|MEDTRONIC PLC filed this Form DEFR14A on 10/11/2017|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
We have provided additional information with respect to Proposal 4 regarding the classes of individuals who are eligible to participate in the 2013 Plan.
PROXY STATEMENT and Notice of 2017 Annual General Meeting of Shareholders Friday, Dec. 8, 2017 ■ 8 a.m. local time ■ Dublin, Ireland
NOTICE OF ANNUAL GENERAL MEETING
Friday, December 8, 2017
8:00 a.m. local time
Conrad Dublin Hotel, Earlsfort Terrace, Dublin 2, Ireland
Proposals 1 to 4 above are ordinary resolutions requiring a simple majority of the votes cast at the meeting to be approved. All proposals are more fully described in this proxy statement. There is no requirement under Irish law that Medtronic’s Irish Statutory Financial Statements for the fiscal year ended April 28, 2017, or the directors’ and auditor’s reports thereon be approved by the shareholders, and no such approval will be sought at the Annual General Meeting.
Shareholders of record at the close of business on October 10, 2017, are entitled to vote at the meeting.
ONLINE PROXY DELIVERY AND VOTING
As permitted by the Securities and Exchange Commission, we are making this proxy statement, the Company’s annual report to shareholders, and our Irish statutory financial statements available to our shareholders electronically via the Internet. We believe electronic delivery expedites your receipt of materials, reduces the environmental impact of our Annual General Meeting and reduces costs significantly. The Notice Regarding Internet Availability of Proxy Materials (the “Notice”) contains instructions on how you can access the proxy materials and how to vote online. If you received the Notice by mail, you will not receive a printed copy of the proxy materials unless you request one in accordance with the instructions provided in the Notice. The Notice will be mailed to shareholders on or about October 24, 2017, and will provide instructions on how you may access and review the proxy materials on the Internet and how to vote.
ADMISSION TO THE ANNUAL GENERAL MEETING
If you wish to attend the Annual General Meeting, you must be a shareholder on the record date and either request an admission ticket in advance by visiting www.proxyvote.com and following the instructions provided (you will need the control number included on your proxy card, voter instruction form or Notice), or bring proof of ownership of ordinary shares to the meeting. Tickets will be issued to registered and beneficial owners and to one guest accompanying each registered or beneficial owner.
August 28, 2017
By order of the Board of Directors,
Bradley E. Lerman
Senior Vice President, General Counsel and Company Secretary
Important Notice Regarding the Availability of Proxy Materials for the Annual General Meeting of Shareholders to be held on December 8, 2017: This proxy statement, the Company’s 2017 Annual Report to Shareholders and our Irish Statutory Financial Statements for the year ended April 28, 2017, are available at www.proxyvote.com.
This summary highlights information described in more detail elsewhere in this proxy statement. It does not contain all of the information that you should consider, and you should read the entire proxy statement carefully before voting.
2017 Annual General Meeting of Shareholders
Advance Voting Methods and Deadlines
Questions and Answers About Attending our Annual General Meeting and Voting
We encourage you to review the questions and answers about our Annual General Meeting and voting beginning on page 78 to learn more about the rules and procedures surrounding the proxy and Annual General Meeting process, as well as the business to be conducted at our Annual General Meeting. If you plan to attend the Annual General Meeting in person, we direct your attention to the information following “Admission to the Meeting” on page 79.
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Voting Matters and Board Recommendations
You are being asked to vote, by separate resolutions, on the election of the following twelve Directors. Each Director nominee is elected annually by a majority of votes cast. Detailed information about each Director’s background, skill sets and areas of expertise can be found beginning on page 13.
In December 2016, the Board decided to split the Quality and Technology Committee into two separate committees effective as of July 1, 2017, with the Quality Committee having a clear quality focus and the Technology Committee having a clear technology focus. In addition, effective March 10, 2017, the Board changed the name of the Finance Committee to the Finance and Financial Risk Committee and effective August 25, 2017, the Board changed the name of the Technology Committee to the Technology and Value Creation Committee.
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Corporate Governance Highlights
2017 Board Composition
Shareholder Outreach on Governance
We recognize the value of shareholder engagement and take a proactive approach to shareholder outreach on governance matters. We continuously engage with our shareholders, including investment and governance specialists, to seek input on governance, executive compensation, strategic issues and to address their questions and concerns. We bring feedback from our shareholders to our Board; such feedback is instrumental to the Board’s decision-making process.
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Medtronic is the global leader in medical technology – alleviating pain, restoring health, and extending life for millions of people around the world. Fiscal year 2017 was a solid year for Medtronic. The company delivered record revenue, made progress in each of its growth strategies, executed on its Covidien cost synergy commitments, generated strong free cash flow growth, and deployed its capital in line with its stated priorities, balancing the return of cash to our shareholders with disciplined reinvestment in its businesses.
During fiscal year 2017, Medtronic delivered record revenue of $29.7 billion, growing approximately 5 percent1, in the mid-single digits for the fifth consecutive year. The company made progress in each of its growth strategies. In Therapy Innovation, the company executed a steady cadence of meaningful product launches, as well as introduced some groundbreaking new technologies. In Globalization, the company expanded access to its therapies in emerging markets around the world, resulting in double-digit revenue growth1. In Economic Value, the company continued to extend its industry leadership in developing value-based healthcare solutions.
The integration of Covidien progressed as planned, and Medtronic has now realized over $600 million in synergy savings since the acquisition, and it remains on track to deliver its goal of $850 million of total cost savings by the end of fiscal year 2018. This operational productivity, coupled with Medtronic’s solid revenue growth, were key contributors to delivering double-digit diluted non-GAAP earnings per share growth1 and generating $5.6 billion in free cash flow2.
Medtronic strategically deployed its capital, meeting its commitment of returning 50 percent of its free cash flow to its shareholders in the form of dividends and net share repurchases. In addition, the company invested approximately $1.5 billion in several strategic investments and five tuck-in acquisitions, and these acquisitions are expected to further enhance Medtronic’s revenue growth and improve returns over time. Late in fiscal year 2017, the company announced the sale of a portion of its Patient Monitoring and Recovery division to Cardinal Health for $6.1 billion as part of its disciplined portfolio management strategy. The transaction closed early in Medtronic’s second quarter of fiscal year 2018.
Medtronic continues to create distinct competitive advantages and capitalize on the long-term trends in healthcare: namely, the desire to improve clinical outcomes; the growing demand for expanded access to care; and the optimization of cost and efficiency within healthcare systems. These trends, along with an aging population in most countries, produce secular growth tailwinds that Medtronic believes represent sustainable, long-term opportunities for the company. The company has a number of growth catalysts and is optimistic about its ability to deliver on its commitments and expand patient access to its products and services around the world.
Most importantly, in its fiscal year 2017, Medtronic served 70 million patients – more patients, in more places around the world, than in any year in its history. Two patients are benefitting from Medtronic therapies and services every second. This is a direct result of the dedication and passion of over 91,000 employees, collaborating with the company’s partners in healthcare, to fulfill the Medtronic Mission.
A few of our more notable fiscal year 2017 performance highlights include the following:
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Executive Compensation Philosophy
Our performance-based compensation programs align the interests of our Named Executive Officers (NEOs) with those of our shareholders. When our shareholders do well, our NEOs receive performance pay. We have developed programs that enable us to attract, retain and engage highly talented executives with compensation packages established pursuant to the following principles:
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Sustainability and Citizenship Highlights
A tenet of the Medtronic Mission – to maintain good citizenship as a company – drives a sense of purpose and responsibility to not only deliver the highest-quality products, therapies and services to our patients, but also to support healthy communities in the areas in which we operate.
That is why we embrace our role in creating positive social impact. Our corporate citizenship activities – related to community involvement, philanthropy, and environmental and governance issues – strengthen our contribution to society.
As an integral part of our business strategy, our sustainability efforts improve operational efficiency, reduce our environmental footprint, deepen relationships with customers, and support new business.
We tackle the sustainability issues that are most important to our Company and shareholders. These material issues have the greatest potential to impact our business operations and patients. Addressing and reporting on these issues is critical to the long-term viability of our business.
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This proxy statement contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements may be identified by words like “anticipate,” “expect,” “project,” “believe,” “plan,” “may,” “estimate,” “intend” and other similar words. Forward-looking statements in this proxy statement include, but are not limited to, statements regarding individual and Company performance objectives and targets, statements relating to the benefits of Medtronic’s acquisitions, product launches and business strategies, and Medtronic’s intent to return capital to shareholders through dividends and share repurchases. These and other forward-looking statements are based on our beliefs, assumptions and estimates using information available to us at the time and are not intended to be guarantees of future events or performance. Factors that may cause actual results to differ materially from those contemplated by the statements in this proxy statement can be found in Medtronic’s periodic reports on file with the Securities and Exchange Commission. The forward-looking statements speak only as of the date of this proxy statement and undue reliance should not be placed on these statements. We disclaim any intention or obligation to publicly update or revise any forward-looking statements. This cautionary statement is applicable to all forward-looking statements contained in this document.
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Our Board of Directors has twelve members, all of whom serve for a term of one year. All nominees are currently Medtronic directors who were elected by shareholders at the 2016 Annual General Meeting. In order to be elected as a director, each nominee must be appointed by an ordinary resolution and each must receive the affirmative vote of a majority of the votes cast by the holders of ordinary shares represented at the Annual General Meeting in person or by proxy. If a nominee becomes unable or declines to serve, the individuals named as proxies in the enclosed proxy form will have the authority to vote for any substitute who may be nominated in accordance with Medtronic’s Articles of Association. We have no reason to believe this will occur.
The Nominating and Corporate Governance Committee considers candidates for Board membership, including those suggested by shareholders, applying the same criteria to all candidates. Any shareholder who wishes to recommend a prospective nominee for the Board for consideration by the Nominating and Corporate Governance Committee must notify the Company Secretary in writing at Medtronic’s registered office at 20 on Hatch, Lower Hatch Street, Dublin 2, Ireland. Any such recommendations should provide whatever supporting material the shareholder considers appropriate, but should at a minimum include such background and biographical material as will enable the Nominating and Corporate Governance Committee to make an initial determination as to whether the nominee satisfies the criteria for directors set out in the Governance Principles.
