UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934

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Medtronic, Inc.

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710 Medtronic Parkway

Minneapolis, Minnesota 55432

Telephone: 763-514-4000

 

July 16, 2010

 

Dear Shareholder:

 

Please join us for our Annual Meeting of Shareholders on Wednesday, August 25, 2010, at 10:30 a.m. (Central Daylight Time) at Medtronic’s World Headquarters, 710 Medtronic Parkway, Minneapolis (Fridley), Minnesota.

 

The accompanying Notice of Annual Meeting of Shareholders and Proxy Statement describe the business to be conducted at the meeting and details regarding admission to the meeting. We also will report on matters of current interest to our shareholders.

 

We invite you to join us beginning at 9:30 a.m. to view Medtronic’s interactive product displays. Product specialists will be available to answer your questions before and after the Annual Meeting.

 

Your vote is important. Whether you own a few shares or many, it is important that your shares are represented. If you cannot attend the Annual Meeting in person, you may vote your shares by internet or by telephone, or, if this proxy statement was mailed to you, by completing and signing the accompanying proxy card and promptly returning it in the envelope provided.

 

We look forward to seeing you at the Annual Meeting.

 

Sincerely,

 

 

William A. Hawkins

Chairman and Chief Executive Officer

 

Alleviating Pain, Restoring Health, Extending Life

 

MEDTRONIC, INC.
NOTICE OF ANNUAL MEETING

OF SHAREHOLDERS

 

 

 

By Order of the Board of Directors,

 

D. Cameron Findlay

Corporate Secretary

 

Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to
Be Held on August 25, 2010. The Proxy Statement and 2010 Annual Report to Shareholders are
available at http://www.medtronic.com/annualmeeting.

 

TABLE OF CONTENTS

 

 

710 Medtronic Parkway

Minneapolis, Minnesota 55432

Telephone: 763-514-4000

 

 

 

 

PROXY STATEMENT
Annual Meeting of Shareholders
August 25, 2010

 

 

 

 

We are providing these proxy materials in connection with the solicitation by the Board of Directors of Medtronic, Inc. (“Medtronic”) of proxies to be voted at Medtronic’s Annual Meeting of Shareholders to be held on August 25, 2010, and at any adjournment of the meeting. The proxy materials were either made available to you over the internet or mailed to you beginning on or about July 16, 2010.

 

What am I voting on?

 

There are two proposals scheduled to be voted on at the meeting:

 

 

How can I receive proxy materials?

 

Under rules recently adopted by the U.S. Securities and Exchange Commission (“SEC”), we are furnishing proxy materials to our shareholders primarily via the internet, instead of mailing printed copies of proxy materials to each shareholder. On or about July 16, 2010, we began mailing to our shareholders (other than those who previously requested electronic or paper delivery) a “Notice of Internet Availability of Proxy Materials” (the “Notice”) containing instructions on how to access this proxy statement and our annual report for the fiscal year ended April 30, 2010 online. If you received the Notice by mail, you will not automatically receive a printed copy of the proxy materials in the mail. Instead, the Notice instructs you on how to access and review all of the important information contained in the proxy materials. The Notice also instructs you on how you may submit your proxy via the internet. If you previously requested electronic delivery, you will still receive an e-mail providing you the Notice, and if you previously requested paper delivery, you will still receive a paper copy of the proxy materials by mail.

 

Finally, you can receive a copy of our proxy materials by following the instructions (contained in the Notice) regarding how you may request to receive your materials electronically or in printed form on a one-time or ongoing basis. Requests for printed copies of the proxy materials can be made by internet at http://www.proxyvote.com, by telephone at 1-800-579-1639 or by email at sendmaterial@proxyvote.com by sending a blank email with your control number in the subject line.

Who is entitled to vote?

 

Shareholders as of the close of business on June 28, 2010 (the “Record Date”), may vote at the Annual Meeting. You have one vote for each share of common stock you held on the Record Date, including shares:

 

 

What constitutes a quorum?

 

A majority of the outstanding shares entitled to vote, present or represented by proxy, constitutes a quorum for the Annual Meeting. Proxies received but marked as abstentions and “broker non-votes” (described below) are counted as present and entitled to vote for purposes of determining a quorum. On the Record Date, 1,082,964,371 shares of Medtronic common stock were outstanding and entitled to vote.

 

How many votes are required to approve each proposal?

 

Provided that a majority of our shares entitled to vote is present at the Annual Meeting (in person or by proxy), the eleven candidates for election who receive a plurality vote of the shares present and entitled to vote in the affirmative will be elected. Proposal 2 requires the affirmative vote of a majority of the shares present and entitled to vote.

 

How are votes counted?

 

You may either vote “FOR” or “WITHHOLD” authority to vote for each nominee for the Board of Directors. You may vote “FOR,” “AGAINST” or “ABSTAIN” on the other proposal. If you abstain from voting on the other proposal, it has the same effect as a vote against the proposal. If you grant a proxy by telephone or internet without voting instructions, or sign and submit your proxy card without voting instructions, your shares will be voted “FOR” each director nominee and the other proposal.

 

What is a broker non-vote?

 

If you hold your shares in street name and do not provide voting instructions to your broker, your shares will not be voted on any proposal for which your broker does not have or does not exercise discretionary authority to vote (a broker non-vote). Shares constituting broker non-votes are not counted or deemed to be present in person or by proxy for the purpose of voting on a non-routine matter at the Annual Meeting and, therefore, are not counted for the purpose of determining whether shareholders have approved the election of directors in proposal 1, because the election of directors is considered a non-routine matter. If you do not provide voting instructions to your broker, your broker will have discretion to vote your shares on proposal 2, because the ratification of auditor appointment is considered a routine matter. Broker non-votes are counted as present for the purpose of determining a quorum at the Annual Meeting.

 

How does the Board recommend that I vote?

 

Medtronic’s Board recommends that you vote your shares:

 

 

How do I vote my shares without attending the meeting?

 

If you are a shareholder of record or hold shares through a Medtronic stock plan, you may vote by granting a proxy. For shares held in street name, you may vote by submitting voting instructions to your broker or nominee. In most circumstances, you may vote:

 

 

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

 

If you are a shareholder of record and prefer to vote your shares at the meeting, bring the accompanying proxy card (if you received a paper copy of the proxy statement) or proof of identification. You may vote shares held in street name only if you obtain a signed proxy from the record holder (broker or other nominee) giving you the right to vote the shares.

 

Even if you plan to attend the meeting, we encourage you to vote in advance by internet, telephone or mail so that your vote will be counted in the event you are unable to attend.

 

What does it mean if I receive more than one proxy card or Notice?

 

It generally means you hold shares registered in more than one account. If you received a paper copy of the proxy statement and you vote by mail, sign and return each proxy card. Or, if you vote by internet or telephone, vote once for each proxy card and/or Notice you receive. If you have received more than one Notice, vote once for each Notice that you receive.

 

May I change my vote?

 

Yes. Whether you have voted by mail, internet or telephone, you may change your vote and revoke your proxy, prior to the Annual Meeting, by:

 

 

Can I receive future proxy materials electronically?

 

Yes. If you are a shareholder of record or hold shares through a Medtronic stock plan and you have received a paper copy of the proxy materials, you may elect to receive future proxy statements and annual reports online as described in the next paragraph. If you elect this feature, you will receive an email message notifying you when the materials are available, along with a web address for viewing the materials. If you received this proxy statement electronically, you do not need to do anything to continue receiving proxy materials electronically in the future.

Whether you hold shares registered directly in your name, through a Medtronic stock plan, or through a broker or bank, you can enroll for future delivery of proxy statements and annual reports by following these easy steps:

 

 

Generally, brokers and banks offering this choice require that shareholders vote through the internet in order to enroll. Street name shareholders whose broker or bank is not included in this website are encouraged to contact their broker or bank and ask about the availability of electronic delivery. As is customary with internet usage, the user must pay all access fees and telephone charges. You may view this year’s proxy materials at www.medtronic.com/annualmeeting.

 

What are the costs and benefits of electronic delivery of Annual Meeting materials?

 

There is no cost to you for electronic delivery. You may incur the usual expenses associated with internet access as charged by your internet service provider. Electronic delivery ensures quicker delivery, allows you to print the materials at your computer and makes it convenient to vote your shares online. Electronic delivery also conserves natural resources and saves Medtronic significant printing, postage and processing costs.

