2015 PROXY STATEMENT HIGHLIGHTS			i
PROXY STATEMENT			1
GENERAL INFORMATION			1
CORPORATE GOVERNANCE			6
Proposal No. 1 – Election of Directors			6
Director Criteria, Qualifications and Experience			6
Directors and Nominees			7
Nominees for Director: 2015 – 2016 Term			7
Board Leadership Structure			14
Board Role in Risk Oversight			14
Policies on Corporate Governance			14
Director Independence			15
Majority Vote Standard for Election of Directors			15
Nominations for Directors			15
Communications with Directors			16
Certain Relationships and Related Person Transactions			16
Board Meetings, Attendance and Executive Sessions			16
Committees of the Board			16
Committee Assignments			17
Audit Committee			17
Compensation and Management Development Committee			18
Corporate Governance Committee			18
Security Ownership of Directors and Executive Officers			19
Security Ownership of Certain Beneficial Owners			20
Section 16(a) Beneficial Ownership Reporting Compliance			20
Compensation of Non-Employee Directors			21
2014 Director Compensation Table			21
Retainers			22
Equity-Based Compensation and Mandatory Deferrals			22
Insurance, Expense Reimbursement and Director Education			22
Proposal No. 2 – Approval of the Amended Stock Plan for Non-Employee Directors			23
Proposal No.  3 – Approval of the Amended and Restated Deferred Compensation Plan for Non-Employee Directors			25
PLAN BENEFITS			27
EXECUTIVE COMPENSATION			28
Proposal No. 4 – Advisory Vote on Executive Compensation			28
Compensation Discussion and Analysis			29
Executive Summary			29
2014 Say on Pay Vote			29
2014 Business Highlights			29

2014 Performance and Payouts			30
Key Executive Compensation Program Practices			31
Components of Executive Compensation			32
Pay Mix			34
Market Review of 2014 Compensation			34
Three-Year Historical Pay-for-Performance Alignment			34
Base Salary			35
Annual Cash Incentives			35
Equity-Based Incentives			37
Other Compensation			38
The Committee’s Processes and Analyses			39
Governance Features of Our Executive Compensation Program			41
Compensation Committee Report			43
Compensation Risk Assessment			43
2014 Summary Compensation Table			44
Grants of Plan-Based Awards in 2014			46
Outstanding Equity Awards at 2014 Fiscal Year-End			47
Option Exercises and Stock Vested in 2014			49
Pension Benefits in 2014			49
Nonqualified Deferred Compensation in 2014			52
Potential Payments upon Termination of Employment			54
Change in Control Arrangements			57
Non-Compete Arrangements			58
Equity Compensation Plan Information			59
AUDIT			60
Proposal No. 5 – Ratification of Independent Registered Public Accounting Firm			60
Responsibilities of the Audit Committee			60
Activities of the Audit Committee in 2014			61
Audit Committee Pre-Approval of Services of Independent Registered Public Accounting Firm			61
Audit and Non-Audit Fees			62
Audit Committee Report			62
ADDITIONAL INFORMATION			63
Other Matters			63
Annual Report and Form 10-K			63
Incorporation by Reference			63
Appendix A – Amended Stock Plan for Non-Employee Directors			A-1
Appendix B – Amended and Restated Deferred Compensation Plan for Non-Employee Directors			B-1
Appendix C – Incentive Plan Financial Measures			C-1

 

 

Corporate and Stockholder Information
Stock Symbol		ZMH
Exchanges		NYSE and SIX Swiss Exchange
Shares Outstanding		170,005,509
Headquarters		345 East Main Street, Warsaw, Indiana
Company Website		www.zimmer.com
Investor Relations Website		www.investor.zimmer.com
Public Company Since		2001
Transfer Agent and Dividend Reinvestment Plan Administrator		American Stock Transfer & Trust Co. www.amstock.com +1-888-552-8493 (domestic) +1-718-921-8124 (international)
Annual Meeting Information
Time and Date		8:00 a.m. (EDT) on Tuesday, May 5, 2015
Place		Conrad Indianapolis, 50 West Washington Street, Indianapolis, Indiana
Record Date		March 6, 2015
Voting				www.ProxyVote.com
				1-800-690-6903
				mail your proxy card / vote instruction form
				vote in person at the meeting

