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710 Medtronic Parkway

Minneapolis, Minnesota 55432

Telephone: 763-514-4000

 

July 18, 2008

 

Dear Shareholder:

 

Please join us for our Annual Meeting of Shareholders on Thursday, August 21, 2008, at 10:30 a.m. (Central Daylight Time) at Medtronic’s World Headquarters, 710 Medtronic Parkway, Minneapolis (Fridley), Minnesota.

 

The enclosed Notice of Annual Meeting of Shareholders and Proxy Statement describe the business to be conducted at 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 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

President 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,

 

 

Terrance L. Carlson

Corporate Secretary

 

Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to Be Held on August 21, 2008. The Proxy Statement and Annual Report to Shareholders are available at http://www.medtronic.com/annualmeeting/.

 

This Notice of Annual Meeting, Proxy Statement and accompanying proxy card
are being distributed on or about July 18, 2008.

TABLE OF CONTENTS

 

710 Medtronic Parkway

Minneapolis, Minnesota 55432

Telephone: 763-514-4000

 

 

 

 

PROXY STATEMENT

Annual Meeting of Shareholders

August 21, 2008

 

 

 

 

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 21, 2008, and at any adjournment of the meeting.

 

What am I voting on?

 

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

 

 

Who is entitled to vote?

 

Shareholders as of the close of business on June 23, 2008 (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. Abstentions are counted as present and entitled to vote for purposes of determining a quorum. Shares represented by “broker non-votes” (see below) are also counted as present and entitled to vote for purposes of determining a quorum. On the Record Date, 1,125,730,817 shares of Medtronic common stock were outstanding and entitled to vote.

How many votes are required to approve each proposal?

 

The following explains 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 six candidates for election who receive a plurality vote of the shares present and entitled to vote in the affirmative will be elected. Ratifying PricewaterhouseCoopers LLP as Medtronic’s independent registered public accounting firm for fiscal year 2009 requires the affirmative vote of a majority of the shares present and entitled to vote. Finally, approval of the Medtronic, Inc. 2008 Stock Award and Incentive Plan 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 proposals. If you abstain from voting on any of the other proposals, it has the same effect as a vote against the proposal. If you just sign and submit your proxy card without voting instructions, your shares will be voted “FOR” each director nominee and the other proposals.

 

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 on which your broker does not have discretionary authority to vote (a broker non-vote). Shares held by brokers who do not have discretionary authority to vote on a particular matter and who have not received voting instructions from their customers are counted as present for the purpose of determining whether there is a quorum at the Annual Meeting, but are not counted or deemed to be present for the purpose of determining whether shareholders have approved that matter.

 

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 any circumstance, 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 enclosed proxy card 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 even if you are unable to attend the meeting.

 

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

 

It generally means you hold shares registered in more than one account. To ensure that all your shares are voted, sign and return each proxy card or, if you vote by internet or telephone, vote once for each proxy card 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 by:

 

 

Can I receive future proxy materials electronically?

 

Yes. If you are a shareholder of record or hold shares through a Medtronic stock plan, 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 with all 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.

 

Commencing this year, directors whose term of office is expiring shall be elected annually for terms of one year. Victor J. Dzau, M.D., William A. Hawkins, Shirley Ann Jackson, Ph.D., Denise M. O’Leary, Jean-Pierre Rosso and Jack W. Schuler are directors who have been nominated for re-election to the Board to serve until the 2009 Annual Meeting and until their successors are elected and qualified. All of the nominees are currently directors, and all of the nominees except for Dr. Dzau were previously elected to the Board of Directors by the shareholders. Dr. Dzau was elected to the Board in February 2008 by the Board following recommendation by the Nominating Subcommittee of the Corporate Governance Committee.

 

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 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 Securities and Exchange Commission (the “SEC”) within four business days of the date of the Board’s final determination.

NOMINEES FOR DIRECTORS FOR ONE-YEAR TERMS ENDING IN 2009:

 

 

THE BOARD RECOMMENDS A VOTE FOR THE DIRECTOR NOMINEES.

 

CLASS II DIRECTORS: DIRECTORS CONTINUING IN OFFICE UNTIL 2009

 

CLASS III DIRECTORS: CONTINUING IN OFFICE UNTIL 2010*

 

 

 

*  Mr. Collins is expected to retire at the 2008 Annual Meeting.

 

Under the New York Stock Exchange Corporate Governance Rules, 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 Rules: 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 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 fiscal years 2006, 2007 or 2008.

 

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 fiscal years 2006, 2007 or 2008. This also included a director’s spouse who was not an employee of The Medtronic Foundation, but was a consultant in which 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 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 a portion of a limited liability company 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 and development phase of any potential therapies. The Board determined that these relationships were not material. Our business relationships with 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, and Dr. Dzau does not participate in negotiations or approvals regarding the relationships. In addition, under the New York Stock Exchange Corporate Governance Rules 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, which manages money for MFS mutual funds and other accounts, and 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 “related parties” (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 2008, 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 and Sales of our Surgical Technologies operating segment. Mr. Tino Schuler worked for 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 2008, Medtronic’s core ear, nose and throat product lines represented less than 2.5% of Medtronic world-wide revenue. Mr. Tino Schuler was paid an aggregate salary and bonus of $211,889 and the standard benefits provided to other non-executive Medtronic employees for his services during fiscal year 2008. Mr. Tino Schuler is not an executive officer of, and does not have a key strategic role within, Medtronic, and this relationship is deemed under the Board of Directors written related party transaction policies as being pre-approved.