 

Directors whose term of office is expiring shall be elected annually for terms of one year. Each of Richard H. Anderson, David L. Calhoun, Victor J. Dzau, M.D., William A. Hawkins, Shirley Ann Jackson, Ph.D., James T. Lenehan, Denise M. O’Leary, Kendall J. Powell, Robert C. Pozen, Jean-Pierre Rosso and Jack W. Schuler has been nominated for re-election to the Board to serve until the 2011 Annual Meeting and until their successors are elected and qualified. All of the nominees are currently directors, and were previously elected to the Board of Directors by shareholders.

 

All of the nominees have consented to being named as a nominee in this proxy statement and have indicated a willingness to serve if elected. However, if any nominee becomes unable to serve before the election, the shares represented by proxies may be voted for a substitute designated by the Board, unless a contrary instruction is indicated on the proxy.

 

A plurality of votes cast is required for the election of directors. However, under the Medtronic Principles of Corporate Governance, any nominee for director in an uncontested election (i.e., an election where the only nominees are those recommended by the Board of Directors) who receives a greater number of votes “withheld” from his or her election than votes “for” such election (a “Majority Withheld Vote”) will, within five business days of the certification of the shareholder vote by the inspector of elections, tender a written offer to resign from the Board of Directors. The Corporate Governance Committee will promptly consider the resignation offer and recommend to the Board of Directors whether or not to accept it. The Corporate Governance Committee will consider all factors its members deem relevant in considering whether to recommend acceptance or rejection of the resignation offer, including, without limitation:

 

 

If a director’s resignation is accepted, the Corporate Governance Committee will recommend to the Board of Directors whether to fill the vacancy on the Board created by the resignation or reduce the size of the Board. Any director who tenders his or her offer to resign pursuant to this policy shall not participate in the Corporate Governance Committee or Board deliberations regarding whether to accept the offer of resignation. The Board will act on the Corporate Governance Committee’s recommendation within 90 days following the certification of the shareholder vote, which may include, without limitation:

 

 

Thereafter, the Board of Directors will disclose its decision to accept the resignation offer or the reasons for rejecting the offer, if applicable, on a Current Report on Form 8-K to be filed with the SEC within four business days of the date of the Board’s final determination.

NOMINEES FOR DIRECTORS FOR ONE-YEAR TERMS ENDING IN 2011:

 

 

THE BOARD RECOMMENDS A VOTE FOR THE DIRECTOR NOMINEES.

 

Under the New York Stock Exchange Corporate Governance Standards, to be considered independent, a director must be determined to have no material relationship with Medtronic other than as a director. The Board of Directors has determined that the following directors, comprising all of our non-management directors, are independent under the New York Stock Exchange Corporate Governance Standards: Messrs. Anderson, Calhoun, Lenehan, Powell, Pozen, Rosso and Schuler, Drs. Dzau and Jackson and Ms. O’Leary. In making this determination, the Board considered its Director Independence Standards, which correspond to the New York Stock Exchange standards on independence. These standards identify 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:

 

 

All of the relationships of the types listed above were entered into, and payments were made or received, by Medtronic in the ordinary course of business and on competitive terms. Aggregate payments to, transactions with or discretionary charitable contributions to each of the relevant organizations did not exceed the greater of $200,000 or 2% of that organization’s consolidated gross revenues for that organization’s last three fiscal years.

 

In addition, the Board considered relationships consistent with its Director Independence Standards in which the director had a further removed relationship with the relevant third party. This included the director being a director (rather than an employee or executive officer) of a Medtronic vendor or purchaser of Medtronic’s products in which aggregate payments to, transactions with or discretionary charitable contributions to the relevant third party did not exceed the greater of $200,000 or 2% of that organization’s consolidated gross revenues for that organization’s last three fiscal years. This also included a director’s spouse who was a consultant but not an employee of The Medtronic Foundation and payments to the spouse did not exceed $100,000. The Board of Directors determined that none of the relationships were

material. All of the relationships were entered into, and payments were made or received, by Medtronic in the ordinary course of business and on competitive terms.

 

Dr. Dzau is Chancellor of Health Affairs at Duke University. Medtronic is party to an agreement with Duke University to collaboratively research, develop and commercialize therapies to treat Hepatitis C, which was entered into before Dr. Dzau became a director of Medtronic. Dr. Dzau is a director of Alnylam Pharmaceuticals, Inc. (“Alnylam”). Medtronic is party to an agreement with Alnylam to collaboratively research opportunities in the area of neurodegenerative disorders. The parties have a research program targeting Huntington’s disease, and may expand their collaboration in the future with other research programs for diseases such as Alzheimer’s and Parkinson’s. In addition, Dr. Dzau is a director of Genzyme Corporation (“Genzyme”). Medtronic and Genzyme each own 50% of a limited liability company, which was formed before Dr. Dzau became a director of Medtronic, for the research, development and commercialization of therapies involving the local delivery of myoblast biologics in order to produce a myogenic and angiogenic result in the human heart. Currently, the company is still in the research phase of any potential therapies. The Board determined that these relationships were not material. Medtronic’s business relationships with Duke University, Alnylam and Genzyme are maintained on an arm’s length basis. Neither Dr. Dzau nor the institutions with which he is affiliated are given special treatment in these relationships, Dr. Dzau does not participate in negotiations or approvals regarding the relationships, and Medtronic makes no payments to Dr. Dzau other than in connection with his service as a director. In addition, pursuant to the New York Stock Exchange Corporate Governance Standards for evaluating director independence, the Board determined that none of the amounts paid in connection with the relationships are at a level that would compromise Dr. Dzau’s independence.

 

Mr. Pozen is Chairman of MFS Investment Management (“MFS”), which manages money for MFS mutual funds and other accounts, any of which may from time to time buy or sell Medtronic stock. The Board determined that this relationship is not material. Mr. Pozen has no involvement with these transactions and there is an informational barrier between him and the rest of MFS with regard to Medtronic stock.

 

In January 2007, the Board of Directors of Medtronic adopted written related party transaction policies and procedures. The policies require that all “interested transactions” (as defined below) between Medtronic and a “related party” (as defined below) are subject to approval or ratification by the Corporate Governance Committee. In determining whether to approve or ratify such transactions, the Corporate Governance Committee will take into account, among other factors it deems appropriate, whether the interested transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related person’s interest in the transaction. In addition, the Corporate Governance Committee has reviewed a list of interested transactions and deemed them to be pre-approved or ratified. Also, the Board of Directors has delegated to the chair of the Corporate Governance Committee the authority to pre-approve or ratify any interested transaction in which the aggregate amount is expected to be less than $1 million. Finally, the policies provide that no director shall participate in any discussion or approval of an interested transaction for which he or she is a related party, except that the director shall provide all material information concerning the interested transaction to the 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:

 

 

A “related party” is defined as any:

 

 

During fiscal year 2010, Tino Schuler, a son of director Jack W. Schuler, was employed by Medtronic as one of a number of marketing directors focused on Medtronic’s core ear, nose and throat product lines reporting to a Vice President, Marketing of Medtronic’s core ear, nose and throat product lines. Mr. Tino Schuler worked for Xomed Surgical Products, Inc. (“Xomed”) beginning in August 1993, and Xomed, the predecessor to our core ear, nose and throat business, was acquired by Medtronic in 1999. In fiscal year 2010, Medtronic’s Surgical Technologies operating segment, which includes the core ear, nose and throat product lines, represented approximately 6% of Medtronic world-wide revenue. Mr. Tino Schuler was paid an aggregate salary and bonus of $244,040 and the standard benefits provided to other non-executive Medtronic employees for his services during fiscal year 2010. Mr. Tino Schuler is not an executive officer of, and does not have a key strategic role within, Medtronic.

 

Physio-Control, Inc., a subsidiary of Medtronic, and other defendants, including Mr. Hawkins as Chief Executive Officer of Medtronic, entered into a consent decree with the U.S. Food and Drug Administration regarding Physio-Control’s quality system improvements for its external defibrillator products. The decree addresses issues raised by the FDA during inspections of Physio-Control’s quality system processes.

