ZIMMER HOLDINGS, INC.
345 East Main Street
Warsaw, Indiana 46580

 

March 20, 2009

 

Dear Stockholder:

We look forward to your attendance either in person or by proxy at the 2009 Annual Meeting of Stockholders of Zimmer Holdings, Inc. We will hold the meeting at 9:00 a.m. Eastern Time on Monday, May 4, 2009 at the Conrad Indianapolis, 50 West Washington Street, Indianapolis, Indiana.

The notice of annual meeting of stockholders and the proxy statement describe the business to be conducted at the meeting and provide other information that you should know when you vote your shares. Following the required business meeting we will report on the company’s operations.

We are pleased to continue to take advantage of the U.S. Securities and Exchange Commission rule that allows companies to furnish proxy materials to their stockholders primarily over the Internet. We believe this process allows us to provide our stockholders with the information they need in a timelier manner, while reducing the environmental impact and lowering the costs of printing and distributing our proxy materials. On or about March 20, 2009, we mailed most of our stockholders a Notice of Internet availability of proxy materials instead of paper copies of this proxy statement and our 2008 Annual Report. The Notice contains instructions on how to access those documents over the Internet. The Notice also contains instructions on how to request a paper copy of our proxy materials, including this proxy statement, our 2008 Annual Report and a form of proxy card or voting instruction card. All stockholders who have previously requested a paper copy of our proxy materials will continue to receive a paper copy of the proxy materials by mail.

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

 

 

 

 

 

By Order of the Board of Directors

 

 

Chad F. Phipps
Senior Vice President, General Counsel and Secretary

 

March 20, 2009

TABLE OF CONTENTS

 

 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

 

ZIMMER HOLDINGS, INC.

PROXY STATEMENT

 

 

This proxy statement and accompanying proxy are being provided to stockholders on or about March 20, 2009 in connection with the solicitation by the Board of Directors of Zimmer Holdings, Inc. (“Zimmer,” “we,” “us,” “our” or the “company”) of proxies to be voted at the 2009 annual meeting on May 4, 2009.

 

Why did I receive a notice in the mail regarding the Internet availability of proxy materials instead of a full set of proxy materials?

 

U.S. Securities and Exchange Commission rules allow us to furnish proxy materials to our stockholders primarily over the Internet. On or about March 20, 2009, we mailed a Notice of Internet availability of proxy materials to most stockholders, and we mailed a printed copy of the proxy materials to those stockholders who had so requested. If you received a Notice of Internet availability by mail, you will not receive a printed copy of the proxy materials unless you request a copy in the manner described in the Notice. The Notice also instructs you as to how you may access and review this proxy statement and our 2008 Annual Report, and how you may submit your proxy to vote at the annual meeting.

This proxy statement, the form of proxy and voting instructions are being made available to our stockholders on March 20, 2009 at www.proxyvote.com. Our 2008 Annual Report, including financial statements for the year ended December 31, 2008, is being made available at the same time and by the same method. The 2008 Annual Report is not to be considered as part of the proxy solicitation materials or as having been incorporated by reference.

 

Who is entitled to vote at the annual meeting?

 

Holders of record of our $0.01 par value common stock at the close of business on March 5, 2009 are entitled to vote at the meeting. As of that date, there were 222,296,296 shares of common stock outstanding and entitled to vote. We are soliciting proxies on behalf of the Board of Directors to give all stockholders who are entitled to vote on the matters that come before the meeting the opportunity to do so whether or not they attend the meeting in person.

 

What will stockholders vote on at the meeting?

 

 

 

Will there be any other items of business on the agenda?

 

We do not expect any other items of business because the deadline for stockholder proposals and nominations has already passed. Nonetheless, in case there is an unforeseen need, the accompanying proxy gives discretionary authority to the persons

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

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.

 

What are the recommendations of the Board of Directors on how I should vote my shares?

 

The Board of Directors recommends that you vote your shares as follows:

 

 

What are my voting rights?

 

Holders of our common stock are entitled to one vote per share.

 

How can I vote my shares without attending the meeting?

 

Whether you hold shares directly as a registered stockholder of record or beneficially in street name, you may vote without attending the meeting. You may vote by granting a proxy or, for shares held beneficially in street name, by submitting voting instructions to your stockbroker, trustee or nominee. In most cases, you will be able to do this by using the Internet or telephone or by mail if you received a printed set of the proxy materials.

By Internet – If you have Internet access, you may submit your proxy via the Internet by following the instructions provided in the Notice, or if you received a printed version of the proxy materials by mail, by following the instructions provided with your proxy materials and on your proxy card or voting instruction card.

By Telephone or Mail – If you received printed proxy materials, you may submit your proxy by telephone by following the instructions provided on your proxy card or voting instruction card. If you received a Notice, you may submit your proxy by telephone after accessing the proxy materials via the Internet. You may also submit your proxy by mail by signing your proxy card if your shares are registered or, for shares held beneficially in street name, by following the voting instructions included by your stockbroker, trustee or nominee, and mailing it in the envelope provided. If you provide specific voting instructions, your shares will be voted as you have instructed.

 

How do I vote my shares in person at the meeting?

 

Either an admission ticket or proof of ownership of our common stock, as well as a form of personal identification, must be presented in order to be admitted to the meeting. If you are a stockholder of record and received a Notice, your Notice is your admission ticket. If you are a stockholder of record and received a printed copy of the proxy materials, you must bring the admission ticket portion of your proxy card to be admitted to the meeting. If you are a beneficial holder and wish to vote in person at the meeting, you must obtain from your stockbroker, trustee or other nominee holder a legal proxy issued in your name and present it to the inspectors of election with your ballot to be able to vote at the meeting. We encourage you to vote via the Internet, by telephone or by mail even if you plan to attend the meeting.

 

How do I vote my shares in the 401(k) plan?

 

If you hold company stock in the savings and investment (401(k)) plan, you may instruct the plan trustee on how to vote your shares by mail, by telephone or via the Internet as described above. Your plan trustee will vote the shares credited to your plan account in accordance with your voting instructions. The trustee votes the shares on your behalf because you are the beneficial holder, not the record holder, of the shares credited to your account. The trustee will vote the plan shares for which it does not receive voting instructions in the same proportion as the shares for which it received voting instructions.

 

What can I do if I change my mind after I vote my shares?

 

If you are a stockholder of record, you may revoke your proxy at any time before it is voted at the meeting by: (1) giving timely written notice of the revocation to our Corporate Secretary, or (2) submitting a later-dated vote in person at the meeting, via the Internet, by telephone or by mail. If you are a beneficial holder, you may submit new voting instructions by contacting your stockbroker, trustee or other nominee holder. You may also vote in person at the annual meeting if you obtain a legal proxy as described above.

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

 

What vote is required to approve each proposal?

 

Directors receiving the majority of votes cast (where the number of shares voted “for” a director exceeds the number of shares voted “against” the director) will be elected, provided that if the number of nominees exceeds the number of directors to be elected (a situation we do not anticipate), the directors will be elected by a plurality of the votes cast. Ratification of the selection of PwC as our independent registered public accounting firm, approval of the 2009 Stock Incentive Plan, approval of an extension of the Stock Plan for Non-Employee Directors and approval of an extension of the Restated Deferred Compensation Plan for Non-Employee Directors each requires the affirmative vote of the majority of the shares of common stock present or represented by proxy.

 

What effect do abstentions and broker non-votes have?

 

Shares not present at the meeting and shares voting “abstain” have no effect on the election of directors. For all other proposals, abstentions are treated as shares present or represented and voting, so abstaining has the same effect as a vote “against” the proposal. Broker non-votes on a proposal are not counted or deemed to be present or represented for the purpose of determining whether stockholders have approved that proposal.

 

May I give my proxy to someone other than the individuals listed on the proxy card?

 

If you are a registered stockholder and wish to give your proxy to someone other than the individuals named on the proxy card, you may do so by crossing out the names appearing on the proxy card and inserting the name of another person. The person you have designated on the proxy card must present the signed card at the meeting.

 

Who tabulates the votes?

 

Representatives of Broadridge Financial Solutions, Inc. will tabulate the votes and act as independent inspectors of election.

 

Who pays the cost of this proxy solicitation?

 

We will pay the costs of this solicitation. Our employees may solicit proxies on behalf of the Board of Directors by mail, telephone, facsimile, electronic transmission and personal solicitation. In addition, we have retained The Altman Group, Inc. to assist in soliciting proxies for a fee of $7,000, plus out-of-pocket expenses. We will, upon request, reimburse brokerage firms and others for their reasonable expenses incurred for forwarding solicitation material to beneficial holders of stock. Questions concerning proxy voting or process should be directed to The Altman Group, Inc. via telephone at 1 (800) 499-8419 (this call is toll-free in the United States).

 

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.

The following table sets forth certain information concerning each person (including any group) known to us to beneficially own more than five percent (5%) of our common stock as of March 5, 2009. Unless otherwise noted, shares are owned directly or indirectly with sole voting and investment power.

 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

 

The following table sets forth, as of January 5, 2009, beneficial ownership of shares of our common stock by each current director, each of the executives named in the Summary Compensation Table and all current directors and executive officers as a group. Unless otherwise noted, such shares are owned directly or indirectly with sole voting and dispositive power.

 

 *  Less than 1.0%

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.

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 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 Code of Ethics for Chief Executive Officer and Senior Financial Officers, 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, and will be provided in print without charge upon written request to our Corporate Secretary at the address shown on the cover page of this proxy statement. We will post on our website any substantive amendment to, or waiver from, the Code of Ethics for Chief Executive Officer and Senior Financial Officers or a provision of the Code of Business Conduct that applies to any of our directors or executive officers. The Board

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

regularly reviews corporate governance developments and modifies its Corporate Governance Guidelines, committee charters and key practices as warranted.

As permitted by the rules of the New York Stock Exchange, the Board has adopted categorical standards to assist it in making determinations of director independence. These standards incorporate, and are consistent with, the definition of “independent” contained in the New York Stock Exchange listing standards. These standards are set forth in Appendix A to this proxy statement and are also included in the Board’s Corporate Governance Guidelines, which are available on our website as described above. 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, Cecil B. Pickett, Ph.D. and Augustus A. White, III, M.D., 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 Executive Vice President and Chief Operating Officer of Thermo Fisher Scientific Inc., or Thermo Fisher, a leading provider of analytical instruments, equipment, software and services for research, manufacturing, analysis and diagnostics from which we purchase certain products. During 2008, 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 these transactions, 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.

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 offer to 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 2009, all nominees for election as directors are currently serving on the Board.

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 director candidate at the annual meeting of stockholders, 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 “2010 Proxy Proposals” 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 also gives consideration to diversity, age, international background and experience and specialized expertise in the context of the needs of the Board as a whole. During the past year, we paid a fee to a third-party search firm to assist the committee in identifying and evaluating potential director candidates. One candidate identified by the firm, Betsy J. Bernard, joined the Board of Directors effective January 8, 2009. Another candidate identified by the firm, Marc N. Casper, joined the Board of Directors effective February 23, 2009.

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

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, at the address shown on the cover page of this proxy statement. The Board has instructed our Corporate Secretary to promptly forward all such communications to the specified addressees thereof.

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 2008.

Under our Code of Business Conduct, which is available on our website at www.zimmer.com, our Compliance Officer or an attorney in our Legal Department is charged with reviewing any conflict of interest involving any other employee.

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 Board meetings to report on and discuss their areas of responsibility. Directors are also expected to attend the annual meeting of stockholders. All of the directors then in office attended the 2008 annual meeting. In 2008, the Board of Directors held 10 meetings and committees of the Board held a total of 27 meetings. Each director then in office attended more than 75% of the total meetings of the Board of Directors and each of the committees on which he served during 2008.

Non-management directors meet in executive sessions without management present upon the adjournment of every regularly scheduled meeting of the Board and at other times they determine. Mr. McGoldrick, in his capacity as non-executive Chairman, presides at these meetings of 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.

Our Restated By-Laws provide that the Board may delegate responsibility to committees. During 2008, the Board had four standing committees: an Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, 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 Securities and Exchange Commission rules and New York Stock Exchange 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.

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

The table below shows the current membership of each Board committee and the number of meetings held during 2008.

 

 

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

 

 

The Board of Directors has determined that Larry C. Glasscock, Robert A. Hagemann, Arthur J. Higgins and John L. McGoldrick qualify as “audit committee financial experts” as defined by the rules of the Securities and Exchange Commission. See pages 10-12 for a description of their respective business experience. Stockholders should understand that this designation is a Securities and Exchange Commission 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 Securities and Exchange Commission 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 8-9.

 

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 2008 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 page 13.

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

 

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

 

 

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

 

 

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 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 13 meetings during 2008. 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

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

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, 2008 be included in the Annual Report on Form 10-K for filing with the Securities and Exchange Commission.

The committee has 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

Larry C. Glasscock, Chairman
Robert A. Hagemann
Arthur J. Higgins
John L. McGoldrick
Augustus A. White, III, M.D., Ph.D.

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

The Board of Directors was previously divided into classes whose terms expired at successive annual meetings. During 2007, our Restated Certificate of Incorporation was amended to provide that, beginning with the 2008 annual meeting, directors whose terms were expiring would be elected for one-year terms. As a result, seven directors will be elected at the meeting to serve a term expiring in 2010. The nominees for director named below are currently our directors. Ms. Bernard was appointed a director by our full Board of Directors effective January 8, 2009. Mr. Casper was appointed a director by our full Board of Directors effective February 23, 2009. After the election of seven directors at the meeting, we will have nine directors, including the two directors whose present terms extend beyond the meeting. Listed first below are the nominees for election, followed by the directors whose terms expire in 2010, with information including their principal occupations and other business affiliations, the year each was first elected as a director, the Board committee memberships of each and each director’s age.

 

Nominees for Director: 2009 – 2010 Term

 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

Nominees for Director: 2009 – 2010 Term (continued)

 

 

 

Continuing Directors Whose Present Terms Expire in 2010

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

Continuing Directors Whose Present Terms Expire in 2010 (continued)

 

 

Seven directors are to be elected at the meeting for one-year terms ending at the 2010 annual meeting. At the recommendation of the Corporate Governance Committee, the Board has nominated Betsy J. Bernard, Marc N. Casper, David C. Dvorak, Robert A. Hagemann, Arthur J. Higgins, Cecil B. Pickett, Ph.D. and Augustus A. White, III, M.D., Ph.D. for election at this annual meeting. Unless otherwise instructed, the persons named as proxies will vote all proxies received for the election of each of the nominees.

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.

As previously reported, on August 15, 2008, a shareholder derivative action, Hays v. Dvorak et al., was filed in the U.S. District Court for the Southern District of Indiana. The plaintiff seeks to maintain the action purportedly on our behalf against certain of our current and former directors and executive officers. The plaintiff alleges, among other things, breaches of fiduciary duties, abuse of control, unjust enrichment and gross mismanagement based on allegations that defendants engaged in violations of federal securities laws by allegedly failing to disclose developments relating to our Orthopaedic Surgical Products manufacturing operations in Dover, Ohio and problems relating to one of our Hip products, the Durom^® Acetabular Component. The plaintiff does not seek damages from us, but instead requests damages of an unspecified amount on our behalf. The plaintiff also seeks equitable relief to remedy the individual defendants’ alleged misconduct, attorneys’ fees, costs and other relief.

Our Restated Certificate of Incorporation and indemnification agreements we have entered into with our directors obligate us to indemnify our directors to the fullest extent permitted by Delaware law, provided that their conduct complied with certain requirements. We are obligated to advance defense costs to our directors, subject to the individual’s obligation to repay such amount if it is ultimately determined that he or she was not entitled to indemnification. In addition, our indemnity obligation can, under certain circumstances, include indemnifiable judgments, penalties, fines and amounts paid in settlement in connection with those actions.

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

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

 

The Compensation and Management Development Committee of the Board of Directors consists of the four 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 follows 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, 2008 and this proxy statement.

 

Compensation and Management Development Committee

 

Arthur J. Higgins, Chairman
Larry C. Glasscock
John L. McGoldrick
Cecil B. Pickett, Ph.D.

 

Overview

 

This Compensation Discussion and Analysis supplements the more detailed information in the tables and narrative discussion that follow this section. Our goal is to provide stockholders with a better understanding of our executive compensation practices and the decisions made concerning the compensation payable to our executive officers, including the persons named in the Summary Compensation Table, or the named executive officers, that appears on page 20.

The Board of Directors has delegated to the Compensation and Management Development Committee, which we refer to as the committee in this section of the proxy statement, key aspects of the Board’s oversight responsibilities with respect to the design and administration of our executive compensation program. The committee also approves compensation paid to our executive officers, including the named executive officers. The report of the committee appears above.

While a number of our executive compensation practices and related plans have been in effect for several years, our practices and plans will continue to evolve as circumstances warrant. Our executive compensation practices are affected by the global nature of our business, which requires us to attract and retain executive talent not only in the U.S. but throughout the world. In addition, a number of the leading orthopaedic manufacturers in the world have significant operations in and around Warsaw, Indiana, where our principal executive offices are located. This means that there are opportunities for experienced orthopaedic executives on a continuous basis in this community. On the other hand, the fact that Warsaw, Indiana is a small community in a predominantly rural area presents challenges to attracting executive talent from other industries and parts of the country.

During 2008, our management team, which has undergone significant changes in the past two years, faced a number of challenges. The 2007 settlement with the U.S. government required us to commit significant time and resources to meet our obligations under the Deferred Prosecution and Corporate Integrity Agreements and to implement an enhanced Corporate Compliance Program applicable in most respects to all of our businesses on a global basis. We experienced two major product suspensions. We also constructed a new manufacturing facility in Ireland and we completed a major acquisition of products and personnel for our Spine division.

The significant decline in the U.S. stock market that began in 2008 also impacted the trading price of our stock with adverse consequences for both our stockholders and employees whose compensation includes significant stock-based components. Our overall financial performance in 2008 resulted in below-target payouts under our annual cash incentive program and contributed to below-threshold performance and no payouts under our multi-year performance programs.

 

Compensation Philosophy

 

We design our executive compensation program to attract, retain and motivate highly qualified executives and to align their interests with the interests of our stockholders. The ultimate goal of our program is to increase stockholder value by providing executives with appropriate incentives to achieve our business objectives. We seek to achieve this goal through a program that rewards executives for superior performance, as measured by both financial and non-financial factors. In the case of our executive officers, we intentionally make a greater proportion of their total compensation subject to the achievement of objective performance measures which we believe reflect increases in stockholder value. We also encourage executives to act as equity

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

owners by requiring them to meet the stock ownership requirements discussed below under “Stock Ownership Guidelines for Executive Officers.”

Management provides the committee with recommendations on the compensation of the executive officers other than the Chief Executive Officer, or CEO. These recommendations include specific amounts for base salaries, target cash incentive opportunities and equity-based awards for the executive officers. These recommendations are developed initially by our human resources department with the assistance of management’s compensation consultant, Steven Hall and Partners. 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 our CEO who also considers his own assessment of the performance of each executive officer other than himself. The committee gives significant consideration to the recommendations of management, but also considers information and advice provided by its compensation consultant, Watson Wyatt Worldwide, or Watson Wyatt. The activities of Steven Hall and Partners and Watson Wyatt are described in more detail below under “Compensation Consultants.” The committee itself is responsible for reviewing the performance of the CEO, without the CEO’s participation, and determines his compensation. The committee considers our performance on an operational and financial basis and the committee’s assessment of the CEO’s contributions during the year and overall performance.

The compensation philosophy the committee employs is to set each major compensation element at levels which approximate a specific percentile of market, based on data obtained from published salary survey sources, as follows:

 

We have used above-median targets for annual cash incentives and equity-based incentives since we became an independent public company in 2001. As explained above, this approach makes a greater proportion of total compensation tied to the achievement of objective performance measures. The target percentiles shown above are derived from the survey data and not the peer group discussed below.

Our objective is to provide a total pay opportunity that is competitive with our closest competitors, but which also places a greater emphasis on equity-based compensation. When the actual pay of our executive officers is in alignment with our performance, this approach effectively aligns the interests of the executives with those of our stockholders.

The committee assessed whether our 2008 compensation was consistent with the compensation philosophy explained above by asking Watson Wyatt to conduct a market review. The committee reviewed an analysis of 2008 compensation for each executive officer, including base salary, annual cash bonus, annual cash compensation (base salary plus annual cash bonus), long-term incentives and total direct compensation (annual cash compensation plus long-term incentives). This information was then compared to competitive pay level compensation collected from our peer group and from published compensation surveys. On an overall basis, the base salaries of our executive officers for 2008 were generally below the median of the peer group and at or above the median of the published survey data. Target bonus opportunities for 2008 were generally at or below the 25th percentile of the peer group and at the median of the published survey data. Long-term incentive grants were at the median of the peer group and above the 75th percentile of the survey data. This resulted in 2008 target total direct compensation between the 25th and 50th percentiles of the peer group and above the 75th percentile of the published survey data.

 

Benchmarking

 

It has been our practice for many years to compare our compensation practices with the practices of a group of other U.S. public companies, comprised of direct competitors and other bio-medical manufacturers of comparable size based on revenue and market capitalization. With Watson Wyatt’s assistance, the committee monitors the continuing relevancy of the companies in the peer group and makes changes as companies alter their focus, merge or are acquired, or as new competitors emerge.

The peer group for 2008 consisted of C.R. Bard, Inc.; Baxter International Inc.; Becton, Dickinson and Company; Biogen Idec Inc.; Boston Scientific Corporation; Covidien Ltd.; Genzyme Corporation; Medtronic, Inc.; St. Jude Medical, Inc.; Stryker Corporation; and Thermo Fisher Scientific Inc.

The committee uses information derived from the peer group to assess our compensation practices. It also considers more general market data obtained from published salary survey sources. The comparative data is for the previous year and therefore does not reflect compensation levels or trends on a real-time basis.

Management and Steven Hall and Partners also use data from other large healthcare companies to develop incentive plan design and other aspects of executive compensation other than pay levels.

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

 

Internal Equity

 

The committee reviews the relative pay differences for different executive officers considering not only the market targets described above, but also the responsibilities of the executive, including the nature of the executive’s duties, number of direct reports and other factors, as well as the executive’s tenure and experience in his or her current position, retention concerns and, with respect to international executives, local custom and practice. 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 compliance objectives. Accordingly, the committee has historically set total target cash compensation (base salary plus target bonus opportunity) for the CEO at a multiple of the total compensation of the next most highly compensated executive officer. In 2007 and 2008, the next most highly compensated executive officer after the CEO was the Chairman, Europe, Middle East and Africa. Based in Italy, he is responsible for the sales, marketing and distribution of our products in the European, Middle Eastern and African regions. He has served in his current position since 2003 and has served in senior executive roles with us for more than 18 years.

In 2007, our new CEO was promoted from another position within the company. He did not have the same longevity as his predecessor and, as a result, the historic difference between the compensation of the CEO and the other executive officers has been significantly compressed. As part of the market review described above, Watson Wyatt compared our CEO’s pay multiple to the CEO pay multiples of each of the 11 companies in our peer group. Watson Wyatt found that the multiple of our CEO’s target total direct compensation (base salary plus target bonus opportunity plus long-term incentive grant value) to the average target total direct compensation for our other named executive officers is below the 25th percentile of our peers.

 

Major Elements of Compensation

 

There are three major elements of our executive compensation program: base salary, annual cash incentives and equity-based incentives. Our retirement plans and welfare benefits are generally available to all employees, including executive officers, and we also provide a limited range of perquisites or other benefits.

Base Salaries.  We use base salary as a recruiting and retention tool and to recognize individual performance and responsibility through annual merit reviews and promotional increases. As explained above, an executive’s base salary may vary from the 50th percentile of market due to the nature of his or her responsibilities, individual performance, tenure, internal equity, retention concerns and other factors. The salaries earned by our named executive officers appear in the Summary Compensation Table under the “Salary” column.

Annual Cash Incentives.  We create opportunities each year for additional cash compensation that are tied to the achievement of annual performance objectives. We use our Executive Performance Incentive Plan, or EPIP, for this purpose. Each executive officer is eligible for an award opportunity in an amount based upon a percentage of his or her base salary. The executive officers believed to have the greatest responsibility for our overall performance in the coming year are assigned the highest percentages so that more of their total compensation is tied to achievement of objective performance measures.

EPIP Performance Measures and Payout Percentage.  The performance objectives used in the EPIP are established by the committee at the beginning of each year. In recent years, the committee has set specific goals for three performance measures — adjusted earnings per share (weighted at 50%), consolidated revenue (weighted at 25%) and consolidated free cash flow (weighted at 25%) — derived from the operating plan approved by the Board for that year. This allocation is consistent with the committee’s belief that earnings per share is the performance measure that correlates most directly with stockholder value.

Actual payouts under the EPIP depend upon the extent to which we achieve the performance measure goals. Payouts generally range from 0% of a specified percentage of base salary if we fail to achieve at least 85% of the goal, to 200% of the specified percentage if we achieve 120% or more of the goal. Payouts cannot exceed two times the specified percentage of base salary. For 2008, the level of EPIP payouts was negatively affected by our overall financial performance for the year. Specifically, our performance against the targets set by the committee was as follows:

 

 

 

As a result, the EPIP payout percentage applicable to our named executive officers for 2008 was 85.8% of their target awards. The EPIP payout percentages for each of 2007 and 2008 were significantly lower than the payout percentages for prior years. The dollar amount of the EPIP payout to each of our named executive officers for 2008 appears in the Summary Compensation Table under the “Non-Equity Incentive Plan Compensation” column. Additional information about the EPIP

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

appears in the narrative discussion that follows the Summary Compensation Table. In addition, the annual EPIP opportunity for each named executive officer appears in the Grants of Plan Based Awards in 2008 table under the heading “Estimated Possible Payouts Under Non-Equity Incentive Plan Awards.”

EPIP Payout Structure Review.  The committee engaged Watson Wyatt to analyze the EPIP payout structure in 2008. Specifically, Watson Wyatt analyzed the relationship between performance and payout at threshold, target and maximum levels as compared to comparable programs of the companies in our peer group and typical market practice. Watson Wyatt also performed a probability analysis to assess the degree of difficulty associated with each of the EPIP’s performance measures. The analysis yielded a number of findings, including:

 

Watson Wyatt concluded that overall, the EPIP structure and goal setting process are reasonable and within typical incentive plan design practices and the 2008 EPIP goals were appropriately set, reasonably challenging and in line with peer group practices. The committee members discussed the findings of the report and concluded that they will continue to monitor the appropriateness of the 85%–120% performance outcome range and the associated payout range, but that no major changes in the design of the EPIP are warranted at this time.

Equity-Based Incentives.  We make equity-based awards under stockholder-approved plans to provide incentives over periods longer than one year. These incentives take the form of stock options, restricted stock, RSUs and performance shares. Performance shares are, and other types of awards in the discretion of the committee may be, conditioned upon achievement of performance goals. The ownership stake provided by these equity-based incentives, the multiple-year vesting or performance period for these awards and our stock ownership guidelines for executive officers discussed later in this section, align the interests of our executive officers with our stockholders and are intended to promote executive retention.

The expense we incurred in 2008 for financial reporting purposes for the equity-based incentives awarded to our named executive officers appears in the Summary Compensation Table under the “Stock Awards” and “Option Awards” columns. Due to our financial performance during the relevant periods, none of the performance share awards to management-level employees and none of the performance-based RSU awards made to four executive officers outstanding during 2008 were earned.

Equity-based incentives are awarded by the committee under plans approved by our stockholders. 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 cannot grant awards to executive-level employees or new hires for executive-level positions. The aggregate number of shares underlying all such grants by the CEO during 2008 was limited to 150,000. The CEO subsequently reports any such grants he makes to the committee.

We require management-level employees to sign a non-competition agreement as a condition of receiving an equity award. In addition, the award agreement provides that, if the employee breaches the non-competition agreement, the committee may require the employee to 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.

Annual Long-Term Incentive Plan Awards.  The committee has traditionally approved awards of stock options on an annual basis to management-level employees based on fixed share guidelines. The committee typically approves the awards at its December or January meeting and sets a future date as the actual grant date at that time. For 2008, the committee approved awards in December 2007 to all executive officers but our CEO. The committee approved the CEO’s award in February 2008 following the committee’s review of his 2007 performance. The grant dates for all awards followed the release of our fourth quarter and full-year 2007 earnings. In determining the number of shares underlying each executive officer’s award, the committee considers the officer’s individual performance in the context of the fixed share guidelines associated with his or her salary grade, as well as any multi-year awards that are currently outstanding. The committee awarded performance shares in 2006 with a performance period ending December 31, 2008 that were outstanding during 2008. In view of this performance share grant, the committee reduced the overall number of shares underlying the stock options granted to executive officers in February 2008 to a number less than what otherwise would have been awarded based on the fixed share guidelines.

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

The committee reviewed the design of our annual long term incentive program in the fall of 2007 with the assistance of Watson Wyatt and Steven Hall and Partners. As part of this review, the committee considered whether to change the mix of equity-based awards granted to management-level employees in 2008 from 100% stock options to a mix of stock options and RSUs, a portion of which would be subject to performance-based vesting and the balance of which would be subject to time-based vesting. The committee ultimately decided not to change the mix of equity-based awards for 2008 in light of the three-year performance share grant that was outstanding. However, the committee has continued its review of our long term incentive program into 2009 and we expect that design changes will be made to the program to better accomplish our business objectives in the current economic environment.

We do not backdate stock options or issue stock options with exercise prices below the fair market value of our common stock on the grant date. We do not purposely schedule grant dates to precede favorable information or follow unfavorable disclosures.

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.

The terms and conditions of equity-based awards granted to employees based outside the U.S. may vary to comply with local law or to obtain the full benefit of applicable tax laws in those jurisdictions.

Multi-Year Performance Awards — Results for Performance Periods Ended December 31, 2008.  In February 2009, the committee certified the performance results for the three-year performance period ended December 31, 2008 under the performance share awards granted to executive officers and other management-level employees in January 2006. The performance shares awarded in 2006 provided award recipients the opportunity to earn shares based on the compound annual growth rate, or CAGR, of our adjusted earnings per share, or EPS, over a three-year period beginning January 1, 2006 and ending December 31, 2008. The CAGR goal was set at 17% for the three-year period. No shares are earned unless actual performance is at least 85% of the CAGR goal. The actual CAGR of our EPS for the three-year period was 11.52%. As a result, no shares were earned under this performance share program.

Also in February 2009, the committee certified the performance results for the 18-month performance period ended December 31, 2008 under the performance-based RSU awards granted in July 2007 to our CEO, our Chief Financial Officer, or CFO, and two other executive officers in connection with their respective promotions in May 2007. The performance-based RSUs provided these four executive officers the opportunity to earn shares based on the CAGR of our EPS over an 18-month period beginning July 1, 2007 and ending December 31, 2008. The CAGR goal for this program was set at 17% for the 18-month period. No shares are earned unless actual performance is at least 85% of the CAGR goal. The actual CAGR of our EPS for the 18-month period was 8.8%. As a result, no shares were earned under this performance-based RSU program.

Other Stock Awards.  Awards of restricted stock and RSUs granted in previous years were also outstanding during 2008. For example, the committee made grants of RSUs to a group of management-level employees, including executive officers, in December 2007. These grants were intended to provide an incentive to these employees to remain employed through the critical implementation phase of the Deferred Prosecution Agreement and Corporate Integrity Agreement. The number and market value of outstanding shares and units appear in the Outstanding Equity Awards at 2008 Fiscal Year-End table.

 

Compensation Consultants

 

As it has for several years, Watson Wyatt acted as the committee’s consultant during 2008. Typically, the firm provides the committee with advice on compensation program design and best practices and produces the comparative information derived from the peer group and published survey data that the committee reviews. Major activities conducted during 2008 consisted of: (1) performing the EPIP payout structure review discussed above; (2) advising the committee on and helping to develop the compensation packages for two newly-hired executive officers; (3) performing the market review of our 2008 executive compensation discussed above; (4) preparing “tally sheets” for our executive officers that the committee considered when making compensation decisions for 2009; (5) reviewing the composition of the peer group we use for executive compensation benchmarking purposes to ensure that it remains appropriate; and (6) reviewing and recommending changes to our long-term incentive plan design structure for 2009. On occasion, company management engages Watson Wyatt to perform services outside of executive compensation. For example, company management recently engaged Watson Wyatt to develop long-term incentive plan communication materials to be distributed to all management-level employees. The firm’s activities are discussed at greater length in various parts of this discussion and analysis.

During 2008, Steven Hall and Partners served as a consultant to our human resources department and company management. Steven Hall and Partners compared our company compensation plans against our peer group companies for various

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

forms of equity and long-term incentive plan designs, and provided recommendations as well as advice on other compensation related matters. Steven Hall and Partners also assists the human resources department and management in providing the committee with recommendations for base salary, target bonus percentages and long-term incentive awards for executive officers, except for the CEO. The specific recommendations are typically discussed with Watson Wyatt as the committee’s compensation consultant. The final recommendations are then reviewed by the committee, which frequently makes adjustments to the final determinations. In addition, Steven Hall and Partners acts as a resource to the human resources department and management in analyzing the compensation information from and recommendations made by Watson Wyatt.

 

Other Compensation

 

Retirement and Other Post-Employment Benefits.  Executives based in the U.S. may be eligible to participate in our 401(k) savings and investment plan, or SIP, and the benefit equalization plan, or BEP/SIP, that supplements the SIP, our defined benefit pension plan, or RIP, the benefit equalization plan, or BEP/RIP, that supplements the RIP and our retiree medical plan. We originally established the RIP, the BEP/RIP and the BEP/SIP at the time of our separation from our former parent in 2001. Under the terms of an Employee Benefits Agreement between our former parent and us, we agreed to establish plans that were substantially identical in all material respects to corresponding plans offered by the former parent. Since 2001, we have continued to offer these plans and the SIP in an effort to remain market competitive, to retain talented employees, to assist employees in preparing for retirement, to provide income to employees following retirement and, in the case of the benefit equalization plans, to provide benefits to eligible executives that are comparable, as a percentage of compensation, to benefits provided to employees whose compensation is not limited by the annual compensation limit 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, the BEP/RIP and the retiree medical plan are only available to executives 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 post-employment 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 officer’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 officer in a given year. These plans are discussed in greater detail in the narrative following the Pension Benefits in 2008 table.

Employment and Change in Control Severance Agreements.  We do not have employment agreements with any of our executive officers. 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. See “Change in Control Arrangements” on page 36 for a more detailed description of the material terms of these agreements.

Disability Compensation.  Executive officers 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.

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 executive officer used our aircraft for non-business purposes during 2008. 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.

 

Stock Ownership Guidelines for Executive Officers

 

Our executive officers must meet stock ownership guidelines set by the Board. The committee oversees compliance with these guidelines and periodically reviews the guidelines. The guidelines require (1) our CEO to own shares with a value equal to at least five times his base salary; (2) other designated executive officers, including the other named executive officers, to own shares with a value equal to at least three times the executive’s base salary; and (3) other executive officers to own shares with a value equal to at least two times the executive’s base salary. All shares owned by an executive officer count toward these guidelines, including shares owned indirectly, shares held in our 401(k) savings plan or employee stock purchase plan, as well as restricted shares, RSUs and performance shares (at the target award level). In addition, one-half of the unrealized gain on vested stock options is counted toward these guidelines. All executive officers are currently in compliance with the guidelines or are

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

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 officer 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.

 

Other Compensation Practices

 

Tax Deductibility of Compensation.  Section 162(m) of the Internal Revenue Code, or 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 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 2008, 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.

Potential Impact on Compensation of Executive Misconduct.  If the Board determines that an executive officer has engaged in fraudulent or intentional misconduct, the Board may take a range of actions to remedy the misconduct, prevent its recurrence, and impose such discipline on the wrongdoers as would be appropriate. Discipline would vary depending on the facts and circumstances, and may include (1) termination of employment; (2) initiation of a lawsuit to recover damages resulting from the misconduct; and (3) if the misconduct resulted in a significant restatement of our financial results, seeking reimbursement of any portion of performance-based or incentive compensation paid or awarded to the executive that is greater than would have been paid or awarded if calculated based on the restated financial results. These remedies would be in addition to, and not in lieu of, any actions imposed by law enforcement agencies, regulators or other authorities.

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

Executive Officer Compensation Tables and Notes

 

The following tables set forth information regarding compensation paid to our CEO, our CFO and each of our three other most highly compensated executive officers who served as executive officers as of December 31, 2008 based on total compensation earned, excluding increases in pension value. The tables also provide compensation information with respect to one former executive officer who would have been among the three other most highly compensated executive officers during 2008 but who was no longer serving as an executive officer as of December 31, 2008.

 

 

 

Ms. Conley forfeited unvested performance shares and RSUs when her employment terminated effective May 16, 2008. In accordance with SFAS 123(R), we reversed compensation expense relating to the forfeited awards that had been recognized for financial statement reporting purposes in 2007 and 2006. As a result, the amount reported in this column for 2008 for Ms. Conley is negative.

 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

 

 

For a discussion of the assumptions made in the valuation, see Note 3 to the Consolidated Financial Statements included in our Annual Reports on Form 10-K for the years ended December 31, 2008 and December 31, 2007.

 

 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

 

 

 

 

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 Reports on Form 10-K for the years ended December 31, 2008 and December 31, 2007.

 

 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT

 

 

 

 

 

 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2009 PROXY STATEMENT