 

Physio-Control, Inc., a subsidiary of Medtronic, and other defendants, including Mr. Hawkins as President and 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 and outlines the actions Physio-Control must take in order to resume unrestricted distribution of its external defibrillators.

 

Medtronic has one outstanding loan to an executive officer, Catherine Szyman, who is neither a named executive officer nor a member of the Board of Directors. The loan was extended for relocation purposes in 2001 prior to the enactment of, and is permissible under, the Sarbanes-Oxley Act of 2002. The principal amount of the loan is $250,000, has a 10 year term, and accrues interest equal to 35.22% of appreciation in the underlying house or the maximum allowable interest under usury law, whichever is less. Medtronic currently anticipates the loan will be paid in full in August upon Ms. Szyman’s relocation to Minnesota.

 

 

The Board of Directors first adopted Principles of Corporate Governance (the “Governance Principles”) in fiscal 1996 and has revised these Governance Principals from time to time, including to comply with New York Stock Exchange Corporate Governance Rules. 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 under the Corporate Governance caption. 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.

 

The Chair of our Corporate Governance Committee, Mr. Rosso, is our designated “Lead Director” and presides as the chair at meetings of the independent directors. 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 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 Rules. Each director attended 75% or more of the total meetings of the Board and Board committees on which the director served in fiscal year 2008. 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 2008.

 

 

 

 

Effective August 21, 2008, Mr. Powell will serve as the chair of the Corporate Governance Committee and as Lead Director, and Mr. Hawkins will serve as Chairman of the Board. Mr. Collins is expected to retire at the 2008 Annual Meeting.

 

The Board has four standing committees — the Audit Committee, the Compensation Committee, the Corporate Governance Committee, and the Quality and Technology Committee — with each of their principal functions 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 in order to implement requirements of the Sarbanes-Oxley Act of 2002 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, and 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 may become 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 22 for additional discussion of the Compensation Committee’s processes and procedures relating to compensation.

 

Compensation Committee Interlocks and Insider Participation

 

None of the members of the Compensation Committee during fiscal year 2008 was an officer or employee of Medtronic, and no executive officer of Medtronic during fiscal year 2008 served on the compensation committee or board of any company that employed any member of Medtronic’s Compensation Committee or Board.

 

 

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 must notify the Corporate Secretary in writing at Medtronic’s offices at 710 Medtronic Parkway, Minneapolis, MN 55432 no later than March 20, 2009. 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 the Governance Principles. These criteria include business experience and skills, independence, distinction in their activities, judgment, integrity, the ability to commit sufficient time and attention to Board activities and the absence of potential conflicts with Medtronic’s interests. The Corporate Governance Committee also considers any other relevant factors that it may from time to time deem appropriate, including the current composition of the Board, the balance of management and independent directors, the need for Audit Committee and other expertise and the evaluation of all prospective nominees.

 

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 making 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 63 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 15 to Medtronic’s consolidated financial statements included in Medtronic’s Annual Report for fiscal year 2008.

 

It is has been the longstanding practice of Medtronic for all directors to attend the Annual Meeting of Shareholders. All directors 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 2008. No additional compensation was provided to Messrs. Collins or Hawkins for their service as directors on the Board.

 

 

 

 

In April 2007, the Board approved changes to Medtronic’s non-employee director compensation program. The changes, effective September 1, 2007, include:

 

 

Consequently, compensation disclosed for fiscal year 2008 includes both (i) the portion of the September 1 through August 31 plan year that occurred within fiscal year 2008 (which was April 28, 2007 through August 31, 2007) and (ii) a shortened plan year for the September 1, 2007 to April 25, 2008 period.

 

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. The annual cash retainer for the September 1 through August 31 plan year was $70,000 (with $35,000 of that amount being earned in fiscal year 2008), and the annual cash retainer for the shortened 2008 plan year was $53,333.

 

In addition, the Chairs of each of the Compensation, Quality and Technology, and Corporate Governance Committees received an annual cash stipend for the September 1 through August 31 plan year of $10,000 (with $5,000 of that amount being earned in fiscal year 2008), and a cash stipend of $6,667 for the shortened 2007-2008 plan year. Similarly, the chair of the Audit Committee received a cash stipend for the

September 1 through August 31 plan year of $10,000 (with $5,000 of that amount being earned in fiscal year 2008), and a cash stipend of $10,000 for the shortened 2007-2008 plan year. Finally, non-chair members of the Audit Committee received a cash stipend of $3,333 for the shortened 2007-2008 plan year.

 

The annual cash retainer and annual cash stipend are paid in two installments — in the middle and at the end of a plan year. Members of the Special Committee are paid a cash fee of $2,500 at the end of each fiscal quarter. 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 11 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 last business day of the plan year in an amount equal to the annual retainer in effect on such day (on a pro-rata basis for participants who are directors for less than the entire plan year and reduced by 25 percent for those directors who fail to attend at least 75 percent of the applicable meetings) divided by the average closing price of a share of Medtronic common stock for the last 20 trading days during the plan year. 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. Amounts in the stock awards column show 100% of the grant date fair value of stock awards granted to each director in fiscal year 2008, which is recognized in the year of grant and equals the share-based compensation expense recognized in fiscal year 2008 for financial statement reporting purposes in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”) (disregarding forfeiture assumptions).

 

Option Awards.  Directors are granted stock options on the first business day of the plan 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. 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). Amounts in the option awards column represent the share-based compensation expense recognized in fiscal year 2008 for financial statement reporting purposes in accordance with SFAS No. 123(R) (disregarding forfeiture assumptions) based on the assumptions noted in the following table. The following table provides the fair value of options granted to the directors for which expense was recognized in fiscal year 2008 and the related assumptions used in the Black-Scholes model:

 

 

 

Directors received the following stock option grants during fiscal year 2008:

 

 

 

 

All non-employee director stock options described above vest and are exercisable in full on the date of grant, except that a director initially appointed 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 share-based compensation expense recognized in fiscal year 2008 for financial statement reporting purposes in accordance with SFAS No. 123(R) (disregarding forfeiture assumptions).

Stock Holdings.  Non-employee directors held the following restricted stock, stock options, and deferred stock units as of April 25, 2008:

 

 

To more closely align their interests with those of shareholders, directors are encouraged 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 compensation through participation in Medtronic’s Capital Accumulation Plan, 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) supplemental retirement plan.

 

Charitable Giving.  As part of its overall program to promote charitable giving, The Medtronic Foundation matches gifts by Medtronic employees and directors to qualified educational institutions up to $7,000 per fiscal year. In addition, any individual who became a director prior to July 1, 1998 and who has served as a director for five or more years may recommend charitable institutions to which Medtronic will make a total contribution of $1 million at the time of the director’s death.

 

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. 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 23, 2008, 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 23, 2008 concerning beneficial ownership of Medtronic’s directors, named executive officers identified in the Summary Compensation Table below, 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 2008 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, except that Gary L. Ellis failed to accurately report shares for taxes withheld on October 23, 2007, due to Medtronic’s administrative oversight, Jack W. Schuler failed to timely file a report for the purchase of shares on August 23, 2007, due to an oversight by Mr. Schuler’s advisors, and Kendall J. Powell failed to timely file a report for a sale of shares by his spouse on August 27, 2007, due to an oversight by Mr. Powell’s advisors. The amended reports were filed promptly when the errors were discovered.

 

The compensation discussion and analysis describes all material elements of our compensation programs for our named executive officers during fiscal year 2008. The accompanying Summary Compensation Table and additional tables should be read for additional information relating to the compensation of our named executive officers.

 

The Compensation Committee of the Board of Directors has the authority and is the decision-making body on all matters of compensation related to our executive officers. The Compensation Committee establishes the compensation philosophy and approves all aspects of the executive compensation program including plan design and administration. 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 11 of this proxy statement.

 

 

The goal of our compensation program for named executive officers is to support and enhance the Medtronic Mission. Our Mission has been in place since 1960, and it drives every aspect of our business. Its principles, in a condensed version below, speak to:

 

 

Our Mission 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 its objectives are established for this purpose. It 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. To do this, the Compensation Committee annually reviews the total compensation levels and mix of elements using public information from our peer group’s proxy statements and survey information from credible general industry surveys. The variable components of the program are designed to allow for market median pay for target performance, above-market median pay when performance is above target performance and below-market median pay when performance is below target performance. In addition, the equity components of the program align our executives with the interests of our shareholders and ensure that their total compensation will increase or decrease in direct correlation to the movement of our stock price.

 

The following is an illustration of the major components of Medtronic’s compensation programs as applied to each named executive officer with the exception of Mr. Collins who, in his role as Chairman of the Board, received compensation consisting of base salary, a performance share plan (the “Performance Share Plan”) payout for the 2006 to 2008 performance period and a pro-rata annual incentive payment in fiscal year 2008.

 

 

 

 

The compensation mix in the illustration above reflects our pay philosophy, which emphasizes performance-based pay (annual and long-term incentives represent 73% to 88% of total compensation),

and a focus on long-term financial measures and stock performance (55% to 74% of total compensation). In delivering a relatively large percentage of total compensation in the form of long-term incentives, our intent is to deliver maximum value to the named executive officer only when value is delivered to shareholders in the form of both stock performance and long-term financial performance. The percentages are calculated based on total direct compensation (base salary, annual incentives and long-term incentives) excluding special time-based restricted stock awards and excluding 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. conducts an annual proxy review of total compensation for named executive officers. In addition, the consultant provides relevant market data, updates on trends in executive and director compensation, advice on program design and specific compensation decisions for the Chief Executive Officer and advice on the recommendations made by the Chief Executive Officer with respect to the compensation of other executives. The consultant attended all of the Compensation Committee meetings in fiscal year 2008, as is Medtronic’s long-standing practice. The consultant also meets with the Compensation Committee in executive session as requested at each meeting. The compensation consultant only works with management with the express permission of the Compensation Committee. Any services performed for the Company are related to executive and director compensation and are solely in support of decision-making by the Compensation Committee.

 

In making compensation decisions for the named executive officers, the Compensation Committee solicits views of our Chief Executive Officer, who attends all Compensation Committee meetings at the Compensation Committee’s invitation. The Chief Executive Officer is not present during the executive session portions of the meetings, and he does not make specific recommendations to the Compensation Committee about his own compensation.

 

At the Annual Meeting in August 2007, Mr. Collins stepped down as Medtronic’s Chief Executive Officer. Since that time, Mr. Collins has served in the capacity of Chairman of the Board of Directors and remains an employee of the company. It is anticipated that Mr. Collins will continue in this role through the date of the Annual Meeting in August 2008, at which time he will retire from Medtronic.

 

Mr. Collins’ compensation for his one-year period as employee Chairman is $1,000,000. Although he received awards in fiscal year 2008 under incentive programs in which he was a participant prior to stepping down as Chief Executive Officer, he did not receive any new grants under the Company’s long-term incentive or stock compensation programs. As the Chief Executive Officer during part of fiscal year 2008, Mr. Collins’ fiscal year 2008 compensation is reported in this proxy statement.

 

The Compensation Committee regularly conducts a comprehensive review of our peer group that includes an assessment of companies in the peer group as well as the size, performance and industry of companies outside the group. Such a review was conducted for fiscal year 2008 and resulted in a peer group consisting of twenty companies, including direct and indirect competitors in the medical device and pharmaceutical field as well as other leading companies. The peer group included six companies that were not a part of the peer group in fiscal year 2007. In addition, one peer company from fiscal year 2007 was acquired by a private group of investors. This peer group was selected based on discussions with, and recommendations from, the Compensation Committee’s independent compensation consultant. In establishing the peer group, all U.S.-based companies in Global Industry Classification Standard (GICS) sub-

industry codes related to Medtronic’s industry were identified. This group was further reduced by eliminating companies with less than $1 billion in revenues. One exception was made to these requirements for 3M which, although not in one of the GICS sub-industry codes used to identify other peer group candidates, operates a large health care segment representing 30% of its revenue and is locally based. The final peer group was selected such that Medtronic is at approximately the median of the companies in terms of several size measures such as revenues and market capitalization.

 

The following table lists Medtronic’s fiscal year 2008 peer group, including Medtronic’s ranking relative to these companies based on financial data available at the time of consideration:

 

 

With respect to base salaries, our objective is to establish salaries within a competitive range based on the market median base salary for our industry peer group and general industry survey data. Establishing market competitive base salaries aids in the attraction and retention of top talent and allows us to develop an overall pay program that appropriately reflects the market mix of fixed versus variable compensation.

 

The Compensation Committee solicits the views of our Chief Executive Officer on compensation matters as they relate to the Chief Operating Officer and members of senior management reporting to the Chief Executive Officer or the Chief Operating Officer. In making his recommendations to the Compensation Committee, the Chief Executive Officer assesses individual performance during the fiscal year, the individual’s current salary percentile relative to general industry labor market data, past salary treatment and the scope and complexity of the position.

 

In addition to the recommendations of the Chief Executive Officer, the Compensation Committee receives a detailed analysis of the named executive officers’ pay as compared to the peer group, presented by the independent consultant to the Compensation Committee, and general industry survey data

provided by Management. After an evaluation of the analysis and the data presented, the Compensation Committee approves base salaries for named executives annually at its meeting in April.

 

Base salary percentage increases for fiscal year 2008 and for fiscal year 2009 (to date) are shown below:

 

 

 

 

The fiscal year 2008 salaries for Mr. Hawkins and Mr. DeMane reflect their fiscal year-end annualized pay following mid-year promotions to Chief Executive Officer and Chief Operating Officer, respectively. Mr. Hawkins received an annual salary increase of 4.0% at the beginning of fiscal year 2008, bringing his salary to $806,000. Upon his promotion to Chief Executive Officer, Mr. Hawkins’ salary was increased to $1,100,000. Mr. DeMane received an annual salary increase of 5.1% at the beginning of fiscal year 2008, bringing his salary to $557,000. Upon his promotion to Chief Operating Officer, Mr. DeMane’s salary was increased to $725,000. Mr. Ellis received an annual salary increase of 6% at the beginning of fiscal year 2008, as well as a salary adjustment to align his pay more closely with competitive market data for his position. As a reflection of a majority of the named executive officers’ short tenure in their current roles, their salaries are approximately 86% to 95% of the competitive market for their positions. At the beginning of fiscal year 2008, Mr. Collins’ base pay in his role as Chief Executive Officer was $1,275,000. Upon stepping down as Chief Executive Officer and assuming the position of Chairman of the Board of Directors, Mr. Collins’ base salary was reduced by 21.6% to $1,000,000.

 

We deliver annual performance-based incentives to our named executive officers through the Medtronic, Inc. Executive Incentive Plan (“MIP”). Our objective is to establish MIP award targets within a competitive range based on the market median annual incentives for our competitive market. However, we establish an award range that allows above-market pay for above-market performance and below-market pay for below-market performance. It is important to note that our MIP award targets are set at competitive levels to allow us to attract and retain employees and offer a pay mix that is similar to those offered in the market in which we compete for talent.

 

Award Targets.  The Compensation Committee reviews, discusses and approves MIP award targets for named executive officers in June.

 

Our MIP award targets are established as a percentage of base salary earned during the fiscal year. The Plan provides that no incentives are earned unless a minimum (threshold) earning per share target is met, and that upon meeting this threshold the plan will provide participants a minimum award of 50% of target. Minimum awards (at the threshold level of performance) are 50% of the target amount and maximum payouts for named executive officers vary from 220% to 225% of the target amount.

Performance Measures.  MIP award measures are reviewed and approved annually at the Compensation Committee’s June meeting. Financial measures are selected based on how effectively they impact, independently and together, the overall success of Medtronic.

 

The fiscal year 2008 financial measures for the portion of our plan based on Company performance were earnings per share, revenue growth, cash flow and two quality-related measures, with weights of 50%, 30%, 10%, 5% and 5%, respectively. 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. 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. Cash flow is an indication of liquidity and reflects Medtronic’s flexibility in making certain business decisions, and for this purpose is defined as net income plus or minus changes in working capital and net property, plant and equipment. The first quality-related measure is related to savings in the cost of materials and inventory management and the second is related to a reduction in the number of observations made by regulatory bodies that result from audits or other actions. Target payouts for Company measures for fiscal year 2008 were based on performance targets with the following ranges: 10% to 18% growth in earnings per share, 10% to 15% revenue growth, cash flow ranging from $2,275 million to $2,717 million, scrap, obsolescence and physical inventory adjustments ranging from $149 million to $105 million, and 150% to 60% of established target for the number of observations. These are reasonably aggressive goals as compared to our peer group of companies and, as such, fully support our compensation philosophy. In addition, the earnings per share threshold was set at a 9% growth over the prior year’s actual results.

 

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

 

MIP awards paid to Messrs. Hawkins, Ellis, DeMane, Mahle and Collins are based 100% on Company performance measures. Mr. Collins’ award will be pro-rated based on the period of time in fiscal year 2008 in which he served as the Chief Executive Officer. In order to focus Mr. Butel on the achievement of business geography objectives, a significant portion, 75% of his MIP, is based on the performance of the business geography he leads. For 2008, these business unit measures included revenue growth (40% weight), earnings before interest and taxes (“EBIT”) (30%), the quality-related measures of scrap, obsolescence and physical inventory adjustments (7.5%) and on-time complaint reporting (7.5%), and two measures related to asset management — days sales outstanding (7.5%) and weighted average inventory weeks (7.5%). Target payouts for Mr. Butel’s business geography measures for fiscal year 2008 were based on performance targets within the following ranges: 12% to 21% revenue growth, $584 million to $639.3 million in EBIT, scrap, obsolescence and physical inventory adjustments ranging from $11.5 million to $9.4 million, on-time complaint reporting from 90% to 100% of target, days sales outstanding ranging from 85.4 to 73.9 days, and weighted average inventory weeks from 22.8 to 19.5 weeks.

 

In establishing performance measure targets, the Compensation Committee considered a number of factors including prior performance, forecast performance, industry expectations, and the annual operating plan. Finally, the competitive market, changes in the regulatory environment, and economic trends were also considered.

 

Fiscal Year 2008 Award Payments.  For fiscal year 2008, Medtronic’s earnings per share and revenue growth performance were below target. Medtronic’s earnings per share exceeded the minimum threshold amount required for an award. Return on net assets was below target, resulting in overall Company performance at 55.8% of target. Asia Pacific performance, which impacts Mr. Butel’s MIP, was at 78.5% of target.

An overview of the fiscal year 2008 MIP program, including targets and award payments is presented below:

 

 

 

 

At the direction of the Compensation Committee, in fiscal year 2008 Management conducted a comprehensive review of the MIP with the intent of providing greater focus on Medtronic’s overall business objectives, reducing the overall number of performance measures and driving appropriate Company, business unit and business geography performance. Under the revised plan, effective for fiscal year 2009, the Company performance measures will consist of revenue growth, earnings per share, and cash flow, weighted 40%, 40% and 20%, respectively. For this purpose, cash flow is defined as profit after tax exclusive of special charges, plus or minus changes in accounts receivable, inventories, net property, plant and equipment, certain other operating assets and accounts payable, and excluding the Physio-Control business and the effects of foreign exchange rates. Performance measures for business geography heads have been revised to include revenue growth and EBIT for the relevant area of responsibility, weighted 40% each. The remaining 20% will be based on performance against two quantitative performance measures as determined annually for each business unit or geography. This determination will be made by the Chief Executive Officer, with the input of the respective business leader, prior to the start of the fiscal year and approved by the Compensation Committee to the extent that they apply to executive officers. Awards for executive officers will be based 100% on Company performance, with awards for executive officers who are the head of a business unit or geography weighted 50% on the performance of the Company and 50% on the performance of the relevant business unit or geography.

 

Long-term compensation allows us to provide incentives and rewards to those employees who are responsible for the strategic and long-term success of the company. Our objective is to align the actions of our named executive officers with the interests of shareholders, link a significant portion of their compensation to sustained financial results and growth in stock price, provide a competitive total compensation package, and aid in the attraction and retention of top talent. We provide our named executives with four types of long-term compensation: (1) stock options; (2) performance-based restricted stock; (3) cash-based long-term performance plan; and (4) time-based restricted stock units.

 

A goal of our program is to establish aggregate long-term compensation pay targets within a competitive range based on the median long-term incentives of our industry peer group of companies. We establish a pay range that allows aggregate payouts that are above market median pay for above target performance and below market median pay for below target performance.

 

Our program achieves an equal balance among the three primary components of the program (stock options, performance-based restricted stock, and performance-based cash) and to use time-based restricted stock in more limited circumstances for special recognition and retention purposes. This mix of long-term incentives is similar to that used by the companies in our peer group. By maintaining an equal balance of the three primary components, we underscore the importance of all of them. This supports our overall compensation philosophy and objectives — to reinforce alignment with shareholder interests, encourage strong financial performance through aggressive goals and highly leveraged programs, and emphasize performance-based compensation.

Award Targets.  The Compensation Committee reviews, discusses and approves all long-term compensation pay targets for named executives in June after discussing and reviewing a comprehensive annual proxy executive compensation study provided by our external independent consultant. Once the market median long-term incentive compensation of the peer group of companies is determined for each named executive officer, that amount is allocated equally among the three primary components to establish the award targets for stock options, performance-based restricted stock, and the long-term performance plan.

 

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.

 

As discussed above, stock option grant guidelines are approved by the Compensation Committee in June following a review of competitive market data. These guidelines consist of an award target and a minimum and maximum award range that varies from 50% to 200% of the targeted amount.

 

At the October Compensation Committee meeting, the Chief Executive Officer presents the Compensation Committee with his recommendations for option awards to the named executive officers. Award recommendations may be at, above or below the target amounts based on individual performance. The Chief Executive Officer makes no recommendations to the Compensation Committee regarding his own award. Based on this information, and competitive market data provided by the independent consultant, the Compensation Committee determines and approves 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 is present), the Compensation Committee approves 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 generally vest in equal increments of 25% each year beginning one year after the date of grant. Annual stock option awards to named executive officers are granted on the first business day of our fiscal third quarter.

 

For fiscal year 2008, stock option awards were granted at target amounts to all of the named executive officers with the exception of Mr. Collins, who was not granted an award. Stock option awards accounted for approximately 31% of total compensation for our Chief Executive Officer and approximately 18% to 25% of total compensation for the remaining named executive officers, excluding Mr. Collins. Mr. Hawkins’ 2008 stock option award was granted after his promotion to Chief Executive Officer, slightly increasing the proportion of his total compensation represented by the award.

 

Performance-Based Restricted Stock.  Performance-based restricted stock is used to focus executives on a key financial goal, diluted earnings per share, align executive interests with shareholder interests, and aid in the attraction and retention of top talent.

 

As discussed above, performance-based restricted stock grant targets for named executive officers are approved by the Compensation Committee in June following a review of our peer companies. Actual grants are approved by the Compensation Committee during the October meeting and made at the beginning of our fiscal third quarter and are equal to the grant targets (unlike stock options, there is no grant range provided). All performance-based restricted stock grants are made in the number of shares equal to the target award amount divided by the closing market price of our shares on the date of grant, rounded up to the nearest whole share. Performance-based restricted stock awards “cliff vest” 100% three years after the date of grant if the applicable performance goal is achieved.

 

The performance goal that must be achieved for the fiscal year 2008 performance-based restricted stock grants to vest is cumulative diluted earnings per share growth of 9% each year over three years. Diluted earnings per share is an appropriate measure of overall financial well being. 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 stock 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 2008, performance-based restricted stock awards were delivered at target grant amounts to all of the named executive officers with the exception of Mr. Collins, who was not granted an award. Performance-based restricted stock awards accounted for approximately 31% of total compensation for Mr. Hawkins and approximately 18% to 24% of total compensation for the remaining named executive officers, excluding Mr. Collins. Mr. Hawkins’ 2008 performance-based restricted stock award was granted after his promotion to Chief Executive Officer, slightly increasing the proportion of his total compensation represented by the award.

 

Cash-Based Long-Term Performance Plan.  Our objective with our Long-Term Performance Plan (“LTPP”) is to maintain the alignment of our named executive officers’ goals with our long-term financial performance goals. We feel this approach focuses our executives on sustained achievement of financial targets that are critical to our long-term success.

 

As discussed above, our LTPP grant targets for named executive officers are approved annually by the Compensation Committee in June following a review of our peer groups. Grants are made annually for overlapping three-year performance periods. Calculations of final awards are reviewed by the Compensation Committee each April based on year-end forecasts and confirmed in June by the Chairman of the Compensation Committee just prior to payout. For the 2008-2010 phase of the LTPP, no incentives are earned unless two thresholds of earnings per share and return on net assets are met. Minimum payouts (at the threshold level of performance) are 20% of the target amount and maximum payouts are 180% of the target amount. The minimum, target and maximum payouts to our named executive officers can be found in the Grants of Plan-Based Awards table on page 41 of this proxy statement.

 

For the LTPP, performance measure targets are set at or close to the same level as our long-term financial objectives. Target payouts for the fiscal year 2008 to fiscal year 2010 period are based on performance targets with the following ranges: average growth in diluted earnings per share of 9% to 17% per year over three years, average revenue growth of 8% to 16% per year over three years, and average return on net assets of 12% to 20% over three years. The objectives are weighted 50%, 30%, and 20%, respectively. In setting our performance measure targets, we consider a number of items — the most important of which is our strategic plan, which takes into account our current product lines and our timeline for the approval and introduction of new products.

 

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 2008, LTPP awards were granted at target amounts to all of the named executive officers, with the exception of Mr. Collins, who was not granted an award. LTPP awards accounted for approximately 11% of total compensation for our Chief Executive Officer and approximately 16% to 22% of total compensation for the remaining named executive officers, excluding Mr. Collins. Because Mr. Hawkins’ 2008 LTPP grant was made prior to his promotion to Chief Executive Officer, it is a relatively small portion of his total fiscal-year compensation.

 

Fiscal year 2008 was also the final year of the 3-year performance period for the fiscal year 2006 through fiscal year 2008 phase of the Performance Share Plan, the predecessor to the LTPP. This predecessor plan was similar in design to the current LTPP except the plan was denominated in performance shares and the payout was 50% in cash and 50% in Medtronic stock. Performance targets for the fiscal year 2006 to fiscal year 2008 plan were as follows: average growth in diluted earnings per share of 9% to 17% per year over three years, average revenue growth of 9% to 17% per year over three years, and average return on net assets of 12% to 20% over three years. The objectives were weighted 50%, 30%, and 20%, respectively.

 

The target value of the cash portion of the 2008 award is determined by multiplying the participant’s overall target award by 50%. The target number of shares is determined by taking 50% of the participant’s

overall target award and dividing it by the average stock price for the 20-day period ending on the first day of the performance period, rounding up to the nearest whole share. For the 2006 to 2008 Performance Share Plan, the average 20-day stock price was $51.5745.

 

For the three-year performance period covered by the fiscal year 2008 Performance Share Plan, the Company’s actual average diluted earnings per share growth was 135% of target and the actual average return on net assets was 148% of target. Medtronic’s average revenue growth over the three-year performance period was below the minimum performance level, resulting in an overall achievement percentage of 97.23%.

 

The payout of the cash portion of the award is calculated as the product of the target cash award and the plan’s overall achievement percentage. Similarly, the number of plan shares awarded is calculated as the product of the number of target shares and the plan’s overall achievement percentage.

 

The table below provides an overview of the 2006 to 2008 Performance Share Plan, including award targets and cash and stock award payments is presented below:

 

 

 

 

The Stock Awards Column in the Summary Compensation Table includes the share-based compensation expense recognized in accordance with SFAS 123(R) in fiscal year 2008 as required under applicable SEC rules, rather that the amounts shown in the table above.

 

Time-Based Restricted Stock Units.  Grants of time-based restricted stock units 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 these awards is generally three- to five-year cliff vesting, specific circumstances will dictate the terms of these grants. All time-based restricted stock unit grants are made at a price equal to the closing market price of our shares on the date of grant.

 

As a result of the Company’s ongoing reviews of its retention strategy for its top officers, management recommended to the Compensation Committee, and the Compensation Committee approved, the following grant of time-based restricted stock units:

 

 

There were no other grants of time-based restricted stock or restricted stock units made to the named executive officers during fiscal year 2008.

 

Medtronic’s performance-based plans require that when special charges (such as certain litigation, restructuring charges and in-process research and development charges) 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:

 

 

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 2008 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. These items included non-recurring charges related to restructuring, litigation, intangible asset impairments and in-process research and development as reported in the financial tables accompanying Medtronic’s press release detailing 2008 fiscal year-end earnings. The rationale for each adjustment is to encourage management to make strategic decisions that are in the best interests of the Company without undue concern for the impact of those decisions on their compensation. The following table reconciles the adjustments made in fiscal year 2008 and provides a brief description of each adjustment:

 

 

The Compensation Committee reviewed and approved the above adjustments consistent with Medtronic’s long-standing principles as outlined above. These adjustments resulted in a payout of 55.81% under the annual incentive plan (MIP) and 97.23% under the 2006-2008 Performance Share Plan.

 

Medtronic provides broad-based benefit plans to all of its employees, including the named executive officers. These 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 in which they wish to participate. Employees hired prior to May 1, 2005 had the option of continuing in a defined benefit pension plan (the “Medtronic Retirement Plan”) or elect 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 Savings and Investment Plan (the Company’s 401(k) plan). Additional details regarding these pension plans are provided on page 47 of this proxy statement.

 

Supplemental Retirement Plans.  Medtronic offers a Supplemental Executive Retirement Plan benefit. This plan is a nonqualified plan which is designed to provide all eligible employees, including the named executive officers, with benefits which supplement those provided under certain of the tax qualified plans maintained by Medtronic. The plans are 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. The Plan also restores benefits for otherwise eligible compensation deferred into the Medtronic, Inc. Capital Accumulation Plan Deferral Program (the “Capital Accumulation Plan”). The Supplemental Executive Retirement Plan uses the same benefit formula as the qualified plan and includes the same elements of compensation included in the qualified plan in addition to compensation deferred into the Capital Accumulation Plan. As such, 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 provides all eligible employees, including our named executive officers, with a market competitive nonqualified deferred compensation program through the Capital Accumulation Plan. Our plan allows named executive officers to make voluntary deferrals from their base pay and incentive payments. There is no Company contribution other than a credit of gain/loss related to the investment allocation choices made by the participants.

 

Business Allowance and Perquisites.  With the exception of Mr. Butel, who was on an expatriate assignment, we provide our named executive officers with a market competitive business allowance rather than perquisites such as an automobile program, financial and tax planning, and country club memberships. With the exception of Mr. Butel, the annual business allowances provided to our named executive officers in fiscal year 2008 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. We offer these opportunities to aid in the attraction and retention of top talent. 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. These amounts are included in the “All Other Compensation” column of our summary compensation table.

 

The principal reasons for providing compensation in a change of control situation are two-fold: (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 that the interests of shareholders will be best served if the interests of our executive officers are aligned with them, and providing change of control benefits should eliminate, or at least reduce, the

reluctance of senior management to pursue potential mergers or transactions that may be in the best interest of shareholders.

 

For fiscal year 2008, our change of control agreements for our named executive officers provided the following:

 

 

Our change of control agreements are discussed in more detail in the “Potential Payments Upon Termination or Change of Control” section below. Other than the agreement with Mr. DeMane that is described on page 51 of this proxy statement, we do not have employment contracts other than those associated with a change of control.

 

Equity Holding.  The Compensation Committee has approved the implementation of stock retention requirements. 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 or 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/termination.

 

Modified stock retention guidelines apply to shares awarded to Mr. DeMane in fiscal year 2007 because he was a Swiss-based executive at this time. The modified guidelines allow Mr. DeMane to satisfy holding requirements by demonstrating ownership of an equivalent number of shares rather than holding shares from specific awards, which due to Swiss tax regulations would result in severe tax consequences.

 

As of April 25, 2008, all executive officers were in compliance with the stock retention requirements.

 

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 the Medtronic, Inc., 2003 Long-Term Incentive Plan. This plan specifically prohibits 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. Medtronic does have outstanding stock option awards granted under prior long-term incentive plans whose terms did allow awards to be transferred, however these plans are no longer available for new grants.

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 had 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.

 

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 other highest-paid named executive officers, 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 SFAS No. 123(R), Medtronic realigned its equity grant practices from an over reliance on stock options to a more balanced program. Consequently, the Compensation Committee now grants fewer stock options and more performance-based awards in the form of performance-based restricted stock 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”). In order to mitigate the effect on share dilution resulting from grants made under our stock-based compensation programs and to take advantage of favorable market conditions, we periodically repurchase shares of Medtronic stock. The Compensation Committee approves all stock awards to its executive officers as well as all awards which cannot be 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 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. 2003 Long-Term 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:

 

 

The following table summarizes all compensation for each of the last two 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 2008, and Arthur D. Collins, Jr., who completed his tenure as Chief Executive Officer at the beginning of fiscal year 2008 (collectively, the “named executive officers”). You should refer to the section entitled “Compensation Discussion and Analysis” beginning on page 22 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 fiscal year 2008. 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 48 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.

 

Stock Awards.  The stock awards column represents the dollar amount of share-based compensation expense recognized in fiscal year 2008 for restricted stock and restricted stock units (including performance-based restricted stock and performance-based restricted stock units) (collectively, the “restricted stock awards”) granted to each of the named executive officers and share-based compensation recognized in fiscal year 2008 relating to the equity-based portions of our LTPP (formerly our Performance Share Plan), which includes long-term incentive compensation for the fiscal year 2006 to fiscal year 2008 and fiscal year 2007 to fiscal year 2009 periods. This column also includes compensation expense recognized in fiscal year 2008 for financial statement reporting purposes in accordance with SFAS No. 123(R) relating to the amendment of a restricted stock agreement originally awarded to Mr. Collins on October 30, 2006. Under the terms of the original award, Mr. Collins was granted 184,805 shares of performance-based restricted stock under our 2003 Long-Term Incentive Plan. The restrictions on the award lapse on the third anniversary of the grant date if Medtronic’s cumulative diluted earnings per share growth of 9% each year over three years is achieved. Mr. Collins’ October 2005 and 2004 grants provide that in the circumstance of death, disability or retirement, the restrictions lapse in their entirety. To clarify its intention that the October 2006 grant was to have been on terms consistent with the terms of the prior grants, in October 2007 the Compensation Committee amended the terms of the October 2006 grant to provide that in the circumstance of death, disability or retirement, the restrictions lapse in their entirety provided the performance goal is also achieved at the end of the three-year period. The expense recognized for restricted stock awards is equal to the grant date fair value, which is equal to the closing stock price on the date of grant and expensed over the vesting period.

 

Option Awards.  The option awards column represents the dollar amount of share-based compensation expense recognized in fiscal year 2008 for stock option awards granted to each of the named executive officers for financial statement reporting purposes in accordance with SFAS No. 123(R). The following table provides the fair value of options granted to the named executive officers for expense recognized in fiscal years 2007 and/or 2008 and the related assumptions used in the Black-Scholes model:

 

 

 

 

Non-Equity Incentive Plan Compensation.  This column reflects the full Medtronic annual incentive plan cash payment earned by the named executive officers during fiscal year 2008 and payable in June 2008 and the cash portion of the 2006-2008 Performance Share Plan payable in June 2008. This column includes any amounts that the officer may have deferred under the Capital Accumulation Plan. These deferrals are not included in the nonqualified deferred compensation table on page 48 of this proxy statement because the payment was made after the end of fiscal year 2008. The table below reflects the compensation received by the named executive officer under each plan.

 

 

Change in Pension Value and Nonqualified Deferred Compensation Earnings.  This column includes the estimated aggregate increase in the accrued pension benefit under Medtronic’s defined benefit pension plan. The change in the present value of the accrued value is impacted by variables such as additional years of service, age and the discount rate used to calculate the present value of the change. The Company changed its discount rate in valuing pension liabilities from 6.0% in fiscal year 2007 to 6.75% for the fiscal year 2008 plan year. The higher discount rate used to determine the change in pension value contributed to a significant decrease in the change in pension value from fiscal year 2007 to fiscal year 2008 in comparison with the change in pension value from fiscal year 2006 to fiscal year 2007. Assumptions are described in Note 13 to our consolidated financial statements in our annual report for fiscal year 2008 accompanying this proxy statement.

 

Also included for fiscal year 2007 is $1,473 in above-market earnings on Mr. Mahle’s deferred compensation earnings.

 

All Other Compensation.  The all other compensation column includes the following:

 

 

 

 

The following table summarizes all plan-based award grants to each of the named executive officers during fiscal year 2008. You should refer to the Compensation Discussion and Analysis sections entitled “Annual Performance-Based Incentives” on page 26 and “Long-Term Compensation” beginning on page 28 to understand how plan-based awards are determined. A narrative description of the material factors necessary to understand the information in the table is provided below.