 

The Board of Directors first adopted Principles of Corporate Governance (the “Governance Principles”) in fiscal 1996 and revises these Governance Principles from time to time. 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, Corporate Governance and Quality and Technology Committees and our codes of conduct are published on our website at www.medtronic.com/corporate-governance/index.htm. 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.

 

Mr. Hawkins, our Chief Executive Officer, also serves as Chairman of the Board. The Board believes that it is appropriate for Mr. Hawkins to serve as Chairman of the Board due to his extensive knowledge of

Medtronic and the medical-device industry in general, which makes him most capable of effectively identifying strategic priorities and providing unified leadership in the execution of strategy.

 

The Chair of our Corporate Governance Committee, Mr. Kendall J. Powell, is our designated “Lead Director” and presides as chair at meetings of the independent directors. Mr. Powell also suggests agenda items for Board meetings and reviews and approves the agendas for each meeting of the Board of Directors and its Committees. He also presides over the directors’ annual evaluation of the Board and advises Mr. Hawkins on the efficiency of Board meetings, facilitating teamwork and communications between the non-management directors and management. As Lead Director, Mr. Powell also receives all committee materials in addition to those committees upon which he serves.

 

Six regular meetings of our Board are held each year and at each Board meeting our independent directors meet in executive session with no company management present.

 

Our Board of Directors, in exercising its overall responsibility to oversee the management of our business, considers risks generally 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’s risk management oversight 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:

 

 

Our four standing Board committees — Audit, Compensation, Corporate Governance and Quality and Technology — consist solely of independent directors, as defined in the New York Stock Exchange Corporate Governance Standards. Each director attended 75% or more of the total Board and Board committee meetings on which the director served in fiscal year 2010. The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the

“Exchange Act”). The following table summarizes the current membership of the Board and each of its standing committees and the number of times each standing committee met during fiscal year 2010.

 

 

 

 

The principal functions of our four standing committees — the Audit Committee, the Compensation Committee, the Corporate Governance Committee, and the Quality and Technology Committee — are described below.

 

 

 

 

Audit Committee Independence and Financial Experts

 

In accordance with New York Stock Exchange requirements and SEC Rule 10A-3, all members of the Audit Committee meet the additional independence standards applicable to its members. In addition, all of our current Audit Committee members are audit committee financial experts, as that term is defined in SEC rules.

 

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 pre-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 the policies do not include 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. The member to whom such authority is delegated will report any pre-approval decisions to the Audit Committee at its next scheduled meeting.

 

 

You should refer to the Compensation Discussion and Analysis on page 25 for additional discussion of the Compensation Committee’s processes and procedures relating to compensation.

Compensation Committee Interlocks and Insider Participation

 

At the beginning of fiscal year 2010, the members of our Compensation Committee were Richard H. Anderson (Chair), Victor J. Dzau, M.D., Kendall J. Powell, James T. Lenehan and Jack W. Schuler. On August 27, 2009, as part of normal Board committee rotations, Dr. Dzau and Mr. Lenehan moved from the Compensation Committee, and Jean-Pierre Rosso joined. No member of the Compensation Committee during fiscal year 2010 was ever an officer or employee of Medtronic, and no executive officer of Medtronic during fiscal year 2010 served on the compensation committee or board of any company that employed any member of Medtronic’s Compensation Committee or Board.

 

Compensation Risk Assessment

 

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 Frederic W. Cook & Co., and included a comprehensive internal survey designed to identify material policies and practices to be assessed, a review of the identified compensation plans and practices against the evaluation framework and an identification of mitigating factors with respect to any such risks.

 

In particular, as a result of the assessment we noted that:

 

 

 

The 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 Corporate Governance Committee shall notify the Corporate Secretary in writing at Medtronic’s offices at 710 Medtronic Parkway, Minneapolis, MN 55432. 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 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 Corporate Governance Committee identifies a need to replace a current member of the Board, to fill a vacancy in the Board or to expand the size of the Board, the Nominating Subcommittee considers candidates from a variety of sources. The process followed to identify and evaluate candidates includes meetings to evaluate 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 Exhibit 4 to the Governance Principles. These criteria include business experience and skills, distinction in their activities, judgment, the ability to commit sufficient time and attention to Board activities and the absence of potential conflicts with Medtronic’s interests. While the Corporate Governance Committee does not have a formal diversity policy for Board membership, the Corporate Governance Committee seeks directors who represent a mix of backgrounds and experiences that will enhance the quality of the Board’s deliberations and decisions. The Corporate Governance Committee considers, among other factors, diversity with respect to viewpoint, skills, experience and community involvement in its evaluation of candidates for Board membership.

 

After completing interviews and the evaluation process, the Corporate Governance Committee makes a recommendation to the full Board as to persons who should be nominated by the Board. The Board determines the nominees after considering the recommendations and report of the Corporate Governance Committee and such other evaluations as it deems appropriate.

 

Alternatively, shareholders intending to appear at the Annual 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 Corporate Governance Committee was not requested to consider his or her candidacy) must comply with the procedures in Medtronic’s restated articles of incorporation, which are described under “Other Information — Shareholder Proposals and Director Nominations” on page 65 of this proxy statement.

 

 

In November 2005, the Board convened a Special Committee, comprised of Jack W. Schuler (Chair), Robert C. Pozen and Jean-Pierre Rosso, to oversee Medtronic’s response to a subpoena received from

the Office of the United States Attorney for the District of Massachusetts relating to alleged fraud and abuse and alleged violation of federal Anti-Kickback statutes. For more information about this matter, please see note 17 to Medtronic’s consolidated financial statements for fiscal year 2010.

 

It is has been the longstanding practice of Medtronic for all directors to attend the Annual Meeting of Shareholders. All directors, except Jean-Pierre Rosso, attended the last Annual Meeting.

 

The Director Compensation table reflects all compensation awarded to, earned by or paid to the Company’s non-employee directors during fiscal year 2010. No additional compensation was provided to Mr. Hawkins 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 annual retainer and annual cash stipend for Board and committee service (prorated for partial year’s service). Due to the economic and business environment, on April 16, 2009, the Board decreased the annual cash retainer portion of the Board’s compensation by five percent from $80,000 in fiscal year 2009 to $76,000 for fiscal year 2010. For fiscal year 2011, the Board reinstated the annual cash retainer to $80,000.

 

In addition, the Chairs of each of the Compensation, Quality and Technology, and Corporate Governance Committees received an annual cash stipend of $10,000. The Chair of the Audit Committee received a cash stipend of $15,000 and non-chair members received a cash stipend of $5,000. Finally, members of the Special Committee received a cash stipend of $10,000.

 

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 plan year. The table on page 14 of this proxy statement under the section entitled “Committees of the Board and Meetings” shows on which committees the individual directors serve.

 

Stock Awards.  Directors are granted deferred stock units on the first business day of the fiscal year in an amount equal to the annual retainer in effect for the preceding fiscal year (on a pro-rata basis for participants who are directors for less than the entire preceding plan year and reduced by 25% for those directors who failed to attend at least 75% of the applicable meetings during such fiscal year) divided by the fair market value of a share of Medtronic common stock on the date of grant. Dividends paid on Medtronic common stock are credited to a director’s stock unit account in the form of additional stock units. The balance in a director’s stock unit account will be distributed to the director in the form of shares of Medtronic common stock upon resignation or retirement from the Board in a single distribution or, at the director’s

option, in five equal annual distributions. The stock awards column represents aggregate grant date fair value of the deferred stock units granted in the respective fiscal year as computed in accordance with FASB ASC Topic 718, Compensation — Stock Compensation. The amounts reported do not match the amounts reported in last year’s proxy statement due to new reporting requirements adopted by the SEC, which require the Company to restate the amounts for these years applying the new grant date fair value methodology.

