011, the Board adopted an executive compensation recoupment policy. This policy applies to the following:

 

 

In the event we are required to prepare an accounting restatement due to our material noncompliance with any financial reporting requirement under federal securities laws, the Board will review the facts and circumstances that led to the requirement for the restatement and take any actions it deems appropriate with respect to incentive-based compensation. The Board will consider whether an executive officer received compensation based on performance reported, but not actually achieved, or was accountable for the events that led to the restatement, including any misconduct. Actions the Board may take include: seeking recovery of incentive-based compensation received by an executive officer during the three-year period preceding the date we are required to prepare an accounting restatement in excess of what would have been paid to the executive officer under the accounting restatement; imposing disciplinary actions; and pursuing any other remedies. In addition, the committee is monitoring regulatory developments with respect to compensation recoupment policies mandated by recent legislation and will recommend to the Board any changes to the current policy that are necessary or appropriate in light of guidance to be issued by the SEC.

 

Tax Deductibility of Executive Compensation

 

Section 162(m) of the Internal Revenue Code (the “Code”) limits the deductibility of compensation paid to the most highly-compensated executive officers of U.S. public companies to $1,000,000 per year unless the compensation qualifies as performance-based. The committee’s policy is to take into account Section 162(m) in establishing compensation of our named executives. However, the deductibility of some types of compensation payments can depend upon the timing of the vesting or an executive’s exercise of previously granted awards. Interpretations of and changes in applicable tax laws and regulations as well as other factors beyond our control also can affect deductibility of compensation. For these and other reasons, the committee has determined that it will not necessarily seek to limit executive compensation to that sum which is deductible under Section 162(m) of the Code. In 2010, the impact of the Section 162(m) limitation on our after-tax compensation expense was not material.

 

The EPIP and our equity-based incentive plans contain performance-based conditions and have been approved by stockholders so that payments under those plans can qualify as performance-based compensation. We will continue to monitor developments and assess alternatives for preserving the deductibility of compensation payments and benefits to the extent reasonably practicable, consistent with our compensation policies and what we believe is in the best interests of our stockholders.

 

The Compensation and Management Development Committee of the Board of Directors consists of the six directors named below, each of whom meets the independence standards of the Board’s Corporate Governance Guidelines, the New York Stock Exchange listing standards and applicable securities laws.

 

We reviewed and discussed with management the Compensation Discussion and Analysis that precedes this report. Based on our review and discussions with management, we recommended to the Board of Directors that the Compensation Discussion and Analysis be included in Zimmer’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and this proxy statement.

 

 

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Compensation and Management Development Committee

 

Arthur J. Higgins, Chairman

Betsy J. Bernard

Marc N. Casper

Larry C. Glasscock

John L. McGoldrick

Cecil B. Pickett, Ph.D.

 

At the request of the Compensation and Management Development Committee, Towers Watson completed a broad assessment of the compensation plans and programs in place during 2010 in which our senior executives participate. The components of our senior executive compensation program are part of our global compensation structure, and the majority of the compensation policies or practices that apply to other levels of our employees or to any of our subsidiaries or divisions are included in our senior executive compensation program.

 

Towers Watson reviewed plan design, including performance and payout curves or formulas, payout caps and vesting requirements; performance metrics, including quality and sustainability of results and the use of top line and bottom line metrics; and governance considerations, including how target level performance is determined. Towers Watson also reviewed pay philosophy and structure considerations, including whether the program delivers an appropriate mix of fixed and variable compensation to encourage appropriate risk-taking, whether the program appropriately balances achievement of annual objectives with long-term value creation through a mix of short- and long-term pay elements, the extent to which executives’ interests are aligned with future sustained performance through a mix of cash and equity, and the existence of stock ownership guidelines to subject executives’ wealth to the consequences of appropriate and excessive risk-taking.

 

The purpose of the assessment was to determine whether the risks related to the design and operation of these plans and programs, if present, are reasonably likely to have a material adverse effect on us. Towers Watson found no design features in our executive compensation practices that pose a significant concern from the perspective of motivating senior officers to knowingly expose us to excessive enterprise risk. We believe that our compensation policies and practices do not encourage excessive risk-taking and are not reasonably likely to have a material adverse effect on us. The various mitigating factors which support this conclusion include:

 

 

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2011 PROXY STATEMENT