DEF 14A 1 d657741ddef14a.htm DEF 14A DEF 14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934 (Amendment No.     )

 

Filed by the Registrant        Filed by a Party other than the Registrant

 

CHECK THE APPROPRIATE BOX:

Preliminary Proxy Statement

 

Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

Definitive Proxy Statement

 

Definitive Additional Materials

 

Soliciting Material Under Rule 14a-12

 

 

LOGO

Baxter International Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

 

PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):

 

No fee required.

 

  Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
 

1) Title of each class of securities to which transaction applies:

 

2) Aggregate number of securities to which transaction applies:

 

3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

4) Proposed maximum aggregate value of transaction:

 

 

 

5) Total fee paid:

 

Fee paid previously with preliminary materials:

 

  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.
 

1) Amount previously paid:

 

2) Form, Schedule or Registration Statement No.:

 

3) Filing Party:

 

 

 

4) Date Filed:


Table of Contents

Notice of 2019

Annual Meeting

of Stockholders

and Proxy Statement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 7, 2019

Baxter International Inc.

Headquarters

One Baxter Parkway

Deerfield, Illinois 60015

 

 

 

 

 

 

 

LOGO

 


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LOGO

 

 

Baxter International Inc.

One Baxter Parkway

Deerfield, Illinois 60015

  March 26, 2019   LOGO

 

Dear Fellow Stockholder:

It is my pleasure to invite you to attend Baxter’s Annual Meeting of Stockholders on Tuesday, May 7, 2019 at 9:00 a.m., Central Daylight Time, at our corporate headquarters located at One Baxter Parkway, Deerfield, Illinois 60015. Registration will begin at 8:00 a.m.

 

Baxter’s mission is unchanging and enduring: Save and Sustain Lives. It is a constant that defines our emphasis on medically necessary products as well as the commitment of our employees. What does change, in contrast, is how we bring this mission to life. For the past three years, we have been on a journey of transformation to deliver enhanced value for our stakeholders.

 

We continue investing to renew the pace of high-potential innovation across the company. This is an essential part of our commitment to patients, and equally essential to delivering increased value for our investors. Building on our recent progress, we intend to continue accelerating innovation through our internal research and development pipeline, business development, and by expanding into new adjacencies, from prevention through recovery. We are employing a highly disciplined business development strategy, assessing opportunities of varying scope and scale. We are focused on ensuring a complementary fit – whether through adjacencies or even new healthcare lines beyond our current core – as well as a return on investment in line with our current standards and expectations.

 

Simultaneously, we will maintain our tenacious focus on operational efficiency, which has been key to increasing our margins and cash flow over the past three years. Our focus on operational excellence has been a defining element of our ongoing transformation. Zero-based organization and spending initiatives have helped usher in a new era of efficiency, agility and spending discipline across all corners of the business.

 

An evolving culture has played a crucial role in Baxter’s broader transformation over the past three years. Our longtime mission to Save and Sustain Lives is being pursued with a new sense of dynamism and urgency, powered by levers like speed, simplicity, courage and collaboration. This charge will continue in order to maintain and accelerate our renewed trajectory.

 

Our 50,000 employees1 make it all possible. Our globe-spanning diversity is matched only by the commitments we share…including our passion for patients, our drive to innovate, and our belief in reaching beyond today’s goals and expectations. As much as any strategy, these traits will continue to form our future and the impact we deliver for our stakeholders.

 

As Baxter’s Chairman and CEO, it is gratifying to help channel this energy into meaningful results. We have already accomplished a great deal; but I am convinced that this is prologue for what is to come. There are so many opportunities within our reach to advance healthcare, refine our operations and deliver enhanced value for investors. Now it is time to deliver on the potential we have worked hard to create. Many thanks for your ongoing support and confidence as this journey continues.

 

We hope that you join us at the Annual Meeting of Stockholders to discuss our results and learn more about our strategic agenda. Details of the business to be conducted at the Annual Meeting are included in the attached Notice of Annual Meeting of Stockholders and Proxy Statement, which we encourage you to read carefully. If you plan to attend the Annual Meeting, please review the information on attendance provided on page 73 of the proxy statement.

 

Your vote is very important to us. Whether or not you plan to attend in person, I urge you to vote your shares as promptly as possible. You may vote your shares by Internet or by telephone. If you received a paper copy of the proxy card by mail, you may sign, date and return the proxy card in the enclosed envelope. If you attend the Annual Meeting, you may revoke your proxy and vote in person.

 

On behalf of the Board of Directors and our management team, thank you for your continued support of Baxter and your participation in this year’s Annual Meeting of Stockholders.

 

Very truly yours,

 

LOGO

 

José (Joe) E. Almeida

Chairman of the Board,

President and Chief Executive Officer

 

1 

As of December 31, 2018.


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LOGO

 

 

Baxter International Inc.

One Baxter Parkway

Deerfield, Illinois 60015

  March 26, 2019    LOGO

 

Dear Stockholder:

It has been my privilege to serve as Baxter’s lead independent director during 2018. I also enjoyed meeting with several of our investors as part of our stockholder engagement program in late 2018 (as described on p.32 of the proxy statement). I look forward to continuing to engage in productive dialogue with our stockholders in 2019 and beyond.

 

Your Board plays a key advisory role in the mission and strategic direction of the company, and we are actively committed to our oversight responsibilities across all areas of the company. The Board includes diverse and independent directors with a wide range of skills and experiences that support Baxter’s strategy and help to position the company for long-term success in the complex and rapidly changing healthcare environment.

 

As a lead director, I liaise closely with the other independent directors to help ensure their input is incorporated into the Board meetings and work closely with Joe Almeida to develop the agenda topics. Additionally, I provide an independent channel for investors and other stakeholders to access the Board and Baxter generally. There were many developments in our Board and governance practices in 2018, including:

 

•   Board Refreshment – We welcomed two new Board members: Patricia (Patty) Morrison and Amy Wendell. Their appointments were the result of our ongoing board refreshment activities, which included (for the first time) the use of a third party to help oversee our annual self-assessment process. Both Amy and Patty bring critical experience in the areas of information technology and cybersecurity and M&A, respectively, which complement Baxter’s strategies and potential transformation activities. Ms. Carole Shapazian and Mr. Munib Islam have announced their decisions to depart from the Board effective May 6th. We are grateful for their years of service and contributions to Baxter.

 

•   Stockholder Engagement – We continued to build upon our year-round engagement program with stockholders to better understand their perspectives on a variety of relevant issues, including strategy, performance, governance, compensation, corporate responsibility and Board composition, refreshment and leadership.

 

•   Governance Improvements – Consistent with feedback received from several investors and in light of the company’s increased focus on digital health, we amended our Committee charters in February 2019 to assign oversight responsibility for IT functions (including non-product related cybersecurity matters) to the Audit Committee. The Quality, Compliance & Technology Committee is now responsible for cybersecurity as it relates to Baxter products and services. Ms. Morrison has been added to the Audit Committee in light of her significant expertise in these areas.

 

I am confident that Baxter will continue to build on its growing momentum with the Board’s active involvement, valuable input and support. I am equally confident that we currently have the proper structures in place to help accomplish the company’s long term strategic goals.

 

Best regards,

 

LOGO

 

Thomas T. Stallkamp

Lead Director


Table of Contents
Table of Contents                  

 

i

 

 

 

Table of Contents

 

 

 

Table of Contents

     i      
  Notice of 2019 Annual Meeting
of Stockholders and Proxy Statement
     1      
 

Proxy Statement Highlights

     2      
  Corporate Governance at
Baxter International Inc.
     10      
        
 

 

Proposal 1 Election of Directors

 

  

 

 

 

 

10

 

 

 

 

   
 

Nominees for Election as Directors

     11      
 

Board of Directors

     17      
 

Other Corporate Governance Information

     20      
 

Board Responsibilities

     20      
 

Board Structure and Processes

     22      
 

Committees of the Board

     23      
 

Director Compensation

     24      
 

Corporate Responsibility

     27      
 

Executive Compensation

     29      
        
 

 

Proposal 2 Advisory Vote to Approve Named
Executive Officer Compensation

  

 

 

 

    

29

 

 

 

   
 

Compensation Committee Report

     30      
 

Compensation Discussion and Analysis

     30      
  Summary      30      
 

Compensation Philosophy

     34      
 

Components of Executive Compensation

     35      
 

Structure of Compensation Program

     36      
 

Elements of Executive Compensation

     42      
 

Executive Compensation Tables

     46      
  Summary Compensation Table      46      
 

2018 Grants of Plan-Based Awards

     48      
 

Description of Certain Awards Granted in 2018

     49      
 

Certain Employment Arrangements

     50      
  Outstanding Equity Awards at 2018 Fiscal Year-End      51      
 

2018 Option Exercises and Stock Vested

     52      
 

Pension Benefits

     53      
  2018 Nonqualified Deferred Compensation      54      
  Potential Payments Upon Termination or Following a Change in Control      55      
 

CEO Pay Ratio

     56      
 

Audit Matters

     57      
        
 

 

Proposal 3 Ratification of Appointment of
Independent Registered Public Accounting Firm

  

 

 

 

    

57

 

 

 

   
 

Audit Committee Report

     59      
 

Audit and Non-Audit Fees

     60      
  Pre-Approval of Audit and Permissible Non-Audit Fees      60      
 

Ownership of Our Stock

     61      
  Security Ownership by Directors and Executive Officers      61      
 

Security Ownership by Certain Beneficial Owners

     62      
  Section 16(a) Beneficial Ownership
Reporting Compliance
     62      
 

Stockholder Proposals

     63      
        
 

Proposal 4 Independent Board Chairman

  

 

63

 

   
        
 

Proposal 5 Right to Act by Written Consent

  

 

66

 

   
 

General Information

     70      
 

Questions and Answers about the Annual Meeting

     70      
 

Other Information

     73      
 

 

 

investor.baxter.com


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Notice of 2019 Annual Meeting of Stockholders and Proxy Statement                   

 

1

 

 

 

Notice of 2019 Annual Meeting of Stockholders and Proxy Statement

 

LOGO

The 2019 Annual Meeting of Stockholders of Baxter International Inc. (the Annual Meeting) will be held at our corporate headquarters located at One Baxter Parkway, Deerfield, Illinois 60015, on Tuesday, May 7, 2019 at 9:00 a.m., Central Daylight Time, for the following purposes:

 

 

 

LOGO

  To elect the 12 directors named in the attached proxy statement.

LOGO

  To approve named executive officer compensation for 2018.

LOGO

  To ratify the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for Baxter International Inc. (Baxter or the company) in 2019.

LOGO

  To vote on the two stockholder proposals as described in the proxy statement, if such proposals are properly presented at the Annual Meeting.

LOGO

  To transact any other business that may properly come before the meeting.

 

 

 

The Board of Directors recommends that stockholders vote FOR Items 1, 2 and 3. The Board of Directors recommends that stockholders vote AGAINST each of the stockholder proposals referred to in Item 4. Stockholders of record at the close of business on March 14, 2019 will be entitled to vote at the meeting.

 

By order of the Board of Directors,

 

 

LOGO

 

Ellen K. McIntosh

Corporate Secretary

 

 

 

 

 

 

 

LOGO

  How Do I Vote?

 

  LOGO     By Internet, following the instructions on the Notice of Internet Availability of Proxy Materials or the proxy card;
  LOGO     By telephone, using the telephone number printed on the proxy card; or
  LOGO     By mail (if you received your proxy materials by mail), using the enclosed proxy card and return envelope.

 

 

Important Notice Regarding

the Availability of Proxy Materials for

the Annual Meeting of Stockholders

to be Held on May 7, 2019

 

 

The proxy statement relating to the

Annual Meeting and the

Annual Report to Stockholders for the year

ended December 31, 2018 are available at

http://materials.proxyvote.com/071813.

 

 

 

Proxy Statement

The accompanying proxy is solicited on behalf of the Board of Directors for use at the Annual Meeting to be held on Tuesday, May 7, 2019. On or about March 26, 2019, Baxter began mailing to stockholders of record a Notice of Internet Availability of Proxy Materials providing instructions on how to access proxy materials via the Internet and how to vote online (www.proxyvote.com). Stockholders who did not receive the Notice of Internet Availability of Proxy Materials as a result of a previous election will receive a paper or electronic copy of the proxy materials, which Baxter also began sending on or about March 26, 2019.

 

 

investor.baxter.com


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2

                  Proxy Statement Highlights
 

 

 

Proxy Statement Highlights

 

To assist you in reviewing the proposals to be acted upon at the Annual Meeting, this section presents concise detail about each non-routine voting item. For more complete information, please review our Annual Report on Form 10-K for the year ended December 31, 2018 and the complete proxy statement.

 

   

LOGO

PROPOSAL 1

 

 

 

Election of Directors

 

What am I voting on?

You are asked to vote for the reelection of the 12 directors set forth below for a term of one year.

 

 

What is the Board’s recommendation?

The Board recommends a vote FOR the election of each of the director nominees.

The Board believes that the 12 directors standing for reelection possess a desirable mix of professional and industry experience and qualifications, reflective of the Board’s ongoing board refreshment efforts. The Board has demonstrated an ability to effectively consult with management on the company’s strategic and operational plans and oversee the company’s performance. See below for additional information regarding the qualifications, experiences and backgrounds of the Board (including the director nominees) and recent Board developments.

 

Where can I find more information?

Concise supporting information is presented below.

 
       

 

LOGO

 

 

 

See also “Corporate Governance at Baxter International Inc.—Proposal 1—Election of Directors” for additional information.

 

 

LOGO  | 2019 Annual Meeting of Stockholders and Proxy Statement


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Proxy Statement Highlights                  

 

3

 

 

 

    

Name
  Primary Occupation

  Age     Director
Since
    Independent
Y/N
    Key Attributes
and Skills
  A   C   CG   QCT
   

José (Joe) E. Almeida

Chairman, President and Chief Executive

Officer, Baxter International Inc.

    56       2016       N    

 Significant experience in the medical device industry

 Extensive experience leading and helping to transform global, multi-faceted corporations

               
   

Thomas F. Chen

Senior Vice President and

President of International Nutrition,

Abbott Laboratories (retired)

    69       2012       Y    

 Extensive international business experience in hospital products and pharmaceuticals

 Global perspective

           
   

John D. Forsyth

Chairman and CEO, Wellmark Blue Cross Blue Shield

    71       2003       Y    

 Significant experience in the healthcare industry, including with leading payors

 Understanding of large, complex organizations, including healthcare payors

           
   

James R. Gavin III, M.D., Ph.D.

Chief Executive Officer and

Chief Medical Officer

Healing our Village, Inc.

    73       2003       Y    

 Significant experience in the healthcare industry, including with leading healthcare providers

 Extensive scientific and medical expertise, including as a practicing endocrinologist

           
   

Peter S. Hellman

President and Chief Financial

and Administrative Officer

Nordson Corporation (retired)

    69       2005       Y    

 Extensive financial and capital markets experience

 Significant experience leading global industrial companies, including a multi-billion dollar information technology business

           
   

Michael F. Mahoney

Chairman, President and CEO, Boston Scientific Corporation

    54       2015       Y    

 Extensive experience leading global, medical products companies, including most recently as a Chairman and CEO

           
New  

Patricia B. Morrison

Executive Vice President, Customer Support Services & Chief Information Officer, Cardinal Health, Inc. (retired)

    59       2019       Y    

 Significant experience in information technology and cybersecurity at global healthcare companies

             
   

Stephen N. Oesterle, M.D.

Healthcare Consultant, former Senior Vice President, Medicine and Technology, Medtronic plc

    68       2017       Y    

 Significant experience in the medical products and healthcare industries

 Strong scientific and medical background, including as a practicing cardiologist

           
   

Cathy R. Smith

Executive Vice President and Chief

Financial Officer, Target Corporation

    55       2017       Y    

 Significant financial expertise and corporate leadership experience, including in response to cybersecurity incidents

             
   

Thomas T. Stallkamp (Lead Director)

Founder and Principal,

Collaborative Management LLC

    72       2000       Y    

 Extensive experience leading global corporations, including global manufacturers

 Significant business development and supply chain experience

           
   

Albert P.L. Stroucken

Chairman and Chief Executive Officer, Owens-Illinois Inc. (retired)

    71       2004       Y    

 Extensive experience leading large, complex organizations

 Significant financial expertise

           
New  

Amy A. Wendell

Senior Advisor, Parella Weinberg Partners L.P., former Senior Vice President of Strategy and Business Development, Covidien

    58       2019       Y    

 Extensive experience in business development and strategy in healthcare industry, including significant restructuring and integration experience

             

Key

 

   Committee Chairperson

 

A    Audit Committee

 

CG   Corporate Governance Committee

   Committee Member

 

C   Compensation Committee

 

QCT  Quality, Compliance and Technology Committee

 

 

 

 

investor.baxter.com


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4

                  Proxy Statement Highlights
 

 

2018 Board and Governance Highlights

 

Board Refreshment Activities

   See pages 18 and 32

•  Heightened focus by the Board on refreshment and diversity led to the appointment of two new directors as described below

•  Two directors, Munib Islam and Carole Shapazian, have announced their departure from the Board, effective May 6th

•  Continued outreach to many of our large institutional investors. Thomas Stallkamp, the lead independent director, participated in several of these discussions.

•  Expanded the scope of the Board’s annual self-assessment review, as described below

 

LOGO

Appointed Two New Independent Directors Appointed Patricia B. Morrison, the former Executive Vice President, Customer Support Services and Chief Information Officer, Cardinal Health Appointed Amy A. Wendell, Senior Advisor, Parella Weinberg Partners and the former Senior Vice President, Strategy and Business Development, Covidien Decreased Average Director Tenure 2016 9.4 years 2019 7.8* years ~58%** Directors on Board <4 years Expanded Scope of the Board's Annual Self-Assessment Process Each November, the Board conducts an annual self-assessment. In 2018, the Board retained a third party to oversee this process and conduct 1:1 interviews with each director. Did so in the interest of getting fresh perspectives and helping to solicit frank feedback from each director

 

*  Calculated after giving effect to Mses. Morrison’s and Wendell’s appointments and the previously announced departures of Mr. Islam and Ms. Shapazian from the Board, effective May 6, 2019

**Calculated as of March 26, 2019, after giving effect to the upcoming departures of Mr. Islam and Ms. Shapazian from the Board

 

  

Governance Practices

 

   See page 32

•  Continued to augment Baxter’s stockholder engagement program, with continued involvement from members of the Board and senior management. In 2018, Thomas Stallkamp, as lead independent director, participated in several of these discussions.

•  Since the 2018 annual meeting, the company has approached stockholders holding over 50% of the company’s outstanding shares to engage in discussions. The company will continue having these conversations with interested investors.

•  Topics discussed with stockholders included company strategy and performance, corporate governance matters (including Board composition and refreshment), board leadership structure, executive compensation and corporate responsibility initiatives (including company culture and diversity).

•  Consistent with feedback shared by several stockholders in these discussions and in light of the company’s increased focus on digital health, amended the Audit and Quality, Compliance & Technology Committee charters in February 2019 to assign oversight responsibility for IT functions (including non-product related cybersecurity matters) to the Audit Committee. The Quality, Compliance & Technology Committee is now responsible for cybersecurity as it relates to Baxter products and services.

 

    

 

 

LOGO  | 2019 Annual Meeting of Stockholders and Proxy Statement


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Proxy Statement Highlights                  

 

5

 

 

Board Qualifications, Experiences and Backgrounds

The following chart sets forth the varied qualifications, experiences and backgrounds of the director nominees in the aggregate. Each chevron represents a director nominee who possesses the specific attribute or experience. See “Corporate Governance at Baxter International Inc.—Nominees for Election as Directors” and “—Board of Directors—Director Qualifications” for additional information.

 

LOGO

 

   

 

LOGO

 

 

 

Advisory Vote to Approve Named Executive Officer Compensation

 

What am I voting on?

You are asked to cast a non-binding advisory vote to approve Baxter’s compensation programs as described in the “Executive Compensation—Compensation Discussion and Analysis” section of the proxy statement.

       

 

What is the Board’s recommendation?

The Board recommends a vote FOR this proposal.

The Board and the Compensation Committee believe that Baxter’s executive compensation programs appropriately align executives’ interests with Baxter’s strategies and long-term objectives, including Baxter’s ongoing pursuit of top quartile financial performance. See “—Performance Highlights” below for additional information regarding 2018 financial and operational highlights.

 

 

 

investor.baxter.com


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6

                  Proxy Statement Highlights
 

 

       

 

Where can I find more information?

Concise supporting information is presented below.

       

 

LOGO

 

 

 

See “Executive Compensation—Proposal 2—Advisory Vote to Approve Named Executive Officer Compensation” for additional information.

Performance Highlights

 

Development or Highlight

  

Further

Information

Strong financial results and stockholder returns for 2018

   See pages 30, 36 and 39

 

LOGO

 

1 

For purposes of calculating performance under the company’s 2018 annual incentive plan, net sales were calculated at budgeted exchange rates (as of January 1, 2018) and were adjusted to exclude results associated with sales of the company’s newly acquired RECOTHROM and PREVELEAK products. Adjusted earnings from continuing operations per share and adjusted operating margin were further adjusted (for purposes of performance calculations under the company’s 2018 annual and long-term incentive plans) to exclude the results associated with RECOTHROM and PREVELEAK. We refer to these measures as used in the proxy statement as adjusted net sales, further adjusted earnings per share or further adjusted EPS and further adjusted operating margin, respectively. These amounts totaled $11.6 billion in adjusted net sales, $3.01 in further adjusted EPS and 17.2% in further adjusted operating margin. See “Executive Compensation—Compensation Discussion and Analysis—Structure of Compensation Program—Financial Targets” and “—Performance Over the Long Term—Performance Against Adjusted Operating Margin Target” for a reconciliation of the amounts listed in the graphics above along with further adjusted amounts (as described in this paragraph) to the applicable measures calculated in accordance with U.S. generally accepted accounting principles (GAAP).

 

 

 

 

 

LOGO  | 2019 Annual Meeting of Stockholders and Proxy Statement


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Proxy Statement Highlights                  

 

7

 

 

 

Compensation Design for 2018

 

   See page 35

Base Salary

 

  

  Provides a base level of competitive compensation

  Used to attract and retain executive talent

  

Annual Incentive Program

 

  

•  Motivates and rewards executives for company and individual performance against annually established financial targets and individual objectives

•  Financial targets and relative weightings for 2018 included:

  Adjusted earnings per share (50%)

  Net sales (30%)

  Free cash flow (20%)

  

Long-Term Incentive Program (LTI)

 

  

Performance Share Units (PSUs) (50%)

 

  Motivates and rewards executives for company performance against financial targets and incorporates an assessment of the executive’s past performance and future potential. All PSU awards are subject to a three-year vesting period

  PSUs recognize that a portion of an executive’s equity awards should be completely “at-risk”

  Financial objectives for 2018 PSU awards included:

  Adjusted operating margin (50%)—based on company performance as compared to the applicable annual financial target, in each case subject to completion of the three-year vesting period across all three tranches of awards

  Three-year total shareholder return (formerly known as growth in shareholder value) (TSR) (50%)—based on company performance as compared to an indexed industry benchmark over a three-year period

 

  

Stock Options (50%)

 

  Motivates and rewards an executive’s contributions to helping to achieve the company’s long-term objectives and increasing stockholder value

  Stock options recognize that it is in the best interests of the company to provide equity that will vest as long as the executive continues to serve at Baxter and are valued, at least in part, on the company’s performance during that period

 

The company did not issue any restricted stock units (RSUs) to any executive officers in 2018, consistent with the structure of its executive compensation program generally.

 

    

 

 

investor.baxter.com


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8

                  Proxy Statement Highlights
 

 

 

    LOGO  

 

Independent Board Chairman

 

What am I voting on?

If properly presented, you will be asked to vote on a stockholder proposal that asks the Board to amend the company’s governing documents to require the Chairman of the Board, whenever possible, to be an independent member of the Board.

 

 

What is the Board’s recommendation?

The Board of Directors recommends a vote AGAINST the stockholder proposal.

 

Where can I find more information?

Concise supporting information is presented below.

       

 

LOGO

 

 

 

See “Stockholder Proposals—Proposal 4—Independent Board Chairman” for additional information.

 

Items to consider when evaluating this proposal:

   Existing Governance Structure: The company’s existing governance structure allows the Board flexibility to make changes in the company’s leadership structure in accordance with the best interests of the company and its stockholders

   Consistent Communication and Coordination Through Transformation: Having Mr. Almeida serve as Chief Executive Officer and Chairman allows consistent communication and coordination throughout the company and effective and efficient implementation of corporate strategy

   Established Independent Oversight: The existing leadership structure and corporate governance practices provide strong independent oversight of the Board, including the regular evaluation and review of the leadership structure by the Board. In 2018, the Board augmented this review process through the use of a third party to oversee its annual self-assessment process. This process resulted in the appointment of two new independent directors, Patricia Morrison and Amy Wendell, to the Board

   Strong Lead Director: The responsibilities of the lead director are significant and include functioning as the primary liaison between the independent directors and the Chief Executive Officer and Chairman. Additionally, Mr. Stallkamp, who has served in the role since 2014, has helped oversee the company and Board through significant milestones and periods of transition, including the July 2015 spin-off of Baxalta Incorporated (Baxalta) and the recruitment and appointment of Joe Almeida as Chief Executive Officer and Chairman beginning January 1, 2016

 

 

LOGO  | 2019 Annual Meeting of Stockholders and Proxy Statement


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Proxy Statement Highlights                  

 

9

 

 

 

    LOGO  

 

Right to Act by Written Consent

 

What am I voting on?

If properly presented, you will be asked to vote on a stockholder proposal that asks the Board to undertake such steps as may be necessary to permit stockholders to act by written consent.

 

What is the Board’s recommendation?

The Board of Directors recommends a vote AGAINST the stockholder proposal.

 

Where can I find more information?

Concise supporting information is presented below.

       

 

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See “Stockholder Proposals—Proposal 5—Right to Act by Written Consent” for additional information.

 

Items to consider when evaluating this proposal:

   Baxter Stockholders Have the Right to Call a Special Meeting: The company’s organizational documents allow holders of 25% of the outstanding shares of the company’s common stock to call a special meeting. This is approximately one-half of the percentage that would be required to act by written consent under the proposal

   Minority Stockholders May be Left Out of the Written Consent Process: The proposal does not include a requirement that all stockholders be given prior notice and an opportunity to be heard. Furthermore, stockholders holding a mere majority of the company’s outstanding voting shares could adopt an action by written consent that is binding on the company and the company’s stockholders. In contrast, holders of just 25% of the outstanding shares of the company’s common stock are already permitted to call a special meeting which requires prior notice and gives all stockholders the opportunity to participate in the process

   The Quality, Compliance & Technology Committee Provides Strong Oversight Over Product and Safety Matters: The Quality, Compliance & Technology Committee is responsible for the oversight of risk management in the areas of product quality and safety at Baxter. It has overseen a significant reduction in product recalls and the elimination of multiple Warning Letters since 2015

   Committed to Maintaining Strong Corporate Governance Practices and Protecting Stockholder Rights: This commitment is evidenced by, among other things, Baxter’s proxy access bylaw, the ability of stockholders to call a special meeting, the complete declassification of the Board, majority voting standard for directors, the removal of super-majority voting provisions from Baxter’s organizational documents and Board composition and refreshment efforts

 

 

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Corporate Governance at Baxter International Inc.

 

 

   

 

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Election of Directors

 

The Board currently consists of 14 members. Mr. Munib Islam’s resignation and Ms. Carole Shapazian’s retirement from the Board will become effective on May 6, 2019, the day prior to the Annual Meeting. After giving effect to these departures, the Board has nominated all of the remaining directors for reelection as directors for a term of one year.

 

The Board of Directors recommends a vote FOR the election of each of the director nominees named below under “—Nominees for Election as Directors.”

 
     

Baxter’s Bylaws require each director to be elected by the majority of the votes cast with respect to that director in uncontested elections; that is, the number of shares voted “for” a director must exceed 50% of the number of votes cast with respect to that director. Abstentions will not be considered votes cast. In a contested election (a situation in which the number of nominees exceeds the number of directors to be elected), the standard for election of directors will be a plurality of the shares represented in person or by proxy and entitled to vote on the election of directors. If a nominee who is serving as a director is not elected at an annual meeting of stockholders, under Delaware law the director would continue to serve on the Board as a “holdover director.” However, under the company’s Bylaws, any incumbent director who fails to be reelected at an annual meeting must offer his or her resignation to the Board. The Corporate Governance Committee would then make a recommendation to the Board whether to accept or reject the resignation, or whether other action should be taken. In accordance with the Bylaws, the Board would act on the Corporate Governance Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date that the election results are certified. The director who offers his or her resignation would not participate in the Board’s decision.

All of the nominees have indicated their willingness to serve if elected, but if any should be unable or unwilling to stand for election, proxies may be voted for a substitute nominee designated by the Board. No nominations for directors were received from stockholders (including as a result of any proxy access nominations), and no other candidates are eligible for election as directors at the Annual Meeting. Accordingly, there is no director election contest and each director nominee must receive a majority of the votes cast with respect to that director in order to be reelected to the Board. Unless proxy cards are marked otherwise, the individuals named as proxies intend to vote the shares represented by proxy in favor of all of the Board’s nominees.

Set forth below under “—Nominees for Election as Directors” is information concerning the nominees for election.

 

 

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Nominees for Election as Directors

 

 

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José (Joe) E. Almeida

 

Chairman of the Board, President and CEO

Age 56

Director since 2016

 

Biography

Mr. Almeida was appointed Chairman of the Board, President and Chief Executive Officer effective January 1, 2016. He began serving as an executive officer of the company in October 2015. He served as Senior Advisor with The Carlyle Group, a multinational private equity, alternative asset management and financial services corporation, from May 2015 to October 2015. Previously, he served as the Chairman, President and Chief Executive Officer of Covidien plc (Covidien), a global health care products company, from March 2012 through January 2015, prior to the acquisition of Covidien by Medtronic plc (Medtronic), and President and Chief Executive Officer of Covidien from July 2011 to March 2012. Mr. Almeida is a member of the Board of Directors of Walgreens Boots Alliance, Inc. and Ortho-Clinical Diagnostics, Inc., a Carlyle Group company. Mr. Almeida served on the board of directors of State Street Corporation from October 2013 to November 2015, Analog Devices, Inc. from December 2014 to November 2015 and EMC Corporation from January 2015 to November 2015. He previously served as director and chairman of the board for The Advanced Medical Technology Association (AdvaMed).

 

Key Attributes, Experience and Skills

Substantial knowledge of the medical device industry and extensive experience leading, operating and transforming global corporations as a result of his roles as Chairman and Chief Executive Officer at Baxter and Covidien and in other senior management roles at other medical device companies.

 

 

    

 

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Thomas F. Chen

 

Independent Director

Age 69

Director since 2012

 

Committees: Corporate Governance and Quality, Compliance and Technology

 

Biography

Mr. Chen served as Senior Vice President and President of International Nutrition of Abbott Laboratories (Abbott), a global health care company, before retiring in 2010. During his 22-year career at Abbott, Mr. Chen served in a number of roles with expanding responsibilities, primarily in Pacific/Asia/Africa where he oversaw expansion into emerging markets. Prior to Abbott, he held several management positions at American Cyanamid Company, which later merged with Pfizer Inc. Mr. Chen currently serves as a director of Stericycle, Inc. and an advisor to Cooperation Fund, a partnership between Goldman Sachs and the sovereign fund, China Investment Cooperation, to bolster U.S. manufacturers’ market presence in China. Mr. Chen previously served as a director of Cyanotech Corporation.

 

Key Attributes, Experience and Skills

Extensive international business experience in pharmaceuticals, hospital products and nutritionals through his 22-year career at Abbott, with a distinct global perspective resulting from his focus on emerging markets, particularly in China, India and other Asia Pacific regions.

 

 

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John D. Forsyth

 

Independent Director

Age 71

Director since 2003

 

Committees: Compensation and Corporate

Governance

 

Biography

Mr. Forsyth has been Chairman of Wellmark Blue Cross Blue Shield, a healthcare insurance provider for residents of Iowa and South Dakota, since 2000 and Chief Executive Officer since 1996. Prior to that, he spent 26 years at the University of Michigan, holding various positions, including President and Chief Executive Officer of the University of Michigan Health System. Mr. Forsyth currently serves as a director of the National Institute of Healthcare Management and previously served as a director of Baxalta, until its merger with Shire plc (Shire).

 

Key Attributes, Experience and Skills

Extensive experience in the healthcare industry and with healthcare payors. An understanding of the challenges associated with leading and operating within large, complex organizations as current Chairman and Chief Executive Officer of Wellmark Blue Cross Blue Shield and given his 26 years of management experience in the University of Michigan Health System.

 

 

    

 

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James R. Gavin III, M.D., Ph.D.

 

Independent Director

Age 73

Director since 2003

 

Committees: Corporate Governance and Quality, Compliance and Technology

 

Biography

Dr. Gavin is Chief Medical Officer of Healing Our Village, Inc., a healthcare corporation that specializes in targeted advocacy, training, education, disease management and outreach for healthcare professionals and minority communities, having previously served as Executive Vice President for Clinical Affairs at Healing Our Village from 2005 to 2007. Dr. Gavin is also Clinical Professor of Medicine and Senior Advisor of Health Affairs at Emory University, a position he has held since 2005, and Clinical Professor of Medicine at Indiana University School of Medicine in Indianapolis, a position he has held since 2008. From 2002 to 2005, Dr. Gavin was President of the Morehouse School of Medicine and from 1991 to 2002 he served as Senior Science Officer at Howard Hughes Medical Institute, a non-profit medical research organization. He previously served as a director of Amylin Pharmaceuticals, Inc. and Baxalta, until its merger with Shire.

 

Key Attributes, Experience and Skills

Extensive experience with, and medical and scientific expertise and knowledge of, the healthcare industry and its providers as a result of the positions he has held at Emory and Indiana Universities, the Morehouse School of Medicine and Howard Hughes Medical Institute as well as significant leadership experience as Chief Executive Officer and Chief Medical Officer of Healing Our Village, Inc.

 

 

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Peter S. Hellman

 

Independent Director

Age 69

Director since 2005

 

Committees: Audit and Compensation

 

Biography

From 2000 until his retirement in 2008, Mr. Hellman held various positions at Nordson Corporation, a manufacturer of systems that apply adhesives, sealants and coatings during manufacturing operations, the most recent of which was President and Chief Financial and Administrative Officer. From 1989 to 1999, Mr. Hellman held various positions with TRW Inc., the most recent of which was President and Chief Operating Officer. Mr. Hellman currently serves as a director of The Goodyear Tire & Rubber Company and Owens-Illinois, Inc. Mr. Hellman previously served as a director of Qwest Communications International Inc.

 

Key Attributes, Experience and Skills

Significant experience leading global industrial companies and a multi-billion dollar information technology business and overseeing global supply operations, manufacturing and distribution practices. Extensive financial, capital markets and operational expertise and experience leading complex corporations with a considerable global presence as a result of the various senior positions held at Nordson Corporation and TRW Inc. as well as extensive experience serving on public company boards, including as the audit committee chair of The Goodyear Tire & Rubber Company and Owens-Illinois, Inc.

    

 

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Michael F. Mahoney

 

Independent Director

Age 54

Director since 2015

 

Committees: Compensation and Quality,

Compliance and Technology

 

Biography

Mr. Mahoney is Chairman, President and Chief Executive Officer of Boston Scientific Corporation (Boston Scientific), a global developer, manufacturer and marketer of medical devices. He has served in that role since 2016. Between 2012 and 2016, he served as President and Chief Executive Officer of Boston Scientific. He first joined Boston Scientific in 2011, with a 24-year track record of building medical device, capital equipment and healthcare IT businesses. Prior to joining Boston Scientific, Mr. Mahoney served as Worldwide Chairman of Johnson & Johnson Medical Devices and Diagnostics Division and as Worldwide Group Chairman of Johnson & Johnson’s DePuy Orthopedics and Neuro Science Business. He serves as a director of AdvaMed.

 

Key Attributes, Experience and Skills

Significant knowledge of the global medical products business and extensive experience leading and operating within global, multi-faceted medical products companies as a result of his roles at Boston Scientific and Johnson & Johnson. These experiences includes significant merger and acquisition activity.

 

 

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Patricia B. Morrison

 

Independent Director

Age 59

Director since 2019

 

Committees: Audit

 

Biography

From 2009 to 2018, Ms. Morrison served as Executive Vice President, Customer Support Services and Chief Information Officer (CIO), of Cardinal Health Inc. (Cardinal), a global, integrated healthcare services and products company. At Cardinal, she led global information technology (IT) operations, which included the transformation of multiple business segments, acquisition integration and digital strategy. Prior to Cardinal, Ms. Morrison served as CIO of both Motorola, Inc. and Office Depot, Inc. and held senior-level IT positions at General Electric Company, PepsiCo, Inc., The Procter & Gamble Company, and The Quaker Oats Company. She currently serves as a director of Aramark Corporation and Splunk Inc.

 

Key Attributes, Experience and Skills

Extensive experience of across diverse global industries overseeing strategic, operational and financial aspects of information technology including cybersecurity, global IT master planning and digital transformation. Most recently, this experience included work in the medical products industry while at Cardinal.

 

    

 

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Stephen N. Oesterle, M.D.

 

Independent Director

Age 68

Director since 2017

 

Committees: Corporate Governance and Quality, Compliance and Technology

 

Biography

Dr. Oesterle is a consultant and provides advisory services to private equity and operating companies in the healthcare industry. From 2002 to 2015, he served as a member of the Executive Committee of Medtronic (Medtronic), a global medical technology, services and solutions company, and as Senior Vice President, Medicine and Technology of Medtronic. Previously, he served as an Associate Professor of Medicine and Director of Invasive Cardiology Services at each of Massachusetts General Hospital (1998 to 2002), Stanford University Medical Center (1992 to 1998) and Georgetown University Medical Center (1991 to 1992). He served as a director of HeartWare International, Inc. (HeartWare) from January 2016 to November 2016, prior to Medtronic’s acquisition of HeartWare. He served as a director of REVA Medical, Inc. (REVA) from February 2018 through March 2019.

 

Key Attributes, Experience and Skills

Extensive experience in the medical products and healthcare industries with a strong scientific and medical background. Substantial knowledge of the medical device industry and extensive medical and leadership experience as a result of his role as Senior Vice President, Medicine and Technology at Medtronic and as a director at HeartWare and REVA as well as positions held at Harvard Medical School, Stanford University Medical Center and other leading hospitals.

 

 

 

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Cathy R. Smith

 

Independent Director

Age 55

Director since 2017

 

Committee: Audit

 

Biography

Ms. Smith is Executive Vice President and Chief Financial Officer at Target Corporation (Target), a retailer. As previously disclosed by Target, Ms. Smith has announced her intention to retire from Target effective May 1, 2020. She will continue serving as Target’s Chief Financial Officer until her successor has been appointed, after which time she has agreed to provide strategic advisory services through her retirement date. Prior to joining Target in 2015, Ms. Smith served as Executive Vice President and Chief Financial Officer at Express Scripts Holding Company, (Express Scripts), an independent pharmacy benefits management company, from 2014 to 2015 and as Executive Vice President, Strategy and Chief Financial Officer at Walmart International (Walmart), a division of Walmart Stores Inc., a discount retailer, from 2010 to 2014.

 

Key Attributes, Experience and Skills

Significant financial expertise and corporate leadership experience as a result of her senior positions held at Target, Express Scripts and Walmart. This experience includes work helping to oversee cybersecurity incident response.

 

    

 

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Thomas T. Stallkamp

 

Lead Independent Director

Age 72

Director since 2000

 

Lead Director since 2014

Committees: Audit and Compensation

 

Biography

Mr. Stallkamp is the current lead independent director and has been elected annually as such by the other independent directors since May 2014. Mr. Stallkamp is the founder and principal of Collaborative Management LLC, a private supply chain consulting firm. From 2004 to 2010, Mr. Stallkamp was an Industrial Partner in Ripplewood Holdings L.L.C., a New York private equity group. From 2003 to 2004, Mr. Stallkamp served as Chairman of MSX International, Inc. (MSX), a global provider of technology-driven engineering, business and specialized staffing services, and from 2000 to 2003, he served as Vice-Chairman and Chief Executive Officer of MSX. From 1980 to 1999, Mr. Stallkamp held various positions with DaimlerChrysler Corporation and its predecessor Chrysler Corporation, the most recent of which was Vice Chairman and President. Mr. Stallkamp serves as a director of BorgWarner Inc.

 

Key Attributes, Experience and Skills

Extensive experience leading complex, global organizations, including global manufacturers, through his senior management roles at DaimlerChrysler Corporation and its predecessor Chrysler Corporation and MSX. Significant financial and business development expertise with Ripplewood Holdings L.L.C. and supply chain expertise as founder and principal of Collaborative Management LLC.

 

 

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Albert P.L. Stroucken

 

Independent Director

Age 71

Director since 2004

 

Committees: Audit and Corporate Governance

 

Biography

Mr. Stroucken served as Executive Chairman of the Board of Owens-Illinois, Inc. (Owens-Illinois), a glass packaging company, from January 1 to June 30, 2016, having served as Chairman, President and Chief Executive Officer from 2006 until 2015. From 1998 to 2006, Mr. Stroucken served as President and Chief Executive Officer of H.B. Fuller Company, a manufacturer of adhesives, sealants, coatings, paints and other specialty chemicals. Mr. Stroucken served as Chairman of H.B. Fuller Company from 1999 to 2006. From 1997 to 1998, he was General Manager of the Inorganics Division of Bayer AG. From 1992 to 1997, Mr. Stroucken was Executive Vice President and President of the Industrial Chemicals Division of Bayer Corporation. Mr. Stroucken previously served as a director of Baxalta and as a director of Shire until its recent acquisition by Takeda Pharmaceutical Company Ltd.

 

Key Attributes, Experience and Skills

Substantial experience leading and operating large, complex corporations and significant financial expertise through his leadership roles with Owens-Illinois, Inc. and H.B. Fuller Company as well as through positions at Bayer Corporation.

 

    

 

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Amy A. Wendell

 

Independent Director

Age 58

Director since 2019

 

Committees: Quality, Compliance and Technology

 

Biography

Ms. Wendell is Senior Advisor at Perella Weinberg Partners L.P., consulting on strategy, corporate finance and investing practices in the healthcare industry, which she joined in 2016. She previously served as Senior Vice President of strategy and business development at Covidien from 2006 to 2015, where she led the company’s strategy and portfolio management initiatives and managed business development activities. From 1986 to 2015, Ms. Wendell held prior roles of increasing responsibility at Covidien (including its predecessors, Tyco International plc and Kendall Healthcare Products Company), from engineering to product management and business development. She serves as a director of Hologic, Inc. and Axogen, Inc.

 

Key Attributes, Experience and Skills

Extensive expertise in the healthcare section in the areas of global business development and licensing, portfolio management, mergers and acquisitions, resource allocation, and identifying new market opportunities, as a result of her roles at Covidien and its predecessors. She has significant restructuring and integration experience as well.

 

 

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Board of Directors

As of March 26, 2019, the Board consists of 14 members. As previously announced, Mr. Munib Islam will be resigning from the Board effective May 6, 2019. Ms. Carole Shapazian will be retiring from the Board effective on the same date. In connection with these departures, the size of the Board will be reduced from 14 to 12 members.

The Board has determined that each of the following current directors satisfies Baxter’s independence standards and the listing standards of the New York Stock Exchange (NYSE) for independence: Thomas F. Chen, John D. Forsyth, James R. Gavin III, M.D., Ph.D., Peter S. Hellman, Munib Islam, Michael F. Mahoney, Patricia B. Morrison, Stephen N. Oesterle, M.D., Carole J. Shapazian, Cathy R. Smith, Thomas T. Stallkamp, Albert P.L. Stroucken and Amy A. Wendell. Please refer to “—Director Independence” below for a discussion of Baxter’s independence standards.

Mmes. Morrison and Wendell joined the Board in February 2019. In 2018, the Board held eight meetings. Each director attended at least 75% of the total number of Board meetings and meetings of the committees on which he or she served in 2018. Baxter’s Corporate Governance Guidelines set forth the company’s expectation that directors attend each annual meeting of stockholders. In 2018, all of the directors then in office participated in the 2018 annual meeting in person or by teleconference.

The Board has a mix of relatively new and longer-tenured directors. This mix provides the Board with the benefit of new perspectives from shorter-tenured directors. It also helps to maintain the continuity of the Board and the Board’s familiarity with, and knowledge of, the Baxter organization. In connection with the recent appointments of Mmes. Morrison and Wendell to the Board and the upcoming departures of Mr. Islam and Ms. Shapazian from the Board, the average Board tenure will decrease from 8.3 years (immediately prior to these appointments) to 7.8 years.

Director Independence

Baxter’s Corporate Governance Guidelines require that the Board be composed of a majority of directors who meet the criteria for “independence” established by the rules of the NYSE. To be considered independent, the Board must affirmatively determine that a director does not have any direct or indirect material relationship with Baxter (either directly or as a partner, stockholder or officer of an organization that has a relationship with Baxter), and solely with regard to Compensation Committee members, consider all relevant factors that could impair his or her ability to make independent judgments about executive compensation.

In making its independence determinations, the Board considers transactions, relationships and arrangements between Baxter and entities with which directors are associated as partner, stockholder or officer. When these transactions, relationships and arrangements have existed, they have generally been in the ordinary course of business and of a type customary for a global diversified company such as Baxter.

 

 

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Director Qualifications

As discussed below in “—Nomination of Directors,” directors are selected on the basis of the specific criteria set forth in Baxter’s Corporate Governance Guidelines. The experience, expertise and knowledge represented by the Board as a collective body allow the Board to lead Baxter in a manner that serves its stockholders’ interests appropriately. Key attributes, experience and skills for each of the company’s director nominees are included above under “—Nominees for Election as Directors”. Set forth below is a summary of the collective qualifications, experiences and backgrounds of the director nominees in the aggregate. Each chevron represents a director nominee who possesses the specific attribute or experience.

 

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Nomination of Directors

It is the policy of the Corporate Governance Committee to consider candidates for director recommended by stockholders, members of the Board and management.

Each year, the Corporate Governance Committee oversees a robust review of the structure and composition of the Board and each committee. This review or self-evaluation is conducted to help assess how the Board and each committee functions in light of the company’s strategic objectives, the company’s Corporate Governance Guidelines and each committee charter. It also helps to identify any potential gaps or areas that the Board would like to augment by appointing new directors, rotating existing directors off the Board or refreshing committee assignments.

For 2018, the Board engaged a third party to help oversee this self-evaluation process. This third party, an outside law firm with significant experience advising the boards of directors of other S&P 500 companies, conducted a one-on-one interview with each

 

 

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director. A representative from the law firm summarized those findings during presentations to the full Board and each committee in November 2018. The Board took this feedback into account when conducting its annual self-assessment process. The Board anticipates engaging a third party every few years or as circumstances otherwise warrant to help conduct these self-assessments.

In connection with the annual self-assessment process (as described above), the Board retained a third-party search firm to help conduct a search for two new directors. The search firm was charged with seeking out candidates with significant information technology and cybersecurity experience in light of the company’s increased focus on digital health. They were also asked to pursue candidates with significant merger and acquisition activity (including integration) experience. Additionally, the Board charged the search firm to seek out a diverse slate, with a particular focus on recruiting female candidates.

With input from members of the Corporate Governance Committee, the search firm identified Mses. Morrison and Wendell. These efforts ultimately resulted in the Corporate Governance Committee recommending that the Board appoint both Mses. Morrison and Wendell. They joined the Board in February 2019.

The Corporate Governance Committee evaluates all candidates for director in the same manner regardless of the source of the recommendation. Stockholder recommendations for candidates for director should include the same information required by Baxter’s Bylaws for stockholder director nominees and be sent to the Corporate Governance Committee, c/o Corporate Secretary, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015.

Baxter’s Corporate Governance Guidelines provide that (as described below), director nominees selected by the Corporate Governance Committee must:

 

   

possess fundamental qualities of intelligence, honesty, perceptiveness, good judgment, maturity, high ethics and standards, integrity, fairness and responsibility;

   

have a genuine interest in the company and recognition that as a member of the Board, each director is accountable to all stockholders of the company, not to any particular interest group;

   

have a background that demonstrates an understanding of business and financial affairs and the complexities of a large, multifaceted, global business, governmental or educational organization;

   

be or have been in a senior position in a complex organization such as a corporation, university or major unit of government or a large not-for-profit institution;

   

have no conflict of interest or legal impediment that would interfere with the duty of loyalty owed to the company and its stockholders;

   

have the ability and be willing to spend the time required to function effectively as a director;

   

be compatible and able to work well with other directors and executives in a team effort with a view to a long-term relationship with the company as a director; and

   

have independent opinions and be willing to state them in a constructive manner.

In 2018, the Board adopted certain amendments to its Corporate Governance Guidelines, which included the adoption of a mandatory retirement age of 75, subject to certain exceptions (such as, during a CEO succession or during a material merger, acquisition or disposition).

A nominee’s ability to meet the independence criteria established by the NYSE is a factor in the nominee selection process. The Corporate Governance Guidelines provide that directors are selected on the basis of talent and experience. Diversity of background, including diversity of gender, race, ethnic or geographic origin, age and experience (including in business, government and education as well as healthcare, science and technology), is a relevant factor in the selection process. This factor is relevant as a diverse Board is likely to be a well-balanced Board with varying perspectives and a breadth of experience that will positively contribute to robust discussion at Board meetings. A diverse board is also more reflective of Baxter’s global customer base. The Board’s focus on diversity matters helped to inform the recently completed director search and the appointments of both Mses. Morrison and Wendell to the Board.

As discussed above, the Board conducts an annual self-evaluation to help identify potential gaps or areas that the Board may look to augment in light of the company’s strategies. Ms. Morrison’s diverse corporate leadership experience across multiple industries, coupled with her extensive experience in cybersecurity, global IT planning and digital transformations and her focus in digital health, helps support Baxter’s pursuit of top quartile performance in its growth through innovation goal. Her contributions to the Board are expected to help the company maintain its position within the top quartile of industry leading performance. Ms. Wendell’s

 

 

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comprehensive experience in business development strategy, corporate finance and portfolio management initiatives (including integration and restructuring activities) in the healthcare industry helps support the company’s goal to deliver sustainable top-quartile performance for its stockholders and grow through innovation (both organic and inorganic). Mses. Morrison and Wendell also further enhance the diversity of the Board’s membership. The Board’s thoughtful approach to Board composition has resulted in a balance of skillsets and backgrounds that align with the company’s strategic initiatives and are core to the Baxter business, enabling the Board to more effectively oversee the company’s ongoing transformation efforts.

If a vacancy occurs or is expected to occur on the Board (and the Board desires to fill the position), the Board initiates a process to identify potential candidates, if that process has not already been launched. Once a candidate has been identified, the Corporate Governance Committee (on behalf of the Board) and the independent search firm will engage in a process that includes a thorough investigation of the candidate, an examination of his or her business background and education, research on the individual’s accomplishments and qualifications, in-person interviews and reference checking. If this process generates a positive indication, the lead director, members of the Corporate Governance Committee and the Chairman of the Board will meet separately with the candidate and then confer with each other regarding the candidate. After consideration of these background screens and interviews (possibly with multiple candidates), the Corporate Governance Committee may then recommend an individual to the full Board for further evaluation and ultimately election. If the full Board agrees, the Chairman of the Board is then authorized to extend an offer to the individual candidate to join the Board at that time or nominate the candidate for election at the next annual meeting of stockholders.

In addition to making recommendations to the Board, eligible stockholders are able to nominate a candidate for election to the Board through the proxy access provisions of Baxter’s Bylaws. Subject to compliance with the related requirements (including with respect to the nominating stockholders and the nominee), the nominee will be included in the proxy statement as a stockholder nominee. The proxy access provision provides that a group of up to 20 stockholders that have held at least 3% of Baxter’s outstanding shares for at least three years can nominate up to two individuals or 20% of the Board, whichever is greater, for election at an annual stockholders’ meeting. No stockholders submitted any proxy access nominees for consideration at the Annual Meeting.

Communicating with the Board of Directors

Stockholders and other interested parties may contact any of Baxter’s directors, including the lead director or the non-management directors as a group, by writing a letter to Baxter Board of Directors c/o Corporate Secretary, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015, or by sending an e-mail to boardofdirectors@baxter.com. Baxter’s Corporate Secretary will forward communications directly to the lead director, unless a different director is specified.

See “Executive Compensation—Compensation Discussion and Analysis—Summary—Stockholder Engagement” for a discussion of the company’s stockholder outreach efforts.

Other Corporate Governance Information

Corporate Governance Guidelines

Baxter’s Board of Directors has long adhered to corporate governance principles designed to ensure effective corporate governance. Since 1995, the Board of Directors has had in place a set of corporate governance guidelines reflecting these principles. Baxter’s current Corporate Governance Guidelines, most recently revised in February 2018, cover topics including director qualification standards, mandatory retirement age, director responsibilities (including those of the lead director), director access to management and independent advisors, director compensation, director orientation and continuing education, succession planning and the annual evaluations of the Board and its committees. Baxter’s Corporate Governance Guidelines are available on Baxter’s website at www.baxter.com under “Our Story—Our Governance—Corporate Governance Matters—Corporate Governance Guidelines.”

Board Responsibilities

Code of Conduct

Baxter has adopted a Code of Conduct that applies to all members of the Board and all employees of the company, including the Chief Executive Officer, Chief Financial Officer, Controller and other senior financial officers. Any amendment to, or waiver from, a provision of the Code of Conduct that applies to Baxter’s Chief Executive Officer, Chief Financial Officer, Controller or persons performing similar functions will be disclosed on Baxter’s website, at www.baxter.com under “Our Story—Our Governance—Corporate Governance Matters.” The Code of Conduct is available on Baxter’s website at www.baxter.com under “Our Story—Our Governance—Corporate Governance Matters—Code of Conduct.”

 

 

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Board’s Oversight of Risk

Baxter’s risk management activities include the identification and assessment of the key risks facing the company among the universe of business risks (strategic, operational, financial, regulatory/compliance, cybersecurity, etc). These risks are identified across the organization and come from multiple businesses, regions and functions. The Board and, as appropriate, its committees review these risks on at least an annual basis after they have been identified and assessed by management (including by the company’s Risk Committee, as discussed below) and regularly review the initiatives put in place to mitigate the effects of these risks.

These reviews include updates throughout the year from the businesses, regions and functions from which the key risks arise. Over the course of the year, each of the key risks and related mitigation strategies is reviewed with the Board or one or more committees of the Board, as applicable. For example, the Audit Committee reviews the financial risk assessment process and findings of the internal auditors while the Quality, Compliance and Technology Committee and the Audit Committee jointly receive an update from the ethics and compliance function at least annually. After giving effect to the recent amendments to the Audit and Quality, Compliance and Technology Committee charters, the Audit Committee has assumed oversight responsibility for the company’s information technology (IT) functions, including non-product related cybersecurity matters. The Quality, Compliance and Technology Committee is now responsible for overseeing product or service based IT matters, including cybersecurity. The Audit Committee has, however, maintained responsibility for the oversight of any cybersecurity incident, including ones related to Baxter products and services. Both committees will receive updates from company management on these topics throughout the year. Additionally, the full Board will receive at least one update on IT and cybersecurity matters each year. Other risks are also reviewed by the Board as well as a Board committee. For example, quality updates are provided to the full Board throughout the year during the review of business and technology strategies of related global business units, capital expenditures or business development activities. The Quality, Compliance and Technology Committee receives a quality update as part of each regularly scheduled meeting. Through its risk oversight activities, the company identifies opportunities to further embed systematic enterprise risk management into its business processes. The Board actively encourages management to continue to identify enterprise risk and develop appropriate mitigation strategies.

In addition to the Board’s role in enterprise risk management, various committees of the Board are also expressly tasked by their charters to be responsible for the oversight of certain risks. More specifically and in addition to the IT and cybersecurity matters described above, the Audit Committee is charged with oversight of the process by which management assesses and manages risk as well as the company’s major financial risk exposures and the steps taken to monitor and control these exposures, while the Quality, Compliance and Technology Committee is charged with oversight of Baxter’s quality, compliance and innovation strategy programs (including with respect to product cybersecurity and IT matters) as well as review of strategic issues and corporate actions relating to current and emerging political issues, corporate citizenship and public policy.

In 2017, Baxter formed the Risk Committee which is comprised of functional and business leaders. The committee meets approximately three times per year and engages in meaningful discussions about the company’s enterprise risk management program. The Risk Committee helps to drive accountability across the organization, define the company’s risk tolerances and evaluate the sufficiency of the company’s mitigation plans. Throughout the year, the Board receives updates about the Risk Committee’s activities and assessments from the head of Corporate Audit.

Certain Relationships and Related Person Transactions

The Board recognizes that related person transactions present a heightened risk of conflicts of interest. Accordingly, pursuant to Baxter’s Corporate Governance Guidelines, the Corporate Governance Committee has been charged with reviewing related person transactions regardless of whether the transactions are reportable pursuant to applicable rules of the SEC. For purposes of this policy, a “related person transaction” is any transaction in which the company was, is or is to be a participant and in which any related person has a direct or indirect material interest other than transactions that involve less than $50,000 when aggregated with all similar transactions. For any related person transaction to be consummated or to continue, the Corporate Governance Committee must approve or ratify the transaction. The Corporate Governance Committee will approve or ratify a transaction if it determines that such transaction is in Baxter’s best interest. Related person transactions are reviewed as they arise and are reported to the Corporate Governance Committee. The Corporate Governance Committee also reviews materials prepared by the Corporate Secretary (including information identified in questionnaires distributed annually to the company’s directors, executive officers and controller and in the company’s annual search of certain of its IT systems) to determine whether any related person transactions have occurred that have not been reported.

 

 

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Board Structure and Processes

Board Leadership Structure; Lead Director

Mr. Almeida has served as Chairman of the Board and Chief Executive Officer since January 1, 2016. Thomas T. Stallkamp currently serves as the lead director and has been elected annually to such position since May 2014. That annual election is made solely by the independent directors, instead of by the full Board.

The Board regularly reviews the leadership structure of the company, including whether the position of Chairman should be held by an independent director. In connection with Mr. Almeida’s appointment, the Board determined that it was in Baxter stockholders’ best interests to keep the Chairman and Chief Executive Officer roles combined. The Board reached this decision in light of Mr. Almeida’s significant industry and leadership experience, including as Chairman and Chief Executive Officer of Covidien. The Board also believed that Mr. Almeida would effectively connect the Board and Baxter management as he worked with management to establish Baxter’s new strategic framework and refresh its long range plan. As Chairman of the Board, he has developed a process through which each component of this strategic framework is reviewed with the Board on a regular basis.

As Chairman of the Board and pursuant to Baxter’s Bylaws, Mr. Almeida presides at all Board and stockholder meetings, serves as the primary spokesperson for Baxter and acts as a liaison between the Board and the stockholders. As Chief Executive Officer and pursuant to Baxter’s Bylaws, Mr. Almeida supervises the business of the company, subject to the direction of the Board.

As lead director and pursuant to Baxter’s Corporate Governance Guidelines, Mr. Stallkamp (or in his absence, another independent director) has the following responsibilities and authority:

 

   

presiding at all executive sessions of the Board;

   

acting as the principal liaison between the independent directors and the Chairman;

   

approving meeting agendas for the Board;

   

approving meeting schedules to assure that there is sufficient time for discussion of all agenda items;

   

working with the Chairman to facilitate timely and appropriate information flow to the Board; and

   

ability to call meetings of the independent directors.

In 2018, executive sessions of the Board occurred as part of every regularly scheduled meeting of the Board and covered critical issues facing the company, including matters related to the company’s product portfolio and inventory levels, capital allocation strategies and potential and ongoing business development opportunities. The lead director, together with the chairpersons of the Compensation and Corporate Governance Committees, lead the non-employee directors in the annual review and approval of compensation for the Chief Executive Officer. Mr. Stallkamp serves as the contact person for interested parties to communicate directly with the independent members of the Board and has engaged with Baxter stockholders on selected topics, including corporate governance matters.

Each May, the Corporate Governance Committee recommends a lead director for approval. Mr. Stallkamp has served in this role since May 2014 and was most recently elected in May 2018.

As discussed above, the Board has determined that the combined Chief Executive Officer—Chairman structure currently serves the best interests of the company and its stockholders at this time in light of Mr. Almeida’s significant industry and leadership experience and the strong role played by the lead director in accordance with Baxter’s Corporate Governance Guidelines. The Board made this determination in advance of extending an offer to Mr. Almeida to serve as Baxter’s Chairman and Chief Executive Officer.

Executive Sessions

As discussed above, independent directors of the Board met in executive session without management at every regularly scheduled meeting during 2018 in accordance with Baxter’s Corporate Governance Guidelines. Mr. Stallkamp, as lead director, led these executive sessions. Additionally, the Audit Committee is required by its charter to regularly hold separate sessions during committee meetings with each of the internal auditor, the independent registered public accounting firm and management. The Compensation, Corporate Governance and Quality, Compliance and Technology Committees generally meet in executive session at each meeting.

 

 

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Committees of the Board

The standing committees of the Board of Directors consist of the Audit Committee, the Compensation Committee, the Corporate Governance Committee and the Quality, Compliance and Technology Committee.

Each committee consists solely of independent directors and is governed by a written charter. All standing committee charters are available on Baxter’s website at www.baxter.com under “Our Story—Our Governance—Board Committees & Charters.”

Audit Committee

The Audit Committee is currently composed of Albert P.L. Stroucken (Chair), Peter S. Hellman, Munib Islam, Patricia B. Morrison, Cathy R. Smith and Thomas T. Stallkamp, each of whom is independent under the rules of the NYSE and Rule 10A-3 of the Securities Exchange Act of 1934, as amended (Exchange Act). The Board has determined that Messrs. Hellman, Stallkamp, Stroucken and Ms. Smith each qualify as an “audit committee financial expert” as defined by the rules of the SEC. The Audit Committee is primarily concerned with the integrity of Baxter’s financial statements, system of internal accounting controls, the internal and external audit process and the process for monitoring compliance with laws and regulations (including with regard to cybersecurity matters). The Audit Committee’s duties include: (1) reviewing the adequacy and effectiveness of Baxter’s internal control over financial reporting with management and the external and internal auditors and reviewing with management Baxter’s disclosure controls and procedures; (2) retaining and evaluating the qualifications, independence and performance of the independent registered public accounting firm; (3) approving audit and permissible non-audit engagements to be undertaken by the independent registered public accounting firm; (4) reviewing the scope of the annual external and internal audits; (5) reviewing and discussing Baxter’s financial statements (audited and unaudited), as well as earnings press releases and related information, prior to their filing or release; (6) overseeing legal and regulatory compliance as it relates to financial matters; (7) overseeing the company’s IT functions, including non-product related cybersecurity matters; (8) holding separate executive sessions with the independent registered public accounting firm, the internal auditor and management; (9) discussing guidelines and policies governing the process by which Baxter assesses and manages risk; and (10) approving certain financing matters, proposed corporate transactions and capital expenditures. The Audit Committee met 10 times in 2018. The Audit Committee Report appears on page 59.

Compensation Committee

The Compensation Committee is currently composed of John D. Forsyth (Chair), Peter S. Hellman, Michael F. Mahoney, Carole J. Shapazian and Thomas T. Stallkamp, each of whom is independent under the rules of the NYSE and is a non-employee director under the rules promulgated by the SEC under Section 16 of the Exchange Act. The Compensation Committee exercises the authority of the Board relating to employee benefit and equity-based plans and the compensation of the company’s officers. The Compensation Committee’s duties include: (1) making recommendations for consideration by the Board, in executive session and in coordination with the Corporate Governance Committee, concerning the compensation of the Chief Executive Officer; (2) determining the compensation of the company’s officers (other than the Chief Executive Officer) and advising the Board of such determination; (3) making recommendations to the Board with respect to incentive compensation plans and equity-based plans and exercising the authority of the Board concerning benefit plans; (4) serving as the administration committee of the company’s equity-based plans; (5) making recommendations to the Board concerning director compensation; (6) reviewing the adequacy of the company’s stock ownership guidelines and periodically assessing compliance with these guidelines; and (7) overseeing the company’s compensation philosophy and strategy and periodically assessing the risk related to its compensation policies and practices. The Corporate Governance and Compensation Committees work together to establish a link between the Chief Executive Officer’s performance and decisions regarding his compensation. All compensation actions relating to the company’s Chief Executive Officer are subject to the approval of the independent directors of the Board. The Compensation Committee met three times in 2018. The Compensation Committee Report begins on page 30.

The Compensation Committee has the sole and direct responsibility for the appointment, compensation and oversight of the work of any advisor retained by the Compensation Committee, and it has directly engaged George B. Paulin, Chairman of Frederic W. Cook & Co., Inc. (FW Cook), as its independent compensation consultant. Additionally, Aon Hewitt assists the Compensation Committee with the compilation of market data from time to time. Mr. Paulin reports directly and exclusively to the Compensation Committee and his firm provides no services to Baxter except advising on executive and Board compensation matters. He provides analyses and recommendations that help inform the Compensation Committee’s decisions, but he does not decide or approve any compensation

 

 

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actions. During 2018, he advised the Compensation Committee Chairman on setting agenda items for Compensation Committee meetings, reviewed management proposals presented to the Compensation Committee, assisted in the Compensation Committee’s assessment of Baxter’s compensation policies and practices and conducted a review of the compensation of non-employee directors at Baxter’s peer companies. See “Executive Compensation—Compensation Discussion and Analysis—Structure of Compensation Program—Baxter’s Peer Group and Use of Peer Group Data” for additional information on Baxter’s peer groups. In accordance with the rules of the SEC and the NYSE regarding the independence of compensation consultants, Mr. Paulin provided the Compensation Committee information regarding any personal, financial, or business relationships between FW Cook and Baxter, its management or the members of the Compensation Committee that could impair its independence or present a conflict of interest. Based on its review of this information, the Compensation Committee determined that there were no relationships that impair the independence or create a conflict of interest between Baxter and FW Cook and the partners, consultants and employees who provide services to the Compensation Committee (including Mr. Paulin). In addition, the Compensation Committee annually reviews the substantive performance of Mr. Paulin and FW Cook as part of its engagement process. In February 2019, the Compensation Committee appointed Mr. Paulin and FW Cook as its independent compensation consultant for 2019.

Corporate Governance Committee

The Corporate Governance Committee is currently composed of James R. Gavin III, M.D., Ph.D. (Chair), Thomas F. Chen, John D. Forsyth, Stephen N. Oesterle, M.D., and Albert P.L. Stroucken, each of whom is independent under the rules of the NYSE. The Corporate Governance Committee assists and advises the Board on director nominations, corporate governance and general Board organization and planning matters. The Corporate Governance Committee’s duties include: (1) developing criteria for use in evaluating and selecting candidates for election or re-election to the Board and assisting the Board in identifying and attracting qualified director candidates; (2) selecting and recommending that the Board approve the director nominees for the next annual meeting and recommending persons to fill any vacancy on the Board; (3) determining Board committee structure and membership; (4) overseeing the succession planning process for management, including the Chief Executive Officer; (5) developing and implementing an annual process for evaluating the performance of the Chief Executive Officer; (6) developing and implementing an annual process for evaluating Board and committee performance; (7) overseeing the continuing education of the Board; and (8) reviewing at least annually the adequacy of Baxter’s Corporate Governance Guidelines. The Corporate Governance Committee met five times in 2018.

Quality, Compliance and Technology Committee

The Quality, Compliance and Technology Committee is currently composed of Carole J. Shapazian (Chair), Thomas F. Chen, James R. Gavin III, M.D., Ph.D., Michael F. Mahoney, Stephen N. Oesterle, M.D, and Amy A. Wendell. The Board, through the recommendation of the Corporate Governance Committee, will appoint a new chairperson to this committee in connection with Ms. Shapazian’s retirement. The Quality, Compliance and Technology Committee assists the Board in fulfilling its oversight responsibilities with respect to legal, regulatory (including quality) and other compliance matters and the company’s innovation strategy. These responsibilities now include oversight over cybersecurity and other IT matters as they relate to the development of Baxter products and services. The committee also advises the Board with respect to Baxter’s responsibilities as a global corporate citizen. The Quality, Compliance and Technology Committee’s duties include: (1) overseeing risk management in the area of product quality and safety; (2) reviewing periodic reports on significant compliance matters from senior executives in charge of the company’s quality and compliance functions; (3) coordinating with the Audit Committee on quality and compliance issues; (4) overseeing the company’s innovation strategy (including with respect to product cybersecurity matters); and (5) reviewing strategic issues and corporate actions relating to current and emerging political, corporate citizenship and public policy issues that may affect Baxter. The Quality, Compliance and Technology Committee met five times in 2018.

Special Litigation Committee

The Special Litigation Committee is composed of Stephen N. Oesterle, M.D. (Chair), Michael F. Mahoney and Cathy R. Smith. The committee was established in September 2017 by the Board to investigate, on behalf of Baxter stockholders, a stockholder demand relating to alleged breaches of fiduciary duties by certain Baxter directors and officers. The Special Litigation Committee met five times in 2018. While it is not a standing committee of the Board, it is continuing to work on the matter.

Director Compensation

Non-employee directors are compensated for their service under Baxter’s non-employee director compensation plan with cash compensation and equity awards of fully vested Baxter shares. For 2018, in addition to the cash compensation paid to all other non-employee directors (as described below under “—Cash Compensation”), Third Point LLC (Third Point), in recognition of

 

 

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Mr. Islam’s service as a director, was paid an amount in cash equal to the value of the fully vested Baxter shares awarded to all other non-employee directors in May 2018 (as described below under “—Equity Grant”). Baxter’s director compensation program utilizes equity awards in order to further align the interests of directors with Baxter stockholders.

As previously announced, Mr. Islam has announced that he will be resigning from the Board effective May 6, 2019. As a result, he will not be eligible to receive any equity award (or a cash award in lieu of equity) in 2019, as his resignation will be effective before the May 7, 2019 grant date. Until May 6th, he continues to serve on the Board as a Third Point nominee in accordance with the terms of the company’s September 2015 Support Agreement with Third Point and as a senior Third Point executive.

Cash Compensation

In 2018, each non-employee director was paid a $90,000 annual cash retainer and a $2,000 fee for each committee meeting attended, including meetings of the Special Litigation Committee. Directors no longer receive additional compensation for each Board meeting attended.

Each non-employee director who acts as the chairperson of any standing committee receives an additional annual retainer of $15,000, except for the Chair of the Audit Committee who receives an additional retainer of $20,000 in light of the increased frequency of meetings held by this committee. The lead independent director is paid an additional annual cash retainer of $50,000. Non-employee directors are eligible to participate in a deferred compensation plan that allows for the deferral of all or any portion of cash payments until their Board service ends. The plan provides participants with a select subset of investment elections available to all eligible employees under Baxter’s tax-qualified Section 401(k) plan.

Equity Grant

For 2018, the aggregate value of a non-employee director’s annual equity grant was $185,000. Except as described above for Mr. Islam, 100% of this grant was made in fully vested Baxter shares unless a director elected to receive 50% of the value of the grant in fully vested options. All equity awards are subject to a six-month forfeiture period in the event the director stops serving on the Board during that period (other than as a result of death, disability or qualifying retirement). Beginning in 2019, each non-employee director can elect to defer receipt of all of his or her fully vested stock award under the deferred compensation plan each year.

Other Director Compensation

Directors are eligible to participate in the Baxter International Foundation matching gift program, under which Baxter’s foundation matches gifts made by employees and directors to eligible non-profit organizations. The maximum gift total for a director participant in the program is $20,000 in any calendar year.

Baxter’s Stock Ownership Guidelines for Directors; Prohibitions on Trading

Baxter’s Corporate Governance Guidelines provide that after five years of Board service, each director is expected to hold common stock equal to five times the annual cash retainer provided to directors. In 2018, all directors whom have served on the Board for at least five years were in compliance with these guidelines. Further, the Board had previously determined that Mr. Islam satisfied this guideline by virtue of Third Point’s ownership of Baxter common stock. See “Ownership of Our Stock—Security Ownership by Certain Beneficial Owners” for a description of Third Point’s holdings. Mses. Morrison and Wendell have until February 2024 to satisfy these guidelines.

Pursuant to Baxter’s securities trading policy, Baxter directors are prohibited from engaging in short-term trading activities (including hedging) and option transactions in Baxter stock. As a result, directors cannot enter into any “put” or “call” options or otherwise buy or sell derivatives on any Baxter stock. Additionally, it is Baxter’s policy not to permit directors to pledge Baxter securities as collateral for loans or otherwise as a security interest.

 

 

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Director Compensation Table

The following table provides information on 2018 compensation for non-employee directors who served during any portion of 2018.

 

Name

  

Fees Earned or

Paid in Cash

($)(1)

    

Stock

Awards

($)(2)

    

Option

Awards

($)(3)

    

All Other

Compensation

($)(4)

    

Total

($)

Thomas F. Chen

    

 

110,000

      

 

92,507

      

 

89,001

      

 

6,433

      

 

297,941  

John D. Forsyth

    

 

121,000

      

 

92,507

      

 

89,001

      

 

      

 

302,508  

James R. Gavin, M.D., Ph.D.

    

 

125,000

      

 

92,507

      

 

89,001

      

 

7,917

      

 

314,425  

Peter S. Hellman

    

 

116,000

      

 

92,507

      

 

89,001

      

 

14,750

      

 

312,258  

Munib Islam

    

 

110,000

      

 

185,000

      

 

      

 

      

 

295,000  

Michael F. Mahoney

    

 

116,000

      

 

185,015

      

 

      

 

      

 

301,015  

Stephen N. Oesterle, M.D.

    

 

120,000

      

 

185,015

      

 

      

 

15,085

      

 

320,100  

Carole Shapazian

    

 

117,000

      

 

185,015

      

 

      

 

20,000

      

 

322,015  

Cathy Smith

    

 

122,000

      

 

92,507

      

 

89,001

      

 

      

 

303,508  

Thomas T. Stallkamp

    

 

166,000

      

 

92,507

      

 

89,001

      

 

20,000

      

 

367,508  

K. J. Storm(5)

    

 

44,667

      

 

      

 

      

 

      

 

44,667  

Albert P.L. Stroucken

    

 

133,350

      

 

185,015

      

 

      

 

      

 

318,365  

 

1

Consists of the amounts described above under “—Cash Compensation.” Mr. Islam has disclaimed receipt of his Board fees due to his employment arrangement with Third Point, and therefore, the amount shown for Mr. Islam was paid in cash to Third Point.

2

The amounts shown in this column are valued based on the grant date fair value of the underlying fully vested Baxter share awards computed in accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 718, Stock Compensation (FASB ASC Topic 718). For more information on how these amounts are calculated, please see Note 13 to the Consolidated Financial Statements included in the company’s Annual Report on Form 10-K for the year ended December 31, 2018. Each non-employee director (other than Mr. Islam and Mses. Morrison and Wendell) had the following number of fully vested shares granted in May 2018: Mr. Chen (1,332); Mr. Forsyth (1,332); Dr. Gavin (1,332); Mr. Hellman (1,332); Mr. Mahoney (2,664); Dr. Oesterle (2,664); Ms. Shapazian (2,664); Ms. Smith (1,332); Mr. Stallkamp (1,332); and Mr. Stroucken (2,664). No other fully vested shares were issued to non-employee directors in 2018. In light of his employment arrangement with Third Point, Mr. Islam has disclaimed interest in the $185,000 in cash paid in lieu of a grant of 3,233 fully vested shares. As a result, this amount was paid to Third Point directly.

3

The amounts shown in this column are valued based on the grant date fair value of the underlying stock option award computed in accordance with FASB ASC Topic 718. For more information on how these amounts are calculated, please see Note 13 to the Consolidated Financial Statements included in the company’s Annual Report on Form 10-K for the year ended December 31, 2018. Each of Messrs. Chen, Forsyth, Hellman and Stallkamp and Dr. Gavin and Ms. Smith elected to receive 50% of the value of their May 2018 equity grant in the form of fully vested stock options. This resulted in the issuance of 9,027 fully vested stock options to each electing independent director. As of December 31, 2018, each non-employee director had the following number of stock options outstanding, all of which were fully vested as of such date: Mr. Chen (26,869); Mr. Forsyth (47,546); Dr. Gavin (56,986); Mr. Hellman (56,986); Mr. Islam (6,290); Mr. Mahoney (20,777); Dr. Oesterle (1,060); Ms. Shapazian (30,179); Ms. Smith (0); Mr. Stallkamp (30,286); and Mr. Stroucken (47,959).

4

The amounts in this column include matching gift contributions made by Baxter’s charitable foundation as of March 1, 2019 on qualifying charitable donations made by the following directors in 2018: Mr. Hellman ($14,750); Dr. Oesterle ($15,085); Ms. Shapazian ($20,000); and Mr. Stallkamp ($20,000). These are the only components of “All Other Compensation” that involved an amount equal to or greater than $10,000 for any director in 2018. All other amounts in this column represent dividend equivalent payments made in 2018 on RSUs held by the non-employee directors (including any RSUs with deferred vesting pursuant to the deferred compensation plan).

5

Mr. K.J. Storm retired from the Board effective May 2018. He had most recently served on the Audit and Corporate Governance Committees of the Board.

 

 

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Corporate Responsibility                  

 

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Corporate Responsibility

 

Corporate responsibility is fundamental to Baxter’s strategic aspirations and supports its mission to save and sustain lives. The company is focused on achieving top quartile results relative to its industry peers and other comparators across four dimensions: quality and patient safety, best place to work, growth through innovation and industry leading performance. Baxter’s corporate responsibility strategy focuses on the issues that matter most to the company (in accordance with its mission and strategic goals) and its stakeholders. This strategy also reflects Baxter’s assessment of where it may be able to have the greatest positive impact, and is reflected in Baxter’s Corporate Responsibility Priorities and Goals (which are set forth in Baxter’s annual Corporate Responsibility Report and briefly highlighted below).

Management and Board Oversight

Baxter’s Corporate Responsibility Council, composed of executives and subject matter experts from across the company, helps oversee Baxter’s corporate responsibility strategies and leads the company’s efforts to integrate corporate responsibility into the company’s business. Beginning in 2018, the full Board is now updated on corporate responsibility matters (including a discussion of related goals and industry trends) at least annually. Topics included in the September 2018 discussion incorporated environmental, health and safety and a review of Baxter’s philanthropic contributions (consistent with the company’s mission and strategic goals). This discussion also included updates on the company’s Best Place to Work initiatives and Baxter’s diversity and inclusion efforts.

Previously, portions of these updates had been provided to the Quality, Compliance and Technology Committee. And pursuant to Baxter’s enhanced stockholder engagement program, Baxter directors and management have engaged in corporate responsibility discussions with certain investors. Outputs from these discussions are shared with the entire Board during Board wide corporate responsibility updates and to the Corporate Governance Committee as part of its oversight of corporate governance matters generally. See “Executive Compensation—Compensation Discussion and Analysis—Summary—Stockholder Engagement” for additional Information.

Priorities and Goals

Baxter has a long-standing commitment to responsible operations and corporate responsibility reporting. Baxter is ever conscious of its global impact, including with respect to its employees, the communities it operates in and the people who use its products. The company believes that it has an obligation to ensure that these commitments are reflected in its global impact. Baxter’s 2020 Corporate Responsibility Priorities and Goals cover the following eight categories:

 

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Many of these goals contain quantitative targets against which performance is assessed, tracked and disclosed in the company’s Corporate Responsibility Report annually.

In 2018, Baxter was honored for its efforts as an employer of choice and a socially responsible and sustainable business, receiving a number of recognitions including: Corporate Responsibility Magazine’s 100 Best Corporate Citizens, Forbes’ America’s Best Large Employers, Working Mother’s 100 Best Companies, as well as Equal Opportunity Publications’ Top 50 Employer of Women Engineers and Top 50 Employer in STEM Workforce Diversity. The company was named one of America’s Most JUST Companies by JUST Capital, and has consistently received a top score of 100 percent on the Human Rights Campaign Foundation’s Corporate Equality Index (CEI). Baxter is proud to have also been included in the Dow Jones Sustainability Index, the FTSE4Good Index Series, the Diversity Best Practices Leading Inclusion Index of U.S. companies, and to receive Newsweek Magazine’s Green Ranking. These awards are among numerous other regional and country-specific recognitions across the globe.

Annual Reporting

Baxter is committed to sharing information about its corporate responsibility programs, priorities, goals and performance. The annual Corporate Responsibility Report illustrates the company’s commitment to sound governance and balanced, transparent disclosure. It also serves as a platform for stakeholder engagement and provides an important means for soliciting feedback on the company’s activities. More information about Baxter’s corporate responsibility efforts and initiatives, including the 2017 Corporate Responsibility Report, is available on Baxter’s website at www.baxter.com under “Our Story — Corporate Responsibility.”

 

 

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Executive Compensation

 

 

   

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Advisory Vote to Approve Named Executive Officer Compensation

 

At the 2017 annual meeting, stockholders recommended that the Board continue to hold annual advisory votes approving the compensation of Baxter’s named executive officers (commonly referred to as “say-on-pay”). The Board determined to follow the stockholders’ recommendation and continue to hold annual say-on-pay votes. Accordingly, the Board is requesting that stockholders approve, pursuant to a non-binding vote, the compensation of the company’s named executive officers as disclosed in the proxy statement.

 

The Board of Directors recommends a vote FOR approval of the compensation of the company’s named executive officers for 2018.

 

 
     

In accordance with Section 14A of the Exchange Act, stockholders are being asked to vote on a resolution to approve, on a non-binding, advisory basis, the compensation of Baxter’s named executive officers for 2018. The Board encourages stockholders to carefully review the “Executive Compensation—Compensation Discussion and Analysis” section of the proxy statement, in connection with this advisory vote. The Compensation Discussion and Analysis section describes Baxter’s executive compensation program and the decisions made by the Compensation Committee and the Board with respect to the compensation of the company’s named executive officers for 2018.

The company has designed its executive compensation programs to attract, motivate, reward and retain the senior management talent required to help achieve its corporate and strategic objectives and increase stockholder value. As discussed below in Compensation Discussion and Analysis, pay-for-performance is the most significant structural element of Baxter’s executive compensation program, where the majority of executive pay is at risk and is only delivered if specific annual and long-term performance requirements are met.

In addition, Baxter has also adopted policies, like the stock ownership guidelines and the executive compensation recoupment policy, to help ensure long-term focus and appropriate levels of risk-taking by executive officers.

The Board believes that Baxter’s executive compensation program is designed to meet the objectives discussed in the Compensation Discussion and Analysis section. Accordingly, the Board recommends that stockholders vote in favor of the following resolution:

 

 

RESOLVED, that the stockholders of Baxter International Inc. approve the compensation paid to the company’s named executive officers as described in the proxy statement under “Executive Compensation,” including the Compensation Discussion and Analysis, the compensation tables and other narrative disclosure contained therein.

 

  LOGO

This say-on-pay advisory vote is non-binding on the Board. Although the vote is non-binding, the Board and the Compensation Committee will review and thoughtfully consider the voting results when making future decisions concerning the compensation of the company’s future named executive officers. The next say-on-pay advisory vote will be held at the 2020 annual meeting of stockholders.

 

 

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Compensation Committee Report

The Compensation Committee is responsible for the oversight of Baxter’s compensation programs on behalf of the Board. In fulfilling its oversight responsibilities, the Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis set forth in the proxy statement.

Based on the review and discussions referred to above, the Compensation Committee recommended to the Board of Directors that the following Compensation Discussion and Analysis be included in Baxter’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and the proxy statement, each of which has been or will be filed with the SEC.

Compensation Committee

John D. Forsyth (Chair)

Peter S. Hellman

Michael F. Mahoney

Carole J. Shapazian

Thomas T. Stallkamp

Compensation Discussion and Analysis

This Compensation Discussion and Analysis discusses the 2018 compensation paid to Baxter’s executive officers who are identified as named executive officers below. The purpose of this discussion is to provide investors with an understanding of the company’s executive compensation policies and practices, and the decisions regarding the compensation for the named executive officers.

Summary

2018 Results

Baxter’s financial results for 2018 reflect the company’s achievement of significant financial, operational and strategic objectives. The related highlights include the following, all of which are consistent with the company’s previously reported results except with respect to net sales, adjusted earnings per share and adjusted operating margin, each of which have been adjusted (or further adjusted as applicable), as described below:

 

   

exceeded the net sales target (calculated at budgeted exchange rates established at January 1, 2018) of $11,549 million by $39 million (or 100.3% of target), after having eliminated the sales associated with the company’s newly acquired RECOTHROM and PREVELEAK products;

   

exceeded the adjusted EPS target of $2.80 per share by $0.21 (or 107.7% of target), after having eliminated the results associated with RECOTHROM and PREVELEAK (based on further adjusted EPS results);

   

exceeded the free cash flow target of $1,360 million by $55 million (or 104.0% of target);

   

exceeded the adjusted operating margin target of 17.0% by 20 basis points (or 101.2% of target), after having eliminated the results associated with RECOTHROM and PREVELEAK;

   

delivery of innovative products for patients and expanded access to life-sustaining therapies through 22 new product launches (excluding geographic expansions); and

   

returned $2.8 billion to stockholders in 2018 through cash dividends and share repurchases.

As discussed in “—Structure of Compensation Program—Financial Targets” below, Baxter’s short-term cash compensation program for 2018 was based on the company’s further adjusted EPS, adjusted net sales and free cash flow performance for 2018, subject to adjustments for individual performance. Payouts for PSU awards earned under Baxter’s long-term incentive plan in 2018 are based on Baxter’s total shareholder return (for the period between January 1, 2018 and December 31, 2020) and the company’s further adjusted operating margin performance in 2018.

Baxter’s global net sales totaled $11.1 billion in 2018 (or $11.6 billion calculated on an adjusted basis), with adjusted EPS of $3.05 and adjusted operating margin of 17.4%. For purposes of the company’s 2018 cash bonus plan, adjusted EPS, as reported, was reduced by $0.04 to $3.01 to exclude results associated with RECOTHROM and PREVELEAK. Baxter achieved free cash flow (operating cash

 

 

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flow less capital expenditures) of $1.4 billion. Additionally, for purposes of adjusted operating margin PSUs earned in 2018, under the company’s long term incentive plan, adjusted operating margin, as reported, was reduced by 20 basis points to 17.2% to also exclude RECOTHROM and PREVELEAK results. This approach is consistent with the company’s historical practice of excluding the financial effect of material acquisitions from its results for purposes of calculating company performance under its compensation plans. See “—Structure of Compensation Program—Financial Targets” and “—Performance Over the Long-Term—Performance Against Adjusted Operating Margin Target” for a reconciliation of adjusted net sales, further adjusted EPS, further adjusted operating margin and free cash flow to the closest GAAP measure.

The company’s financial, operational and strategic performance (as discussed above) were all significant factors in the compensation decisions made for 2018. A comparison of the performance of Baxter’s common stock against certain of its peers over the past three years provides another perspective on Baxter’s overall performance. This comparison is an additional factor that the Compensation Committee or the Board, as applicable, considered when making compensation decisions for 2018. While the Compensation Committee has historically considered the relative performance of Baxter’s common stock over longer periods when making compensation decisions, the shorter time period is intended to reflect the impact of Mr. Almeida’s appointment as the company’s new Chief Executive Officer and Chairman (effective January 1, 2016) and the subsequent changes made to the company’s strategic framework and long range plan.

The graph below compares the cumulative total shareholder return (including reinvested dividends) on Baxter common stock and the Standard & Poor’s 500 Composite Index and the Standard & Poor’s 500 Health Care Index for the three-year period ended December 31, 2018. As set forth below, the total shareholder return for Baxter for this period totaled approximately 78%, as compared to 30% for the S&P 500 Composite Index and 26% for the S&P 500 Health Care Index over the same period.

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2018 Named Executive Officers

For 2018, the Baxter named executive officers include:

 

Named Executive Officer    Title

  José E. Almeida

  

Chairman of the Board, President and Chief Executive Officer

  Giuseppe Accogli

  

Senior Vice President and President, Global Businesses

  Brik V. Eyre

  

Senior Vice President and President, Americas

  Sean Martin

  

Senior Vice President and General Counsel

  James K. Saccaro

  

Executive Vice President and Chief Financial Officer

On March 21, 2019, Baxter announced that Mr. Eyre will retire from the company effective June 30, 2019, and will cease serving as Senior Vice President and President, Americas as of April 1, 2019. In connection with his retirement, Mr. Accogli will succeed Mr. Eyre as Senior Vice President and President, Americas effective April 1, 2019.

2018 Say-on-Pay Vote

At the 2018 annual meeting, approximately 93% of the stockholders voting at the meeting approved the compensation paid to Baxter’s named executive officers in 2017. Due to the strong level of stockholder support and consistent with discussions with select institutional investors (as described below), the company substantially maintained its executive compensation policies for 2018.

The Compensation Committee and management are committed to continuing to strengthen pay-for-performance alignment, as well as the overall design of Baxter’s executive compensation programs. As part of the outreach discussed below in “—Stockholder Engagement,” stockholders provided the following feedback related to Baxter’s compensation practices:

 

   

queried whether stock options should constitute performance based compensation;

   

questioned the company’s decision to issue retention stock units to certain named executive officers in 2017;

   

expressed a preference for three year (rather than annual) performance targets for the adjusting operating margin PSUs granted to the company’s executive officers; and

   

probed the company’s decision to use different peer groups for purposes of evaluating its executive compensation program generally and for assessing performance under its TSR PSU awards.

While the Compensation Committee appreciates the feedback and took it into consideration, the Compensation Committee and management believe there is an appropriate business rationale for maintaining most of these features of the company’s executive compensation program at this time. Consistent with the company’s executive compensation program generally, the company did not issue any RSUs to executive officers in 2018.

Stockholder Engagement

Baxter sponsors an ongoing stockholder engagement program. At the direction of the Board, this program was expanded in 2017 to cover additional topics, including corporate responsibility matters, and to target additional stockholders. Additionally, Thomas Stallkamp, the lead independent director, took part in many of these discussions. As part of this program, the company is committed to engaging in constructive dialogue with its stockholders. Management is primarily responsible for stockholder communications and engagement, with involvement from the lead director and the chairs of the Corporate Governance and Compensation Committees. Management provides regular updates to the Board on topics or concerns raised by stockholders. The Board considers this feedback as well as the interests of all stakeholders when overseeing company strategy, formulating governance practices and designing or evaluating compensation programs, as discussed above.

During 2018 and early 2019, Mr. Thomas Stallkamp and select members of management have met with stockholders as part of the company’s annual outreach program. These discussions followed an outreach to top Baxter investors representing over 50% of Baxter’s outstanding shares. These investors include institutional investors, hedge funds, mutual funds and public pension funds. The company continues to meet with interested stockholders. Topics covered in these discussions have been expanded from prior years and now include Baxter’s strategy and performance, Board composition, structure and refreshment and succession planning and executive compensation and corporate responsibility matters. Management continues to solicit feedback from stockholders on these subjects and will continue to provide related updates to the Board.

 

 

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2018 Compensation Program Summary

Baxter’s compensation program for 2018 was consistent with the 2017 program. The annual financial measures and weightings used for 2018 annual cash bonus assessment were as follows:

 

Measure    Weighting  

  Adjusted EPS

     50

  Net Sales

     30

  Free Cash Flow

     20

 

   

PSUs constitute 50% of the annual equity grant for named executive officers in 2018. One-half of the 2018 PSUs are measured against Baxter’s TSR relative to its healthcare index peer group (as described below) over a three-year period, and one-half of the 2018 PSUs are measured against three annual adjusted operating margin targets. Baxter utilizes three annual measures for adjusted operating margin at this time given the challenges of establishing a meaningful and precise three-year performance target. This approach is consistent with the practices of several of Baxter’s peer companies for similar performance measures. Each annual measure only affects one-third of the initial grant requiring sustained performance over the three-year period to earn the full target award. Additionally, all PSU awards are subject to the satisfaction of a three-year time vesting requirement.

   

The performance schedule for both the TSR and adjusted operating margin PSUs are aligned with peer group practice. With respect to TSR PSUs, the performance and payout schedule is as follows:

 

TSR PSU Plan

Payout

  

Peer Group

Achievement Level

  200% of target

   75th Percent Rank

  150% of target

   65th Percent Rank

  100% of target

   50th Percent Rank

    25% of target

   25th Percent Rank

 

   

The peer group used to determine Baxter’s achievement level for TSR PSUs is the Dow Jones Medical Equipment Index. The Compensation Committee has elected to use an indexed based peer group for this purpose, consistent with the recommendation of FW Cook, in the interest of potentially dampening volatility (given the larger number of companies contained in the index as compared to those in the peer group used by the Compensation Committee for benchmarking executive compensation) and providing continuity as companies leave the executive compensation peer group due to mergers and acquisitions and other corporate activity. This approach of utilizing an indexed peer group for purposes of TSR calculations is utilized by many of Baxter’s peer companies. Additionally, Baxter’s Investor Relations group utilizes this index for performance comparisons.

   

With respect to the adjusted operating margin PSUs, the schedule for 2018 awards is as follows:

 

Adjusted Operating Margin PSU

Plan Payout

   Baxter
Achievement
Level

200% of target (Maximum)

   110%

Target

   100%

25% of target (Threshold)

   90%

2018 Executive Compensation Awarded and Earned

For his service as Baxter’s Chairman and Chief Executive Officer in 2018, Mr. Almeida has compensation reported in the Summary Compensation Table of $15,645,125. In reviewing the company’s programs and the decisions made relative to Mr. Almeida’s compensation, the independent members of the Board (including all Compensation Committee members) believe that Mr. Almeida was fairly rewarded for leading the company in 2018. They also believe that Mr. Almeida’s compensation reflects the increased value delivered to Baxter stockholders beginning with the start of his tenure in 2016, as reflected in the three-year total shareholder return graph set forth above.

 

 

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A primary component of this total was Mr. Almeida’s base salary of $1,300,000, as established in October 2015 in connection with his hiring. Mr. Almeida has not received a salary increase since he began serving as Baxter’s Chairman and Chief Executive Officer in January 2016.

Another primary component of Mr. Almeida’s 2018 compensation was his annual cash bonus of $2,582,450. Mr. Almeida’s annual bonus funded at 137% of target reflecting the company’s adjusted net sales, further adjusted EPS and free cash flow achievements, and he was provided 100% of his funded bonus target.

In 2018, Mr. Almeida received 50% of his equity awards in stock options and 50% in PSUs. One-half of the newly issued PSUs are measured against Baxter TSR performance for the period from January 1, 2018 through December 31, 2020, and one-half are measured against three annual adjusted operating margin targets for 2018, 2019 and 2020, subject to satisfaction of the three-year time vesting requirements. For 2018, and as discussed in “—Financial Targets” below, the company’s adjusted operating margin performance was reduced to reflect the exclusion of RECOTHROM and PREVELEAK products. Mr. Almeida’s long-term incentive grant for 2018 has a grant date fair value of $11,628,156. This value represents:

 

   

the full amount of the stock options granted to him as part of the 2018 annual grant process;

   

the full amount of the TSR PSUs granted to him as part of the 2018 annual grant process;

   

the first one-third of the adjusted operating margin PSUs granted to him in connection with the 2018 annual grant process;

   

the second one-third of the adjusted operating margin PSUs awarded to him in connection with the 2017 annual grant process; and

   

the final one-third of the adjusted operating margin PSUs awarded to him in connection with his hiring in October 2015 (which was made to him in lieu of a 2016 annual grant).

The remaining two-thirds of the adjusted operating margin PSUs awarded to Mr. Almeida as part of the 2018 annual grant process will be deemed granted in 2019 and 2020 (in two equal installments). Similarly, the final one-third of the adjusted operating margin PSUs awarded in connection with his 2017 annual grant will be deemed granted in 2019. These PSUs are deemed granted at these times because the related performance criteria are to be established in each of these years.

Each named executive officer (other than Mr. Almeida) received total performance based compensation (cash bonus, stock options and PSUs) for 2018 as follows: $2,880,436 (Mr. Accogli); $3,056,490 (Mr. Eyre), $2,333,503 (Mr. Martin) and $3,824,816 (Mr. Saccaro). These amounts reflect input made by the Compensation Committee and Mr. Almeida to reflect the individual’s 2018 performance or potential, as discussed below.

A significant component of the total compensation paid to the named executive officers in 2018 was in the form of equity. The ability of the named executive officers to realize the grant date fair value of long-term incentives that are subject to the satisfaction of future performance vesting requirements will ultimately depend on the company’s performance over the long term.

Compensation Philosophy

Baxter’s compensation program is designed to:

 

   

recognize company and individual performance;

   

drive the long-term financial performance of the company (and in doing so, encourage innovation and appropriate levels of risk-taking); and

   

reflect the value of each officer’s position in the market and within the company.

The objectives of the program are to compensate Baxter’s executive officers in a manner that is consistent with these principles, align the interests of management and stockholders and drive sustained and superior performance relative to the company’s peers. The program is also designed to be comparable with companies with which Baxter competes for executive talent in order to attract, retain and motivate high-performing executives.

 

 

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Components of Executive Compensation

The table below describes the components of Baxter’s executive compensation for 2018. See “—Elements of Executive Compensation” below for additional information on each component. In addition to the compensation components listed below and in order to ensure we provide an overall competitive total compensation program, we also offer our executives employee benefits that are generally available to all employees.

 

Component

 

 

Objectives

 

 

Determination of Amount

 

 

Base Salary

 

   Fixed component of compensation

 

   Provides a base level of competitive compensation

   Used to attract and retain executive talent

 

   Targeted within a competitive range between the 25th to the 75th percentile of the peer group based on multiple factors (as discussed below) with a primary focus on the 50th percentile of the peer group

   Reviewed annually, and when executives are hired or promoted

 

 

Cash Bonuses

 

   Variable short-term compensation component

   Target awards are based on a percentage of base salary

 

   Used to motivate and reward executives for company and individual performance against annually established financial targets and individual objectives

   For 2018, financial targets included adjusted earnings per share (50%), adjusted net sales (30%) and free cash flow (20%)

 

 

   Bonus targets generally set within a competitive range between the 25th to the 75th percentile of the peer group with a primary focus on the 50th percentile of the peer group

   Bonus targets are reviewed annually, and when executives are hired or promoted

 

Long-Term Incentive Awards (LTI)

 

   Variable long-term compensation component

   Represent a significant component of each named executive officer’s compensation package

   In 2018, annual equity awards consisted of 50% stock options and 50% PSUs

 

   Used to motivate and reward an executive’s contributions to achieving the company’s long-term objectives and increasing stockholder value

   Stock options recognize that it is in the best interests of the company to provide equity that will vest as long as the executive continues to serve at Baxter and the value of which depends, in part, on the company’s performance over the vesting period

   PSUs recognize that a portion of an executive’s equity awards should be completely “at-risk”

   For 2018, financial objectives for PSU awards include adjusted operating margin (50%) and TSR (50%)

 

 

   LTI targets generally set within a competitive range between the 25th and 75th percentile of the peer group with a primary focus on the 50th percentile of the peer group

   LTI targets are reviewed annually, and when executives are hired or promoted

   Actual awards may be adjusted based on an assessment of the officer’s individual performance and future potential

 

 

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Structure of Compensation Program

Pay-for-Performance

Pay for performance is the most significant structural element of Baxter’s compensation program. Baxter’s focus on pay-for-performance is best demonstrated through the structure of its executive compensation programs, where the majority of executive pay is at risk and subject to specific annual and long-term performance requirements (including in the case of stock options, the performance of Baxter common stock). As shown below for 2018, 89% of Mr. Almeida’s target compensation and 78% of the average target compensation for the other named executive officers was at risk and subject to performance.

Named Executive Officer (NEO) Total Target Direct Compensation

 

LOGO    LOGO

For 2018, Baxter’s annual performance against financial targets of adjusted EPS, adjusted net sales and free cash flow helped to determine the payout of cash bonuses under Baxter’s cash bonus plan. The payout amounts determined in relation to these financial targets were adjusted to reflect the officer’s individual performance for 2018, as discussed below under “—Individual Performance.”

For 2018, Baxter named executive officers received 50% of their annual equity grants in the form of PSUs, of which:

 

   

one-half will be measured against Baxter’s three-year TSR relative to the company’s peer group (as discussed in “—Performance Against Peers”), and

   

one-half will be measured against three annual adjusted operating margin targets.

Stock options make up the remaining 50% of annual equity awards for 2018. The overall performance of Baxter’s common stock determines the value of the stock options. The size of the equity awards is intended to reflect the officer’s potential for future performance or advancement, as assessed by the Compensation Committee or the Board. See “—Individual Performance” for additional information.

Financial Targets

The Compensation Committee selected adjusted EPS, net sales at budgeted exchange rates and free cash flow as the financial measures for funding the cash bonus pool and as financial metrics for the cash bonus plan for 2018.    The table below shows the relative weight assigned to each measure for 2018:

 

                                 Metric    Weight  

Adjusted EPS

  

 

50

Net Sales

  

 

30

Free Cash Flow

  

 

20

 

 

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Adjusted EPS, adjusted net sales (or net sales at budgeted exchange rates) and free cash flow were selected as financial metrics for the 2018 cash bonus plan as they are of immediate interest to stockholders and are the primary measures on which Baxter regularly provides guidance and publicly announces earnings to the market.

Baxter generally calculates adjusted EPS for purposes of funding its cash bonus pool the same way it calculates adjusted EPS when publicly announcing earnings. The company uses net sales at budgeted exchange rates as a target for the same reason that Baxter provides sales guidance excluding the impact of foreign currency fluctuations and certain other items— that is, the company believes it provides a better perspective on underlying sales growth. The use of budgeted exchange rates allows Baxter to evaluate final performance on the same foreign currency basis that was used for setting the target and establishing the budget. The company uses free cash flow (rather than operating cash flow) as it gives effect to the company’s capital expenditures and better reflects the cash available for future investment. Additionally, the company’s historical practice has been to exclude the financial effect of material acquisitions from its results for purposes of calculating company performance under its compensation plans.

The table below provides adjusted EPS, net sales and free cash flow targets for 2018, as well as actual results. For the first two metrics, actual results for 2018 constitute further adjusted EPS and adjusted net sales, reflecting the elimination of RECOTHROM and PREVELEAK results (as discussed below). The Compensation Committee approved the company funding percentage under the 2018 cash bonus plan of 137%.

 

     2018
    

Threshold

  

Target

  

Maximum

  

Actual

  

Achievement as a
Percent of Target(4)

 

Payout as a Percent
of Target(5)

  Further Adjusted EPS(1)

    

$

2.52

    

$

2.80

    

$

3.08

    

$

3.01

    

 

107.7%

   

 

166

%

  Adjusted Net Sales (in millions)(2)

    

$

10,972

    

$

11,549

    

$

12,127

    

$

11,588

    

 

100.3%

   

 

103

%

  Free Cash Flow (in millions)(3)

    

$

1,156

    

$

1,360

    

$

1,564

    

$

1,415

    

 

104.0%

   

 

113

%

                                                  

 

Weighted Payout:    

   

 

137

%

 

  1

Further adjusted EPS for purposes of the 2018 cash bonus plan was calculated as the company’s diluted earnings per share (determined in accordance with GAAP) as adjusted for special items and the impact of RECOTHROM and PREVELEAK results. Special items for 2018 totaled $313 million (or $36 million on an after-tax basis), or $0.06 per diluted share. These adjustments primarily related to intangible asset amortization, business optimization initiatives, acquisition and integration costs related to the acquisition of Claris Injectables Limited (Claris) and the RECOTHROM and PREVELEAK products, upfront payments related to research and development collaborations and license agreements, a gain from remeasuring the company’s previously held investment to fair value upon acquisition of a controlling interest in its joint venture in Saudi Arabia, certain product related items (including product litigation), Hurricane Maria insurance recoveries, costs associated with complying with certain European regulations (medical device reporting regulations), the settlement of certain Claris-related claims and an update to the estimated impact of tax reform previously made by the company. Adjusted EPS for the 2018 bonus plan was further adjusted to remove the impact of $22 million, or $0.04 per diluted share, of RECOTHROM and PREVELEAK results from the year. We refer to this further adjusted amount as further adjusted EPS throughout the proxy statement. Total GAAP EPS from continuing operations in 2018 was $2.99.

  2

Net Sales for purposes of the 2018 cash bonus plan were calculated as the company’s reported net sales (determined in accordance with GAAP) at budgeted exchange rates as of January 1, 2018. These amounts were adjusted to reflect the elimination of $52 million of RECOTHROM and PREVELEAK net sales in 2018. We refer to this adjusted amount as adjusted net sales throughout the proxy statement. Adjusted net sales totaled $11.6 billion for 2018. GAAP net sales for 2018 totaled $11.1 billion.

  3

Free Cash Flow is calculated from the company’s operating cash flow from continuing operations calculated in accordance with GAAP less capital expenditures. This amount excluded $681 million in capital expenditures in 2018.

  4

Level of achievement used to determine funding of the cash bonus pool may not foot due to rounding. For 2018, the pool was funded at two times the base salary for each executive officer covered by the bonus pool (other than Mr. Almeida, for whom the bonus pool was funded at two times his target cash bonus).

  5

Bonus payout approved by the Compensation Committee based on performance of each financial metric. The funding of each metric ranges from 0% to 200% with the achievement of target performance at 100%. Each metric funds linearly between the threshold and target, the target and mid-point, and the mid-point and maximum. The band of funding around the target varies by metric. This variation reflects the probability of achievement of a given target based on historical performance data.

 

    

Adjusted EPS (50%)

  

Net Sales (30%)

  

Free Cash Flow (20%)

    

Performance

  

Payout

  

Performance

  

Payout

  

Performance

  

Payout

  Threshold

    

 

90%

 

    

 

50%

 

    

 

95%

 

    

 

50%

 

    

 

85%

 

    

 

25%   

 

  Target

    

 

100%

 

    

 

100%

 

    

 

100%

 

    

 

100%

 

    

 

100%

 

    

 

100%   

 

  Mid-Point

    

 

105%

 

    

 

125%

 

    

 

102.5%

 

    

 

125%

 

    

 

107.5%

 

    

 

125%   

 

  Maximum

    

 

110%

 

    

 

200%

 

    

 

105%

 

    

 

200%

 

    

 

115%

 

    

 

200%   

 

 

 

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Performance Over the Long-Term

As a healthcare company, Baxter operates in a rapidly changing, increasingly competitive and heavily regulated environment. Accordingly, encouraging its executive officers to focus on the long-term performance of the company is particularly important to Baxter. In 2018, Baxter granted PSUs designed to reward strong and sustained long-term performance by the company on two important measures: TSR and adjusted operating margin. Fifty percent of each PSU award in 2018 was based on each of TSR and adjusted operating margin.

Performance Against Peers

TSR PSUs were granted in 2016, 2017 and 2018, and each have a three-year performance period. The performance period for the 2016 TSR PSUs ended on December 31, 2018. The performance periods for the 2017 and 2018 TSR PSUs will end on December 31, 2019 and December 31, 2020, respectively.

The TSR PSUs described in this section are measured based on the following formula:

Average Closing Stock Price Over the Last Twenty Consecutive Trading Days of the Performance Period

minus Average Closing Stock Price Over the Last Twenty Consecutive Trading Days Immediately

Preceding the Commencement of the Performance Period

plus Reinvested Dividends

 

  Divided (÷) by   

Average Closing Stock Price Over the Last Twenty Consecutive Trading Days Immediately Preceding the

Commencement of the Performance Period

The TSR PSUs pay out in shares of Baxter common stock in a range of 0% to 200% of the number of PSUs awarded. The table below shows how the company’s TSR against its peers (as described below) correlates with the 0% to 200% range of payouts for the 2016 TSR PSUs.

 

Performance    Payout  

Below 25th Percentile Rank

  

 

0

25th Percentile Rank

  

 

25

60th Percentile Rank

  

 

100

75th Percentile Rank

  

 

150

85th Percentile Rank or Above

  

 

200

The performance and payout schedule for the 2017 TSR PSUs and the 2018 TSR PSUs is shown in the following table, based on the company’s TSR performance relative to the related performance of the companies in the Dow Jones Medical Equipment Index over the relevant period:

 

Performance    Payout  

Below 25th Percentile Rank

  

 

0

25th Percentile Rank

  

 

25

50th Percentile Rank

  

 

100

65th Percentile Rank

  

 

150

75th Percentile Rank or Above

  

 

200

TSR PSUs pay out linearly between each set of data points above the 25th percentile and below the 85th percentile (with respect to the 2016 TSR PSUs) or above the 25th percentile and below the 75th percentile (with respect to the 2017 and 2018 TSR PSUs). In order to pay out at the 100% target level, Baxter must outperform its peers at the 60th percentile (with respect to the 2016 TSR PSUs) or 50th percentile (with respect to the 2017 and 2018 TSR PSUs) over the relevant performance period.

 

 

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The peer group used for measuring performance for the 2016 TSR PSUs reflects the nature of Baxter’s business at the time the peer group was established in July 2014 and includes medical products companies. It was the same peer group used to make compensation decisions for Baxter’s named executive officers in 2016:

 

  Abbott Laboratories

   

Cerner Corporation

   

Stryker Corporation

  Agilent Technologies, Inc.

   

DaVita Inc.

   

Thermo Fisher Scientific Inc.

  Allergan plc

   

DENTSPLY Sirona Inc.

   

Varian Medical Systems, Inc.

  Bausch Health Companies Inc.

   

Laboratory Corporation of America Holdings

   

Zimmer Biomet Holdings, Inc.

  Becton, Dickinson and Company

   

Medtronic Public Limited Company

     

  Boston Scientific Corporation

   

Quest Diagnostics Incorporated

     

The Compensation Committee elected to use a peer index (the Dow Jones Medical Equipment Index) for purposes of evaluating TSR performance beginning with the 2017 TSR PSU awards. See “—Baxter’s Peer Group and Use of Peer Group Data” for additional information. This index will be used for purposes of assessing performance for the 2018 and 2019 TSR PSUs as well.

Performance Against Adjusted Operating Margin Target

Adjusted operating margin PSUs were granted in 2016, 2017 and 2018. Adjusted operating margin was established as the relevant performance metric for 2019 as well.

One-third of the adjusted operating margin PSUs are deemed granted on the annual grant date of the year the award is made and on each of the annual grant dates of the subsequent two years. The third tranche of the 2016 PSUs, the second tranche of the 2017 PSUs and the first tranche of the 2018 PSUs were deemed granted in 2018, in connection with the establishment of the related adjusted operating margin target (as discussed below). Adjusted operating margin is calculated by dividing adjusted operating income by net sales for the period. Historically, Baxter has calculated adjusted operating margin (for purposes of its long-term incentive plan) in the same manner that it calculates and publicly announces its adjusted operating margin guidance and performance. Adjusted operating margin PSUs will pay out in shares of Baxter common stock in a range of 0% to 200% of the number of PSUs awarded. The table below shows how the company’s further adjusted operating margin 2018 performance for the third tranche of the 2016 adjusted operating margin PSUs correlates with the 0% to 200% range of payouts.

 

Performance as a

Percentage of Target

  

Payout

 

Below 93%

  

 

0

93%

  

 

25

100%

  

 

100

107% and above

  

 

200

The performance and payout schedule for the second tranche of the 2017 adjusted operating margin PSUs and the first tranche of the 2018 adjusted operating margin PSUs were as follows, based, in each case, on the company’s further adjusted operating margin performance in 2018:

 

Performance as a

Percentage of Target

  

Payout

 

Below 90%

  

 

0

90%

  

 

25

100%

  

 

100

110% and above

  

 

200

Adjusted operating margin PSUs pay out linearly between each set of data points from 93% achievement to 107% achievement (with respect to the 2016 adjusted operating margin PSUs) or from 90% achievement to 110% achievement (with respect to the 2017 and 2018 adjusted operating margin PSUs).

 

 

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The company set the adjusted operating margin target for 2018 at 17.0%. This target applies to the third tranche of the 2016 PSUs, the second tranche of the 2017 PSUs and the first tranche of the 2018 PSUs. Baxter achieved further adjusted operating margin of 17.2% in 2018, or 101.2% of the adjusted operating margin target. Special items impacting 2018 operating income totaled $337 million. These adjustments primarily related to intangible asset amortization, business optimization initiatives, acquisition and integration costs related to the acquisition of Claris and the RECOTHROM and PREVELEAK products, upfront payments related to research and development collaborations and license agreements, certain product related items (including product litigation), Hurricane Maria insurance recoveries, costs associated with complying with certain European regulations (medical device reporting regulations) and the settlement of certain Claris-related claims. In connection with the calculation of 2018 further adjusted operating income, the elimination of RECOTHROM and PREVELEAK results account for the reduction of an additional $26 million in operating income. GAAP operating income for 2018 totaled $1.6 billion.

Performance of Baxter Common Stock

The performance of Baxter common stock helps to determine the value of the stock options and TSR PSUs that were granted to the named executive officers in 2018.

Individual Performance

The Compensation Committee assesses the individual performance and/or future potential of each company officer (other than the Chief Executive Officer) in making compensation decisions related to cash bonuses and equity awards. The independent members of the Board make this determination with respect to the Chief Executive Officer. Baxter believes it is important to consider an individual’s performance in assessing compensation and not just the company’s overall performance relative to the financial targets discussed above.

The assessment of an individual’s performance in the prior fiscal year may result in an adjustment of the amount that would otherwise be paid out to that individual under the cash bonus plan for that year based on the company’s financial performance. Assessment of the future potential of an officer (which is informed by past performance) may cause the Compensation Committee or the Board, as applicable, to adjust the size of equity grants that would otherwise be made to that officer in a given year under the company’s long-term incentive plan based on peer group positioning.

The Compensation Committee’s assessment of individual performance and future potential is inherently subjective and requires significant input from the Chief Executive Officer, who reviews the performance goals and self-evaluations of each of the other executive officers and shares his insights and recommendations with the Compensation Committee. Based on that input, the Compensation Committee assesses how well an officer fulfilled his or her obligations in the past year and an officer’s potential for future contributions to Baxter. The assessment of the prior year’s performance focuses on how well the operations or function for which an officer is responsible performed during the year. The Compensation Committee also considers how well an officer performed against the performance goals set for the officer.

The independent members of the Board are responsible for assessing the Chief Executive Officer’s performance each year and making adjustments to any bonus or equity award that would otherwise be made to the Chief Executive Officer under the cash bonus plan or long-term incentive plan, as applicable. As part of this assessment, they review the extent to which the Chief Executive Officer has satisfied his goals for the year (as described below). This review is conducted with the support of the lead independent director and the Corporate Governance and Compensation Committees, which oversee the establishment of the Chief Executive Officer’s goals and the annual review process.

The goals set for each named executive officer for 2018 reflect the diversity of the company’s business and the wide range of responsibilities that are attributed to each of these officers. For example, Mr. Almeida had performance goals for 2018 covering the areas of leadership, innovation, quality/regulatory/compliance, strategic and business development, operational excellence, people/Board relations and financial sustainability. These goals are in addition to the financial targets established for the company generally under the cash bonus and long-term incentive plans. For the other named executive officers, the Compensation Committee considers various performance criteria depending on the nature of the executive’s role. These criteria include goals such as implementation of critical projects (like acquisitions or divestitures), product development, regulatory or quality performance and innovation or research.

In evaluating each officer’s performance against his or her goals, consideration is given not only to whether an objective was met but most significantly how the objective was met. This consideration reflects how appropriately the officer prioritized meeting an objective relative to the officer’s other responsibilities.

 

 

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Accordingly, the adjustments that are made to an officer’s compensation based on his or her performance are not directly correlated to the number of goals that an officer achieved. The Compensation Committee believes that this type of rigid correlation could motivate an officer to focus on achieving his or her performance goals rather than on fulfilling his or her job responsibilities in a manner that is in the best interests of the company and its stockholders. For 2018, the Board made no individual adjustment with respect to Mr. Almeida’s cash bonus award. Based upon the recommendation of Mr. Almeida and with the approval of the Compensation Committee, the other named executive officers received no individual adjustments to their 2018 cash bonus awards.

In February 2018, the Board awarded an individual adjustment of 111% with respect to Mr. Almeida’s 2018 long-term equity award. The other named executive officers received adjustments to their 2018 equity grants within a range of 95% to 108% of target. See “—Elements of Executive Compensation—Equity Awards—Individual Equity Grants” and “—Elements of Executive Compensation—Cash Bonuses—Determination of 2018 Annual Bonus Payouts—Individual Performance” for additional information regarding individual adjustment determinations made for the named executive officers in 2018.

Baxter’s Peer Group and Use of Peer Group Data

Use of peer group data plays a significant role in the structure of the compensation program as it is a primary input in setting target levels for base salaries, cash bonuses and equity awards and helps to ensure that compensation is market competitive in order to attract and retain top talent. Baxter uses data from companies that the Compensation Committee has objectively selected as comparable companies (the peer group) to help identify a reasonable starting point for base salaries, cash bonuses and equity awards and then analyzes company and individual performance to determine whether it is appropriate to move away from this baseline. Peer group data also plays a role in what non-cash compensation is paid to the named executive officers as the market data the company obtains regarding companies in its peer group helps determine what types and amounts of non-cash compensation are appropriate for competitive purposes. If data is not available for a particular officer’s position at the company, the Compensation Committee utilizes the information that is available to Aon Hewitt as well as internal equity principles to set an officer’s compensation targets at levels that are competitive with other officers at Baxter.

The companies in Baxter’s compensation peer group are intended to be its closest comparators as a medical products company. This peer group of 21 companies (as established in July 2014) was used to assess performance under the 2016 TSR PSUs. Beginning with the 2017 TSR PSUs, the Compensation Committee approved the use of the Dow Jones Medical Equipment Index for purposes of evaluating the company’s TSR performance over the applicable three-year period. It did so consistent with the recommendation of FW Cook which was made based upon other peer company practices and in light of the fact that Baxter management uses this index within its investor relations function. The Dow Jones Medical Equipment Index consisted of approximately 50 companies as of December 31, 2018.

This index will also be used for purposes of evaluating the company’s 2019 TSR PSUs, which were recently granted in February 2019.

For 2018, the following companies were included in Baxter’s updated peer group for purposes of benchmarking executive compensation. This list reflects the deletion, in 2017, of companies from the peer group that had different business strategies or executive compensation policies than Baxter. It also reflects the impact of consolidation within the healthcare sector since the peer group was first established in 2014:

 

 

  Abbott Laboratories

   

 

DaVita Inc.

   

 

Stryker Corporation

 

  Agilent Technologies, Inc.

   

 

DENTSPLY Sirona Inc.

   

 

Thermo Fisher Scientific Inc.

 

  Becton, Dickinson and Company

   

 

Laboratory Corporation of America Holdings

   

 

Varian Medical Systems, Inc.

 

  Boston Scientific Corporation

   

 

Medtronic plc

   

 

Zimmer Biomet Holdings, Inc.

 

  Cerner Corporation

   

 

Quest Diagnostics Incorporated

     

The median revenue and market capitalization for these companies was approximately $10.4 billion and $21.3 billion for the year ended December 31, 2018 or as of December 31, 2018, as applicable. Baxter’s revenue of $11.1 billion for the year ended December 31, 2018 and market capitalization of approximately $33.8 billion as of December 31, 2018 were between the 50th and 75th percentiles of this peer group.

For 2019, Danaher Corporation has been added to the peer group for purposes of benchmarking executive compensation. FW Cook proposed this addition in response to further industry consolidation and in the interest of adding a company with a financial profile similar to that of Baxter’s to the peer group.

 

 

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Elements of Executive Compensation

Base Salaries

As discussed above, the Compensation Committee or the Board (in the case of the Chief Executive Officer) generally sets salaries within a competitive range between the 25th to the 75th percentile of salaries paid to comparable officers of companies in the peer group based on multiple factors, with a primary focus on the 50th percentile of the peer group. These factors include the individual’s prior performance, overall experience, tenure in position and impact on company results, current comparison to benchmark position and an assessment of internal equity among peers.

For 2018, Mr. Almeida received a base salary of $1,300,000. Effective as of February 24, 2018, the base salaries of each of the named executive officers (other than Mr. Almeida) were increased as part of the annual review process. As a result of these adjustments, salaries increased from (i) $687,000 to $710,000 (for Mr. Accogli), (ii) $660,000 to $673,000 (for Mr. Eyre), (iii) $620,000 to $635,000 (for Mr. Martin) and (iv) $700,000 to $717,000 (for Mr. Saccaro). For 2019, the base salaries for Messrs. Accogli, Eyre, Martin and Saccaro have been increased to $735,000, $693,000, $651,000 and $739,000, respectively. As noted above, Mr. Almeida’s base salary and the only component of his compensation that is not performance based, remained unchanged for 2019. Additionally, Mr. Eyre will stop serving as an executive officer effective April 1, 2019.

Cash Bonuses

Cash bonus targets, like salaries, are set by the Compensation Committee (or the Board in the case of Mr. Almeida) within a competitive range generally between the 25th to the 75th percentile of the peer group, with a primary focus on the 50th percentile of the peer group. The same factors which influence the setting of salaries also impact the establishment of cash bonus targets. Payouts under the cash bonus plan range from 0% to 250% based on a combination of company (0% to 200%) and individual performance (0% to 125%). In the event that an individual incurs a termination of employment on or after July 1 of the performance year due to death or disability, the individual remains eligible for cash bonus program and the target amount will be prorated to reflect the number of full days of participation.

Target Setting

Cash bonus targets for all applicable named executive officers are set within a range that is competitive with cash bonuses targets of comparable officers at companies in Baxter’s peer group (as in effect for the applicable period). The Compensation Committee has the discretion to further adjust each officer’s cash bonus target as it deems appropriate. Typical reasons for adjusting cash bonus targets are experience, sustained individual performance, promotability and internal equity.

Determination of 2018 Annual Bonus Payouts

Based on the company’s performance against its 2018 financial targets, the bonus pool was funded at two times the base salary for each executive officer covered by the bonus pool (other than Mr. Almeida). For Mr. Almeida, the bonus pool was funded at two times his target cash bonus in accordance with the terms of his offer letter. Application of the funding schedule associated with each metric resulted in an aggregate funding percentage of 137%, which the Compensation Committee approved as presented by company management. The actual cash bonus paid to each named executive officer was calculated using the following formula: (x) such officer’s cash bonus target multiplied by (y) the company’s aggregate performance across the three applicable metrics (as discussed below). The Compensation Committee or the Board then had the ability to further adjust the resulting amount in light of the applicable officer’s individual performance for the relevant period, as discussed below in “—Individual Performance.”

Company Performance. For 2018, Baxter performed relative to its adjusted EPS, net sales and free cash flow financial targets at 107.7%, 100.3% and 104.0%, respectively; provided that adjusted EPS and net sales performance for 2018 were assessed as adjusted net sales and further adjusted EPS. This resulted in aggregate company performance of 137%. See “ —Structure of Compensation Program—Financial Targets” for a reconciliation of these non-GAAP financial measures to the closest GAAP measures.

Individual Performance. The goals for each Baxter named executive officer for 2018 reflect the responsibilities that are attributed to each of these officers. In evaluating each officer’s performance against his goals, consideration was given not only to whether an objective was met, but also to how the objective was met.

The Compensation Committee believes that the methodology it uses in paying cash bonuses is consistent with providing compensation that reflects how an officer is valued within the company and the marketplace. Based on the Compensation

 

 

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Committee’s assessment (or the Board’s assessment in the case of Mr. Almeida) the 2018 cash bonus payouts were based on the company’s financial performance (137% of target), with no adjustments made for individual performance.

Equity Awards

Equity awards are a significant component of each named executive officer’s compensation package. The company’s compensation program emphasizes equity awards to motivate executive officers to drive the long-term performance of the company and to align their interests with those of the company’s stockholders. This emphasis is appropriate as these officers have the greatest role in establishing the company’s direction and should have the greatest proportion of their compensation aligned with the long-term interests of Baxter’s stockholders. This alignment is furthered by requiring officers to satisfy the stock ownership guidelines discussed below under “—Baxter’s Stock Ownership Guidelines for Executive Officers; Prohibitions on Trading.”

Structure of Equity Compensation Program

Baxter’s equity compensation program for named executive officers has historically provided for annual grants in equal proportion of PSUs and stock options based on grant value.

The company also periodically grants equity to named executive officers for recognition, recruitment and retention purposes, and as discussed above, utilizes equity as a primary vehicle to attract and retain high performing executives. In general, the Compensation Committee views one-time grants and grants not tied to performance as appropriate in limited circumstances and seeks to avoid their use to the extent it may be inconsistent with a pay-for-performance philosophy. The company did not make any retention grants to the named executive officers in 2018.

Individual Equity Grants

In order to determine the size of equity grants to be granted to each named executive officer (other than Mr. Almeida) in connection with the annual grant process in March 2018, the Compensation Committee reviewed market data on the size of equity awards made to similarly situated officers at companies in Baxter’s peer group. The Compensation Committee (or the Board in the case of the Chief Executive Officer) set targets that are competitive with the peer group for each of the named executive officers as of the assessment date. In determining the actual amount of each officer’s equity grant, the Compensation Committee or the Board, as applicable, then used its discretion in March 2018 to adjust 2018 target equity grants for the company’s named executive officers, across a range of 95% to 111% of the applicable peer group benchmark. These adjustments were made primarily to reflect an assessment of each named executive officer’s sustained individual performance and future potential.

The Board awarded Mr. Almeida 111% of his equity target in March 2018 as a result of Baxter’s top quartile industry performance and the significant improvements made by the company as part of its quality and safety programs.

One-half of the PSUs granted to the named executive officers in 2018 are measured on Baxter’s TSR performance for the period from January 1, 2018 through December 31, 2020, and one-half are measured on annual adjusted operating margin (OM) targets for 2018, 2019 and 2020.

Perquisites

Baxter provides a very limited range of perquisites to its named executive officers. Baxter permits limited personal travel on company aircraft due to the potential efficiencies associated with such use. All personal aircraft usage must be pre-approved by the Chief Executive Officer in accordance with the terms of the company’s aircraft policy. The company and Mr. Almeida entered into an Aircraft Time Sharing Agreement in March 2018 whereby Mr. Almeida leases the company’s aircraft on a non-exclusive, time sharing basis in accordance with the terms of the company’s aircraft policy. Consistent with the company’s practices, the agreement requires him to pay the company for any personal use at a reimbursement rate set by the Federal Aviation Regulations.

Baxter may from time to time reimburse business-related travel and other related entertainment and incidental costs for officers and their significant others. Reimbursement for spouses or significant others of company officers is currently limited to incentive sales meetings at which the attendance of a significant other is encouraged. When such significant other travel occurs, Baxter pays these expenses and costs as the business purpose served is closely related to the benefits received. During 2018, Baxter’s named executive officers were also eligible for reimbursement for executive physical examinations and related health services.

In 2018, except as disclosed in the footnotes to the “—Executive Compensation Tables—Summary Compensation Table,” the aggregate incremental cost associated with providing each perquisite was less than $10,000 for each named executive officer.

 

 

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Retirement and Other Benefits

Messrs. Eyre and Saccaro are participants in Baxter’s pension and supplemental pension plans due to their prior employment with Baxter. These plans were closed to new participants as of December 31, 2006. Since Messrs. Eyre and Saccaro rejoined the company after this date, they are not eligible to accrue additional benefits in the company’s pension plans. Messrs. Almeida, Accogli and Martin are not eligible to participate in Baxter’s pension plans as each executive was hired by Baxter or transferred to the United States after the plans were closed to new participants in 2006. Employees hired or rehired after that date, including each named executive officer, receive an additional employer contribution equal to 3% of their compensation in Baxter’s tax-qualified Section 401(k) plan and nonqualified deferred compensation plan if their compensation exceeds the compensation that can be taken into account under Baxter’s 401(k) plan. A more detailed discussion of the pension program is provided under the caption “—Executive Compensation Tables—Pension Benefits.”

Each of the named executive officers is eligible to participate in Baxter’s deferred compensation plan, which permits the officer to defer the receipt of covered compensation and receive a 3.5% company match. Baxter allows named executive officers to participate in a deferred compensation plan in order to provide a market competitive plan as well as to facilitate retirement savings as part of the total compensation program in a cost- and tax-effective way for the company. The terms of Baxter’s deferred contribution plan are more fully described under the caption “—Executive Compensation Tables—2018 Nonqualified Deferred Compensation.”

Risk Assessment of Compensation Policies and Practices

With the assistance of the Compensation Committee’s independent compensation consultant, the Compensation Committee reviewed Baxter’s material compensation policies and practices applicable to its employees, including its executive officers, and concluded that these policies and practices do not create risks that are reasonably likely to have a material adverse effect on the company. The key features of the executive compensation program that support this conclusion include:

 

   

appropriate pay philosophy, peer group and market positioning;

   

effective balance in cash and equity mix, short- and long-term focus, corporate, business unit and individual performance focus and financial and non-financial performance measurement and discretion; and

   

meaningful policies that mitigate risk, such as the stock ownership guidelines and executive compensation recoupment policy discussed below.

Baxter’s Stock Ownership Guidelines for Executive Officers; Prohibitions on Trading

In order to align their economic interests with those of stockholders, executive officers are required to own a certain amount of Baxter stock. The Chief Executive Officer is required to achieve ownership of Baxter common stock valued at a minimum of six times annual base salary within five years of his or her appointment. Each of the other executive officers is required to achieve ownership of Baxter common stock valued at a minimum of four times annual base salary, in each case within five years of becoming an executive officer. As of December 31, 2018, Messrs. Accogli, Eyre, and Saccaro have met their ownership requirements, Mr. Almeida met his ownership requirements in February 2019 and Mr. Martin is expected to meet his ownership requirements within the five-year phase-in period (which will end in February 2022). This requirement, like the executive compensation recoupment policy discussed below, helps ensure long-term focus and appropriate levels of risk-taking by executive officers.

Pursuant to Baxter’s securities trading policy, officers and certain other employees, including all named executive officers, are prohibited from engaging in short-term trading activities (including hedging) and option transactions in Baxter stock. As a result, these persons cannot enter into any “put” or “call” options or otherwise buy or sell derivatives on any Baxter stock. Additionally, it is Baxter’s policy to not permit officers to pledge Baxter securities as collateral for loans or otherwise as a security interest.

Executive Compensation Recoupment Policy

Baxter has an executive compensation recoupment policy that applies to all cash bonuses paid by Baxter under its incentive plans and all grants of equity awarded by the company to any person designated as an officer by the Board. Following any restatement of the company’s financial results or if an officer violates a restrictive covenant contained in any agreement between the company and the officer, the Board will review the facts and circumstances that led to the requirement for the restatement or the violation and take any actions it deems appropriate with respect to executive incentive compensation. With respect to a restatement, the Board will consider whether an officer received compensation based on performance reported, but not actually achieved, or was accountable for the events that led to the restatement, including any misconduct. Actions the Board may take include recovery, reduction or forfeiture of all

 

 

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or part of any bonus, equity or other compensation previously provided or to be provided in the future, disciplinary actions and the pursuit of any other remedies. Baxter intends to disclose the aggregate amount of incentive compensation recovered under this policy, so long as the underlying event has already been publicly disclosed by the company. The company has made no such recoupments under the policy.

Post-Termination Compensation

Named executive officers may be entitled to receive certain payments if Baxter undergoes a change in control and the officer ceases to be employed by the company pursuant to severance agreements between Baxter and each executive officer. Providing for payments in a change in control situation is consistent with market practice and helps ensure that if a change in control is in the best interests of the stockholders (as determined by the Board), officers have appropriate incentives to remain focused on their responsibilities before, during and after the transaction without undue concern for their personal circumstances. In consideration for these benefits, the named executive officers have agreed to be bound for two years from the date of their respective termination to non-competition, non-solicitation and non-disparagement covenants. The named executive officers’ severance benefits were not a significant factor in determining their other compensation elements because the Compensation Committee did not believe that these benefits, as provided, exceeded market practices of peer companies in a way that justified a reduction in or any enhancement of any other elements. None of the named executive officers is entitled to any excise tax gross-up covering the officer’s change in control benefits.

In addition, under the terms of his offer letter, Mr. Almeida is entitled to receive certain payments in the event that his employment with Baxter is terminated by Baxter other than for cause or by Mr. Almeida for good reason within five years of his hire date.

For a more detailed discussion of these agreements, including the estimated amounts that would be payable assuming a termination date of December 31, 2018, please refer to the information under the caption “Executive Compensation Tables—Potential Payments Upon Termination or Following a Change in Control.”

 

 

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Executive Compensation Tables

Summary Compensation Table

The following table shows for the years indicated below the compensation provided by Baxter and its subsidiaries to its named executive officers.

 

Name and

Principal Position

  Year(1)  

Salary

($)(2)

 

Bonus

($)(3)

 

Stock
Awards

($)(4)

  Option
Awards
($)(5)
 

Non-Equity
Incentive

Plan
Compensation
($)(6)

 

Change in

Pension

Value and
Nonqualified
Deferred
Compensation
Earnings

($)(7)

  All Other
Compensation
($)(8)
  Total

 

José E. Almeida

Chairman of the Board, Chief

Executive Officer and President

   

 

 

 

2018

 

   

 

 

 

1,300,000

 

   

 

 

 

 

   

 

 

 

6,728,166

 

   

 

 

 

4,899,990

 

   

 

 

 

2,582,450

 

   

 

 

 

 

   

 

 

 

134,519

 

   

 

 

 

15,645,125

 

   

 

 

 

2017

 

   

 

 

 

1,300,000

 

   

 

 

 

 

   

 

 

 

5,373,599

 

   

 

 

 

5,185,130

 

   

 

 

 

2,808,000

 

   

 

 

 

 

   

 

 

 

266,935

 

   

 

 

 

14,933,664

 

   

 

 

 

2016

 

   

 

 

 

1,300,000

 

   

 

 

 

 

   

 

 

 

826,481

 

   

 

 

 

 

   

 

 

 

3,510,000

 

   

 

 

 

 

   

 

 

 

177,464

 

   

 

 

 

5,813,945

 

 

James K. Saccaro

Executive Vice President and

Chief Financial Officer

   

 

 

 

2018

 

   

 

 

 

714,485

 

   

 

 

 

 

   

 

 

 

1,667,170

 

   

 

 

 

1,273,996

 

   

 

 

 

883,650

 

   

 

 

 

 

   

 

 

 

115,460

 

   

 

 

 

4,654,761

 

   

 

 

 

2017

 

   

 

 

 

681,658

 

   

 

 

 

 

   

 

 

 

5,863,351

 

   

 

 

 

1,140,729

 

   

 

 

 

1,108,800

 

   

 

 

 

139,156

 

   

 

 

 

110,970

 

   

 

 

 

9,044,664

 

   

 

 

 

2016

 

   

 

 

 

644,415

 

   

 

 

 

 

   

 

 

 

941,495

 

   

 

 

 

1,182,757

 

   

 

 

 

1,056,825

 

   

 

 

 

104,349

 

   

 

 

 

92,438

 

   

 

 

 

4,022,279

 

 

Giuseppe Accogli

Senior Vice President and

President, Global Businesses(9)

   

 

 

 

2018

 

   

 

 

 

706,597

 

   

 

 

 

 

   

 

 

 

1,072,958

 

   

 

 

 

979,998

 

   

 

 

 

827,480

 

   

 

 

 

 

   

 

 

 

186,536

 

   

 

 

 

3,773,569

 

   

 

 

 

2017

 

   

 

 

 

632,986

 

   

 

 

 

 

   

 

 

 

2,335,306

 

   

 

 

 

907,399

 

   

 

 

 

1,012,000

 

   

 

 

 

 

   

 

 

 

139,813

 

   

 

 

 

5,027,504

 

   

 

 

 

2016

 

   

 

 

 

514,028

 

   

 

 

 

400,000

 

   

 

 

 

454,248

 

   

 

 

 

399,192

 

   

 

 

 

775,005

 

   

 

 

 

 

   

 

 

 

934,210

 

   

 

 

 

3,476,683

 

 

Brik V. Eyre

Senior Vice President and

President, Americas(9)

   

 

 

 

2018

 

   

 

 

 

671,077

 

   

 

 

 

 

   

 

 

 

1,295,267

 

   

 

 

 

931,003

 

   

 

 

 

830,220

 

   

 

 

 

 

   

 

 

 

99,312

 

   

 

 

 

3,826,879

 

   

 

 

 

2017

 

   

 

 

 

654,123

 

   

 

 

 

 

   

 

 

 

2,624,272

 

   

 

 

 

1,037,028

 

   

 

 

 

902,880

 

   

 

 

 

17,967

 

   

 

 

 

98,610

 

   

 

 

 

5,334,880

 

   

 

 

 

2016

 

   

 

 

 

618,533

 

   

 

 

 

 

   

 

 

 

831,958

 

   

 

 

 

985,634

 

   

 

 

 

954,986

 

   

 

 

 

8,965

 

   

 

 

 

78,979

 

   

 

 

 

3,479,055

 

 

Sean Martin

Senior Vice President and

General Counsel

   

 

 

 

2018

 

   

 

 

 

632,781

 

   

 

 

 

 

   

 

 

 

853,539

 

   

 

 

 

784,004

 

   

 

 

 

695,960

 

   

 

 

 

 

   

 

 

 

82,214

 

   

 

 

 

3,048,498

 

   

 

 

 

2017

 

   

 

 

 

521,479

 

   

 

 

 

500,000

 

   

 

 

 

1,704,447

 

   

 

 

 

2,284,047

 

   

 

 

 

694,400

 

   

 

 

 

 

   

 

 

 

16,324

 

   

 

 

 

5,720,697

 

                                                                                         

 

1

2017 is the first year in which Mr. Martin became a named executive officer.

2

Amounts shown in this column represent salary earned in each year, based on the executive’s applicable base salary for each portion of the year. For additional information regarding each named executive officer’s salary for 2018, see “—Elements of Executive Compensation—Base Salaries.”

3

Amount shown in this column include (i) a discretionary cash award paid to Mr. Accogli in 2016 in connection with the conclusion of his expatriate assignment and (ii) a discretionary cash award paid to Mr. Martin in 2017 as an incentive to join Baxter from his prior company.

4

Amounts shown for 2018 represent the grant date fair value of TSR PSUs granted in 2018 and adjusted operating margin PSUs deemed granted in 2018 that pertain to grants made in 2016, 2017 and 2018. Amounts shown for 2017 represent the grant date fair value of TSR PSUs granted in 2017, adjusted operating margin PSUs deemed granted in 2017 that pertain to grants made in 2016 and 2017, and retention RSUs granted to Messrs. Accogli, Eyre and Saccaro and a hiring RSU grant made to Mr. Martin. Amounts shown for 2016 represent the grant date fair value of TSR PSUs granted in 2016, and the PSUs deemed granted in 2016 that pertain to grants made in 2014 and 2016. The grant date fair value of the maximum amount of shares payable under the PSUs granted in 2018 includes the following: $13,456,332 for Mr. Almeida; $2,145,916 for Mr. Accogli; $2,590,534 for Mr. Eyre; $1,707,078 for Mr. Martin; and $3,334,340 for Mr. Saccaro.

PSU awards reflect the grant date fair value computed in accordance with FASB ASC Topic 718. Refer to Note 13 to the Consolidated Financial Statements included in the company’s Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of how grant date fair value of PSU awards were calculated. RSU awards were valued as of the grant date by multiplying the per share closing price of Baxter common stock on the grant date by the number of shares subject to the awards. Dividend equivalents accrue on the unvested PSUs and RSUs included in this table but are paid only if the underlying awards vest. For further information on these awards, see the “—2018 Grants of Plan-Based Awards” table.

5

Amounts shown in this column represent the value of Baxter stock options based on the grant date fair value computed in accordance with FASB ASC Topic 718. For more information on how these amounts are calculated, please see Note 13 to the Consolidated Financial Statements included in the company’s Annual Report on Form 10-K for the year ended December 31, 2018. For further information on these awards, see the “—2018 Grants of Plan-Based Awards” table.

6

Amounts shown in this column represent cash bonuses paid for performance in the applicable year. The methodology applied in determining the cash bonus amounts earned by the named executive officers is discussed under “Compensation Discussion and Analysis—Elements of Executive Compensation—Cash Bonuses.”

7

Amounts shown in this column represent the aggregate of the increase in actuarial values of each of the named executive officer’s benefits under the company’s pension plan and supplemental pension plan. As discussed below in connection with the “Pension Benefits” table, none of Messrs. Almeida, Accogli or Martin are eligible to participate in the pension plans. While participants in the pension plans, neither Mr. Eyre nor Mr. Saccaro is

 

 

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  eligible to accrue additional benefits under the pension plans. An increase in the discount rate has resulted in a decrease in Mr. Saccaro’s pension value of accumulated benefits (with respect to his prior Baxter employment) by $136,482 and a decrease for Mr. Eyre pension value of accumulated benefits (with respect to his prior Baxter employment) by $11,636. For more information on these pension benefits, see the “—Pension Benefits” table below.
8

Amounts shown in this column represent (i) the dollar value of term life insurance premiums paid by the company on behalf of the named executive officers; (ii) contributions made by the company to Baxter’s deferred compensation plan; (iii) contributions made by the company to Baxter’s tax-qualified Section 401(k) plan; (iv) tax preparation services provided to Mr. Accogli in support of his transfer from Switzerland to the United States in 2016; and (v) employer paid taxes and (vi) tax gross-up payments made in connection with Mr. Accogli’s previous expatriate assignment, which concluded in 2016. Contributions made by the company to Baxter’s deferred compensation and tax-qualified Section 401(k) plans on behalf of Messrs. Almeida, Accogli, Eyre, Martin and Saccaro include an additional employer contribution equal to 3% of their compensation as a result of their ineligibility to participate in, or accumulate additional benefits under, the company’s pension and supplemental pension plans. The following table quantifies the amounts paid to each named executive officer in 2018 for any component discussed above that involved an amount equal to or greater than $10,000:

 

    Deferred
Compensation
Contributions
($)
  401(k)
Contributions
($)
 

Tax
Preparation
Services

($)

  Employer
Paid
Taxes ($)
  Gross-Up
Payments
($)

Mr. Almeida

   

 

114,990

   

 

17,875

   

 

   

 

   

 

Mr. Saccaro

   

 

95,846

   

 

17,875

   

 

   

 

   

 

Mr. Accogli

   

 

88,432

   

 

17,875

   

 

11,255

   

 

37,671

   

 

28,307

Mr. Eyre

   

 

80,100

   

 

17,875

   

 

   

 

   

 

Mr. Martin

   

 

63,550

   

 

17,875

   

 

   

 

   

 

 

9

On March 21, 2019, Baxter announced that Mr. Eyre will retire from the company effective June 30, 2019, and that will cease serving as an executive officer of the company on April 1, 2019. The company also announced that Mr. Accogli will succeed Mr. Eyre as Senior Vice President and President, Americas effective April 1, 2019.

 

 

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48

                  Executive Compensation
 

 

The following table summarizes grants of plan-based awards made during 2018.

2018 Grants of Plan-Based Awards

 

        Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
      Estimated Future
Payments

Under Equity Incentive
Plan Awards
 

All Other
Stock
Awards:
Number of
Shares of
Stock or Units
(#)

 

All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)(1)

 

Exercise
or

Base
Price

of
Option
Awards
($/Sh)(2)

 

Grant
Date Fair
Value of
Stock
and
Option
Awards

Name   Grant
Date
 

Threshold

($)

 

Target

($)

 

Maximum

($)

      

Threshold

(#)

 

Target

(#)

 

Maximum

(#)

Mr. Almeida

                                                                                                                       

Cash Bonus(3)

   

 

2/20/2018

             

 

1,885,000

                                                                                         

Stock Option Grant

   

 

3/1/2018

                                                                                   

 

373,435

   

 

66.31

   

 

4,899,990

TSR PSU Grant(4)

   

 

3/1/2018

                                           

 

9,387

   

 

37,549

   

 

75,098

                                 

 

3,393,303

OM 2016 PSU Grant(5)

   

 

3/1/2018

                                           

 

5,254

   

 

21,015

   

 

42,030

                                 

 

1,393,505

OM 2017 PSU Grant(5)

      3/1/2018                                               4,190       16,761       33,522                                     1,111,422

OM 2018 PSU Grant(5)

      3/1/2018                                               3,129       12,516       25,032                                     829,936

Mr. Saccaro

                                                                                                                       

Cash Bonus(3)

   

 

2/19/2018

             

 

645,000

                                                                                         

Stock Option Grant

   

 

3/1/2018

                                                                                   

 

97,093

   

 

66.31

   

 

1,273,996

TSR PSU Grant(4)

   

 

3/1/2018

                                           

 

2,441

   

 

9,762

   

 

19,524

                                 

 

882,192

OM 2016 PSU Grant(5)

   

 

3/1/2018

                                           

 

1,224

   

 

4,897

   

 

9,794

                                 

 

324,720

OM 2017 PSU Grant(5)

      3/1/2018                                               922       3,687       7,374                                     244,485

OM 2018 PSU Grant(5)

      3/1/2018                                               814       3,254       6,508                                     215,773

Mr. Accogli

                                                                                                                       

Cash Bonus(3)

   

 

2/19/2018

             

 

604,000

                                                                                         

Stock Option Grant

   

 

3/1/2018

                                                                                   

 

74,687

   

 

66.31

   

 

979,998

TSR PSU Grant(4)

   

 

3/1/2018

                                           

 

1,878

   

 

7,510

   

 

15,020

                                 

 

678,679

OM 2016 PSU Grant(5)

   

 

3/1/2018

                                           

 

128

   

 

510

   

 

1,020

                                 

 

33,818

OM 2017 PSU Grant(5)

      3/1/2018                                               733       2,933       5,866                                     194,487

OM 2018 PSU Grant(5)

      3/1/2018                                               626       2,503       5,006                                     165,974

Mr. Eyre

                                                                                                                       

Cash Bonus(3)

   

 

2/19/2018

             

 

606,000

                                                                                         

Stock Option Grant

   

 

3/1/2018

                                                                                   

 

70,953

   

 

66.31

   

 

931,003

TSR PSU Grant(4)

   

 

3/1/2018

                                           

 

1,784

   

 

7,134

   

 

14,268

                                 

 

644,700

OM 2016 PSU Grant(5)

   

 

3/1/2018

                                           

 

1,020

   

 

4,081

   

 

8,162

                                 

 

270,611

OM 2017 PSU Grant(5)

      3/1/2018                                               838       3,352       6,704                                     222,271

OM 2018 PSU Grant(5)

      3/1/2018                                               595       2,378       4,756                                     157,685

Mr. Martin

                                                                                                                       

Cash Bonus(3)

   

 

2/19/2018

             

 

508,000

                                                                                         

Stock Option Grant

   

 

3/1/2018

                                                                                   

 

59,750

   

 

66.31

   

 

784,004

TSR PSU Grant(4)

   

 

3/1/2018

                                           

 

1,502

   

 

6,008

   

 

12,016

                                 

 

542,943

OM 2017 PSU Grant(5)

   

 

3/1/2018

                                           

 

671

   

 

2,682

   

 

5,364

                                 

 

177,843

OM 2018 PSU Grant(5)

   

 

3/1/2018

                                           

 

501

   

 

2,002

   

 

4,004

                                 

 

132,753

 

1

All stock option awards made in 2018 are non-qualified stock options and vest ratably in annual one-third increments over the three-year period beginning on the grant date.

2

The option exercise prices reflect the closing price of Baxter’s common stock on the grant date.

3

The amounts shown represent award opportunities under Baxter’s 2018 annual cash bonus program at 100% of target bonus. There is no threshold amount for cash bonuses. The maximum cash bonus that could have been paid to any participating officer for 2018 performance was the lesser of (i) two times an officer’s salary (or target bonus in the case of Mr. Almeida) and (ii) $10 million. The actual cash bonus paid to each named executive officer for his 2018 performance is reported as “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table.

4

These PSUs will be paid out in shares of Baxter common stock based on the change in Baxter TSR during the three-year performance period ending on December 31, 2020. The amounts set forth under “Threshold,” “Target” and “Maximum” represent the number of shares of Baxter common stock that would be paid out after the three-year performance period if Baxter’s TSR performance for the measurement period achieves the 25th, 50th and 75th percentiles of the indexed peer group, respectively. For more information on how these payouts are determined, please see “Compensation Discussion and Analysis—Structure of Compensation Program—Performance over the Long-Term—Performance Against Peers.”

5

The OM 2016 PSU Grants represent the third tranche of adjusted operating margin PSUs deemed granted in 2018, in connection with the establishment of the 2018 adjusted operating margin target. The OM 2017 PSU Grants represent the second tranche of adjusted operating margin

 

 

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  PSUs deemed granted in 2018 in connection with the establishment of the same target. The OM 2018 PSU Grants represents the first tranche of adjusted operating margin PSUs deemed granted in 2018 with the establishment of the same target. These PSUs have been (with respect to the OM 2016 PSU Grants) or will be paid out in shares of Baxter common stock based on the achievement of the 2018 adjusted operating margin goal, subject to satisfaction of the three-year time vesting requirement. The amounts set forth under “Threshold,” “Target” and “Maximum” represent the number of shares of Baxter common stock that would be paid out following the conclusion of the three-year time vesting requirement if Baxter’s adjusted operating margin performance for 2017 and 2018 met 90%, 100% and 110% of the applicable target. For the OM 2016 PSUs, the “Threshold,” “Target” and “Maximum” represent 93%, 100% and 107%, of the target, respectively. For more information on how these payouts are determined, please see “Compensation Discussion and Analysis— Structure of Compensation Program—Performance over the Long-Term—Performance Against Adjusted Operating Margin Target.”

Description of Certain Awards Granted in 2018

Consistent with the company’s executive compensation program, each named executive officer’s grant for 2018 consisted of 50% stock options, and 50% PSUs, with adjusted operating margin PSUs and TSR PSUs each comprising 50% of the PSU award.

Performance Share Units

The TSR PSUs granted in 2018 will be paid out in shares of Baxter stock based on the change in total Baxter TSR during the performance period ending on December 31, 2020 compared to its indexed peer group. The adjusted operating margin PSUs granted in 2018 will be paid out in shares of Baxter stock after the end of the same three-year performance period based on achievement of three annual adjusted operating margin targets. The company’s 2018 further adjusted operating margin performance of 17.2% exceeded the related adjusted operating margin target and the number of adjusted operating margin PSUs corresponding to the 2018 performance period have been awarded. The adjusted operating margin target for 2019 was established by the Board in February 2019. The adjusted operating margin target for 2020 will be established by the Board in the first quarter of 2020.

One third of the adjusted operating margin PSUs granted in 2018 will be awarded after the end of each applicable annual performance period. Notwithstanding these annual awards, none of the awarded adjusted operating margin PSUs will vest until the end of the third annual performance period. TSR PSUs granted in 2018 are scheduled to vest at the end of the three-year performance period.

Generally, if an officer ceases to be employed at Baxter before his or her PSUs vest, the PSUs will terminate on the date of termination unless the termination is due to death, disability, retirement or a change in control. If an officer who is retirement eligible (as defined below) retires after December 31, 2018, then the officer’s PSUs will continue to vest based upon their original vesting schedule. If an officer is terminated due to death or disability after December 31, 2018, the officer’s PSUs will be deemed to have been earned at 100% of target and paid out within 60 days of the death or disability termination date. See “—Potential Payments Upon Termination or Following a Change in Control” for a discussion of the impact of a change of control transaction on outstanding PSUs. An individual is retirement eligible if he or she is at least 65 years of age, or at least 55 years of age with at least ten years of service.

Stock Options

Each named executive officer received a stock option grant in connection with the company’s annual equity award process in March 2018.

All stock options granted to named executive officers in 2018 vest one-third per year over a three-year period, starting on the first anniversary of the grant date. The exercise price of each stock option granted by Baxter to its executive officers under the company’s incentive compensation programs is the closing price of Baxter’s common stock on the grant date. Generally, if an officer ceases to be employed at Baxter before his or her stock options vest, these options will expire on the date such officer’s employment is terminated unless the termination is due to death, disability, retirement or a change in control. If an officer who is retirement eligible (as defined below) retires after December 31, 2018, then the officer’s stock options will continue to vest based upon their original vesting schedule and expire on the fifth anniversary of the termination date. If an officer is terminated due to death or disability after December 31, 2018, the officer’s options will vest immediately and expire five years later. Except as discussed above, each of these options expires on the ten-year anniversary of the grant date. These grants are reflected in the “All Other Option Awards: Number of Securities Underlying Options” column in the 2018 Grants of Plan-Based Awards table above. See “—Potential Payments Upon Termination or Following a Change in Control” for a discussion of the impact of a change of control transaction on outstanding stock options.

 

 

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50

                  Executive Compensation
 

 

Certain Employment Arrangements

Almeida Offer Letter

Mr. Almeida’s offer letter, dated as of October 28, 2015, provides for an annual base salary of $1,300,000. Mr. Almeida has not received a salary increase since he was appointed to his current position effective January 1, 2016. He is eligible to participate in Baxter’s officer bonus and long-term incentive programs at a level commensurate with his position as Chief Executive Officer as determined by the independent directors of the Board, and to receive benefits to the same extent and on the same terms as those benefits provided to other senior executives, such as health, disability, insurance and retirement benefits. The offer letter also provides for severance equal to two years’ base salary and target bonus in the event of an involuntary termination without cause or termination with good reason within five years of his hire date. In addition to these benefits, in accordance with the terms of his change of control agreement, Mr. Almeida is eligible for certain payments in the event of his termination for good reason or termination without cause following a change in control. For more information about these payments, please see “—Potential Payments Upon Termination or Following a Change in Control.” Mr. Almeida also is subject to certain restrictive covenants, including non-competition, non-solicitation of customers, suppliers and employees and non-disparagement.

Non-Compete / Non-Solicit Agreements; Equity Clawback Provision

Effective in 2017, long term incentive plan participants, including named executive officers, were required to execute updated non-competition, non-solicitation and confidentiality agreements (Non-Competition Agreement). In addition, each annual equity grant since 2017 contains an equity clawback provision in the event that a participant violates the terms of his or her Non-Competition Agreement after leaving Baxter. In this event, all unvested awards (including awards that would otherwise have vested if the individual were retirement eligible) are terminated. Additionally, all awards that vested within the 12 months prior to termination that have not otherwise been sold or exercised are cancelled and any gain from the sale or exercise of any award that vested within the 12 months prior to termination is subject to recoupment by Baxter.

 

 

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51

 

 

The following table summarizes equity awards outstanding as of December 31, 2018.

Outstanding Equity Awards at 2018 Fiscal Year-End

 

    Option Awards           Stock Awards  
Name  

Number of
Securities
Underlying
Unexercised
Options (#)

Exercisable

   

Number of
Securities
Underlying
Unexercised
Options (#)

Unexercisable(1)

   

Option
Exercise
Price

($)

    Option
Expiration
Date
          

Number of
Shares or
Units of
Stock
That
Have Not
Vested

(#)(2)

   

Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested

($)(2)

   

Performance
Period and

PSU
Type(3)(4)

   

Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested

(#)(3)(4)

   

Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested

($)(3)(4)

 

Mr. Almeida

 

 

480,000

 

 

 

240,000

 

 

 

37.25

 

 

 

10/28/2025

 

         

 

105,302

 

 

 

6,930,978

 

 

 

2015 - 2018 

(T) 

 

 

130,176

 

 

 

8,568,184

 

 

 

178,253

 

 

 

356,506

 

 

 

50.77

 

 

 

3/2/2027

 

                         

 

2017 - 2019 

(T) 

 

 

102,345

 

 

 

6,736,348

 

         

 

373,435

 

 

 

66.31

 

 

 

3/1/2028

 

                         

 

2018 - 2020 

(T) 

 

 

37,833

 

 

 

2,490,168