 

Option Awards.  Directors are granted stock options on the first business day of the fiscal year in an amount equal to the annual retainer divided by the fair market value of a share of Medtronic common stock on the date of grant (which will also be the exercise price of the option). These options expire at the earlier of the tenth anniversary of the date of grant or five years after the holder ceases to be a Medtronic director. If there is an increase in the annual retainer after the annual option award is granted, each director will be automatically granted, as of the date such increase is approved, a supplemental annual option award equal to (1) the amount of such increase divided by (2) the fair market value of a share of Medtronic common stock on the date of grant. On the date he or she first becomes a director, each new non-employee director receives (1) a one-time initial stock option grant for a number of shares of Medtronic common stock equal to two times the amount of the annual retainer, divided by the fair market value of a share of Medtronic common stock on the date of grant (which will also be the exercise price of such option); and (2) a pro-rated stock option grant for a number of shares of Medtronic common stock equal to his or her annual retainer (pro-rated based on the number of days remaining in the plan year) divided by the fair market value of a share of Medtronic common stock on the date of grant (which will also be the exercise price of the option). These grants are made on the first business day of the fiscal quarter following the date the director is elected to the Board. Amounts in the option awards column represent the aggregate fair value of awards computed in accordance with FASB ASC Topic 718, Compensation — Stock Compensation (disregarding forfeiture assumptions). The amounts reported do not match the amounts reported in last year’s proxy statement due to new reporting requirements adopted by the SEC, which require the Company to restate the amounts for these years applying the new grant date fair value methodology.

 

The following table provides the fair value of options granted to the directors for which expense was recognized in fiscal year 2010 and the related assumptions used in the Black-Scholes model:

 

 

 

 

Non-employee directors received the following stock option grants during fiscal year 2010:

 

 

All non-employee director stock options described above vest and are exercisable in full on the date of grant, except that a director initially elected by the Board will not be entitled to exercise any stock option until the director has been elected to the Board by Medtronic’s shareholders. Amounts in the grant date fair value column represent the aggregate fair value of awards computed in accordance with FASB ASC Topic 718, Compensation — Stock Compensation (disregarding forfeiture assumptions).

 

Stock Holdings.  Non-employee directors held the following restricted stock, stock options, and deferred stock units as of April 30, 2010:

 

 

 

 

To more closely align their interests with those of shareholders, directors are encouraged, within five years of the date of their election to the Board, to own stock of Medtronic in an amount equal to five times the annual Board retainer fees. In addition, each director must retain, for a period of three years, 75% of the net after-tax profit shares realized from option exercises or share issuances resulting from grants made on or after April 26, 2003. 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 after three years. In the case of retirement or termination, the shares may be sold after the shorter of the remaining retention period or one year following retirement or termination, as applicable.

 

Deferrals.  Directors may defer all or a portion of their cash compensation through participation in the Medtronic Capital Accumulation Plan Deferral Program, a nonqualified deferred compensation plan designed to allow participants to make contributions of their compensation before taxes are withheld, and to earn returns or incur losses on those contributions based upon allocations of their balances to one

or more investment alternatives, which are also investment alternatives that Medtronic offers its employees through its 401(k) Plan.

 

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 independent directors may also be contacted via e-mail at independentdirectors@medtronic.com. Our Lead Director may be contacted via e-mail at leaddirector@medtronic.com. 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 long-standing Code of Conduct to help ensure that our business is conducted in accordance with the highest standards of moral and 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. Our Code of Ethics for Senior Financial Officers, which is a part of the Code of Conduct, includes certain 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 Corporate Governance caption in the Investors 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.

 

Significant Shareholders.  The following table shows information as of June 28, 2010, concerning each person who is known by us to beneficially own more than 5% of our common stock.

 

 

 

 

Beneficial Ownership of Management.  The following table shows information as of June 28, 2010 concerning beneficial ownership of Medtronic’s common stock 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.

 

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance.  Based upon a review of reports and written representations furnished to it, Medtronic believes that during fiscal year 2010 all filings with the SEC by its executive officers and directors complied with requirements for reporting ownership and changes in ownership of Medtronic’s common stock pursuant to Section 16(a) of the Exchange Act, except that James P. Mackin, Senior Vice President and President, CRDM, failed to timely file on shares withheld for taxes due to Medtronic’s administrative oversight. The amended report was filed promptly when the error was discovered.

 

The CD&A describes all material elements of our compensation programs for our named executive officers during fiscal year 2010. Additional information can be found in the Summary Compensation Table and additional tables.

 

The Compensation Committee of the Board of Directors (the “Compensation Committee” or the “Committee”) is the decision-making body on all compensation matters related to our named executive officers and the Compensation Committee establishes the compensation philosophy, program design and administration for the Company. For more information on the Compensation Committee, its members and its duties as identified in its charter, you should refer to the section entitled “Committees of the Board and Meetings” beginning on page 14 of this proxy statement.

 

Our compensation program is designed to support and enhance the Medtronic Mission which has driven every aspect of our business since 1960 and lays the foundation for our unyielding standards for ethical and legal conduct and the utmost integrity in all of our activities. Our compensation program for named executive officers is aligned with these principles and is designed to:

 

 

Our philosophy is to position total compensation at a level that is commensurate with Medtronic’s size and performance relative to other leading medical device and pharmaceutical companies, as well as a limited number of general industry companies. The variable components of our program are pay for performance based and allow for market median pay for target performance, above-market median pay when performance is above target and below-market median pay when performance is below target performance. In addition, the equity components of the program align our executives with shareholders and ensure that their actual compensation increases or decreases in direct correlation to both the long-term financial performance of the Company and the movement of our stock price.

 

Our compensation policies and practices are designed such that they do not create risks that are reasonably likely to have a material adverse effect on the Company. While you should refer to the section entitled “Compensation Risk Assessment” beginning on page 17 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 named executive officers include the following:

 

 

 

Summarized below are key compensation decisions and developments for fiscal year 2010 for our named executive officers:

 

 

 

Mr. Hawkins’ total compensation increase in fiscal year 2010 of $553,778 primarily relates to higher payouts from incentive-based compensation and an increase in the valuation of his pension primarily driven by a change in discount rates used to estimate its present value. This includes an increase over the prior fiscal year of $172,697 for non-equity incentive plan compensation, which was driven by exceeding performance objectives for the fiscal year 2010 cash incentive plan, after the voluntary base pay reduction of 5%. The change related to Mr. Hawkins’ increase in pension value and nonqualified deferred compensation was $413,987.

 

The following table is intended to show Mr. Hawkins’ actual realized pay during fiscal year 2010 and is intended to supplement the information in the Summary Compensation Table on page 45. The information in this non-required table differs substantially from the information contained in the Summary Compensation Table which is required by the SEC. The equity grant information in this table reflects the gross compensation value of the awards prior to deduction for payment of taxes on these grants by Mr. Hawkins when either exercised or when vesting restrictions lapsed. In addition, as outlined in on page 42 of this proxy statement, Mr. Hawkins is required to retain a portion of the after-tax value of these awards/grants in equity for an additional three years. In addition, while the required Summary Compensation Table requires inclusion of increases in pension compensation solely due to changes in discount rates, the following does not.

William A. Hawkins — Chairman and Chief Executive Officer
Review of Fiscal 2010 Realized Compensation

 

 

The following is an illustration of the major components of Medtronic’s compensation programs and their targeted values as applied to each named executive officer.

 

 

 

The compensation mix in the illustration above reflects our bias for pay for performance, as well as our focus on sustained performance. Variable pay (annual and long-term incentives) represents 67% to 90% of total compensation at targeted amounts, while long-term financial measures and stock performance represent 43% to 76% of total targeted compensation. The percentages above are calculated based on total direct compensation (base salary, annual incentives and long-term incentives) at target and exclude special restricted stock unit awards and compensation related to relocation or expatriate duties.

 

The Compensation Committee has engaged Frederic W. Cook & Co., Inc., an independent outside compensation consulting firm, to advise the Compensation Committee on all matters related to executive officer and director compensation. Specifically, Frederic W. Cook & Co., Inc. conducts annual competitive market analyses of total compensation for named executive officers, provides relevant market data, updates on compensation trends and counsel on program design and specific compensation decisions related to our CEO and other executives. The consultant attended all of the Compensation Committee meetings in fiscal year 2010, as is Medtronic’s long-standing practice, and met with the Compensation Committee in executive session as requested at each meeting.

 

During the fiscal year the Compensation Committee adopted independence standards for the outside consultant. This policy established an assessment framework to confirm and report on the consultant’s independence. It also requires the consultant to confirm its independent status according to the Compensation Committee’s standards. Frederic W. Cook & Co., Inc. confirmed its independence at the June 2010 committee meeting, and the Committee agreed. The consultant has been engaged directly by the Committee, only provides services or undertakes work for the Company at the direction of the Compensation Committee, and does not provide any unrelated products or services to the Company.