If the Nominating and Corporate Governance Committee identifies a need to replace a current member of the Board, to fill a vacancy on the Board, or to expand the size of the Board, it considers candidates from a variety of sources, including third-party search firms that assist with identifying, evaluating and conducting due diligence on potential director candidates. The process followed to identify and evaluate candidates includes meetings to review biographical information and background material relating to candidates, and interviews of selected candidates by members of the Board. Recommendations of candidates for inclusion in the Board slate of director nominees are based upon the criteria set forth in the Governance Principles. These criteria include business experience and skills, judgment, honesty and integrity, the ability to commit sufficient time and attention to Board activities and the absence of potential conflicts with Medtronic’s interests. While the Nominating and Corporate Governance Committee does not have a formal diversity policy for Board membership, we seek directors who represent a mix of backgrounds and experiences that will enhance the quality of the Board’s deliberations and decisions. When evaluating candidates for Board membership, the Nominating and Corporate Governance Committee considers, among other factors, diversity with respect to viewpoint, skills, experience, and community involvement, and input from other members of the Board.
After completing the evaluation process, the Nominating and Corporate Governance Committee makes a recommendation to the full Board as to individuals who should be nominated by the Board. The Board determines the nominees after considering the recommendations and report of the Nominating and Corporate Governance Committee and such other nominees and evaluations as it deems appropriate.
Shareholders who intend to appear at the Annual General Meeting to nominate a candidate for election by the shareholders at the meeting (in cases where the Board does not intend to nominate the candidate or where the Nominating and Corporate Governance Committee was not requested to consider the candidacy) must comply with the procedures in Medtronic’s Articles of Association, which are described under “Other Information — Shareholder Proposals and Director Nominations” on page 80 of this proxy statement.
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Nominees for directors for one-year terms ending in 2018:
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE DIRECTOR NOMINEES.
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The Board of Directors has adopted Principles of Corporate Governance (the “Governance Principles”), last amended March 2017. The Governance Principles describe Medtronic’s corporate governance practices and policies, and provide a framework for the governance of Medtronic. Among other things, the Governance Principles include the provisions below.
Our Governance Principles, the charters of our Audit, Compensation, Finance and Financial Risk, Nominating and Corporate Governance, Quality, and Technology and Value Creation Committees and our codes of conduct are published on our website at www.medtronic.com/us-en/about/corporate-governance.html. These materials are available in print to any shareholder upon request. From time to time, the Board reviews and updates these documents as it deems necessary and appropriate to keep abreast of governance regulations.
Mr. Ishrak, our Chief Executive Officer, also serves as Chairman of the Board. The Board believes it is appropriate for Mr. Ishrak to serve as Chairman of the Board due to his extensive knowledge of, and experience in, the global health care industry generally and in the medical device industry specifically. This knowledge and experience is critical in identifying strategic priorities and providing unified leadership in the execution of strategy. We believe that Mr. Ishrak’s experience and knowledge as the CEO and Chairman is an asset to Medtronic and promotes efficient board functioning, with independent board leadership provided by our “Lead Independent Director”.
Under Medtronic’s Principles of Corporate Governance, the independent directors annually elect a Lead Independent Director to ensure periodic refreshment of Board leadership roles. Our current Lead Independent Director is Scott C. Donnelly who replaced Richard H. Anderson on July 1, 2017.
As Lead Independent Director, Mr. Donnelly’s duties include:
In keeping with Medtronic’s commitment to corporate governance best practices, Mr. Donnelly also takes the lead in both the Board’s ongoing, thoughtful evaluation of Medtronic’s governance structure and constructive shareholder engagement on emerging governance issues. Medtronic’s accountability to its shareholders is clearly indicated by its openness to their engagement, including through its proxy access policy and strong Lead Independent Director. In this role, Mr. Donnelly ensures that he is available, if appropriately requested by shareholders, for consultation and direct communication.
Four regular meetings of our Board were held in Fiscal Year 2017. At each Board meeting, our independent directors meet in executive session with no Company management present, as did each of our committees.
Our Board of Directors, in exercising its overall responsibility to oversee the management of our business, considers risks when reviewing the Company’s strategic plan, financial results, merger and acquisition-related activities, legal and regulatory matters and its public filings with the Securities and Exchange Commission. The Board is also deeply engaged in the Company’s
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Enterprise Risk Management (“ERM”) program and has received briefings on the outcomes of the ERM program and the steps the Company is taking to mitigate risks that program has identified. The Board’s oversight of risk management includes full and open communications with management to review the adequacy and functionality of the risk management processes used by management. In addition, the Board of Directors uses its committees to assist in its risk oversight responsibility as follows:
We conducted a risk assessment of our compensation policies and practices and concluded that such policies and practices do not create risks that are reasonably likely to have a material adverse effect on our Company. The framework for the assessment was developed using materials from the Compensation Committee’s independent consultant, Frederic W. Cook & Co., Inc. This framework included an update to a comprehensive internal survey used in Fiscal Year 2010 that was designed to identify material policies and practices to be assessed, a review of the identified compensation plans and practices against the evaluation framework and identification of mitigating factors with respect to any risks.
In particular, as a result of the assessment, we noted that:
Our standing Board committees consist solely of independent directors, as defined in the New York Stock Exchange (“NYSE”) Corporate Governance Standards. The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 (the “Exchange Act”). Each director attended 75% or more of the total Board and Board committee meetings on which the director served in Fiscal Year 2017. In addition, it has been the longstanding practice of Medtronic for all directors to attend the Annual General Meeting of Shareholders. All directors attended the last Annual General Meeting.
The following table summarizes (i) the membership of the Board as of the end of Fiscal Year 2017, (ii) the members of each of the Board’s standing committees as of the end of Fiscal Year 2017, and (iii) the number of times each standing committee met during Fiscal Year 2017.
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As of the End of Fiscal Year 2017
Effective on July 1, 2017, the Board refreshed its committee assignments in order to provide fresh perspective, facilitate diverse experiences and improve director engagement. In addition, in December 2016, the Board decided to split the Quality and Technology Committee into two separate Board committees effective July 1, 2017, in March 2017 the Board decided to rename the Finance Committee the Finance and Financial Risk Committee, and in August 2017 the Board decided to rename the Technology Committee the Technology and Value Creation Committee. The current committees and committee membership are as follows.
As of AUGUST 28, 2017
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The principal functions of our six standing committees — the Audit Committee, the Compensation Committee, the Finance and Financial Risk Committee, the Nominating and Corporate Governance Committee, the Quality Committee, and the Technology and Value Creation Committee — are described below.
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Audit Committee Pre-Approval Policies
Rules adopted by the SEC require public company audit committees to pre-approve audit and non-audit services provided by a company’s independent registered public accounting firm. Our Audit Committee has adopted detailed pre-approval policies and procedures pursuant to which audit, audit-related, tax and other permissible non-audit services are pre-approved by category of service. The fees are budgeted, and actual fees versus the budget are monitored throughout the year. During the year, circumstances may arise when it becomes necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, we obtain the approval of the Audit Committee before engaging the independent registered public accounting firm. The policies require the Audit Committee to be informed of each service, and do not permit any delegation of the Audit Committee’s responsibilities to management. The Audit Committee may delegate pre-approval authority to one or more of its members, but such member(s) must report any pre-approval decisions to the Audit Committee at its next scheduled meeting.
Compensation Committee1, 2
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Finance and Financial Risk Committee
Nominating and Corporate Governance Committee
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Technology and Value Creation Committee
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Under the NYSE Corporate Governance Standards, to be considered independent, the Board must affirmatively determine that the director has no material relationship with Medtronic, other than as a director. The Board of Directors has determined that the following directors, (all of our non-management directors), are independent under the NYSE Corporate Governance Standards: Messrs. Anderson, Arnold, Donnelly, Hogan, Lenehan, Powell and Pozen, Drs. Jackson and Nabel, Gov. Leavitt and Ms. O’Leary. In making this determination, the Board considered any current or proposed relationships that could interfere with a director’s ability to exercise independent judgment, including those identified by Medtronic’s Standards for Director Independence, which correspond to the NYSE standards on independence. These standards identify certain types of relationships that are categorically immaterial and do not, by themselves, preclude the directors from being independent. The types of relationships and the directors who have had such relationships include:
In the course of fulfilling its duties, the Board of Directors also considered situations in which the director had a further removed relationship with the relevant third party, such as being a director or trustee (rather than an employee or executive officer) of an organization that engages in a business relationship with Medtronic or receives discretionary charitable contributions from Medtronic or its affiliates. The Board determined that no such further removed relationships impact the independence of its directors.
The Board of Directors of Medtronic has adopted written related party transaction policies and procedures. The policies require that all “interested transactions” (as defined below) between Medtronic or any of its subsidiaries and a “related party” (as defined below) are subject to approval or ratification by the Nominating and Corporate Governance Committee. In determining whether to approve or ratify such transactions, the Nominating and Corporate Governance Committee will consider, among other factors it deems appropriate, whether the interested transaction is on the same terms as are generally available to an unaffiliated third-party under the same or similar circumstances, the extent of the related person’s interest in the transaction, and any other information regarding the interested transaction or the related party that would be material to investors in light of the circumstances. An interested transaction may be approved only if it is determined in good faith that, under all of the circumstances, the interested transaction is in the best interests of Medtronic and its shareholders. In addition, the Nominating and Corporate Governance Committee has reviewed certain categories of interested transactions and deemed them to be pre-approved or ratified. Also, the Board of Directors has delegated to the chair of the Nominating and Corporate Governance Committee (or another member if the chair is interested in the transaction) the authority to pre-approve or ratify any interested transaction in which the aggregate amount is not expected to exceed $1 million. Finally, the policies provide that no director shall participate in any discussion or vote regarding an interested transaction for which he or she is a related party, except that the director shall provide all relevant information concerning the interested transaction to the Nominating and Corporate Governance Committee.
Under the policies, an “interested transaction” is defined as any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including any indebtedness or any guarantee of indebtedness) in which:
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An “interested transaction” includes a material amendment or modification to an existing interested transaction.
A “related party” is defined as any:
During Fiscal Year 2017, Sarah Powell, a daughter of director Kendall J. Powell, was employed by Medtronic as a Senior Leadership Development Rotation Program Associate. The Leadership Development Rotation Program is a three-year program designed to place high-potential, high-performing graduates of an MBA program in two 18-month assignments in different business units of Medtronic. The aggregate value of the compensation paid to Ms. Powell during Fiscal Year 2017 was approximately $160,700, which included salary, bonus and incentive payments and restricted stock units. In addition, Ms. Powell received the standard benefits provided to other non-executive Medtronic employees for her services during Fiscal Year 2017. Ms. Powell is not an executive officer of, and does not have a key strategic role within, Medtronic.
During Fiscal Year 2017, Christopher Ellis, a son of Gary Ellis, former Chief Financial Officer, became employed by Medtronic as a Senior Finance Program Manager after Gary Ellis retired as Chief Financial Officer. The aggregate value of the compensation paid to Christopher Ellis during Fiscal Year 2017 was approximately $139,292, which included salary and bonus. In addition, Christopher Ellis received the standard benefits provided to other non-executive Medtronic employees for his services during Fiscal Year 2017. Christopher Ellis is not an executive officer of, and does not have a key strategic role within, Medtronic.
The Sarbanes-Oxley Act of 2002 requires companies to maintain procedures to receive, retain and treat complaints received regarding accounting, internal accounting controls or auditing matters and to allow for the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. We currently have such procedures in place. Our 24-hour, toll-free confidential compliance line is available for the submission of concerns regarding accounting, internal controls or auditing matters.
Our Lead Independent Director may be contacted via e-mail at email@example.com. Shareholders may also communicate with our independent directors via e-mail at firstname.lastname@example.org. Communications received from shareholders may be forwarded directly to Board members as part of the materials sent before the next regularly scheduled Board meeting, although the Board has authorized management, in its discretion, to forward communications on a more expedited basis if circumstances warrant or to exclude a communication if it is illegal, unduly hostile or threatening or otherwise inappropriate. Advertisements, solicitations for periodical or other subscriptions and other similar communications generally will not be forwarded to the directors.
All Medtronic employees, including our Chief Executive Officer and other senior executives, are required to comply with our Code of Conduct to help ensure that our business is conducted in accordance with the highest standards of ethical behavior. Our Code of Conduct covers all areas of professional conduct, including customer relationships, conflicts of interest, insider trading, intellectual property and confidential information, as well as requiring strict adherence to all laws and regulations applicable to our business. Employees are required to bring any violations and suspected violations of the Code of Conduct to the attention of Medtronic through management or our legal counsel or by using Medtronic’s confidential compliance line. In addition, our Code of Ethics for Senior Financial Officers provides specific policies applicable to our Chief Executive Officer, Chief Financial Officer, Treasurer and Controller and to other senior financial officers designated from time to time by our Chief Executive Officer.
These policies relate to internal controls, the public disclosures of Medtronic, violations of the securities or other laws, rules or regulations, and conflicts of interest. The members of the Board of Directors are subject to a Code of Business Conduct and Ethics relating to director responsibilities, conflicts of interest, strict adherence to applicable laws and regulations, and promotion of ethical behavior.
Our codes of conduct are published on our website, at www.medtronic.com under the About Medtronic — Corporate Governance section, and are available in print to any shareholder who requests them. We intend to disclose future amendments to, or waivers for, directors and executive officers of, our codes of conduct on our website promptly following the date of such amendment or waiver.
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The Nominating and Corporate Governance Committee conducts a biennial review of our non-employee director compensation program and makes recommendations for adjustments, as appropriate, to the Board. In connection with the review conducted in Fiscal Year 2016, the Nominating and Corporate Governance Committee’s outside consultant on director compensation, Towers Watson, assessed the compensation paid to our non-employee directors against non-employee director compensation trends and data from our 28-company peer group, which includes both Irish and non-Irish companies. After consultation with Towers Watson, the Nominating and Corporate Governance Committee found the compensation program to be appropriate and no changes were made to the program in the last two fiscal years.
The principal features of the compensation received by our non-employee directors for Fiscal Year 2017 are described below.
Non-employee Directors are eligible for the following compensation:
The Director Compensation table reflects all compensation awarded to, earned by, or paid to the Company’s non-employee directors during Fiscal Year 2017. No additional compensation was provided to Mr. Ishrak for his service as a director on the Board.
Fees Earned or Paid in Cash
The fees earned or paid in cash column represents the amount of the annual retainer and annual cash stipend for Board and committee service.
The annual cash retainer, annual cash stipend and special committee fees are paid in two installments — in the middle and at the end of a fiscal year. The annual cash retainer and annual cash stipend are reduced by 25% if a non-employee director does not attend at least 75% of the total meetings of the Board and Board committees on which such director served during the relevant year. The table on page 21 of this proxy statement under the section entitled “Committees of the Board and Meetings” shows the committees on which the individual directors serve.
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Directors are annually granted restricted stock units on the first day of the fiscal year in an amount equal to $175,000 divided by the fair market value of a share of Medtronic ordinary shares on the date of grant. Grants are made on a pro rata basis for participants who are directors for less than the entire preceding fiscal year and are reduced by 25% for any directors who failed to attend at least 75% of the applicable meetings during such fiscal year. The restricted stock units vest on the one-year anniversary of the grant date. Dividends paid on Medtronic ordinary shares are credited to a director’s stock unit account in the form of additional units.
Prior to the Covidien acquisition in January 2015, directors were granted deferred stock units rather than restricted stock units. The balance in a director’s stock unit account will be distributed to the director in the form of Medtronic ordinary shares upon resignation or retirement from the Board in a single distribution or, at the director’s option, in five equal annual distributions.
Non-employee directors held the following restricted stock units, stock options, and deferred stock units as of April 28, 2017:
To align directors’ interests more closely with those of shareholders, the Nominating and Corporate Governance Committee approved the Medtronic plc Stock Ownership and Retention Guidelines pursuant to which non-employee directors are expected to own stock of Medtronic in an amount equal to five times the annual Board retainer. Until the ownership guideline is met, the directors must retain 75% of after-tax Medtronic shares received through settlement of equity compensation awards. Once the guideline is met, the directors must retain 75% of after-tax shares for one year following grant of equity compensation awards. For stock options, net after-tax profit shares are those shares remaining after payment of the option’s exercise price and income taxes. For share issuances, net gain shares are those remaining after payment of income taxes. Shares retained may be sold on the later of one year after grant or when the ownership guidelines are met. In the case of retirement or termination, shares may be sold after the shorter of the remaining retention period or one year following retirement or termination, as applicable. As of July 7, 2017, all directors were in compliance with the stock ownership and retention policy; however, due to their more recent appointments, Mr. Donnelly and Dr. Nabel are continuing to make progress towards the required ownership guidelines.
Prior to the Covidien acquisition in January 2015, directors were able to defer all or a portion of their cash compensation through participation in the Medtronic Capital Accumulation Plan Deferral Program. This was a nonqualified plan designed to allow participants to defer a portion of their pre-tax compensation, and to earn returns or incur losses on those deferred amounts based upon allocation of their balances to one or more investment alternatives, which were the same investment alternatives that Medtronic offers its employees through its 401(k) Plan. Director contributions in the deferred compensation program were discontinued effective as of the close of the Covidien acquisition in January 2015.
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The following table shows information as of July 7, 2017, concerning each person who is known by us to beneficially own more than 5% of our ordinary shares.
The following table shows information as of July 7, 2017, concerning beneficial ownership of Medtronic’s ordinary shares by Medtronic’s directors, named executive officers identified in the Summary Compensation Table under “Executive Compensation,” and all directors and executive officers as a group.
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Based upon a review of reports and written representations furnished to it, Medtronic believes that during Fiscal Year 2017, all filings with the SEC by its executive officers and directors complied with requirements for reporting ownership and changes in ownership of Medtronic’s ordinary shares pursuant to Section 16(a) of the Exchange Act.
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This Compensation Discussion and Analysis (“CD&A”) describes the compensation program and compensation decisions made by the Compensation Committee in regard to the compensation of the following named executive officers (“NEOs”) for Fiscal Year 2017:
Fiscal Year 2017 Highlights
During Fiscal Year 2017, we achieved solid results across all of our business groups and geographies. At the same time, we produced meaningful operating profit growth based on our synergy capture from the Covidien integration and our operating excellence initiatives. Performance with respect to our differentiated growth platforms was as follows: (i) revenue growth was mid-single digit range on a constant currency, constant week basis, (ii) diluted non-GAAP EPS growth was in the double digits on a constant currency, constant week basis, and (iii) free cash flow was $5.6 billion. Nevertheless, our performance fell slightly below the financial goals we set for Fiscal Year 2017, as illustrated below. As a result, our payout for the annual incentive plan was below target and paid out at 94.41%.
The Company is committed to deliver mid-single digit constant currency revenue growth and double-digit constant currency EPS growth over the long-term. With our diverse growth platforms and leadership in growth markets, we expect to create long-term value growth for our shareholders.
The Compensation Committee made the following compensation decisions for Fiscal Year 2017:
In addition, award payouts for the annual incentive plan and the three-year long-term performance plan were at 94.41% and 100% of target award opportunities, respectively, as summarized below.
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PERFORMANCE AS A PERCENT OF PLAN PERFORMANCE &
Finally, business group and region NEOs received special equity grants in conjunction with their Fiscal Year 2017 compensation reviews to strengthen long-term retention of key executives to support leadership continuity.
Compensation of our Chief Executive Officer
The compensation of our CEO is positioned within the median range of our Compensation Comparison Group and is based on the same design elements and performance standards that are applicable to the other NEOs. For Fiscal Year 2017, the Compensation Committee determined to increase the CEO’s base salary by 3%, maintain his target annual incentive opportunity at 175% of base salary, and increase his long-term incentive opportunity from $13.0 million to $13.5 million, which will be equally allocated to stock options, restricted stock units, and long-term performance plan awards.
The following chart presents the increase in target total direct compensation for our CEO for Fiscal Year 2017 as determined following Fiscal Year 2016, as well as the total shareholder return for Fiscal Year 2016 for the Company, our compensation comparison group, and our industry peers.
CHANGE IN FY 2017 CEO TOTAL DIRECT COMPENSATION
MEDTRONIC PLC 2017 Proxy Statement 33
Target total direct compensation represents base salary + target annual incentive + target long-term incentive
NEO Pay Versus Performance
The Compensation Committee annually evaluates how the amount of annual cash compensation aligns with the Company’s performance when ranked against the comparison companies. For purposes of this analysis, annual size and performance is evaluated based on company size, profitability, and growth; annual cash compensation represents the actual base salaries and annual bonuses paid for each fiscal year. As illustrated below, total annual compensation for the NEOs has been directionally aligned with the Company’s size and performance over the last five fiscal years.
TOTAL ANNUAL COMPENSATION
Consideration of “Say-on-Pay” Voting Results
For Fiscal Year 2016, the Medtronic advisory vote on “say-on-pay” garnered shareholder support of 95%. The Compensation Committee reviewed shareholder and other stakeholder feedback along with the results of the shareholder “say-on-pay” vote in making compensation decisions during Fiscal Year 2016.
Efforts to gather stakeholder feedback included periodic outreach to our largest shareholders. Based on this feedback and the 95% say-on-pay approval by shareholders in 2016, shareholders support our compensation policies and practices. Therefore, the Compensation Committee continued to apply the same principles in determining Fiscal Year 2017 compensation actions. The Medtronic advisory “say-on-pay” vote is held on an annual basis.
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The Compensation Committee has incorporated the following market-leading governance features into our programs:
Role of Compensation Committee
The Compensation Committee establishes our compensation philosophy, program design and administration rules, and is the decision-making body on all compensation matters related to our NEOs. The Committee solicits input from an independent outside compensation consultant and relies on the consultant’s advice. For more information on the Compensation Committee, its members and its duties as identified in its charter, please refer to the section entitled “Committees of the Board and Meetings — Compensation Committee” beginning on page 23 of this proxy statement.
Independent Compensation Consultant
The Compensation Committee has engaged Frederic W. Cook & Co., Inc., an independent outside compensation consulting firm (the “Independent Consultant”), to advise the Compensation Committee on all matters related to executive officer compensation. Specifically, the Independent Consultant conducts an annual competitive market analysis of total compensation for NEOs, provides relevant market data, updates the Compensation Committee on compensation trends and regulatory developments, and counsels the Committee on program designs and specific compensation decisions related to our CEO and other executives. This is the only work completed by Frederic W. Cook & Co., Inc. for Medtronic and the services of that firm are at the discretion and direction of the Compensation Committee.
In June 2013, the Compensation Committee adopted enhanced independence standards for outside consultants that mirror the NYSE listing standards. This policy established an assessment framework to confirm and report on a consultant’s independence. The policy also requires a consultant to confirm its independent status according to the Compensation Committee’s standards. The Compensation Committee reviews and confirms the independence of its outside consultants on an annual basis.
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In light of the NYSE listing standards, the Compensation Committee has considered the independence of the Independent Consultant. In connection with this process, the Compensation Committee has reviewed, among other items, a letter from the Independent Consultant addressing its independence and the members of the consulting team serving the Committee, including the following factors: (i) other services provided to us by the Independent Consultant, (ii) fees paid by us as a percentage of the Independent Consultant’s total revenue, (iii) policies or procedures of the Independent Consultant that are designed to prevent conflicts of interest, (iv) any business or personal relationships between the senior advisor of the consulting team with a member of the Compensation Committee, (v) any Company stock owned by the senior advisor or any member of that individual’s immediate family, and (vi) any business or personal relationships between our executive officers and the senior advisor. The Compensation Committee discussed these considerations and concluded that the work performed by the Independent Consultant and its senior advisor involved in the engagement did not raise any conflict of interest.
Role of Chief Executive Officer in Compensation Decisions
In making compensation decisions for executive officers reporting to the CEO, the Compensation Committee solicits the views of our CEO and the Independent Consultant. The CEO is not present during Compensation Committee executive sessions and does not make recommendations to the Compensation Committee about his own compensation.
Our compensation programs align the interests of our NEOs with those of our shareholders. We provide market-competitive programs that enable us to attract, retain and engage highly talented executives with compensation packages established pursuant to the following principles:
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The design of our executive compensation program is illustrated below:
The mix of total direct compensation for our NEOs is weighted 83% to 91% at risk with 67% to 75% allocated to long-term incentives, as illustrated below:
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The Compensation Committee considers relevant market pay practices when establishing executive compensation levels and evaluating compensation programs, including base salary and annual and long-term incentives. To facilitate our ability to benchmark competitive compensation levels and practices, the Compensation Committee established a 27-company compensation comparison group (“Comparison Group”). The Compensation Committee selected the companies that constitute the Comparison Group after discussing various recommendations from the Independent Consultant. The Comparison Group is selected using Compensation Committee-approved criteria designed to identify companies that reflect our size (measured by revenue, market capitalization, and other size measures), our complexity, and our global footprint and to ensure we include companies that represent our Medical Device and Life Sciences industry.
The Compensation Committee uses data from the Comparison Group to establish a competitive market median range within which individual pay can be positioned to reflect each NEO’s experience and performance. Consistent with our pay-for-performance philosophy, we establish an award range for short-term and long-term incentives that generates above-market pay for above-market performance and below-market pay for below-market performance. In addition to the competitive market information, the Compensation Committee also reviews information about performance, potential, expertise, and experience for each NEO.
The following table summarizes the selection criteria used by the Compensation Committee to select the Compensation Comparison Group.
During Fiscal Year 2017, the Independent Consultant recommended the removal of St. Jude Medical from the Comparison Group because they were acquired by Abbott Laboratories in January 2017 and Abbott Laboratories is in our Comparison Group. The Compensation Committee approved that change. Summarized below is a comparison of the Company to the Comparison Group in various measures of financial and market size at the middle of Fiscal Year 2017:
COMPARISON GROUP SIZE COMPARISONS
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Transition of Gary Ellis from Chief Financial Officer Role
Medtronic announced on May 4, 2016, Gary Ellis’ intent to retire from his Chief Financial Officer (“CFO”) role effective June 20, 2016, concurrent with the appointment of Karen Parkhill to the CFO role. Mr. Ellis continued to be employed until December 31, 2016, to assist with the CFO transition as well as to continue leading Medtronic’s Global Operations, Real Estate Management, and Information Technologies functions.
The table below shows the Fiscal Year 2016 and 2017 compensation for Mr. Ellis.
The base salary increase of 4.6% for Mr. Ellis was in recognition of strong performance in FY16, and the overall compensation package reflected Mr. Ellis’ agreement to continue leading Medtronic’s Global Operations, Real Estate, and Information Technologies functions until a successor was appointed and to provide CFO transition support for Ms. Parkhill.
Appointment of Karen Parkhill to Chief Financial Officer Role
Medtronic announced on May 4, 2016, the appointment of Karen Parkhill as Executive Vice President and Chief Financial Officer of Medtronic. She serves on the Company’s Executive Committee and is responsible for leading Medtronic’s global finance organization and key supporting functions, including Treasury, Controller, Tax, Internal Audit, Investor Relations, Corporate Strategy, and Business Development.
Ms. Parkhill joined Medtronic from Comerica Incorporated, where she was Vice Chairman and Chief Financial Officer. She was a member of Comerica’s Management Executive Committee and the Comerica Bank Board of Directors. As Chief Financial Officer at Comerica, Ms. Parkhill had direct management of Finance, overseeing Accounting, Business Finance, Corporate Planning and Development, Investor Relations, and Treasury, as well as Economics, with responsibility for all financial reporting. She previously had administrative responsibilities for Comerica’s Service Company, Corporate Compliance and Financial Intelligence. Ms. Parkhill’s full professional biography can be found on Medtronic.com.
The table below shows the Fiscal Year 2017 compensation for Ms. Parkhill.
One-Time, New Hire Compensation
Ms. Parkhill forfeited certain compensation following her termination of employment with Comerica. Medtronic compensated Ms. Parkhill for this loss by providing a $1 million cash bonus, paid 50% within 30 calendar days of the effective date of her employment and 50% six months following the effective date (in each case subject to the Company’s standard claw-back policy), as well as a one-time restricted stock unit award (“New Hire RSU”) on the effective date of her employment. The New Hire RSU had a grant date value of $4.4 million and vests in 33-1/3% increments on each of the first three anniversaries of the grant date, subject to the Company attaining a diluted earnings per share threshold for the fiscal year ending prior to each vesting date. The Compensation Committee reviews benchmark data provided by the Independent Consultant when assessing one-time, new hire compensation arrangements and determined that Ms. Parkhill’s one-time, new hire compensation is consistent with competitive market practice.
Fiscal Year 2017 Annual Base Salaries for Other Named Executive Officers
Our philosophy is to maintain base salary within a +/- 15% range around the median base salary paid by our Comparison Group. The range allows for pay decisions to take into account individual factors such as performance, potential, expertise, and experience. At the beginning of each fiscal year, the Independent Consultant presents to the Committee an analysis that identifies the median base salary ranges for the CEO and each NEO based on their respective, or substantially similar, positions in the Compensation Comparison
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Group. For example, the Independent Consultant analyzes Messrs. Coyle and Hanson’s compensation compared to compensation of the median base salary range for business group leaders of companies in the Comparison Group. Using this market data for each of the NEOs, the Compensation Committee approves base pay increases to maintain base salary within the market median range, again, taking into account individual factors such as performance, potential, expertise, and experience.
The table below shows the Fiscal Year 2017 base salary increases for the CEO and each NEO (excluding Mr. Ellis and Ms. Parkhill with respect to the CFO role, which is discussed on the previous page).
Fiscal Year 2017 Annual Incentive Target Pay
Using the same analytical approach described for the annual base salary, the Independent Consultant identifies the median for annual incentive target pay for the CEO and each NEO, which is set as a percentage of annual base salary. No changes were made to Fiscal Year 2017 annual incentive target pay. The table below shows Fiscal Year 2017 CEO and NEO annual incentive target pay as a percentage of base salary (Mr. Ellis and Ms. Parkhill were discussed on previous page).
Fiscal Year 2017 Long-Term Incentive Plan (LTIP) Target Pay
Using the same analytical approach described for the annual base salary and annual target incentive, the Independent Consultant identifies the median for long-term incentive plan target pay for the CEO and each NEO, which is set as target value. For Fiscal Year 2017, changes made to the long-term incentive plan target pay for the CEO and NEOs were based on changes in the market median value. The table below shows Fiscal Year 2017 CEO and NEO target long-term incentive pay as a percentage of base salary (Mr. Ellis and Ms. Parkhill were discussed on previous page).
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Fiscal Year 2017 Special Retention Restricted Stock Unit (RSU) Grants
The Compensation Committee monitors the retentive value of all unvested, long-term incentive plan components. The Committee uses a target value of two (2) times target total direct compensation (TTDC) which is equal to annual base salary plus annual incentive target plus long-term incentive target as a best practice method to quantify the sufficiency of retentive financial incentives. Infrequently, the Committee will grant special RSUs as part of our retention program of high performing, in-demand key executives. Median TTDC values have increased following the FY15 integration of Covidien and Medtronic, resulting in outstanding, unvested LTIP values dropping significantly below the two times TTDC target.
Additionally, Fiscal Year 17 was a critical year to ensure retention of key business group and region executives to support leadership continuity. Based on these factors, the Committee approved special RSUs for the NEOs noted in the following table as well as for other executive business group and region leaders.
The special RSUs vest over three years.
Annual incentive compensation supports the Compensation Committee’s pay-for-performance philosophy and aligns individual goals with Company goals as set forth in the Company’s annual operating plan. Under the Medtronic Incentive Plan, executives are eligible for cash awards based on the Company’s attainment of performance measures established by the Compensation Committee and the Board of Directors as part of the annual and strategic planning process. Consistent with past practice, the Compensation Committee structured the 2017 annual incentive plan as follows:
In establishing the annual incentive plan design, the Compensation Committee, in consultation with its Independent Consultant and management, considered shareholder feedback, competitive comparisons and the Company’s strategic imperatives. When considering the 2017 plan design, the Compensation Committee considered the 95% support expressed by shareholders for the Fiscal Year 2016 say-on-pay proposal. Additionally, the Compensation Committee continues to use performance measures that come directly from the Company’s annual operating plan (which is formally approved by the Board of Directors) and that represent the best financial measures of annual executive performance expectations. Accordingly, the key design elements of the Fiscal Year 2017 annual incentive plan, which are substantially the same as our Fiscal Year 2016 plan, are as follows:
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Fiscal Year 2017 Annual Incentive Plan Calculation Methodology
In calculating the annual incentive plan results, if the minimum performance for a measure is met, then a performance multiplier for each performance measure is determined and the overall performance score is calculated. For each performance measure, the performance multiplier would be 0 if performance is below the minimum, 0.5x if performance is at threshold, 1x if performance is at target and 2x if performance is at or above the maximum performance level. The performance multiplier for each performance measure is multiplied by the weighted percentage to obtain a performance score for that measure. The performance scores for each measure are added together for an overall performance score, taking into account the Quality Compliance Modifier. That overall performance score is then multiplied by the applicable NEO’s individual target award and eligible earnings to arrive at the actual payment amount, as illustrated below:
MEDTRONIC INCENTIVE PLAN PERFORMANCE EQUALS:
Fiscal Year 2017 Annual Incentive Plan Performance Measures
At the Compensation Committee’s June 2016 meeting, the Committee approved the target performance goal and performance range for each of the three equally weighted performance measures. The targets come directly from the Company’s Board-approved annual operating plan and the performance range is derived from the median performance range structure used by our compensation Comparison Group. The Committee also strives to ensure the three measures are aligned with each other.
The following provides details about the performance measures, targets, and performance range.
For purposes of the annual incentive calculation, “diluted earnings per share” refers to non-GAAP diluted earnings per share as reported to shareholders. A reconciliation of the GAAP to non-GAAP diluted earnings per share is included in Appendix A to this proxy statement. Revenue growth is defined as the annual growth rate in revenue excluding the effects of foreign exchange rates, and is expressed as a percentage. Cash Flow Indicator is defined as profit after tax exclusive of special charges, plus or minus changes in accounts receivable, inventories, and accounts payable. The Cash Flow Indicator only includes changes in assets and liabilities that best reflect annual operations. This calculation excludes the effects of foreign exchange rates. Quality Compliance Modifier Performance Threshold uses a score calculated as follows:
FDA Inspections = Average Number of Findings per Inspection X 10 points
Non-Material FDA Warning Letter = 1 point per finding
Material FDA Warning Letter = 20 points
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Using the same analytical approach described for annual base salary and short-term incentives, the Independent Consultant identifies a +/- 20% median range for long-term incentive target pay for the CEO and each NEO. Target LTIP is expressed as a fixed dollar value from which the underlying shares subject to the LTIP award are determined based on the market price at the close of business on the grant date.
The target is split equally among three LTIP components; stock options, restricted stock units, and a three-year cash incentive plan called the Long-Term Performance Plan (LTPP). For example, the hypothetical target LTIP of $2,400,000 would be granted as $800,000 stock options (full-value equivalent), $800,000 restricted stock units, and $800,000 under the LTPP. Note that stock options are stated in a full-value equivalent, using a four-to-one conversion ratio for the purposes of setting the LTIP target. This value conversion ratio will differ slightly from the Company’s Black-Scholes grant date valuation used for accounting expense purposes under FASB ASC Topic 718.
Fiscal Year 2017 Long-Term Incentive Plan Components
Stock options are a performance-based compensation component that tie one-third of the target LTIP value to stock price appreciation and shareholder value creation. Stock options only have value when the market price exceeds the exercise price. All stock option grants have an exercise price that is equal to the market close stock price on the date of grant. Stock options have a ten-year term and vest in equal increments of 25% per year beginning one year after the date of grant.
Restricted Stock Units (RSU)
Restricted stock units represent the second one-third of the target LTIP value, and are intended to assist in retaining high performing executives and align executives’ compensation with shareholders through long-term stock ownership. The RSU grants cliff vest (100%) on the third anniversary of the grant date. Unlike the more commonly used time-based RSUs used by our Comparator Group, Medtronic’s RSUs include a three-year minimum performance threshold that must be met before the RSUs vest. For Fiscal Year 2017 RSU grants, the performance threshold was set as the diluted earnings per share cumulative compound annual growth rate (cumulative CAGR) of 3%.
Long-Term Performance Plan (LTPP)
Our LTPP is a three-year cash incentive plan that is based on long-term measures of Company performance. Our LTPP design was established following an extensive review completed by the Compensation Committee, Independent Consultant, and management. The review considered shareholder feedback, competitive benchmarking, and the Company’s short-term and long-term strategic imperatives. The LTPP has different measures than our short-term incentive plan as it is tied to longer term financial performance measures that are not influenced by variability in the stock market. The LTPP pays in cash after the end of the three fiscal year performance period, provided a minimum level of diluted earnings per share is attained. A new LTPP award grant and performance period is established at the beginning of each fiscal year. Because three-year performance periods overlap, performance goals are established at the start of each performance period and, once established, do not change.
Fiscal Year 2017 Long-Term Performance Plan Calculation Methodology
For each performance measure, the performance multiplier would be 0 if performance is below the minimum, 0.5x if performance is at threshold, 1x if performance is at target, and 2x if performance is at or above the maximum performance level. The performance multiplier for each performance measure is multiplied by the weighted percentage to obtain a performance score for that measure. The performance scores for each measure are added together for an overall performance score. That overall performance score is then multiplied by the applicable NEO’s individual target award to arrive at the actual payment amount.
LONG-TERM INCENTIVE PLAN PAYOUT EQUALS:
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Fiscal Year 2017 Long-Term Performance Plan Performance Measures
At the Compensation Committee’s June 2016 meeting, the Committee approved the LTPP performance measures and targets for the Fiscal Year 2017 – 2019 performance cycle. The targets were established based on Medtronic’s strategic plan and aligned with the goals disclosed to investors. The revenue growth measure, target, and performance range are different from those applicable to the annual incentive plan because the LTPP measures cumulative CAGR over a three-year performance period. Cumulative CAGR requires that each year’s growth is counted. In contrast, standard CAGR measures only the beginning and end points.
The following table provides detailed information about each performance measure.
Revenue growth is defined as Medtronic’s three-year cumulative compounded annual revenue growth measured at constant currency, but otherwise including all other components (acquisitions, divestitures, etc.).
Return on Invested Capital is defined as Net Cash Earnings plus Interest Expense net of Tax, divided by Invested Capital for each year, averaged over the 3-year period. Net Cash Earnings is defined as non-GAAP earnings (adjusted to exclude the impact of non-recurring items) after the removal of the after-tax impact of Amortization. Invested Capital is defined as Total Equity Plus Interest-Bearing Liabilities less Cash and Cash Equivalents for each year.
Fiscal Year 2017 Annual Incentive Plan Results and Payouts
At the Compensation Committee’s June 2017 meeting, the Committee reviewed performance against the incentive plan targets for Fiscal Year 2017 and approved the resulting CEO and NEO annual incentive plan payout percentages and payments as shown below.
Annual Incentive Plan Financial Results:
Annual Incentive Plan Quality Compliance Modifier:
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Annual Incentive Plan Payments:
Fiscal Year 2015 — 2017 Restricted Stock Unit Payout Results
At the Compensation Committee’s June 2017 meeting, the Committee certified the attainment of the 3% cumulative CAGR diluted earnings per share performance threshold results for the restricted stock unit performance period that began in Fiscal Year 2015 and was completed at the end of Fiscal Year 2017.
The following table shows the results for fiscal year 2015-2017 Restricted Stock Unit Performance Threshold:
Fiscal Year 2015 — 2017 Long-Term Performance Plan Payout Results
At the Compensation Committee’s June 2017 meeting, the Committee certified the results for the LTPP performance period that began in Fiscal Year 2015 and was completed at the end of Fiscal Year 2017. Payments of awards for this LTPP performance period were made during the first fiscal quarter of 2018 and can be found in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table on page 50.
Fiscal Year 2015 — 2017 Long-Term Performance Plan Results
The following table shows the results for Fiscal Year 2015 – 2017 LTPP and the resulting total payout percentage:
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Long-Term Performance Plan Payments:
Medtronic provides broad-based benefit plans to all of its employees, including the same programs for NEOs. All employees participate in the same health care plans, and we do not provide NEOs with any different or additional benefit plans, except for a business allowance of $24,000 for U.S.-based NEOs and $40,000 for the CEO. Our business allowance policy is described in detail below.
United States Tax-Qualified Retirement Plans
Medtronic sponsors a number of United States tax-qualified retirement plans for its employees, including the NEOs. The Company maintains the Medtronic Retirement Plan (“MRP”), which consists of two types of benefits – the Final Average Pay Pension (“FAPP”) benefit and the Personal Pension Account (“PPA”) benefit. Employees hired before May 1, 2005 could elect to receive the FAPP and either the PPA or the Personal Investment Account (“PIA”) feature in the Medtronic Savings and Investment Plan – our 401(k) plan. Employees hired or rehired on or after May 1, 2005 but prior to January 1, 2016 are not eligible for the FAPP benefit as that particular benefit has been closed to new entrants, but may elect either the PPA benefit under the MRP or the PIA feature under the 401(k) plan. Employees hired or rehired on or after January 1, 2016 are eligible for the Medtronic Core Contribution (“MCC”) feature in the 401(k) plan. Additional details regarding the MRP and 401(k) plan are provided on page 57 of this proxy statement.
Supplemental Retirement Plans
The Company offers a Nonqualified Retirement Plan Supplement (“NRPS”) designed to provide all eligible employees, including the NEOs, with benefits that supplement those provided under certain of our tax-qualified plans. The NRPS is designed to restore benefits lost under the PPA, PIA, FAPP or MCC due to covered compensation limits prescribed by the Internal Revenue Code. The NRPS also restores benefits for otherwise eligible compensation deferred into the Medtronic Capital Accumulation Plan Deferral Program (the “Capital Accumulation Plan”). The NRPS provides employees with no greater benefit than they would have received under the qualified plan in which they participate were it not for the covered compensation limits and deferrals into the Capital Accumulation Plan.
Nonqualified Deferred Compensation Plan
The Company provides all employees at the vice president level or above, including our NEOs, and highly-compensated employees with a market-competitive nonqualified deferred compensation plan through the Capital Accumulation Plan. Our plan allows these employees to make voluntary deferrals from their base pay and incentive payments, which are then credited with gains or losses based on the performance of selected investment alternatives. These alternatives are the same as those offered in our tax-qualified 401(k) Plan for all employees. There are no Company contributions to the plan or Company subsidized returns or Company guaranteed returns.
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Medtronic does not provide any perquisites such as automobiles, club memberships, or financial and tax advisors. Instead, we provide NEOs with a market-competitive business allowance. The NEOs may spend their business allowance at their discretion for expenses such as financial and tax planning, automobiles or club memberships. The business allowance is paid as taxable income, and we do not track how executives use their respective business allowances. The annual business allowances provided to our U.S.-based NEOs in Fiscal Year 2017 ranged from $24,000 to $40,000. Additionally, it is occasionally appropriate for NEOs to be accompanied during business travel by their spouses. The expenses associated with such travel, while rare, are considered taxable income. The business allowances and travel expenses are included in the “All Other Compensation” column of the Summary Compensation Table.
Corporate Aviation Service
The Medtronic Aviation service provides air transportation for use primarily by the CEO and members of the Board of Directors. Other executives may occasionally use the aviation services for business purposes based on availability and approval by the CEO or General Counsel. The service will help facilitate more effective and efficient travel planning and limited personal use is deemed appropriate in conjunction with scheduled business travel.
Change of Control Policy
Compensation in a change of control situation is designed to protect the compensation already earned by executives and to ensure that they will be treated fairly in the event of a change of control, and to help ensure the retention and dedicated attention of key executives critical to the ongoing operation of the Company. Our change of control policy supports these principles. We believe shareholders will be best served if the interests of our executive officers are aligned with shareholders’ interests, and we believe providing change of control benefits should motivate senior management to objectively evaluate potential mergers or transactions that may be in the best interests of shareholders. Our change of control agreements are discussed in more detail in the “Potential Payments Upon Termination or Change of Control” section of “Executive Compensation.”
Our Change of Control (COC) Policy requires a “double trigger” and only applies if a participant is involuntarily terminated without cause or the participant terminates employment for good reason within three years after a COC event. Our COC policy also does not provide for any “golden parachute” excise tax gross-ups.
Compensation Risk Assessment
Compensation policies and practices are also designed to discourage inappropriate risk-taking. While you should refer to the section entitled “Governance of Medtronic — Board Role in Risk Oversight” beginning on page 19 of this proxy statement for a discussion of the Company’s general risk assessment of compensation policies and practices, mitigating factors with respect to our NEOs include the following:
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Medtronic’s executive stock ownership and retention guidelines are meant to align management and shareholder incentives, at the highest levels of Medtronic’s organization. Those guidelines require the CEO to maintain ownership of stock equal to six (6) times annual salary and other NEOs to maintain stock equal to three (3) times annual salary. Until the ownership guideline is met, the CEO must retain 75% of after-tax profit shares received through settlement of equity compensation awards and other NEOs must retain 50% of such shares. Once the guideline is met, the CEO must retain 75% of after tax profit shares and other NEO’s must retain 50% of such shares, for one year following grant of equity compensation awards. For purposes of complying with the guidelines, stock is not considered owned if pledged as collateral for a loan. Shares owned outright, legally or beneficially, by an officer or the officer’s immediate family members, after-tax “in the money” vested but unexercised stock options, after-tax unvested restricted stock units, and shares held in the tax-qualified and nonqualified retirement and deferred compensation plans count toward the guideline. For stock options, net after-tax profit shares are those shares remaining after payment of the option’s exercise price and income taxes. For share issuances (restricted stock unit vesting), net gain shares are those shares remaining after payment of income taxes.
Compliance with our ownership and retention guidelines is measured at the beginning of the first fiscal month of a new fiscal year by the internal team at the Company responsible for handling executive compensation matters and the results of such measurement are reported to the Nominating and Corporate Governance Committee or Compensation Committee, as applicable, after the measurement. On each measurement date, compliance is measured using each executive officer’s base salary then in effect and the average closing price per share of the Company’s ordinary shares on the NYSE for the six (6) calendar months preceding the measurement date. As of July 7, 2017, all NEOs are in compliance with the stock ownership and retention policy.
Hedging and Pledging Policy
Our insider trading policy prohibits our NEOs and directors (along with others) from engaging in short sales of Medtronic securities (including short sales against the box) or engaging in purchases or sales of puts, calls or other derivative securities based on Medtronic securities. The policy also prohibits our NEOs from purchasing Medtronic securities on margin, borrowing against Medtronic securities held in a margin account or pledging Medtronic securities as collateral for a loan (unless the officer can clearly demonstrate the financial capacity to repay the loan without resorting to the pledged securities).
Sale and Transfer of Awards
All stock option, restricted stock, restricted stock unit, and performance-based restricted stock/restricted stock unit awards are granted under plans that specifically prohibit the sale, assignment and transfer of awards with limited exceptions such as the death of the award recipient. In addition, the Compensation Committee may allow an award holder to assign or transfer an award.
Incentive Compensation Forfeiture (“Clawback”)
The Company has a comprehensive Incentive Compensation Forfeiture Policy, which is designed to recoup improper awards or gains paid to executive officers. If the Board determines that any executive officer has received an improper payment or gain, which is an incentive payment or grant mistakenly paid or awarded to the executive officer as a result of misconduct (as defined below), the executive officer must return the improper payment or gain to the extent it would not have been paid or awarded had the misconduct not occurred, including interest on any cash payments. “Misconduct” means any material violation of our Code of Conduct or other fraudulent or illegal activity for which an executive officer is personally responsible as determined by the Board. All executive officers are required to agree to this policy in writing.
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Equity Compensation Forfeiture
The Company may require the return or forfeiture of cash and shares received or receivable in certain circumstances in which an employee has a termination of employment from the Company or any affiliate. The Company may exercise its ability to require forfeiture of awards if the employee receives or is entitled to receive delivery of shares or proceeds under an equity award program within six (6) months prior to or twelve (12) months following the date of termination of employment if the current or former employee engages in any of the following activities: (a) performing services for or on behalf of any competitor of, or competing with, the Company or any affiliate; (b) unauthorized disclosure of material proprietary information of the Company or any affiliate; (c) a violation of applicable business ethics policies or business policies of the Company or any affiliate; or (d) any other occurrence that is consistent with the intent noted in items a – c, as determined by the Compensation Committee.
Tax and Accounting Implications
In evaluating compensation programs applicable to our NEOs (including the Company’s annual and long-term incentive plans), the Compensation Committee considers the potential impact on the Company of Section 162(m) of the Internal Revenue Code while maintaining maximum flexibility in the design of our compensation programs and in making appropriate payments to NEOs that, in some cases, may not be deductible by the Company.
The Compensation Committee also considers accounting treatment in the design of the long-term incentive plan.
The Compensation Committee has reviewed and discussed with management the section of this proxy statement entitled “Compensation Discussion and Analysis” required by Item 402(b) of Regulation S-K. Based on such review and discussions, the Compensation Committee recommended to the Board that the section entitled “Compensation Discussion and Analysis” be included in this proxy statement.
COMPENSATION COMMITTEE (as of June 22, 2017):
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The following table summarizes all compensation for each of the last three fiscal years awarded to, earned by, or paid to the Company’s Chief Executive Officer, Chief Financial Officers, and three other most highly compensated executive officers during Fiscal Year 2017 (collectively, the named executive officers or “NEOs”). Please refer to the section entitled “Compensation Discussion and Analysis” beginning on page 32 of this proxy statement for a description of the compensation components for Medtronic’s NEOs. A narrative description of the material factors necessary to understand the information in the table is provided below, following the table.
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The fiscal year column represents the last three fiscal years for Medtronic, with the exception of Mr. Hanson. Mr. Hanson’s Fiscal Year 2015 represents September 27, 2014, through Medtronic’s fiscal year end on April 24, 2015 and includes compensation received from Covidien prior to January 26, 2015. Mr. Hanson’s Fiscal Year 2014 aligns with Covidien’s fiscal year end date September 26, 2014.
The salary column represents the base salary earned by the NEO during the applicable fiscal year. This column includes any amounts that the officer may have deferred under the Capital Accumulation Plan, which deferred amounts also are included in the 2017 Nonqualified Deferred Compensation Table on page 59 of this proxy statement. Each of the NEOs also contributed a portion of salary to the SIP. Mr. Hanson contributed a portion of his salary to the Covidien Supplemental Savings Plan prior to January 26, 2015.
Ms. Parkhill’s 2017 amount represents a one-time $1,000,000 bonus following the commencement of her employment with the Company. Mr. Hanson’s 2016 amount of $25,000 represents a bonus payment following his one-year anniversary with Medtronic. Mr. Hanson’s 2015 amount represents a one-time $1,000,000 bonus following the commencement of his employment with the Company.
The stock awards column represents aggregate grant date fair value of restricted stock unit awards and performance-based restricted stock units assuming full (maximum) achievement of applicable performance criteria over the performance period (collectively, the “restricted stock awards”) granted in the respective fiscal year as computed in accordance with FASB ASC Topic 718, Compensation— Stock Compensation. Accordingly, the grant date fair value was determined by multiplying the number of restricted stock awards by the closing stock price on the date of grant. For a description of the vesting terms of the stock awards, see the narrative disclosure following the 2017 Grants of Plan-Based Awards table on page 53 and the footnotes to the 2017 Outstanding Equity Awards at Fiscal Year End table on page 54 of this proxy statement. Additional information regarding the assumptions used to calculate these amounts are incorporated by reference to Note 14 to the Company’s Form 10-K for Fiscal Year 2017.
The option awards column represents the aggregate grant date fair value of stock option awards granted in the respective fiscal year as computed in accordance with FASB ASC Topic 718, Compensation— Stock Compensation. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model. The following table provides the assumptions underlying this estimate.
For a description of the vesting terms of the option awards, see the narrative disclosure following the 2017 Grants of Plan-Based Awards table on page 53 and the footnotes to the 2017 Outstanding Equity Awards at Fiscal Year End table on page 54 of this proxy statement. Additional information regarding the assumptions used to calculate these amounts are incorporated by reference to Note 14 to the Company’s Form 10-K for Fiscal Year 2017.
Non-Equity Incentive Plan Compensation
This column reflects the Medtronic MIP and LTPP payments earned by the NEOs during the applicable fiscal year and payable subsequent to fiscal year end. It includes any amounts deferred under the Capital Accumulation Plan (as stated in the 2017 Nonqualified Deferred Compensation table on page 59 of this proxy statement). The table below reflects compensation received by the NEO under each plan for the performance period ending through Fiscal Year 2017.
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For a more detailed description of the terms of the non-equity incentive plan awards, see page 40 of the Compensation Discussion and Analysis and the narrative disclosure following the 2017 Grants of Plan-Based Awards on page 53 of this proxy statement.
Change in Pension Value and Nonqualified Deferred Compensation Earnings
This column includes the estimated aggregate increase in the accrued pension benefit under Medtronic’s defined benefit pension plans and Covidien’s Kendall Pension Plan. The change in the present value of the accrued pension benefit is influenced by variables such as additional years of service, age, pay and the discount rate used to calculate the present value of the change. In determining the present value of accrued pension benefits under Medtronic’s plans, a discount rate of 4.30% was used for both Fiscal Year 2017 and Fiscal Year 2016.
In determining the present value of accrued pension benefits for Mr. Hanson under Covidien’s Kendall Pension Plan, a discount rate of 3.8% for Fiscal Year 2017 (up from 3.71% in Fiscal Year 2016) was used. The pension values are calculated based on the accrued pension benefits (qualified plan, the nonqualified NRPS and Covidien’s Kendall Pension Plan) as of April 28, 2017, and the fiscal year-end 2017 ASC 715 disclosure assumptions. Assumptions are described in Note 17 to the Company’s Form 10-K for Fiscal Year 2017.
All Other Compensation
The all other compensation column includes the following:
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The following table summarizes all plan-based award grants to each of the NEOs during Fiscal Year 2017. Threshold amounts assume attainment of plan performance thresholds. You should refer to the Compensation Discussion and Analysis sections entitled “Fiscal Year 2017 Annual Incentive Plan Design” on page 41 and “Fiscal Year 2017 Long-Term Incentive Plan Components” beginning on page 43 to understand how plan-based awards are determined. A narrative description of the material factors necessary to understand the information in the table is provided below.
MIP = Annual performance-based plan award granted under the Medtronic Incentive Plan
LTPP = Long-term performance plan award granted under the Medtronic plc Amended and Restated 2013 Stock Award and Incentive Plan
OPT = Nonqualified stock options granted under the Medtronic plc Amended and Restated 2013 Stock Award and Incentive Plan
PBRSU = Performance-based restricted stock unit granted under the Medtronic plc Amended and Restated 2013 Stock Award and Incentive Plan
RSU = Restricted stock unit granted under the Medtronic plc Amended and Restated 2013 Stock Award and Incentive Plan
Estimated Future Payouts Under Non-Equity Incentive Plan Awards
Amounts in these columns represent 2017 MIP at threshold, target and maximum performance and future cash payments under the FY2017-FY2019 LTPP. The LTPP provides for annual grants that are earned over a three-year period. Earned payouts under the LTPP can range from 25% to 200% of the target grant based on the Company’s performance relative to the following metrics: three-year cumulative compounded annual revenue growth rate and ROIC (12-month non-GAAP earnings after the removal of after-tax impact of amortization and excluding non-recurring items, plus interest expense net of tax all divided by Total Equity plus Interest-Bearing Liabilities less Cash and Cash Equivalents for each year averaged over the three-year period). Earned payouts under the MIP for each individual performance measure (annual revenue growth, diluted EPS, and cash flow indicator) can range from 50% to 200% of the target grant based on Company performance and
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a quality compliance modifier performance threshold as described on page 42 of this proxy statement. The threshold payout levels described above reflect threshold performance achievement for one performance metric in the respective LTPP and MIP. The maximum dollar value that may be paid to any participant in qualified performance-based awards denominated in cash in any fiscal year is $20 million for the Chief Executive Officer and $10 million for each other participant. Both the MIP and LTPP have separate diluted EPS goals.
Estimated Future Payouts Under Equity Incentive Plan Awards
Amounts in this column represent grants of performance-based restricted stock units (PBRSUs). PBRSUs vest 100% on the third anniversary of the date of grant provided Medtronic achieves a minimum three-year cumulative diluted EPS threshold growth rate. However, the PBRSU grant to Ms. Parkhill on June 20, 2016, in connection with her hiring will vest ratably over three years (1/3 on each of the first, second and third anniversaries of the grant date), provided Medtronic achieves a minimum EPS threshold for each fiscal year during the vesting period. Unvested PBRSUs receive dividend equivalent units (DEUs), which are credited and added to the share balance. DEUs are only paid to the extent the underlying PBRSUs are earned. This column also includes restricted stock units (RSUs) granted to Messrs. Coyle, Hanson and ten Hoedt on August 1, 2016 for retention purposes. RSU grants will vest in three years.
All Other Option Awards/Exercise or Base Price of Option Awards
The exercise or base price of the stock option grant represents the closing market price of Medtronic ordinary shares on the date of grant. Option awards vest 25% on each anniversary of the date of grant over a four-year period.
Grant Date Fair Value of Stock and Option Awards
This column represents the grant date fair value of each equity award granted in Fiscal Year 2017 computed in accordance with FASB ASC Topic 718, Compensation — Stock Compensation. For a discussion of the assumptions used in calculating the amount recognized for stock options granted on August 1, 2016 see page 51 of this proxy statement. Additional information regarding the assumptions used to calculate these amounts are incorporated by reference to Note 14 to the Company’s Form 10-K for Fiscal Year 2017.
The table below reflects all outstanding equity awards made to each of the NEOs that were outstanding at the end of Fiscal Year 2017. The market or payout value of unearned shares, units or other rights that have not vested equals $83.09, which was the closing price of Medtronic’s ordinary shares on the New York Stock Exchange on April 28, 2017, and for performance-based restricted stock units and for performance share plan awards presumes that the target performance goals are met.
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The amounts shown in the column entitled “Shares or Units of Stock That Have Not Vested” of the 2017 Outstanding Equity Awards at Fiscal Year-End table that correspond to a June 20, 2016, grant date for Ms. Parkhill reflect a time-based restricted stock unit award that vests 1/3 on each of the first, second, and third anniversaries of the grant date. For Mr. Hanson, the December 1, 2014 grant reflects a time-based restricted stock unit award that vests 25% on each of the first four anniversaries of the grant date and the February 18, 2015 grant reflects a time-based restricted stock unit award that vests 50% on the first anniversary and 25% on each of the second and third anniversaries of the date of grant. For Mr. Coyle in the amount of 46,166, Mr. Hanson in the amount of 46,166, and Mr. ten Hoedt in the amount of 11,542, the August 1, 2016 grants vest over three years. The amounts shown in the column entitled “Equity Incentive Plan Awards: Unearned Shares, Units or Other Rights That Have Not Vested” of the 2017 Outstanding Equity Awards at Fiscal Year End table that correspond to July 28, 2014, August 3, 2015, and August 1, 2016 grant dates reflect performance-based restricted stock or restricted stock unit awards that vest on the third anniversary of the date of grant provided the established performance threshold for each award is achieved.
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The table below shows the vesting schedule for all exercisable options. All options for Gary Ellis accelerated and vested upon his retirement on December 31, 2016.
Mr. Ishrak also owns 270,596 and Mr. Ellis owned 35,505 vested and deferred stock units including associated dividend equivalents, which will be distributed following their retirement.
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The table below includes information related to options exercised by each of the NEOs and restricted stock awards that vested during Fiscal Year 2017. The table also includes the value realized for such options and restricted stock awards. For options, the value realized on exercise is equal to the difference between the market price of the underlying shares at exercise and the exercise price of the options. For stock awards, the value realized on vesting is equal to the market price of the underlying shares at vesting.
The table below includes information with respect to Medtronic’s and Legacy Covidien’s pension plans for each of the NEOs as of April 28, 2017, which is the measurement date used for financial statement reporting purposes. A narrative description of the material factors necessary to understand the information in the table is provided below.
The Medtronic, Inc. Retirement Plan consists of two types of benefits, the Medtronic Retirement Plan (MRP) and the Personal Pension Account (PPA). Effective May 1, 2005, the Company froze the MRP to new entrants and provided all eligible employees the option of continuing to accrue retirement benefits under the MRP or to participate in one of two new options being offered. Employees hired before May 1, 2005 had the option of continuing in the MRP or electing to participate in either the PPA or PIA described below. Effective January 1, 2016, the Company froze the PIA and the PPA to new entrants. All eligible employees continue to accrue retirement benefits under the PIA or PPA. New employees hired on or after January 1, 2016 earn the Medtronic Core Contribution (MCC). The MCC provides a 3% employer contribution. The MRP is the final average pay component of the Medtronic, Inc. Retirement Plan. Employees hired on or after May 1, 2005 chose within 60 days of their hire date to participate in either the PPA or the Personal
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Investment Account (PIA). The PPA is a cash balance component of the Medtronic, Inc. Retirement Plan, and the PIA is a component of the Medtronic, Inc. 401(k) Plan.
Mr. Ishrak is a participant in the PPA. The PPA is a tax-qualified cash balance defined benefit pension plan available to employees hired on or after May 1, 2005. The Company contributes 5% of eligible compensation for each year of participation into the participant’s account. Eligible compensation under the PPA matches the MRP discussed above. Additionally, each year a participant’s account will earn interest at a rate equal to the 10-year U.S. Treasury bond rate. For the fiscal year ended April 29, 2016 the interest rate was equal to 2.04%. Each participant’s account has a three-year vesting requirement. The PPA value will be forfeited if the participant leaves the Company before that three-year vesting period is finished. Vested benefits in the PPA are portable and participants may receive distributions for any purpose, but may then be subject to taxation. A PPA participant leaving the Company may receive distributions in the following ways: 1) roll over benefit into another tax-qualified plan or certain IRAs; 2) lump-sum cash payment; 3) leave the PPA balance in the plan (which will continue to earn returns equal to the 10-year U.S. Treasury bond rate); and 4) various monthly annuity options, including single life, ten-year certain, and joint and survivor options.
The benefits currently paid under the Medtronic, Inc. Retirement Plan are limited to an annual maximum of $210,000, in accordance with IRS requirements. The Company also has an unfunded Nonqualified Retirement Plan Supplement (the “NRPS”) that provides an amount substantially equal to the difference between the amount that would have been payable to the executive under the Medtronic, Inc. Retirement Plan in the absence of legislation limiting pension benefits and earnings that may be considered in calculating pension benefits and the amount actually payable under the plan. The NRPS is available to all participating employees whose income or benefits exceed the IRS maximum, not just the executive officers. Compensation used in the calculation of the NRPS benefit includes eligible compensation in excess of the IRS limitation and amounts deferred (excluding amounts paid and deferred under the LTPP or the performance share plan) pursuant to the Capital Accumulation Plan. NRPS benefits are determined based on the qualified plan formula (MRP or PPA) in which the executive elected to participate. The NRPS benefit calculated on the MRP formula is reduced based on the participant’s age at the end of the month following separation from service (within the meaning of Section 409A of the Internal Revenue Code, generally retirement, termination of employment, or significant reduction in work schedule). The monthly benefit is the sum of the monthly principal amount and the monthly interest. The monthly interest is determined based on a declining balance schedule using an interest rate of 6%. The amount of retirement benefit earned under the NRPS is calculated upon separation from service. If the aggregate value is less than $100,000, it is paid out as a lump sum six months after separation from service. If the aggregate value exceeds $100,000, the value is paid out over a 15-year period in the form of a monthly annuity commencing six months after the separation from service. In the event of the employee’s death prior to the completion of the 15-year payment cycle, any remaining benefits from the NRPS are payable per the beneficiary designation on record. If a beneficiary is not named, the benefit is payable to the employee’s surviving spouse, or if there is no surviving spouse, to the children, or if there are no survivors, to the estate.
Mr. Hanson participates in the Kendall Pension Plan, which was frozen with respect to all future benefit accruals (except interest crediting on the cash balance benefit) as of July 1, 1995. The Pension Plan has two components:
Participants retiring on their normal retirement date (age 65) are entitled to a monthly pension calculated as the sum of:
The current account is credited with interest at the one-year Treasury bill rate in effect on January 1 for each calendar year and service credits as follows:
Participants desiring to retire before normal retirement age may do so after attaining age 55 and completing five years of continuous service. If a participant chooses to retire before normal retirement age, the applicable accrued benefit as of June 1, 1990 will be reduced by 0.33% for each month by which the participant’s age is less than 60.
Mr. ten Hoedt participates in the Medtronic Pension Fund (“MPF”). The MPF is a qualified cash balance pension plan available to all eligible employees working for Medtronic entities in Switzerland. The Company and employee contributions vary by age. For Mr. ten Hoedt specifically, the annual contributions during Fiscal Year 2017 were 15.5% for the Company and 9% for the employee. Pensionable salary includes base salary and paid annual incentive. Additionally, each year a participant’s account will earn interest, as set by the Pension Board, credited at the end of the calendar year. For Fiscal Year 2017, interest of 3% was credited. The MPF also provides risk benefits in case of a participant’s death or disability, which are fully insured. There is no vesting, meaning that the full pension account is granted to the participant on termination of employment. A participant leaving the Company may receive the accrued pension fund in the following ways: (1) transfer the fund to a block account; (2) receive the fund in cash, subject to taxation; or (3) in the case of a retirement, receive the funds as an annual pension, either in cash or a combination of pension and cash.
Mr. Ellis participates in the MRP component of the Medtronic, Inc. Retirement Plan. The Medtronic, Inc. Retirement Plan is a funded, tax-qualified, noncontributory defined-benefit pension plan that covers all eligible employees employed with the Company prior to May 1, 2005 who elected to remain in the MRP. Effective May 1, 2005, the Company froze the MRP to new entrants and provided all eligible employees the option of continuing to accrue retirement benefits under the MRP or to participate in one of two new options being offered. All eligible NEOs hired prior to May 1, 2005, elected to continue participation in the MRP. Benefits under the MRP are based upon the employee’s years of credited service
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and the average of the employee’s highest five consecutive years of covered compensation during the employee’s career while covered under the MRP. Employees have the option of providing for a survivorship benefit upon the employee’s death by making the appropriate election at the time of retirement. Covered compensation includes base salary, bonus and incentive plan payments, sales commissions, salary reduction contributions (such as to a cafeteria plan or medical plan) and salary continuation payments for short-term disability, but excludes compensation paid under the LTPP or the performance share plan (the predecessor to the LTPP). In addition, the IRS limits the amount of covered compensation that can be used in the benefit calculation ($265,000 for 2015 and 2016). Normal retirement age under the plan is age 65. Eligible employees may retire upon reaching age 55 with at least ten years of service or upon reaching age 62 without regard to years of service. Any retirement prior to normal retirement age is considered “early retirement” and the benefit includes a reduction for early commencement of benefits.
Benefits under the MRP are calculated as a monthly annuity by taking 40% of the final average covered compensation less a social security allowance (which varies by individual based upon year of birth) and multiplying this result by years of credited service under the MRP. That result is then divided by 30 to yield the benefit at normal retirement age, with an early retirement factor applied to calculate the early retirement benefit. The age at the time that benefits are commenced is used to determine the early retirement reduction amount. The maximum reduction amount is 50% and applies if benefits are commenced at age 55. Employees with over 30 years of service receive 0.5% for every year of credited service in excess of 30 years.
On December 31, 2016, Mr. Ellis retired from his role as Executive Vice President and Chief Financial Officer of Medtronic. Commencing on September 1, 2021, Mr. Ellis will receive payments from the MRP in the form of an annuity that will pay $6,562.02 per month to Mr. Ellis for life. The present value of the benefit is shown in the table above. Mr. Ellis will also receive payments from the NRPS. Per the terms of the NRPS, Mr. Ellis will receive monthly payments over a 15-year period that began in July 2017. The total distribution will be $4,128,928 plus interest.