Matters for Stockholder Voting
Proposal		Board Recommendation		Page Ref.
Election of Directors		FOR each nominee			6
Approval of Amended Stock Plan for Non-Employee Directors		FOR			23
Approval of Amended and Restated Deferred Compensation Plan for Non-Employee Directors		FOR			25
Advisory Vote on Executive Compensation		FOR			28
Ratification of Appointment of PricewaterhouseCoopers LLP		FOR			60
Corporate Governance Highlights
Annual Election of All Directors					Yes
Director Election Standard					Majority
Independent Chairman of the Board					Yes
Independent Directors					All but one
Fully Independent Board Committees					Yes
Supermajority Voting Requirements					No
Shareholder Rights Plan					No
Director Stock Ownership Guidelines					Yes
Prohibition Against Pledging and Hedging					Yes
Regular Board Executive Sessions					Yes
All Directors Attended at Least 75% of 2014 Board and Committee Meetings					Yes

 

Executive Compensation Best Practices
Pay for Performance Philosophy				Yes
Prohibition on Hedging and Pledging				Yes
Stock Ownership Guidelines				Yes
Stock Retention Requirement				Yes
Dividend Equivalents on Restricted Stock Units				No
Executive Employment Agreements				No
Incentive Compensation Recoupment Policy				Yes
Limited Perquisites				Yes
“Double Trigger” Change in Control Arrangements				Yes
Commitment Not to Provide Excise Tax Gross-Up Payments in Future Severance Agreements				Yes

 

Based upon the recommendation of the Corporate Governance Committee, the Board has nominated ten directors for election at the annual meeting to hold office until the 2016 annual meeting and the election of their successors. All of the nominees currently are our directors. Michael J. Farrell was appointed a director by our full Board effective December 11, 2014. Each nominee agreed to be named in this proxy statement and to serve if elected. All of the nominees are expected to attend the 2015 annual meeting.

In connection with our pending combination with Biomet, Inc., we have agreed to expand the Board by two members and appoint persons designated by the principal stockholder of Biomet’s parent company to fill those vacancies following the closing of the transaction. We expect the closing to occur after the date of this proxy statement but before the annual meeting, and if the closing occurs prior to the annual meeting, we will expand the Board and appoint the two new directors immediately following the annual meeting. We will describe these actions and provide additional information about these directors in a Current Report on Form 8-K that we will file with the SEC following their appointment.

 

We are a global leader in musculoskeletal care. We design, develop, manufacture and market orthopaedic reconstructive, spinal and trauma devices, biologics, dental implants and other surgical products. We have operations in more than 25 countries around the world and sell products in more than 100 countries. We operate in markets characterized by rapidly evolving technologies, complex regulatory requirements and significant competition. The Corporate

Governance Committee is responsible for reviewing and assessing with the Board, on an annual basis, the experience, qualifications, attributes and skills sought of Board members in the context of our business and the then-current membership on the Board. The committee looks for current and potential directors collectively to have a mix of experience, skills and qualifications, some of which are described below:

 

In evaluating director candidates and considering incumbent directors for nomination to the Board, the committee considers a variety of factors. These include each candidate’s character and integrity, reputation for working constructively in a collegial environment and availability to devote sufficient time to Board matters. Diversity of background and diversity of gender, race, ethnicity, national origin and age are also relevant factors in the selection process. The committee also considers whether a candidate can meet the independence standards for directors and members of key committees under applicable stock exchange and SEC rules. With respect to incumbent directors, the committee considers the director’s past performance on the Board and contributions to the committees on which he or she serves.

While the Board has not formally adopted a policy regarding director diversity, the committee actively considers diversity in director recruitment and nomination and believes the nominees for election at the annual meeting reflect these efforts: two director nominees (20%) are female; one director nominee (10%) is African-American; and one director nominee (10%) was born and has lived and worked outside the United States.

Following each nominee’s biography, we have included an assessment of the qualifications, skills and experience of such nominee.

 

One of the key responsibilities of the Board is to have a leadership structure that allows it to provide effective oversight of management and maximize the contributions of its members. Currently, the Board is led by a non-executive Chairman of the Board selected from among the independent directors. The non-executive Chairman leads the meetings and activities of the Board, while the Chief Executive Officer (“CEO”) leads the management, operations and employees of the company and is responsible for executing the company’s strategy. The Board adopted this leadership structure in 2007. 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 is not opposed in concept to combining these roles. Prior to 2007, the positions of Chairman and CEO had been held by the same person. The Board believes it should maintain the flexibility to change its leadership structure as circumstances warrant.

Larry Glasscock, who has served as one of our independent directors since 2001, has served as non-executive Chairman since 2013.

The non-executive Chairman of the Board has the following duties and responsibilities:

 

—

presiding at meetings of the Board and stockholders;

 

—

approving the agendas for meetings of the full Board, as prepared by the CEO;

 

—

presiding at executive sessions of the independent directors;

 

—

coordinating the activities of the independent directors; and

 

—

serving as the liaison between the CEO and the rest of the Board.

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

 

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 head of Internal and Compliance Audit, who reports directly to the committee, coordinates our global enterprise risk 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 (“CFO”) and Chief Accounting Officer. The committee also receives reports from our General Counsel, Chief Information 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.

 

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 CEO, CFO, 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 Research, Innovation 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 CEO, CFO, or Chief Accounting Officer and Corporate Controller, we will disclose the nature of that amendment or waiver 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.

 

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 New York Stock Exchange 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 Corporate

Governance Committee and the Board consider a wide range of relevant facts and circumstances. The Board has determined that each of our non-employee directors, Christopher Begley, Betsy Bernard, Paul Bisaro, Gail Boudreaux, Michael Farrell, Larry Glasscock, Robert Hagemann, Arthur Higgins and Cecil Pickett, meets these standards and is independent. The remaining director, David Dvorak, who is an employee, is not independent.

 

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.” All nominees for election as directors at the 2015 annual meeting are currently serving on the Board.

 

The Corporate Governance Committee screens candidates and recommends candidates for nomination to the full Board. In seeking and evaluating director candidates, the committee considers individuals in accordance with the criteria described above under “CORPORATE GOVERNANCE – Proposal No. 1 – Election of Directors – Director Criteria, Qualifications and Experience.” Director candidates may be recommended by Board members, a third-party search firm or stockholders. Mick Farrell, who was appointed to the Board in December 2014, was recommended as a director candidate by a third-party search firm.

The committee considers candidates proposed by stockholders and evaluates them using the same criteria as for other candidates. A stockholder who wishes to recommend a director candidate for consideration by the 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 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 2016 annual meeting of stockholders?” on page 5 for more information on these procedures.)

 

Stockholders or other interested parties may contact our directors by writing to them either individually or as a group or partial group (such as all independent directors), c/o Corporate Secretary, Zimmer Holdings, Inc., 345 East Main Street, Warsaw, Indiana 46580. If you wish your communication to be treated confidentially, please write the word “CONFIDENTIAL” prominently on the envelope and address it to

the director by name so that it can be forwarded without being opened. Communications addressed to multiple recipients, such as to “Board of Directors,” “Audit Committee,” “Independent Directors,” etc. will necessarily have to be opened and copied by the Office of the Corporate Secretary in order to forward them, and hence cannot be treated confidentially.

 

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.

Under our Code of Business Conduct, which is available on our website at www.zimmer.com, our Legal Department or Compliance Office 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 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 2014, the Board held 11 meetings and committees of the Board held a total of 24 meetings. All directors attended 75% or more of the meetings of the Board and committees on which they served.

All current directors then in office attended the 2014 annual meeting of stockholders.

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 independent executive sessions at each regularly scheduled Board meeting. Mr. Glasscock, in his capacity as non-executive Chairman, presides at these executive sessions.

 

Our Restated By-Laws provide that the Board may delegate certain of its responsibilities to committees. During 2014, the Board had four standing committees: an Audit Committee, a Compensation and Management Development Committee, a Corporate Governance Committee and a Research, Innovation and Technology Committee. Each of the committees is composed entirely of independent

directors. In addition, the members of the Audit Committee and the Compensation and Management Development Committee meet the heightened standards of independence required by SEC rules and New York Stock Exchange listing standards.

The table below shows the current membership of each Board committee and the number of meetings held during 2014.

 

The principal functions of the Audit Committee include:

 

—

appointing, evaluating and, where appropriate, replacing our independent registered public accounting firm;

 

—

pre-approving all auditing services and permissible non-audit services provided to us by our independent registered public accounting firm;

 

—

reviewing with our independent registered public accounting firm and with management the proposed scope of the annual audit, past audit experience, our program for the internal examination and verification of our accounting records and the results of recently completed internal examinations;

 

—

resolving disagreements between management and our independent registered public accounting firm regarding financial reporting;

 

—

reviewing major issues as to the adequacy of our internal controls; and

 

—

overseeing our compliance with legal and regulatory matters and aspects of our risk management processes.

The Board of Directors has determined that Messrs. Begley, Glasscock and Hagemann qualify as “audit committee financial experts” as defined by SEC rules. See pages 7 and 11 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.

See also the “Audit” section of this proxy statement for additional information about the Audit Committee’s responsibilities and actions and the Audit Committee Report.

 

The duties of the Compensation and Management Development Committee include:

 

—

administering our annual and long-term incentive plans;

 

—

reviewing and making recommendations to the Board with respect to incentive compensation and equity-based plans;

 

—

approving compensation of executive officers;

 

—

discussing with management the Compensation Discussion and Analysis required by SEC regulations and, if appropriate, recommending its inclusion in our Annual Report on Form 10-K and proxy statement; and

 

—

reviewing the results of Say on Pay votes and determining whether changes should be made to our executive compensation policies and programs to address stockholder concerns.

None of the members of the Compensation and Management Development Committee during 2014 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 43.

 

The duties of the Corporate Governance Committee include:

 

—

developing and recommending to the Board criteria for selection of non-management directors;

 

—

recommending director candidates to the Board;

 

—

analyzing information relevant to the Board’s determination as to whether a director is independent;

 

—

overseeing the annual self-evaluation process for the Board and its committees;

 

—

periodically reviewing the Board’s leadership structure and recommending any proposed changes to the Board for approval;

—

periodically reassessing the Board’s Corporate Governance Guidelines and recommending any proposed changes to the Board for approval; and

 

—

periodically reviewing, in cooperation with the Compensation and Management Development Committee, the form and amount of non-employee director compensation and recommending any proposed changes to the Board for approval.

 

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 2014 all applicable Section 16(a) filing requirements were met.

 

During 2014, we paid non-employee directors an annual retainer of $95,000 subject to mandatory deferral requirements as described below. We paid the non-executive Chairman of the Board an additional annual retainer of $150,000, and we paid each Board

committee chair an additional annual retainer of $10,000. We paid non-employee directors quarterly, on the last day of March, June, September and December. Accordingly, we paid the following amounts during 2014:

 

Directors who commence service on the Board, or who commence service as a committee chair or as non-executive chair, are paid applicable quarterly fees beginning with the quarter during which they commence such service. Similarly, directors who terminate service on

the Board or terminate service as a committee chair or as non-executive chair are paid applicable quarterly fees through the quarter during which such service terminated.

 

We awarded each non-employee director who was elected or re-elected at the 2014 annual meeting of stockholders 500 DSUs as of the date of the annual meeting 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 Restated Deferred Compensation Plan for Non-Employee Directors. 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. When we pay cash dividends on our common stock, amounts deferred as DSUs are credited with additional DSUs equal to the number of shares of our common stock that could have been purchased if we paid cash dividends on the DSUs held in directors’ deferred compensation accounts and such cash was reinvested in our common stock. These additional DSUs are subject to mandatory deferral.

 

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. Non-employee directors may elect to receive the cash payment in a lump sum or in not more than ten annual installments. Currently, 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. If our stockholders approve the Amended Stock Plan for Non-Employee Directors (see Proposal No. 2 beginning on page 23) and the Amended and Restated Deferred Compensation Plan for Non-Employee Directors (see Proposal No. 3 beginning on page 25) at the annual meeting, this conversion feature will be eliminated.

During 2014, we also awarded each continuing non-employee director RSUs as of the date of the annual meeting of stockholders with an initial value of $120,000 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 6, 2017, 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.

 

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.

 

On February 20, 2015, the Board of Directors adopted, subject to stockholder approval, the Zimmer Holdings, Inc. Amended Stock Plan for Non-Employee Directors (the “Director Stock Plan”), and directed that the amended Director Stock Plan be submitted to stockholders for approval at the annual meeting. Our former parent, in its capacity as our sole stockholder, approved the Director Stock Plan in 2001. The Board of Directors amended the Director Stock Plan in 2005 to ensure compliance with Internal Revenue Code Section 409A. The Board of Directors and our stockholders approved an amendment to the Director Stock Plan in 2009 to extend the term of the plan.

The Director Stock Plan is the sole plan for providing equity-based compensation in the form of stock options, restricted stock and RSUs to our non-employee directors. The Board believes that the Director Stock Plan is in our best interest and the best interest of our stockholders, as equity awards granted under the plan help to attract and retain experienced and highly qualified non-employee directors, align director and stockholder interests and link director compensation with company performance.

Proposed Changes

 

 

The Director Stock Plan as proposed to be amended includes the following changes:

 

—

reduces the number of shares available for issuance under the plan from 2,000,000 to 800,000;

 

—

increases from 25% to 50% the percentage of awards under the plan that may be in the form of restricted stock or RSUs;

 

—

adds a $300,000 limit on the grant date fair value of awards that can be granted to any individual participant in any single calendar year;

 

—

eliminates the option for non-employee directors to elect to convert all or a portion of their annual retainer not subject to mandatory deferral into stock options;

 

—

eliminates the provision that addressed awards to non-employee directors at the time of our 2001 spin-off;

 

—

clarifies that a non-employee director holding RSUs will have none of the rights of a stockholder during the restriction period; and

 

—

extends the term of the plan beyond its current scheduled expiration date in 2015 to December 31, 2022.

The copy of the Director Stock Plan included in this proxy statement as Appendix A is marked to show all of the proposed amendments to the plan.

Purpose

 

 

The purpose of the Director Stock Plan is to secure for the company and stockholders the benefits of the incentive inherent in increased common stock ownership by the members of the Board of Directors.

Administration; Eligible Directors

 

 

The Director Stock Plan is administered by the Board of Directors. The Board has the power under the plan to grant awards of stock options, restricted stock and RSUs to directors who are not our current or former employees.

Shares Subject to the Plan

 

 

If the amended Director Stock Plan is approved by stockholders, a maximum of 800,000 shares of our common stock may be issued pursuant to awards under the plan, subject to adjustment as provided in the plan, and no more than 50% of such awards may be in the form of restricted stock or RSUs. Currently, a maximum of 2,000,000 shares may be issued pursuant to awards under the plan and no more than 25% of such awards may be in the form of restricted stock or RSUs. As proposed to be amended, no individual participant may be granted, in any single calendar year during the term of the plan, awards with an aggregate grant date fair value in excess of $300,000.

Terms and Conditions of Stock Options

 

 

The exercise price of stock options is equal to the fair market value of our common stock on the date of grant. Stock options expire no later than 10 years after the date of grant. The stock options become exercisable 25% per year on each anniversary date of the grant of the stock options, beginning on the first anniversary date.

Terms and Conditions of Restricted Stock and RSUs

 

 

The Board of Directors may grant awards of restricted stock or RSUs that may be subject to objectives specified by the Board. The Board shall (1) select the non-employee directors to whom restricted stock and RSUs may from time to time be granted, (2) determine the number of shares to be covered by each award granted, (3) determine the terms and conditions of any award and (4) prescribe the form of the agreement, legend or other instrument necessary or advisable in the administration of awards.

 

Change in Control

 

 

In the event a non-employee director’s membership on the Board terminates pursuant to a qualifying termination (as defined in the plan) during the three-year period following a change in control (as defined in the plan), all of the director’s outstanding stock options will become immediately fully vested and exercisable.

In addition, in the event of a change in control, the Board of Directors may (1) determine that outstanding stock options will be assumed by, or replaced with comparable options by, the surviving corporation and that outstanding awards will be converted to similar awards of the surviving corporation, or (2) take such other actions with respect to outstanding stock options and awards as the Board deems appropriate.

Amendment or Discontinuance

 

 

The Board may amend the Director Stock Plan at any time and from time to time as it deems advisable; provided, however, that, except in connection with a corporate transaction involving us (including any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares), the terms of outstanding awards may not be amended, without stockholder approval, to reduce the exercise price of outstanding stock options or to cancel outstanding stock options in exchange for cash, other awards, or stock options with an exercise price that is less than the exercise price of the original stock options; and provided, further, that except as provided in the plan, the Board may not, without further approval by the stockholders, increase the maximum number of shares of common stock which may be issued pursuant to awards under the plan, reduce the minimum option exercise price, extend the period during which awards may be granted or exercised under the plan or change the class of persons eligible to receive awards under the plan.

U.S. Federal Income Tax Consequences

 

 

The U.S. federal income tax consequences arising with respect to awards granted under the Director Stock Plan will depend on the type of the award. The following provides only a general description of the application of federal income tax laws to certain awards under the plan. This discussion is intended for the information of stockholders considering how to vote at the meeting and not as tax guidance to non-employee directors, as the consequences may vary with the types of awards made, the method of payment or settlement and other factors.

From the non-employee directors’ standpoint, as a general rule, ordinary income will be recognized at the time of exercise of nonqualified stock options or the vesting of restricted stock or RSUs. Future appreciation on shares of common stock held beyond the ordinary income recognition event will be taxable at capital gains rates when the shares of common stock are sold. We, as a general rule, will be entitled to a tax deduction that corresponds in time and amount to the ordinary income recognized by the non-employee director, and we will not be entitled to any tax deduction in respect of capital gain income recognized by the non-employee director.

Incorporation by Reference

 

 

The above description is only a summary of the Director Stock Plan as proposed to be amended and is qualified in its entirety by reference to the full text, a copy of which is included in this proxy statement as Appendix A.

Plan Benefits

 

 

The grant of awards under the Director Stock Plan is entirely within the discretion of the Board. It is currently not possible for us to determine the benefits or amounts that will be awarded in the future under the plan. See “Plan Benefits” on page 27 for information regarding awards made under the plan in 2014.

 

On February 20, 2015, the Board of Directors adopted, subject to stockholder approval, the Amended and Restated Zimmer Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors (the “Deferred Compensation Plan”) and directed that the amended and restated plan be submitted to stockholders for approval at the annual meeting. Our former parent, in its capacity as our sole stockholder, approved the Deferred Compensation Plan in 2001. The Board of Directors amended the plan in 2005 to (1) limit the number of shares of common stock that may be issued under the plan to 200,000; (2) establish an expiration date for the plan; and (3) ensure compliance with Internal Revenue Code Section 409A. The Board of Directors and our stockholders approved an amendment to the Deferred Compensation Plan in 2009 to extend the term of the plan.

Under the terms of the Deferred Compensation Plan, we award each non-employee director 500 DSUs as of the date of each annual meeting of stockholders with an initial value based on the price of our common stock on that date. 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. We settle annual DSU awards and mandatory deferral DSUs in shares of our common stock following a director’s termination of service on the Board. The Board believes that the Deferred Compensation Plan is in our best interest and the best interest of our stockholders, as the annual DSU awards granted under the plan help to attract and retain experienced and highly qualified non-employee directors. In addition, the annual DSU awards and the mandatory deferral DSUs serve to align director and stockholder interests and link director compensation with company performance.

Proposed Changes

 

 

The Deferred Compensation Plan as proposed to be amended includes the following changes:

 

—

eliminates the provision in the plan that permitted non-employee directors to elect to convert the portion of the basic fee payable for service on the Board that is not subject to mandatory deferral into options to purchase shares of our common stock; and

 

—

extends the term of the plan beyond its current scheduled expiration date in 2015 to December 31, 2022.

The copy of the Deferred Compensation Plan included in this proxy statement as Appendix B is marked to show all of the proposed amendments to the plan.

Administration

 

 

The Deferred Compensation Plan is administered by the Board of Directors, which has the authority to adopt rules and regulations to carry

out the plan and to interpret, construe and implement the provisions of the plan.

Eligibility

 

 

Any member of the Board who is not an officer or employee of the company is eligible to participate in the Deferred Compensation Plan.

Amount of Deferral

 

 

Until such time as a participant meets the guideline level of share unit ownership established by the Board, 50% of the basic fee payable to the participant for membership on the Board will be deferred and credited to the participant’s deferred compensation account as DSUs equal to the number of shares of our common stock that could have been purchased with the deferred fee. As an additional mandatory deferral, at each annual meeting of stockholders, each participant will receive 500 DSUs.

A participant may elect to defer receipt of compensation in excess of the participant’s mandatory deferral.

Period of Deferral; Form of Payment

 

 

Mandatory deferrals and annual DSUs will be paid in shares of our common stock within sixty days after the cessation of the participant’s service as a director. Elective deferrals will be paid in cash.

Shares Subject to the Plan

 

 

The maximum number of shares of our common stock that may be issued and distributed under the Deferred Compensation Plan is 200,000 shares.

Participant’s Rights Unsecured

 

 

The rights of any participant to receive future payments under the provisions of the Deferred Compensation Plan is an unsecured claim against our general assets.

Amendment

 

 

The Board of Directors may amend, modify or terminate the Deferred Compensation Plan at any time or from time to time; provided, however, that the Board will submit for stockholder approval any amendment required to be submitted for stockholder approval by law, regulation or applicable stock exchange requirements.

 

Incorporation by Reference

 

 

The above description is only a summary of the Deferred Compensation Plan as proposed to be amended and is qualified in its entirety by reference to the full text, a copy of which is included in this proxy statement as Appendix B.

 

Plan Benefits

 

 

See “Plan Benefits” on page 27 for information regarding mandatory deferrals, annual DSUs and dividend equivalent DSUs awarded under the Deferred Compensation Plan for 2014.

 

The Board of Directors is committed to excellence in corporate governance and recognizes the interest our stockholders have expressed with respect to our executive compensation program. As a part of that commitment, and in accordance with Section 14A of the Exchange Act, our stockholders are being asked to approve, on an advisory basis, the compensation of our named executive officers as reported in this proxy statement. This proposal, commonly known as a “Say on Pay” proposal, gives stockholders the opportunity to endorse or not endorse our executive compensation program for the named executive officers for 2014.

Last year, stockholders showed strong support for our executive compensation program; more than 95% of the stockholders who voted on our Say on Pay proposal voted in favor of the proposal.

As described in detail in the Compensation Discussion and Analysis section of this proxy statement (“CD&A”), our executive compensation program is designed to attract, motivate and retain highly qualified and effective senior leaders who drive our success. In designing our program, the Compensation and Management Development Committee of our Board works to foster an environment in which executives are motivated to achieve financial performance goals and individual objectives that will drive the success of our business and, in turn, increase stockholder value on a long-term, sustainable basis. Taking into consideration feedback received from stockholders, the committee has improved our executive compensation program and practices over the past few years to strengthen the alignment of executives’ interests with those of our stockholders. Our compensation program:

 

—

links a significant portion of total compensation to the achievement of performance goals that we believe will create long-term stockholder value;

 

—

consists primarily of equity-based compensation, which encourages executives to think and act like owners of the company;

 

—

subjects a significant percentage of total compensation to multi-year performance goals and/or vesting requirements, which gives executives a long-term view and enhances retention;

—

differentiates annual incentive compensation based on executives’ contributions and the performance of their specific business unit and/or geographic area of responsibility; and

 

—

provides a competitive total pay opportunity.

We have adopted policies, including our stock ownership guidelines, executive compensation recoupment policy and prohibitions against hedging and pledging company securities, to ensure long-term focus and appropriate levels of risk-taking by our executive officers. Each of these policies is described in more detail in the CD&A.

The Board of Directors believes that our executive compensation program is designed to meet the objectives discussed in the CD&A. Accordingly, the Board recommends that stockholders vote in favor of the following resolution:

“RESOLVED, that the stockholders of Zimmer Holdings, Inc. approve, on an advisory basis, the compensation of the company’s named executive officers, as disclosed in this proxy statement pursuant to the SEC’s executive compensation disclosure rules, including the CD&A, the compensation tables and narrative disclosures.”

As an advisory vote, this proposal is not binding on the company, the Board or the Compensation and Management Development Committee, and will not be construed as overruling a decision by the company, the Board or the committee or creating or implying any additional fiduciary duty for the company, the Board or the committee. However, the committee and the Board value the opinions expressed by stockholders in their vote on this proposal and will consider the outcome of the Say on Pay vote when making future executive compensation decisions.

The Board has adopted a policy providing for annual Say on Pay advisory votes. Accordingly, the next Say on Pay vote will occur in 2016.

 

Our executive compensation programs are designed to achieve the following fundamental objectives:

 

—

focus executives’ attention on specific financial, operational and strategic objectives;

 

—

align executives’ interests with the long-term interests of our stockholders;

 

—

recognize company and individual performance;

 

—

reflect the value of each executive’s position in the market and within the company; and

 

—

attract, retain and motivate a highly qualified and effective senior leadership team.

To accomplish these objectives, the Compensation and Management Development Committee of our Board (the “committee”) annually reviews and approves our executive compensation program components and target compensation levels, as well as specific performance metrics and targets, payout ranges and actual payouts. We emphasize performance-based compensation that appropriately rewards executives for delivering results that meet or exceed multiple pre-established goals over one- and three-year periods, with metrics and targets selected because they are directly linked to our strategic goals. In addition, our long-term incentive (“LTI”) program rewards both absolute stock price growth and relative total shareholder return (“TSR”).

 

At our 2014 annual meeting, stockholders showed strong support for our executive compensation program, with more than 95% of votes cast approving our advisory Say on Pay resolution. Following the 2014 Say on Pay vote, the committee considered the overwhelmingly favorable results of the vote and input from some of our major stockholders.

Based on the strong level of stockholder support, and in light of significant changes to our executive compensation program implemented over the past few years, the committee made no material changes in our executive compensation programs for 2015 as a result of the 2014 Say on Pay vote.

 

In 2014, Zimmer delivered solid financial results and executed on key commercial, operational and strategic priorities. Highlights include the following:

 

—

In April 2014, we embarked upon a new chapter in our company’s history when we announced a combination with Biomet. This landmark transaction, which we expect to close shortly after the date of this proxy statement, is a transformational opportunity to enhance our global scale. By bringing together two highly complementary companies in the musculoskeletal space, we will accelerate our shared vision of leading the industry by delivering exceptional value to healthcare providers, their patients and to our stockholders.

 

—

We reported 2014 net sales of $4.67 billion, an increase of 1.1% reported and 2.4% on a constant currency basis over 2013.

—

Diluted earnings per share (“EPS”) for the year increased 5.4% on an adjusted basis over 2013.

 

—

Our stock price increased 21.7%, from $93.19 at the end of 2013 to $113.42 at the end of 2014.

 

—

As of December 31, 2014, we achieved one-year and three-year TSR of 22.8% and 29.8%, respectively, outperforming our peer group over the three-year period.

 

—

In line with our commitment to return value to our stockholders, we paid or spent an aggregate of $546 million in cash dividends and share repurchases in 2014.

 

—

We focused significant resources on our operational excellence initiatives, investments intended to improve future operating results, and we continued to make progress toward achievement of excellence in our global quality infrastructure.

 

2014 Performance and Payouts

One-Year 2014 Performance and Annual Cash Incentive Payout

Zimmer’s performance in 2014 had the following direct impact on executive compensation:

 

—

The committee determined that our CEO earned 92.6% of his target annual cash incentive opportunity for 2014, while the other NEOs earned from 92.6% to 134.7% of their respective target opportunities.

Three-Year 2012-2014 Performance and Long-Term Equity-Based Incentive Payout

Zimmer’s performance over the three-year period 2012-2014 also had a direct impact on executive compensation:

 

—

For performance-based restricted stock units (“PRSUs”) granted in 2012 with a 2012-2014 performance period, the committee determined that 81.55% of the target award was earned based on our internal total shareholder return (“iTSR”) over the three-year period, as modified based on our TSR relative to the S&P 500 Healthcare Index.

 

ü		Pay for performance.  Nearly 90% of our CEO’s (and nearly 80% of our other NEOs’) target total direct compensation is at-risk and variable with performance, including stock price performance.
ü		Linkage between performance measures and strategic objectives.  Performance measures for incentive compensation are linked to both strategic and near-term operating objectives designed to create long-term stockholder value.
ü		Performance metric for the LTI program aligns with a longer time horizon and minimizes duplication with annual cash incentive plan.  We use iTSR over a three-year period as the performance metric for the PRSU component of the LTI program. iTSR is derived from operating profit growth and free cash flow yield.
ü		Vesting of PRSUs tied to performance relative to peers.  Vesting of PRSUs is tied to meeting target iTSR, subject to a relative TSR modifier based on the S&P 500 Healthcare Index, which requires us to perform well relative to peers.
ü		Moderate target market positioning for LTI awards.  Although the committee generally targets LTI awards between the 50th and 75th percentiles of market, grants to the CEO were significantly below the 50th percentile of market in each of 2012, 2013 and 2014.
ü		Challenging threshold performance goals under the annual cash incentive plan.  The revenue target must be achieved at 95% for a 50% payout; other metrics must be achieved at 90% for a 50% payout. Achievement below these thresholds results in zero payout.
ü		Increased emphasis on performance of executives’ specific business unit or geographic area of responsibility in annual cash incentive plan.  We tie annual incentive plan performance goals for NEOs with specific business unit and/or geographic responsibility to the results of that business unit or geography, rather than the company’s consolidated results.
ü		Appropriateness of peer group.  We use a peer group of other U.S. headquartered publicly traded companies selected on the basis of business focus, market capitalization, revenues and other factors to assess compensation levels, equity usage and incentive plan design and for performance comparisons.
ü		Moderate change-in-control benefits.  Change-in-control severance benefits are limited to two times target cash compensation.

ü		Double trigger change-in-control benefits.  Change-in-control severance benefits and long-term equity incentive awards have a double-trigger; that is, they will not vest or be paid in the event of a change-in-control unless also accompanied by a qualifying termination of employment.
ü		No excise tax gross-ups in new agreements.  We have no gross-up provisions in change-in-control severance agreements entered into after July 2009.
ü		No employment contracts.  Our executives are “at will” employees with no employment agreements.
ü		Robust stock ownership guidelines.  Executives are required to hold equity with a value equal to a multiple of five times salary for our CEO and three times salary for each other NEO. 100% of net after-tax shares received upon vesting or exercise of awards must be retained until an executive meets the guideline ownership level.
ü		Policy prohibiting hedging and pledging of company securities.
ü		No dividends or dividend equivalents accrued or paid on unearned performance-based equity awards.
ü		Maximum payout caps for annual cash incentive compensation and performance-based equity awards.
ü		Clawback of incentive compensation in the event of restatement.  Awards to executive officers under short- and long-term incentive compensation plans are subject to clawback in the event of certain financial restatements. The clawbacks are designed to discourage imprudent risk taking.
ü		Non-competition agreement required for equity award eligibility.  All employees must sign a non-competition agreement as a condition of receiving an equity award. The award is subject to clawback if the agreement is breached.
ü		No repricing or exchange of underwater stock options.  Our equity incentive plans do not permit repricing or exchange of underwater stock options without stockholder approval.
ü		No inclusion of equity awards in pension calculations.
ü		Limited executive perquisites.