 

In making compensation decisions for executive officers reporting to the CEO, the Compensation Committee solicits the views of our Chief Executive Officer. The Chief Executive Officer is not present during Compensation Committee executive sessions, and does not make recommendations to the Compensation Committee about his own compensation.

 

The Compensation Committee considers relevant market pay practices when establishing executive compensation levels and evaluating our compensation programs. In order to ensure the competitiveness of our compensation programs, the Committee has established a peer group of companies for benchmarking purposes. The identification of these companies is based on discussions with, and recommendations from, the Compensation Committee’s independent compensation consultant. The selection criteria were based on companies in the health care equipment, pharmaceutical, and biotechnology industries that position Medtronic in the median range of the group, on average, in various measures of company size. In fiscal year 2010 Genentech was replaced by Gilead Sciences as a function of Genentech’s merger with Roche.

The following table lists Medtronic’s fiscal year 2010 compensation peer group, including Medtronic’s ranking relative to these companies based on financial data available at the time of consideration:

 

 

Medtronic also uses external survey sources to establish market data points, primarily the Towers Watson (formerly Towers Perrin) Executive Compensation Database, the Hewitt Total Compensation Measurement Database, and proxy data from our executive compensation peer group companies. Towers Watson and Hewitt are two of the largest human resource consulting firms globally and both are recognized leaders in the compensation survey industry.

 

We capture data from the general industry, our executive compensation peer companies, and the medical device, life sciences and pharmaceutical industries. We then size the survey data relative to our Company’s revenue or that of the relevant business unit using statistical regression models provided by the survey companies. Tabular data is also utilized. This process is used because it has been shown that there is a positive correlation between the size of a company and executive pay.

 

We use an average of the size adjusted medians of the general industry data to set the initial benchmark for base pay for each of our executive positions. Once this initial benchmark has been established, we conduct an analysis to compare this initial salary benchmark to the median salary of the peer companies, and the medical device, life sciences and pharmaceutical industries. If consistent differences become apparent, we may apply a slight adjustment (typically 5% to 10%) to the initial benchmark salary to bring it to a level that is consistent with data reported in the more specialized industry groups.

For short-term and long-term incentive guidelines, we rely on industry median data from our executive compensation peer companies as well as Frederick W. Cook and Co., Inc.’s annual Survey of Long-Term Incentives, which is compiled by the consultant for our Compensation Committee. This data is then validated by size-adjusted median data from our Towers Watson and Hewitt surveys.

 

We annually review the method and the data sources used, and results of our benchmarking process in order to ensure that all aspects of our compensation programs are positioned at levels that reflect the stated objectives of our compensation philosophy.

 

Our objective is to establish market competitive base salaries within a competitive range of ± 15% of the market median benchmark established for each position. The Compensation Committee solicits the views of our Chief Executive Officer on the compensation of our named executive officers (other than his own). In making his recommendations, the Chief Executive Officer assesses individual performance during the fiscal year, the individual’s current salary percentile relative to the established market benchmark for their position, past salary treatment, time in position and the scope and complexity of the position.

 

The Compensation Committee receives a detailed analysis of the named executive officers’ pay as compared to the median salary of the compensation peer group from the independent consultant to the Compensation Committee. This data, in addition to that provided by management, is presented to and evaluated by the Compensation Committee.

 

As a reflection of the current economic and business environment, all of our executive officers (including our named executive officers) proposed to the Compensation Committee a 5% reduction in their base salaries for fiscal year 2010. These salary changes were approved by the Committee during its April 2009 meeting and became effective on the first day of fiscal year 2010. During its meeting in April 2010 the Committee approved reinstating the voluntary 5% reduction effective on the first day of fiscal year 2011.

 

Base salary percentage decreases from fiscal year 2009 to fiscal year 2010 are shown below:

 

 

 

 

For fiscal year 2010, base salary accounted for approximately 10% of total compensation for Mr. Hawkins and approximately 27% on average for the other named executive officers. During fiscal year 2010, Mr. O’Connell was named Executive Vice-President and Group President of our Restorative Therapies Group and received a promotional increase concurrent with the significant increase in his responsibilities. On average, the fiscal year 2010 base salaries of our named executive officers were approximately 85% of the midpoint of the established market range.

 

In connection with Mr. O’Connell’s promotion, Medtronic required Mr. O’Connell to relocate from California to Minnesota. Because this relocation took place at a time when California real estate had unexpectedly and extraordinarily declined in value, Mr. O’Connell would have incurred a loss in the value of

his house of approximately $900,000, plus the value of improvements made to the home by Mr. O’Connell. In normal circumstances, under Medtronic’s standard relocation policy, Medtronic would have covered only $475,000 of this equity loss. Because Mr. O’Connell was required to sell his house in market conditions under which he otherwise would not have sold, management believed this was an unacceptably large loss to be borne by Mr. O’Connell. Consequently, management requested, and the Compensation Committee agreed, to provide Mr. O’Connell with a special relocation and retention bonus in lieu of amounts that would have been paid under Medtronic’s relocation policy. In making its decision, the Compensation Committee noted that the significant decrease in California real estate values that occurred between 2008 and 2009 was extraordinary and thus unlikely to reoccur, and that Mr. O’Connell’s relocation was unusually important to the Company, thereby avoiding the setting of a precedent for any such payments in the future to others. The Compensation Committee also included in the special bonus a substantial retention feature which required repayment on a pro-rata basis if Mr. O’Connell’s employment is terminated for any reason other than by death or disability, or by the Company without cause, for a period of five years following his California home sale. Accordingly, Medtronic provided Mr. O’Connell a bonus of $1,400,000, which was intended to cover approximately $800,000 of the equity loss plus applicable taxes, with Mr. O’Connell being responsible for the remaining portion of the loss, which exceeded $100,000 (plus the value of improvements). The relocation bonus is reflected in the Bonus column of the Summary Compensation Table on page 45.

 

We deliver annual performance-based incentives to our named executive officers through the Medtronic, Inc. Executive Incentive Plan (“MIP”). MIP award targets, expressed as a percentage of base pay, are within a competitive range of ± 15% of the market median annual incentives for our competitive market. Consistent with our pay for performance philosophy, we establish an award range that generates above-market pay for above-market performance and below-market pay for below-market performance.

 

Award Targets.  The Compensation Committee reviews, discusses and approves MIP award targets for named executive officers each year in June, after review and approval of the Company’s annual operating plan. No incentives are earned unless a minimum (threshold) diluted earnings per share target is met, at which point participants earn a minimum award of 50% of target. Maximum awards to our named executive officers may be as high as 225% of the target amount for maximum achievement of all performance measures.

 

For fiscal year 2010, the Compensation Committee approved an increase in the annual MIP targets for Messrs. Butel and O’Connell to 75% concurrent with their promotions to Executive Vice-President and Group President. Because their promotions occurred after the start of the fiscal year, their actual MIP awards were pro-rated based on their dates of promotion. The annual MIP targets for Messrs. Hawkins, Ellis and Mackin remained at 140%, 80% and 70% respectively.

 

Performance Measures.  MIP performance measures were reviewed and approved at the Compensation Committee’s May meeting and are based upon the annual operating plan approved by the Board. Financial measures are selected based on how effectively they impact, independently and together, the overall success of Medtronic. Performance measures for our named executive officers were based 100% on overall Company performance. We believe our approach focuses our executives on sustained high quality revenue growth, innovation, market share and market expansion.

 

In fiscal year 2010 the Company-wide financial measures were diluted earnings per share, revenue growth, and a measure of cash flow, with weights of 40%, 40% and 20%, respectively. Diluted earnings per share is an aggregate measure that focuses on growth and equity management, and reflects how well we deliver value to our shareholders from our business operations. For purposes of the MIP, as well as performance-based restricted stock unit awards and Long-Term Performance Plan (“LTPP”) awards discussed later in this CD&A, diluted earnings per share refers to non-GAAP diluted earnings per share, a measure which includes adjustments for certain charges. A reconciliation of non-GAAP diluted earnings per share to diluted earnings per share as reported in our financial statements is included in the

“Adjustments for Special Charges” section on page 39 of this proxy statement. Revenue growth is a reflection of our ability to successfully bring new products to market, gain market share and expand the many markets that we serve. The cash flow measure is an indication of liquidity and reflects Medtronic’s flexibility in making certain business decisions. For the purposes of our MIP, the cash flow measure is defined as Medtronic’s net earnings ± changes in accounts receivable, inventory, net PP&E (property plant and equipment), other operating assets and accounts payable.

 

In determining the target levels for the revenue growth and diluted earnings per share performance measures, the Committee reviewed a number of historical and forward-looking factors including the competitive market, changes in the regulatory environment and economic trends. The Committee considered historical data from our executive peer group, analyst consensus data for both our executive compensation peer companies and the medical technology subset of those companies, and Medtronic’s annual operating plan for fiscal year 2010. Once established the target levels were not modified in any manner by the Committee.

 

In fiscal year 2010, the Company performance measures, targets and actual performance were:

 

 

These ranges were established at levels generally equal to the 35^th and 75^th percentiles of the performance of our Med Tech comparator group. Achievement of the target level of performance for each of these measures would have yielded a payout approximating the market median.

 

Once actual performance against each performance measure is established, the achievement percentage is determined by interpolating actual performance relative to the performance range for each measure. These results are then weighted based on the plan weightings and summed to arrive at an overall achievement percentage plan year. Actual payouts are determined by multiplying the executive’s eligible earnings by their annual target percentage, and then by the overall achievement percent for their plan.

 

Fiscal Year 2010 Award Payments.  For fiscal year 2010, Medtronic exceeded the diluted earnings per share threshold of $2.97, and, as highlighted above, exceeded the diluted earnings per share and cash flow measure targets. Revenue growth performance was below the target. This resulted in an overall Company-performance payout level of 119.78% of target.

 

Beginning in fiscal year 2009, Medtronic introduced the potential to modify annual incentive plan payments for employees other than the named executive officers on the basis of individual performance. In fiscal year 2010, this potential was enhanced using an improved formulaic approach. Employees receive greater or less than the MIP payout level based on their individual performance results. Medtronic specifically prohibits named executive officers from having the individual modifier applied to their MIP awards and, as a result, the incentive plan payments made to Medtronic’s named executive officers (based upon Company-wide measures) were made at the payout level of 119.78%.

An overview of the fiscal year 2010 MIP program, including target opportunities and award payments is presented below:

 

 

 

 

In fiscal year 2010, actual MIP awards accounted for approximately 16% of total compensation for our Chief Executive Officer and approximately 22% to 25% of total compensation for the remaining named executive officers.

 

Our long-term incentive program establishes long-term compensation pay targets within a competitive range of ± 20% of the median industry peer group and focuses our executives’ attention on the sustained financial performance of the Company.

 

Our program’s targets equally weight the value of stock options, performance-based restricted stock units, and performance-based cash — and uses special restricted stock unit and/or stock option grants in limited circumstances for special recognition and retention purposes. The stock portions of the program align our compensation program with shareholder value creation. The cash component of our program is designed to deliver aggregate payouts that are above market median pay for above target financial performance and below median pay for below target financial performance. Again, we believe our approach focuses our executives on sustained high quality revenue growth, innovation, market share and market expansion.

 

Award Targets.  The Compensation Committee reviews, discusses and approves all long-term compensation pay targets for named executives in June after reviewing a comprehensive annual competitive market analysis provided by our external independent compensation consultant.

 

Stock Options.  Stock options provide value only when the price of the stock appreciates over the grant price. This helps ensure a strong link between our executives and our shareholders. The value delivered is estimated using a Black-Scholes method of stock option valuation. Information on the Black-Scholes valuation for our fiscal year 2010 stock option awards is presented as part of the discussion of items in the Summary Compensation Table on page 45 of this proxy statement. Grant guidelines are approved by the Compensation Committee annually in June following review of the competitive market data. These guidelines consist of the award target and a minimum and maximum award range that varies from 50% to 200% of the targeted amount.

 

At the June 2009 Compensation Committee meeting, the Chief Executive Officer presented the Compensation Committee with his recommendations for option awards to the other named executive officers which were based on individual performance, potential, and retention considerations. Based on this information, and competitive market analysis presented by the independent consultant, the Compensation Committee approved annual stock option awards to the named executive officers. During the Compensation Committee meeting’s executive session (during which neither the Chief Executive Officer nor any other member of management was present), the Compensation Committee reviewed the data presented by the independent compensation consultant, as well as the performance of the Chief Executive Officer, and approved an annual stock option award for the Chief Executive Officer. All stock option grants have an exercise price that is equal to the closing market price of our shares on the date of grant, have a term of ten years and vest in equal increments of 25% each year beginning one year after the date of grant.

Annual stock option awards to named executive officers were granted on the first business day of our fiscal second quarter.

 

For fiscal year 2010, stock option awards were granted at target amounts to Mr. Hawkins. Messrs. Butel, Mackin and Ellis all received grants approximating the target. Mr. O’Connell received a grant above target as a reflection of the increasingly significant role he was serving and about to accept. The fair value of the stock option awards granted (valued according to our Black-Scholes model at $8.85 per share) accounted for approximately 24% of total compensation for our Chief Executive Officer and approximately 15% to 18% of total compensation for the remaining named executive officers. Targeted award amounts were unchanged from fiscal year 2009. Additional information about stock option awards granted to the named executive officers in fiscal year 2010 can be found in the Grants of Plan-Based Awards table on page 49 of this proxy statement.

 

Performance-Based Restricted Stock Units.  Performance-based restricted stock units are granted with a performance feature to ensure that no shares of stock are delivered to our executives if the Company does not meet a minimum diluted earnings per share growth requirement.

 

Similar to the annual stock option awards discussed above, performance-based restricted stock unit grant targets for named executive officers were approved by the Compensation Committee in June 2009. Actual awards were approved by the Compensation Committee during the June meeting and granted on the first business day of our fiscal second quarter. All performance-based restricted stock unit grants are made in the number of shares equal to the approved award dollar value divided by the closing market price of our shares on the date of grant, rounded up to the nearest whole share. These grants are credited with dividends in the form of dividend equivalent units that will be distributed upon vesting with the underlying award only if the performance criteria are met.

 

The performance goal that must be achieved for the fiscal year 2010 performance-based restricted stock units to vest is a cumulative diluted earnings per share growth during the three year period ending on the third anniversary of the date of grant that equals or exceeds a 5% compound annual growth rate, as determined by the Compensation Committee. Performance is measured over the three consecutive fiscal years beginning with the fiscal year during which the grant is made. If the performance goal is achieved, the awards will “cliff vest” 100% on the third anniversary of the date of grant. If the performance goal is not met, none of the awards vest.

 

For fiscal year 2010, performance-based restricted stock unit awards were delivered at approximately the target grant amounts to all of the named executive officers. Performance-based restricted stock unit awards accounted for approximately 25% of total compensation for Mr. Hawkins and approximately 15% to 19% of total compensation for the remaining named executive officers. Targeted award amounts were unchanged from fiscal year 2009. Additional information about performance-based restricted stock unit awards granted to the named executive officers in fiscal year 2010 can be found in the Grants of Plan-Based Awards table on page 49 of this proxy statement.

 

In fiscal year 2008, performance-based restricted stock awards were granted to each of our named executive officers. Under the terms set forth in the award agreements, these awards will vest on the third anniversary of the date of grant provided that the Company’s cumulative diluted earnings per share growth equals or exceeds a 5% compound annual growth rate over a three-year performance period beginning on the first day of fiscal year 2008 and ending on the last day of fiscal year 2010. At its May 25, 2010 meeting, the Compensation Committee certified that the cumulative diluted earnings per share growth performance threshold had been met based upon Medtronic’s performance over the three year performance period. As a result, these awards will vest as scheduled on October 27, 2010, the third anniversary of the date of grant. These awards are reflected in the Equity Incentive Plan Awards: Unearned Shares, Units or Other Rights That Have Not Vested column of the Outstanding Equity Awards at Fiscal Year End table on page 51 of this proxy statement.

 

Cash-Based Long-Term Performance Plan.  Our LTPP focuses our named executive officers on sustained achievement of critical long-term company-wide financial targets.

The annual LTPP grant targets for each of our named executive officers are established at a level equal to approximately 1/3 of the total median long-term compensation target for their position. Grant targets are approved by the Compensation Committee in June for the three-year performance period beginning in the fiscal year in which the grant is made following a review of the competitive market data. LTPP awards are typically approved at target levels with actual payouts based on Company performance over the ensuing three-year period.

 

For the 2010-2012 phase of the LTPP, no incentives will be earned unless the cumulative diluted earnings per share threshold is met over the three-year performance period. Once the threshold is achieved, minimum achievement for any performance measure results in a payout of 20% of the target amount for that measure. Maximum achievement for any performance measure results in a payout of 180% of the target amount for that measure. Failure to achieve the minimum performance level for any performance measure results in no payout for that measure. The minimum, target and maximum payouts to our named executive officers are presented in the Grants of Plan-Based Awards table on page 49 of this proxy statement.

 

Awards are paid annually for the most recently completed performance period. Calculations of award payments were reviewed by the Compensation Committee in May based on actual period financial performance.

 

Performance Measures.  LTPP performance measures were reviewed and approved at the Committee’s May 2009 meeting and are based 100% on overall Company performance. The financial measures for the 2010-2012 performance period are three-year cumulative diluted earnings per share (“EPS”) growth, three-year average revenue growth and three-year average ROIC, weighted 50%, 30% and 20%, respectively. In establishing the target levels for the EPS and average revenue growth measures the Committee considered historical and forward-looking factors including the competitive market, changes in the regulatory environment and economic trends. The Committee considered historical data from our executive peer group, analyst consensus data for both our executive compensation peer companies and the Med Tech subset of companies. Once established, the target levels were not modified in any manner by the Committee.

 

Performance targets for the three-year performance period covered by the 2010-2012 LTPP are 5% to 13% cumulative diluted EPS, average revenue growth of 2% to 10% and average ROIC of 10% to 20%. These ranges were established at levels generally equal to the 25^th and 75^th percentiles of the performance of our comparator group.

 

Once actual performance over the three-year period has been determined, the achievement percentage is calculated by interpolating actual performance relative to the performance range for each measure. These achievement percentages are then weighted based on the appropriate plan weightings and summed to arrive at an overall achievement percent for the plan year. Actual payouts are determined by multiplying the executive’s grant target by the plan’s overall achievement percent.

 

In fiscal year 2010, LTPP awards for the 2010-2012 performance period were granted at target amounts to all of the named executive officers. LTPP awards accounted for approximately 25% of total compensation for our Chief Executive Officer and approximately 12% to 21% of total compensation for the remaining named executive officers.

 

Payment of awards for the LTPP covering the 2008-2010 plan will be made during the first fiscal quarter of 2010 and can be found in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table on page 45 of this proxy statement.

Performance targets for the three-year performance period covered by the 2008-2010 LTPP were:

 

 

Over the performance period, the Company exceeded the performance thresholds, and exceeded the minimum performance levels for both cumulative diluted earnings per share and average after-tax return on net assets. The company’s actual cumulative diluted earnings per share was 47.2% of target, the actual revenue growth was below the minimum of the performance range and the after-tax return on net assets was 137.5% of target, resulting in an overall achievement percentage of 51.09%. This below target payout clearly demonstrates our pay for performance philosophy.

 

Beginning with the 2011-2013 plan (to be granted in fiscal year 2011), the cumulative diluted EPS and average revenue growth performance measures in the 2010-2012 plan will be removed. The performance measures for the 2011-2013 plan will be three-year relative revenue growth as measured versus a peer group of 19 companies, and ROIC. These two performance measures will be weighted 67% and 33%, respectively. Both measures will be determined on a straight U.S. GAAP basis without adjustments. The goal is to focus management performance on two important metrics: long-term revenue growth and return on capital.

 

Special Restricted Stock Unit or Stock Option Awards.  Grants of time-based restricted stock units and/or stock options are periodically made to named executive officers for strategic reasons such as attraction, promotion, succession planning, special recognition and retention and must be approved by the Compensation Committee. While vesting on such restricted awards is generally three- to five-year cliff vesting and stock options are generally four-year graduated vesting, specific circumstances will dictate the terms of these grants. All restricted stock unit and stock option grants are made at a price equal to the closing market price of our shares on the date of grant.

 

During fiscal year 2010, two such recommendations were approved by the Compensation Committee. Mr. O’Connell was granted both a restricted stock unit and stock option award upon his promotion to Executive Vice-President and Group President. In addition, to further demonstrate the Company’s interest in retaining Mr. Mackin, he was granted special restricted stock unit and stock option awards. The restricted stock unit awards will vest 100% on the fourth anniversary of the date of grant and the stock option awards will vest 25% per year beginning on the first anniversary of the date of grant.

 

As approved by the Compensation Committee, the following stock option and restricted stock unit awards were granted on November 2, 2009:

 

Stock Option Awards:

 

 

Restricted Stock Unit Awards:

 

 

The restricted stock unit awards will be credited with dividends in the form of dividend equivalent units that will be distributed upon vesting with the underlying award only if the performance criteria are met.

There were no other special grants of stock options or performance-based restricted stock units made to the named executive officers during fiscal year 2010.

 

Medtronic’s performance-based plans require that when acquisitions or non-recurring items significantly impact operating income, this impact will be reviewed and evaluated by the Compensation Committee and potentially excluded in determining financial performance. The plans define “significant” as an impact in the “general amount of 5% of the operating income in the year incurred.” In addition, the Company has developed a set of principles to guide treatment of acquisitions and non-recurring items. Specifically:

 

 

The Compensation Committee reviewed this policy, and a review of competitive practice presented by the independent consultant to the Compensation Committee, during its June 2008 meeting. The Compensation Committee determined that Medtronic’s practice is consistent with competitive practice and recommended no changes to the current practice and guidelines.

 

This provision benefits shareholders by allowing management to make decisions of material strategic importance without undue concern for impact on compensation. When such adjustments have been applied, they have had both a positive and negative impact on past awards.

 

In accordance with Medtronic’s policy, for fiscal year 2010 the Compensation Committee excluded a number of items from Medtronic’s results for the purposes of calculating performance on short-term and long-term incentive programs and the Medtronic Savings and Investment Plan (the “401(k) Plan”). The

following table reconciles the adjustments made in fiscal year 2010 and provides a brief description of each adjustment:

 

 

The Compensation Committee reviewed and approved the above adjustments consistent with Medtronic’s principles as outlined above. These adjustments resulted in a payout of 119.78% for named executive officers under the annual MIP and 51.09% under the 2008-2010 LTPP.

 

Medtronic provides broad-based benefit plans to all of its employees, including the named executive officers. All of our employees participate in the same health care plans, and we do not provide our named executive officers with any different or additional health care plans (except for up to $2,000 of the cost of an annual executive physical that may exceed regular plan coverage). The broad-based benefit plans include:

 

Qualified Retirement Plans.  Medtronic sponsors a number of tax qualified retirement plans for its employees. In the United States, Medtronic changed its retirement plans effective May 1, 2005 in order to provide then current employees and employees hired after that date a choice of retirement plans. Employees hired prior to May 1, 2005 had the option of continuing in a defined benefit pension plan (the “Medtronic Retirement Plan”) or electing to participate in one of the new plans. Employees hired after that date choose to participate in either of the new plans, the Personal Pension Account, or the Personal Investment Account. The Personal Pension Account is a cash balance component of the previous defined benefit pension plan and the Personal Investment Account is a component of the Company’s tax qualified 401(k) Plan. Additional details regarding these plans are provided on page 55 of this proxy statement.

 

Supplemental Retirement Plans.  Medtronic does not offer an enhanced retirement plan to its executive officers. The Company offers a nonqualified Supplemental Executive Retirement Plan designed to provide all eligible employees, including but not limited to the named executive officers, with benefits which supplement those provided under certain of the tax qualified plans maintained by Medtronic. The plan is designed to restore benefits lost under the Personal Pension Account, Personal Investment Account or the Medtronic Retirement Plan due to covered compensation limits established by the Internal Revenue Code. This plan also restores benefits for otherwise eligible compensation deferred into the

Medtronic, Inc. Capital Accumulation Plan Deferral Program (the “Capital Accumulation Plan”). The plan 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 our Capital Accumulation Plan.

 

Nonqualified Deferred Compensation Plan.  Medtronic does not offer a special non-qualified deferred compensation plan to its executive officers. The Company provides all vice presidents, including our named executive officers, and highly-compensated sales employees, with a market competitive nonqualified deferred compensation program 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. There are no Company contributions to the plan.

 

Business Allowance and Perquisites.  Instead of perquisites like company-provided automobiles, aircraft, country-club memberships, financial and tax advisors, etc., Medtronic provides named executive officers with a market competitive business allowance, unless they are on an expatriate assignment. The named executive officers may spend their business allowance at their discretion for expenses related to such things as financial and tax planning, automobiles or club memberships. Medtronic does not track an executive’s use of their business allowance. With the exception of Mr. Butel who is on an expatriate assignment, the annual business allowances provided to our named executive officers in fiscal year 2010 ranged from $24,000 to $40,000. In addition, we pay up to $2,000 for the cost of an annual executive physical that exceeds coverage provided by the executive’s medical plans. For named executive officers on expatriate assignments, rather than providing a business allowance, we pay for certain housing and related living costs. These amounts are sometimes a significant part of an expatriate’s total compensation. Additionally, it is occasionally appropriate for named executive officers to be accompanied during business travel by their spouses. The expenses associated with such travel, while rare, is considered taxable income. The referenced amounts are included in the “All Other Compensation” column of our Summary Compensation Table.

 

Compensation in a change of control situation is designed: (1) 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 (2) to help ensure the retention and dedicated attention of key executives critical to the ongoing operation of the Company. Our change of control provisions support these principles. We believe shareholders will be best served if the interests of our executive officers are aligned with shareholders’ interests, and providing change of control benefits should encourage senior management to pursue potential mergers or transactions that may be in the best interest of shareholders.

For fiscal year 2010, our change of control agreements for our named executive officers provided the following benefits if a severance trigger occurs within three years of a change of control:

 

 

Our change of control agreements are discussed in more detail in the “Potential Payments Upon Termination or Change of Control” section of “Executive Compensation.” We do not have individual employment contracts with our named executive officers other than those associated with a change of control.

 

During fiscal year 2010, the Compensation Committee provided notice to our named executive officers that, upon expiration, the current form of the agreement would not be extended and a new agreement without any excise tax gross-up would be offered.

 

Equity Holding.  The Compensation Committee has approved stock retention requirements as follows: the Chief Executive Officer must retain, for a period of three years, 75% of the net after-tax profit shares realized from option exercises and 75% of the net gain shares relating to share issuances resulting from grants made on or after April 26, 2003. Other named executive officers must retain, for a period of three years, 50% of the net after-tax profit shares realized from option exercises and 50% of the net gain shares relating to share issuances resulting from grants made on or after April 26, 2003. For stock options, net after-tax profit shares are those shares remaining after payment of the option’s exercise price and applicable taxes. For share issuances, net gain shares are those shares remaining after payment of income taxes. Shares retained may be sold after three years. The retention requirements were established at a higher level for the Chief Executive Officer as a reflection of the increased scope of decision-making inherent in this position and to maintain increased alignment with long-term Company performance. In the case of retirement or termination, the shares may be sold after the shorter of the remaining retention period or one year following retirement or termination.

 

As of April 30, 2010, all executive officers were in compliance with the stock retention requirements.

 

In addition, in July 2009, we amended our insider trading policy to prohibit our named executive officers (along with others) from engaging in shorts sales of Medtronic securities (including share sales against the box) or engaging in purchases or sales of puts, calls or other derivative securities based on Medtronic securities. It also prohibits our named executive officers 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 officers 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 which specifically prohibit the sale, assignment and transfer of awards granted under the plan with limited exceptions such as

the death of the award recipient. In addition, the Compensation Committee of the Board of Directors may allow an award holder to assign or transfer an award.

 

Incentive Compensation Forfeiture.  Medtronic has a comprehensive Incentive Compensation Forfeiture Policy, which is designed to recoup improper payments 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 paid or awarded to the executive officer due to misconduct, 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 the Medtronic, Inc. 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.

 

Equity Compensation Forfeiture.  The Company may require the return or forfeiture of cash and/or 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 months prior to or twelve 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 determined by the Compensation Committee of the Board of Directors.

 

The Compensation Committee structures all compensation to be compliant with the $1 million deduction limitation of Section 162(m) of the Internal Revenue Code, which limits the amount of remuneration that Medtronic may deduct for our Chief Executive Officer and the three highest-paid named executive officers other than the Chief Executive Officer and Chief Financial Officer, unless the Compensation Committee determines that compliance in a specific situation would not be in the best interests of Medtronic and its shareholders. In addition, the Compensation Committee structures all deferred compensation within the meaning of Section 409A of the Internal Revenue Code such that all named executive officers are not subject to the excise tax under Section 409A.

 

In light of the adoption by Medtronic of FASB ASC Topic 718, Compensation — Stock Compensation, it is now more economically attractive to grant equity-based awards other than stock options. Consequently, the Compensation Committee now grants fewer stock options and more performance-based awards in the form of performance-based restricted stock units and awards under the LTPP, which focuses our named executive officers not only on the performance of the stock, but also on specific performance measures that are critical to the long-term success of the business.

 

All employee stock awards, which include restricted stock grants, restricted stock units and stock options, are approved either by the Compensation Committee of the Board or the internal stock committee (the “ISC”). The Compensation Committee approves all stock awards to the executive officers as well as all awards which are not delegated to the ISC due to the size of the award. The ISC, which includes the Chief Executive Officer and the Senior Vice President, Chief Talent Officer, approves all other stock awards.

 

It is Medtronic’s policy to make stock, stock unit and option grants on the first business day of each fiscal quarter for all grants approved by the Compensation Committee or the ISC during the preceding quarter. This policy was effective beginning in fiscal year 2007. Prior to adopting the current policy, stock grants were effective on the date of approval or, in certain cases, on a future effective date that was specifically identified in the resolutions at the time of approval.

The fair market value or exercise price on all Medtronic stock awards is established in the Medtronic, Inc. 2008 Stock Award and Incentive Plan as the closing sale price of shares on the New York Stock Exchange on the date of grant. Medtronic has priced stock awards consistent with the plan and no backdating of stock options has occurred.

 

The Compensation Committee of the Company has reviewed and discussed the section of this proxy statement entitled “Compensation Discussion and Analysis” required by Item 402(b) of Regulation S-K with management. 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:

 

 

SUMMARY COMPENSATION TABLE

 

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 Officer, and three other most highly compensated executive officers during fiscal year 2010 (collectively, the “named executive officers”). You should refer to the section entitled “Compensation Discussion and Analysis” beginning on page 25 of this proxy statement to understand the elements used in setting the compensation for our named executive officers. A narrative description of the material factors necessary to understand the information in the table is provided below.

 

 

Salary.  The salary column represents the base salary earned by the named executive officer during the applicable fiscal year. This column includes any amounts that the officer may have deferred under the Capital Accumulation Plan, which is included in the nonqualified deferred compensation table on page 57 of this proxy statement. Each of the named executive officers also contributed a portion of his salary to the Medtronic, Inc. Savings and Investment Plan, also referred to as the 401(K) Plan.

 

Bonus.  The bonus column represents the bonus payment made to Mr. O’Connell in recognition of his home equity loss in connection with his required relocation to the Company’s World Headquarters in Minnesota. As described in the Compensation Discussion and Analysis under Relocation Bonus on page 32 of this proxy statement, this bonus is subject to clawback by the Company under specified circumstances on a pro-rata basis over a five-year period.

 

Stock Awards.  The stock awards column represents aggregate grant date fair value of restricted stock and restricted stock units (including performance-based restricted stock and performance-based restricted stock units) (collectively, the “restricted stock awards”) granted in the respective fiscal year as computed in accordance with FASB ASC Topic 718, Compensation — Stock Compensation. The amounts reported do not match the amounts reported in last year’s proxy statement due to new reporting requirements adopted by the SEC, which require the Company to restate the amounts for these years applying the new grant date fair value methodology.

 

Option Awards.  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 amounts reported do not match the amounts

reported in last year’s proxy statement due to new reporting requirements adopted by the SEC, which require the Company to restate the amounts for these years applying the new grant date fair value methodology. The following table provides the assumptions underlying this estimation: