DEF 14A 1 c23034ddef14a.htm DEFINITIVE PROXY STATEMENT def14a
 

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   þ
  Filed by a Party other than the Registrant   o
 
  Check the appropriate box:

  o   Preliminary Proxy Statement
  o   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  þ   Definitive Proxy Statement
  o   Definitive Additional Materials
  o   Soliciting Material Pursuant to §240.14a-12

ZIMMER HOLDINGS, 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):

  þ   No fee required.
  o   Fee computed on table below per Exchange Act Rules 14a-6(i)(1) 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:


        o   Fee paid previously with preliminary materials.


        o   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:


SEC 1913 (02-02) Persons who potentially are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.


 

(ZIMMER LOGO)
 
ZIMMER HOLDINGS, INC.
345 East Main Street
Warsaw, Indiana 46580
 
March 20, 2008
 
Dear Stockholder:
 
You are cordially invited to attend the 2008 Annual Meeting of Stockholders of Zimmer Holdings, Inc., which will be held at 9:00 a.m. on Monday, May 5, 2008, at the New York Marriott East Side Hotel, 525 Lexington Avenue at 49th Street, New York, New York.
The notice of meeting and the proxy statement describe the business to be conducted at the meeting and provide other information that you should know when you vote your shares. Following the required business meeting we will report on the company’s operations.
Pursuant to the new rules recently adopted by the Securities and Exchange Commission, we are providing access to our proxy materials via the Internet. On or about March 20, 2008, we will mail a Notice of Internet Availability of Proxy Materials (the “Notice”) to certain stockholders of record and beneficial holders, and on or about the same date we will mail a printed copy of the proxy statement and a proxy card to stockholders who have requested to receive them. On the mailing date of the Notice, all stockholders and beneficial holders will have the ability to access all of the proxy materials including the proxy statement.
It is important that your shares be represented whether or not you attend the meeting. Registered stockholders can vote their shares via the Internet or by using a toll-free telephone number. Instructions for using these convenient services appear on the Notice and the proxy card and in the proxy statement. If you received a printed copy of the proxy materials, you can also vote your shares by marking your votes on the proxy card, signing and dating it and mailing it promptly using the envelope provided.
We urge you to let us know your feelings about the company or to bring a particular matter to our attention. For those stockholders receiving a printed copy of the proxy materials, we have provided space on the proxy card for comments. If you received a Notice or hold your shares through an intermediary, please feel free to write directly to us.
 
-s- David C. Dvorak
 
David C. Dvorak
President and
Chief Executive Officer


 

(ZIMMER LOGO)
 
Zimmer Holdings, Inc.
345 East Main Street
Warsaw, Indiana 46580
 
 
NOTICE OF ANNUAL MEETING
OF STOCKHOLDERS
 
 
 
TIME AND DATE 9:00 a.m., Eastern Time, on Monday, May 5, 2008
 
PLACE New York Marriott East Side Hotel
525 Lexington Avenue at 49th Street
New York, New York
 
ITEMS OF BUSINESS
 (1) To elect four members of the Board of Directors for one-year terms.
 
 (2) To ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2008.
 
 (3) To approve the Amended Zimmer Holdings, Inc. Executive Performance Incentive Plan.
 
 (4) To approve proposed amendments to our Restated Certificate of Incorporation to eliminate super-majority voting requirements.
 
 (5) To transact such other business as may properly come before the meeting and any adjournment or postponement.
 
RECORD DATE You can vote if you are a stockholder of record on March 6, 2008.
 
ANNUAL REPORT Our 2007 Annual Report, which is not a part of the proxy solicitation material, is enclosed.
 
PROXY VOTING Your vote is important, regardless of the number of shares you own. If you do not attend the meeting to vote in person, your vote will not be counted unless a proxy representing your shares is presented at the meeting. To ensure that your shares will be voted at the meeting, please vote in one of these ways:
 
 (1) Go to the website shown on your proxy card or the Notice of Internet Availability of Proxy Materials and vote via the Internet;
 
 (2) Use the telephone number shown in the proxy statement and on your proxy card (this call is toll-free in the United States); or
 
 (3) If you received a printed copy of the proxy card by mail, mark, sign, date and promptly return your proxy card in the postage-paid envelope.
 
If you do attend the meeting, you may revoke your proxy and vote by ballot.
 
By Order of the Board of Directors
 
 
Chad F. Phipps
Senior Vice President, General Counsel and Secretary
 
March 20, 2008


 

 
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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

(ZIMMER LOGO)
 
ZIMMER HOLDINGS, INC.
 
 
This proxy statement and accompanying proxy are being provided to stockholders on or about March 20, 2008 in connection with the solicitation by the Board of Directors of Zimmer Holdings, Inc. (“Zimmer,” “we,” “us,” “our” or the “company”) of proxies to be voted at the 2008 annual meeting on May 5, 2008.
 
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING
 
 
Why did I receive a Notice of Internet Availability of Proxy Materials?
 
Instead of initially mailing a printed copy of the proxy materials to each stockholder, we may now furnish proxy materials to our stockholders via the Internet under the new e-proxy rules adopted by the Securities and Exchange Commission. On or about March 20, 2008, we mailed a Notice of Internet Availability of Proxy Materials (the “Notice”) to certain stockholders of record and beneficial holders, and we mailed a printed copy of the proxy materials to stockholders who had so requested. If you received a Notice by mail, you will not receive a printed copy of the proxy materials unless you request such a copy in the manner described in the Notice. The Notice also instructs you as to how you may access and review this proxy statement and our 2007 Annual Report, and how you may submit your proxy to vote at the annual meeting.
This proxy statement, the form of proxy and voting instructions are being made available to our stockholders on or about March 20, 2008 at www.proxyvote.com. Our 2007 Annual Report, including financial statements, for the year ended December 31, 2007 is being made available at the same time and by the same method. The 2007 Annual Report is not to be considered as part of the proxy solicitation materials or as having been incorporated by reference.
 
Who is entitled to vote at the annual meeting?
 
Holders of record of our $0.01 par value common stock at the close of business on March 6, 2008 are entitled to vote at the meeting. As of that date, there were 232,619,700 shares of common stock outstanding and entitled to vote. We are soliciting proxies on behalf of the Board of Directors to give all stockholders who are entitled to vote on the matters that come before the meeting the opportunity to do so whether or not they attend the meeting in person.
 
What will stockholders vote on at the meeting?
 
Four items:
 
    election of directors
 
    ratification of the appointment of our independent registered public accounting firm
 
    the approval of the Amended Zimmer Holdings, Inc. Executive Performance Incentive Plan
 
    a management proposal to amend our Restated Certificate of Incorporation to eliminate super-majority voting requirements
 
Will there be any other items of business on the agenda?
 
We do not expect any other items of business because the deadline for stockholder proposals and nominations has already passed. Nonetheless, in case there is an unforeseen need, the accompanying proxy gives discretionary authority to the persons


 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

named on the proxy with respect to any other matters that might be brought before the meeting. Those persons intend to vote that proxy in accordance with their best judgment.
 
What are the recommendations of the Board of Directors on how I should vote my shares?
 
The Board of Directors recommends that you vote your shares as follows:
 
    “FOR” the election of the four nominees as directors;
 
    “FOR” ratification of the appointment of our independent registered public accounting firm;
 
    “FOR” approval of the Amended Zimmer Holdings, Inc. Executive Performance Incentive Plan; and
 
    “FOR” approval of the proposed amendments to our Restated Certificate of Incorporation to eliminate super-majority voting requirements.
 
What is the difference between a “stockholder of record” and a “beneficial holder”?
 
These terms describe how your shares are held. If your shares are registered directly in your name with The Bank of New York, our transfer agent, you are a “stockholder of record”. If your shares are held in the name of a bank, broker, trust or other nominee as custodian, you are a “beneficial holder”.
 
What are my voting rights?
 
Holders of our common stock are entitled to one vote per share.
 
How do I vote by proxy?
 
If you are a stockholder of record, we encourage you to vote via the Internet or by telephone. Internet voting information is provided on the Notice and the proxy card. You may vote by touchtone telephone by calling 1 (800) 690-6903. You will need to have the Notice or, if you received a printed copy of the proxy materials, your proxy card or voting instruction card, available when voting via the Internet or by telephone. These methods are convenient and save us significant postage and processing expense. In addition, when you vote via the Internet or by telephone prior to the meeting date, your vote is recorded immediately and there is no risk that postal delays will cause your vote to arrive late and therefore not be counted.
If you are a stockholder of record and you received a printed copy of the proxy materials, you may vote by marking your proxy card, dating and signing it, and mailing it in the postage-paid envelope. The shares represented will be voted according to your directions. If your proxy card is signed and returned without specifying a vote or an abstention on any proposal, it will be voted according to the recommendation of the Board of Directors on that proposal.
If you are a beneficial holder, you must provide instructions on voting to your bank, broker, trust or other nominee holder.
 
How do I vote in person?
 
Either an admission ticket or proof of ownership of our common stock, as well as a form of personal identification, must be presented in order to be admitted to the meeting. If you are a stockholder of record and received a Notice, your Notice is your admission ticket. If you are a stockholder of record and received a printed copy of the proxy materials, you must bring the admission ticket portion of your proxy card to be admitted to the meeting. If you are a beneficial holder and wish to vote in person at the meeting, you must obtain from your bank, broker, trust or other nominee holder a legal proxy issued in your name and present it to the inspectors of election with your ballot to be able to vote at the meeting. However, we encourage you to vote by proxy card, by telephone, or via the Internet even if you plan to attend the meeting.
 
How do I vote my shares in the 401(k) plan?
 
If you participate in the Zimmer Holdings, Inc. Savings and Investment Program or the Zimmer Puerto Rico Savings and Investment Program, you may instruct the plan trustee on how to vote your shares by mail, by telephone or via the Internet as described above. Your plan trustee will vote the shares credited to your plan account in accordance with your voting instructions. The trustee votes the shares on your behalf because you are the beneficial holder, not the record holder, of the shares credited to your account. The trustee will vote the plan shares for which it does not receive voting instructions in the same proportion as the shares for which it received voting instructions.
 
What can I do if I change my mind after I vote my shares?
 
If you are a stockholder of record, you may revoke your proxy at any time before it is voted at the meeting by: (1) giving timely written notice of the revocation to our Corporate Secretary, or (2) submitting a later-dated vote in person at the meeting,


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

via the Internet, by telephone or by mail. If you are a beneficial holder, you may submit new voting instructions by contacting your bank, broker, trust or other nominee holder. You may also vote in person at the annual meeting if you obtain a legal proxy as described above.
 
What vote is required to approve each proposal?
 
Directors receiving the majority of votes cast (where the number of shares voted “for” a director exceeds the number of shares voted “against” the director) will be elected, provided that if the number of nominees exceeds the number of directors to be elected (a situation we do not anticipate), the directors will be elected by a plurality of the votes cast. Ratification of the selection of our independent registered public accounting firm and approval of the Amended Zimmer Holdings, Inc. Executive Performance Incentive Plan each requires the affirmative vote of the majority of the shares of common stock present or represented by proxy. Approval of the proposed amendments to our Restated Certificate of Incorporation requires the affirmative vote of 80% of the outstanding shares of common stock.
 
What effect do abstentions and broker non-votes have?
 
Shares not present at the meeting and shares voting “abstain” have no effect on the election of directors. For all other proposals, abstentions are treated as shares present or represented and voting, so abstaining has the same effect as a vote “against” the proposal. Broker non-votes on a proposal are not counted or deemed to be present or represented for the purpose of determining whether stockholders have approved that proposal.
 
May I give my proxy to someone other than the individuals listed on the proxy card?
 
If you are a registered stockholder and wish to give your proxy to someone other than the individuals named on the proxy card, you may do so by crossing out the names appearing on the proxy card and inserting the name of another person. The person you have designated on the proxy card must present the signed card at the meeting.
 
Who tabulates the votes?
 
Representatives of Broadridge Financial Solutions, Inc. will tabulate the votes and act as independent inspectors of election.
 
Who pays the cost of this proxy solicitation?
 
We will pay the costs of this solicitation. Our employees may solicit proxies on behalf of the Board of Directors by mail, telephone, facsimile, electronic transmission and personal solicitation. In addition, we have retained The Altman Group, Inc. to assist in soliciting proxies for a fee of $6,000, plus out-of-pocket expenses. We will, upon request, reimburse brokerage firms and others for their reasonable expenses incurred for forwarding solicitation material to beneficial holders of stock. Questions concerning proxy voting or process should be directed to The Altman Group, Inc. via telephone at 1 (800) 499-8419 (this call is toll-free in the United States).
 
Is there a list of stockholders entitled to vote at the annual meeting?
 
A list of stockholders entitled to vote at the meeting will be available at the meeting and for ten days prior to the meeting, between the hours of 8:00 a.m. and 5:00 p.m. Eastern Time, at our offices at 345 East Main Street, Warsaw, Indiana. If you would like to view the stockholder list, please contact our Corporate Secretary to schedule an appointment.
 
PRINCIPAL STOCKHOLDERS
 
The following table sets forth certain information concerning each person (including any group) known to us to beneficially own more than five percent (5%) of our common stock as of March 6, 2008. Unless otherwise noted, shares are owned directly or indirectly with sole voting and investment power.
 
                 
    Total Number of
    Percent
 
Name and Address of Beneficial Owner
  Shares Owned     of Class  
 
Barclays Global Investors, NA(1)
    13,471,967       5.7 %
45 Fremont Street
San Francisco, California 94105
               
(1)  Based solely on information provided by Barclays Global Investors, NA and certain affiliates in a Schedule 13G filed with the Securities and Exchange Commission on February 5, 2008. Barclays Global Investors, NA and its affiliates possess sole power to vote or to direct the vote of 11,682,148 shares and sole power to dispose or to direct the disposition of 13,471,967 shares. Barclays Global Investors, NA is a bank and has


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

sole voting power over 7,831,074 shares and sole dispositive power over 9,388,844 shares. Barclays Global Fund Advisors is an investment adviser and has sole voting and dispositive power over 1,801,809 shares. Barclays Global Investors, Ltd is a bank and has sole voting power over 1,417,641 shares and sole dispositive power over 1,649,690 shares. Barclays Global Investors Japan Trust and Banking Company Limited is a bank and does not have sole or shared voting or dispositive power over any shares. Barclays Global Investors Japan Limited is an investment adviser and has sole voting and dispositive power over 469,333 shares. Barclays Global Investors Canada Limited is an investment adviser and has sole voting and dispositive power over 162,291 shares. Barclays Global Investors Australia Limited and Barclays Global Investors (Deutschland) AG are investment advisers and do not have sole or shared voting or dispositive power over any shares.
 
SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS
 
The following table sets forth, as of January 2, 2008, beneficial ownership of shares of our common stock by each current director, each of the executives named in the Summary Compensation Table and all current directors and executive officers as a group. Unless otherwise noted, such shares are owned directly or indirectly with sole voting and dispositive power.
 
                                 
    Total
  Shares
  Deferred
  Percent
    Shares
  Acquirable in
  Share
  of
Name
  Owned(1)   60 Days(2)   Units(3)   Class
 
Stuart M. Essig
    4,918       2,380       2,538       *  
Larry C. Glasscock
    59,542 (4)     54,759       4,743       *  
Robert A. Hagemann
    (5)                  
Arthur J. Higgins
    818             818       *  
John L. McGoldrick
    66,872       50,000       5,540       *  
Cecil B. Pickett, Ph.D. 
    (5)                  
Augustus A. White, III, M.D., Ph.D. 
    4,498             4,498       *  
David C. Dvorak
    340,579       308,274             *  
James T. Crines
    170,036       146,221             *  
Bruno A. Melzi
    314,413       245,036             *  
Sheryl L. Conley
    337,854       333,774             *  
Stephen H.L. Ooi
    236,586       221,731             *  
J. Raymond Elliott(6)
    1,235,859       1,169,987             *  
Sam R. Leno(7)
    27,458                   *  
All current directors and executive officers as a group (16 persons)
    1,778,532 (8)     1,600,145 (8)     18,137 (8)     *  
 *  Less than 1.0%
(1)  Includes direct and indirect ownership of shares, stock options that are currently exercisable and stock options that will be exercisable within 60 days of January 2, 2008, deferred share units and the following restricted shares, which are subject to vesting requirements: Mr. Dvorak – 27,532; Mr. Crines – 14,599; and all directors and executive officers as a group – 42,131. Does not include stock options or restricted stock units, or RSUs, held by executive officers that vest more than 60 days after January 2, 2008. Also does not include RSUs held by directors that are vested but subject to mandatory deferral of settlement until May 1, 2009 or later.
(2)  Includes stock options that are currently exercisable and stock options that will be exercisable within 60 days of January 2, 2008.
(3)  Amounts credited to directors’ accounts in the Restated Zimmer Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors as deferred share units that will be paid in shares of our common stock within 60 days after cessation of the individual’s service as a director.
(4)  Includes 40 shares held in a trust with respect to which Mr. Glasscock shares voting authority with the trustee.
(5)  Mr. Hagemann and Dr. Pickett joined the Board of Directors effective March 13, 2008.
(6)  Mr. Elliott resigned from the Board of Directors and retired as our employee effective November 30, 2007.
(7)  Mr. Leno resigned effective May 4, 2007.
(8)  Excludes shares owned by Messrs. Elliott and Leno.
 
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
Under Section 16(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, our directors, executive officers and the beneficial holders of more than 10% of our common stock are required to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Based on our records and other information, we believe that during 2007 all applicable Section 16(a) filing requirements were met.
 
CORPORATE GOVERNANCE
 
Our business is managed under the direction of the Board of Directors. The Board has responsibility for establishing broad corporate policies and for our overall performance.


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

Policies on Corporate Governance
 
We are committed to maintaining the highest standards of business conduct and corporate governance, which we believe are essential to running our business efficiently, serving stockholders well and maintaining our integrity in the marketplace. We have adopted a Code of Business Conduct that applies to all directors, officers and employees and a Code of Ethics for Chief Executive Officer and Senior Financial Officers. The Board of Directors has adopted Corporate Governance Guidelines, which, in conjunction with our Restated Certificate of Incorporation, as amended, Restated By-Laws, Board committee charters and key Board policies, form the framework for our governance. The current version of the Code of Business Conduct, the Code of Ethics for Chief Executive Officer and Senior Financial Officers, the Board’s Corporate Governance Guidelines and the charters for each of the Audit Committee, Compensation and Management Development Committee, Corporate Governance Committee and Science and Technology Committee, as well as the Board’s policies on auditor ratification and stockholder rights plans, are available in the Investor Relations/Corporate Governance section of our website, www.zimmer.com, and will be provided in print without charge upon written request to our Corporate Secretary at the address shown on the cover page of this proxy statement. We intend to post on our website any substantive amendment to, or waiver from, the Code of Ethics for Chief Executive Officer and Senior Financial Officers or a provision of the Code of Business Conduct that applies to any of our directors or executive officers. The Board regularly reviews corporate governance developments and modifies its Corporate Governance Guidelines, committee charters and key practices as warranted.
During 2007, the Board approved an amendment to our Restated Certificate of Incorporation to provide that, beginning with this annual meeting, the directors whose terms are expiring will be elected for one-year terms, with each director to hold office until such person’s successor is duly elected and qualified. In connection with Mr. Elliott’s resignation as Chairman of the Board effective November 30, 2007, the Board also approved an amendment to our Restated By-Laws to provide for a separate Chairman of the Board who does not also serve as our Chief Executive Officer. Mr. McGoldrick was appointed non-executive Chairman effective December 1, 2007.
 
Director Independence
 
As permitted by the rules of the New York Stock Exchange, the Board has adopted categorical standards to assist it in making determinations of director independence. These standards incorporate, and are consistent with, the definition of “independent” contained in the New York Stock Exchange listing standards. These standards are set forth in Appendix A to this proxy statement and are also included in the Board’s Corporate Governance Guidelines, which are available on our website as described above. The Board has determined that each of our non-employee directors, Stuart M. Essig, Larry C. Glasscock, Robert A. Hagemann, Arthur J. Higgins, John L. McGoldrick, Cecil B. Pickett, Ph.D. and Augustus A. White, III, M.D., Ph.D., meets these standards and is independent. The Board has determined that David C. Dvorak, who is an employee, is not independent.
In making its determination with respect to Mr. Essig, the Board considered his position as President and Chief Executive Officer of Integra LifeSciences Holdings Corporation, or Integra, a medical device company from which we purchase certain dental products. During 2007, the amount we paid Integra exceeded $1,000,000 but represented less than 2.00% of Integra’s gross revenues. After reviewing the terms of these transactions and the relationship that Mr. Essig has with Integra, the Board determined that he does not have a direct or indirect material interest in the transactions and that our business relationship with Integra does not diminish the ability of Mr. Essig to exercise his independent judgment on issues affecting our business.
 
Majority Vote Standard for Election of Directors
 
In September 2006, the Board approved an amendment to our Restated By-Laws to require directors to be elected by the majority of the votes cast with respect to that director in uncontested elections (the number of shares voted “for” a director must exceed the number of votes cast “against” that director). In a contested election (a situation in which the number of nominees exceeds the number of directors to be elected), the standard for election of directors will be a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors. If a nominee who is serving as a director is not elected at the annual meeting, under Delaware law the director would continue to serve on the Board as a “holdover director.” However, under our Restated By-Laws, any director who fails to be elected must offer to tender his or her resignation to the Board. The Corporate Governance Committee would then make a recommendation to the Board whether to accept or reject the resignation, or whether other action should be taken. The Board will act on the Corporate Governance Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date the election results are certified. The director who tenders his or her resignation will not participate in the Board’s decision. If a nominee who was not already serving as a director is not elected at the annual meeting, under Delaware law that nominee would not become a director and would not serve on the Board as a “holdover director.” In 2008, all nominees for election as directors are currently serving on the Board.


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

Nominations for Directors
 
The Corporate Governance Committee will consider director nominees recommended by stockholders. A stockholder who wishes to recommend a director candidate for consideration by the Corporate Governance Committee should send such recommendation to our Corporate Secretary at the address shown on the cover page of this proxy statement, who will then forward it to the committee. Any such recommendation should include a description of the candidate’s qualifications for board service, the candidate’s written consent to be considered for nomination and to serve if nominated and elected, and addresses and telephone numbers for contacting the stockholder and the candidate for more information. A stockholder who wishes to nominate an individual as a director candidate at the annual meeting of stockholders, rather than recommend the individual to the Corporate Governance Committee as a nominee, must comply with the advance notice requirements set forth in our Restated By-Laws (see “2009 Proxy Proposals” for more information on these procedures).
In considering candidates for the Board, the Corporate Governance Committee considers the entirety of each candidate’s credentials and does not have any specific minimum qualifications that must be met by a committee-recommended nominee. The committee is guided by the following basic selection criteria for all nominees: independence; highest character and integrity; experience and understanding of strategy and policy-setting; reputation for working constructively with others; and sufficient time to devote to Board matters. The committee also gives consideration to diversity, age, international background and experience and specialized expertise in the context of the needs of the Board as a whole. During the past year, we paid a fee to a third-party search firm to assist the committee in identifying and evaluating potential director candidates. One of the candidates identified by the firm, Arthur J. Higgins, joined the Board of Directors effective February 12, 2007. Two additional candidates identified by the firm, Robert A. Hagemann and Cecil B. Pickett, Ph.D., joined the Board of Directors effective March 13, 2008.
 
Stockholder Communication with the Board
 
The Board has implemented a process whereby our stockholders may send communications to the Board’s attention. Any stockholder desiring to communicate with the Board, or one or more specified members thereof, should communicate in a writing addressed to Zimmer Holdings, Inc., Board of Directors, c/o Corporate Secretary, at the address shown on the cover page of this proxy statement. The Board has instructed our Corporate Secretary to promptly forward all such communications to the specified addressees thereof.
 
Certain Relationships and Related Person Transactions
 
On an annual basis, each director and executive officer is obligated to complete a director and officer questionnaire which requires disclosure of any transactions with us in which the director or executive officer, or any member of his or her immediate family, has an interest. Under our Audit Committee’s charter, which is available on our website at www.zimmer.com, our Audit Committee must review and approve all related person transactions in which any executive officer, director, director nominee or more than 5% stockholder of the company, or any of their immediate family members, has a direct or indirect material interest. The Audit Committee may not approve a related person transaction unless (1) it is in or not inconsistent with our best interests and (2) where applicable, the terms of such transaction are at least as favorable to us as could be obtained from an unrelated third party. No related person transaction in an amount exceeding $120,000 occurred during 2007.
Under our Code of Business Conduct, which is available on our website at www.zimmer.com, our Compliance Officer or an attorney in our Legal Department is charged with reviewing any conflict of interest involving any other employee.
 
MEETINGS AND COMMITTEES OF THE BOARD
 
 
Meetings and Attendance
 
The Board meets on a regularly scheduled basis during the year to review significant developments affecting us and to act on matters requiring Board approval. It also holds special meetings when an important matter requires Board action between scheduled meetings. Members of senior management regularly attend Board meetings to report on and discuss their areas of responsibility. Directors are also expected to attend the annual meeting of stockholders. All of the directors then in office attended the 2007 annual meeting. In 2007, the Board of Directors held 14 meetings and committees of the Board held a total of 33 meetings. Each director then in office attended more than 75% of the total meetings of the Board of Directors and each of the committees on which he served during 2007.


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

Executive Sessions of and Communication with Non-Management Directors
 
Non-management directors meet in executive sessions without management present upon the adjournment of every regularly scheduled meeting of the Board and at other times they determine. Prior to December 2007, the director who presided at these meetings rotated session-by-session among the non-management directors in alphabetical order of their last names. Beginning in December 2007, Mr. McGoldrick, in his capacity as non-executive Chairman, presides at these meetings of non-management directors.
The Board has adopted a method for communicating directly with the non-management directors and has designated Stuart M. Essig to receive such communications. Interested parties may contact Mr. Essig via e-mail at stuart.essig@zimmer.com.
 
Committees of the Board
 
Our Restated By-Laws provide that the Board may delegate responsibility to committees. During 2007, the Board had four standing committees: an Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act, a Compensation and Management Development Committee, a Corporate Governance Committee and a Science and Technology Committee. The membership of each of the Audit Committee, the Compensation and Management Development Committee and the Corporate Governance Committee is composed entirely of independent directors. In addition, the members of the Audit Committee meet the heightened standards of independence for audit committee members required by Securities and Exchange Commission rules and New York Stock Exchange listing standards. The membership of the Science and Technology Committee is composed of two independent directors and one employee representative, and the committee works together with an Advisory Board of Science and Technology.
The table below shows the current membership of each Board committee and the number of meetings held during 2007.
 
                 
        Compensation
       
        and
      Science
        Management
  Corporate
  and
Name
  Audit   Development   Governance   Technology
 
Stuart M. Essig
  X   Chair   X    
Larry C. Glasscock
  Chair   X   X    
Robert A. Hagemann(1)
               
Arthur J. Higgins
  X   X   X    
John L. McGoldrick(2)
      X   Chair   X
Cecil B. Pickett, Ph.D.(1)
               
Augustus A. White, III, M.D., Ph.D. 
      X   X   Chair
2007 Meetings
  13   9   10   1
(1)  Mr. Hagemann and Dr. Pickett joined the Board of Directors effective March 13, 2008. At the meeting of directors to be held following the annual meeting, the Board will reappoint members of the Board, or appoint in Mr. Hagemann and Dr. Pickett’s case, to the four standing committees.
(2)  Mr. McGoldrick was appointed our non-executive Chairman of the Board effective December 1, 2007.
 
Audit Committee.  The principal functions of the Audit Committee include:
 
 
    appointing, evaluating and, where appropriate, replacing our independent registered public accounting firm;
 
    pre-approving all auditing services and permissible non-audit services provided to us by our independent registered public accounting firm;
 
    reviewing with our independent registered public accounting firm and with management the proposed scope of the annual audit, past audit experience, our program for the internal examination and verification of our accounting records and the results of recently completed internal examinations;
 
    resolving disagreements between management and our independent registered public accounting firm regarding financial reporting; and
 
    reviewing major issues as to the adequacy of our internal controls.
The Board of Directors has determined that both Larry C. Glasscock and Stuart M. Essig qualify as “audit committee financial experts” as defined by the rules of the Securities and Exchange Commission. Stockholders should understand that this designation is a Securities and Exchange Commission disclosure requirement related to these directors’ experience and understanding with respect to certain accounting and auditing matters. The designation does not impose upon these directors any duties, obligations or liabilities that are greater than are generally imposed on them as members of the Audit Committee and the Board, and their designation as audit committee financial experts pursuant to this Securities and Exchange Commission requirement does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board.


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

The report of the Audit Committee appears on pages 8 and 9.
 
Compensation and Management Development Committee.  The duties of the Compensation and Management Development Committee include:
 
    administering our annual incentive, stock option and long-term incentive plans;
 
    reviewing and making recommendations to the Board with respect to incentive compensation and equity-based plans;
 
    adopting and reviewing our management development programs and procedures;
 
    approving compensation of executive officers; and
 
    discussing with management the Compensation Discussion and Analysis required by Securities and Exchange Commission regulations and, if appropriate, recommending its inclusion in our Annual Report on Form 10-K and proxy statement.
None of the members of the Compensation and Management Development Committee during 2007 or as of the date of this proxy statement is or has been our officer or employee or had any relationship requiring disclosure under Item 404 of Regulation S-K of the Exchange Act. None of our executive officers served on the compensation committee or board of any company that employed any member of the Compensation and Management Development Committee or the Board or otherwise under circumstances requiring disclosure under Item 404 of Regulation S-K.
The report of the Compensation and Management Development Committee appears on page 13.
 
Corporate Governance Committee.  The duties of the Corporate Governance Committee include:
 
 
    developing and recommending to the Board criteria for selection of non-employee directors;
 
    recommending director candidates to the Board;
 
    periodically reviewing both employee and non-employee director performance;
 
    periodically reassessing the Board’s Corporate Governance Guidelines and recommending any proposed changes to the Board for approval; and
 
    periodically reviewing, in cooperation with the Compensation and Management Development Committee, the form and amount of non-employee director compensation and recommending any proposed changes to the Board for approval.
 
Science and Technology Committee.  The duties of the Science and Technology Committee include:
 
 
    advising the Board on matters involving our new science and advanced technology programs, including major internal projects, interactions with academic and independent research organizations and the acquisition of technologies; and
 
    reviewing and recommending to the Board major technology positions and strategies relative to emerging concepts of therapy, new trends in healthcare, and changing market requirements.
 
AUDIT COMMITTEE REPORT
 
The Audit Committee is responsible for monitoring the integrity of the company’s financial statements, the qualifications, performance and independence of the independent registered public accounting firm, the performance of the company’s internal audit function and compliance with certain legal and regulatory requirements. The committee is directly responsible for the appointment, compensation, retention and oversight of the work of the independent registered public accounting firm.
Management is responsible for the financial reporting process, including the system of internal control, for the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States and for management’s report on internal control over financial reporting. The independent registered public accounting firm is responsible for auditing the consolidated financial statements and expressing an opinion as to their conformity with accounting principles generally accepted in the United States as well as rendering an opinion on the company’s internal control over financial reporting. The committee’s responsibility is to oversee and review the financial reporting process and to review and discuss management’s report on internal control over financial reporting. Committee members are not, however, professionally engaged in the practice of accounting or auditing and do not provide any expert or other special assurance as to such financial statements concerning compliance with laws, regulations or accounting principles generally accepted in the United States or as to the independence of the independent registered public accounting firm. The committee relies, without independent verification, on the information provided to it and on the representations made by management and the independent registered public accounting firm.
The committee held 13 meetings during 2007. The meetings were designed, among other things, to facilitate and encourage communication among the committee, management, the internal auditor and the independent registered public accounting firm, PricewaterhouseCoopers LLP, or PwC.


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

The committee discussed with the internal auditor and PwC the overall scope and plans for their respective audits. The committee met with the internal auditor and PwC, with and without management present, to discuss the results of their examinations and their evaluations of the company’s internal control over financial reporting. The committee reviewed and discussed compliance with Section 404 of the Sarbanes-Oxley Act of 2002, including consideration of the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard No. 5, An Audit of Internal Control over Financial Reporting That is Integrated With an Audit of Financial Statements.
The committee discussed major financial risk exposures with management and the steps management has taken to monitor and control such exposures, including risk assessment and risk management policies.
Management has represented to the committee that the consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States, and the committee has reviewed and discussed the consolidated financial statements with management and PwC. The committee reviewed and discussed with management, the internal auditor and PwC management’s report on internal control over financial reporting and PwC’s report on internal control over financial reporting. The committee also discussed with management and the internal auditor the process used to support certifications by the Chief Executive Officer and Chief Financial Officer that are required by the Securities and Exchange Commission and the Sarbanes-Oxley Act of 2002 to accompany periodic filings with the Securities and Exchange Commission and the processes used to support management’s report on internal control over financial reporting.
The committee also discussed with PwC all matters required to be discussed by that firm’s professional standards, including, among other things, matters related to the conduct of the audit of the consolidated financial statements and the matters required to be discussed by AU Section 380, Communication With Audit Committees, as adopted by the Public Company Accounting Oversight Board in Rule 3200 T.
PwC provided to the committee the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), as adopted by the Public Company Accounting Oversight Board in Rule 3600 T, and represented that PwC is independent from the company. The committee also discussed with PwC its independence from the company. When considering PwC’s independence, the committee considered if services PwC provided to the company beyond those rendered in connection with its audit and related reviews of the consolidated financial statements and the company’s internal control over financial reporting, were compatible with maintaining its independence. The committee concluded that the provision of such services by PwC has not jeopardized PwC’s independence.
Based on the reviews and discussions described above, and subject to the limitations on the committee’s role and responsibilities referred to above and in the charter of the Audit Committee, the committee recommended to the Board of Directors, and the Board approved, that the audited consolidated financial statements for the year ended December 31, 2007 be included in the Annual Report on Form 10-K for filing with the Securities and Exchange Commission.
The committee has also confirmed there have been no new circumstances or developments since their respective appointments to the Audit Committee that would impair any member’s ability to act independently.
 
Audit Committee
Larry C. Glasscock, Chair
Stuart M. Essig
Arthur J. Higgins


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

DIRECTORS AND NOMINEES
 
The Board of Directors has been divided into three classes whose terms expire at successive annual meetings. During 2007, our Restated Certificate of Incorporation was amended to provide that, beginning with this annual meeting, directors whose terms are expiring will be elected for one-year terms. As a result, four directors will be elected at the meeting to serve a term expiring in 2009. The nominees for director named below are currently our directors. Mr. Higgins was appointed a director by our full Board of Directors, effective February 12, 2007. Mr. Dvorak was appointed to serve on the Board of Directors, effective May 1, 2007, in connection with his appointment as our President and Chief Executive Officer. Mr. Hagemann and Dr. Pickett were each appointed a director by our full Board of Directors, effective March 13, 2008. After the election of four directors at the meeting, we will have eight directors, including the four directors whose present terms extend beyond the meeting. Listed first below are the nominees for election, followed by the directors whose terms expire in 2009 and 2010, with information including their principal occupations and other business affiliations, the year each was first elected as a director, the Board committee memberships of each and each director’s age.
 
 
     
(PHOTO)
  David C. Dvorak, Director Since 2007
President and Chief Executive Officer of the company since May 1, 2007. Prior to that, Mr. Dvorak served as Group President, Global Businesses and Chief Legal Officer of Zimmer from December 2005. From October 2003 to December 2005, Mr. Dvorak served as Executive Vice President, Corporate Services, Chief Counsel and Secretary, as well as Chief Compliance Officer. Mr. Dvorak was appointed Corporate Secretary in February 2003. He joined Zimmer in December 2001 as Senior Vice President, Corporate Affairs and General Counsel. Mr. Dvorak is a director of the Advanced Medical Technology Association, or AdvaMed, the medical device industry’s trade association. Age 44.
     
(PHOTO)   Robert A. Hagemann, Director Since 2008
Senior Vice President and Chief Financial Officer of Quest Diagnostics Incorporated, or Quest, since November 2003. Prior to that, Mr. Hagemann served as Vice President and Chief Financial Officer of Quest from August 1998. Mr. Hagemann joined a predecessor company, Corning Life Sciences, Inc., a subsidiary of Quest’s former parent, Corning Incorporated, in 1992, and held a variety of senior financial positions before being named Vice President and Corporate Controller of Quest in 1996. Prior to joining Corning, Mr. Hagemann was employed by Prime Hospitality, Inc. and Crompton & Knowles, Inc. in senior financial positions. He was also previously employed by Arthur Young & Co., a predecessor company to Ernst & Young. Mr. Hagemann holds a B.S. in Accounting from Rider University and an M.B.A. from Seton Hall University. Mr. Hagemann has not yet been assigned to any Board committees. Age 51.
     
(PHOTO)   Arthur J. Higgins, Director Since 2007
Chairman of the Board of Management of Bayer HealthCare AG since January 2006 and Chairman of the Bayer HealthCare Executive Committee since July 2004. Prior to joining Bayer Healthcare, Mr. Higgins served as Chairman, President and Chief Executive Officer of Enzon Pharmaceuticals, Inc. from 2001 to 2004. Prior to joining Enzon Pharmaceuticals, Mr. Higgins spent 14 years with Abbott Laboratories, most recently as President of the Pharmaceutical Products Division from 1998 to 2001. He is a member of the Board of Directors of the Pharmaceutical Research and Manufacturers of America (PhRMA), a member of the Council of the International Federation of Pharmaceutical Manufacturers and Associations (IFPMA) and President of the European Federation of Pharmaceutical Industries and Associations (EFPIA). Mr. Higgins graduated from Strathclyde University, Scotland and holds a B.S. in biochemistry. Board Committees: Audit Committee, Compensation and Management Development Committee and Corporate Governance Committee. Age 52.


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

     
(PHOTO)   Cecil B. Pickett, Ph.D., Director Since 2008
President, Research and Development of Biogen Idec Inc. since September 2006. Prior to joining Biogen Idec, Dr. Pickett held several senior R&D positions, most recently as a Corporate Senior Vice President of Schering Plough Corp. and President of Schering-Plough Research Institute. Prior to joining Schering-Plough, he held several senior R&D positions at Merck & Co. Dr. Pickett received his B.Sc. in biology from California State University at Hayward and his Ph.D. in cell biology from the University of California at Los Angeles. Dr. Pickett serves on the Board of Overseers at Tufts Medical School and the Board of Visitors at Columbia University Medical Center. He is also a member of the Institute of Medicine of The National Academy of Sciences. Dr. Pickett is a director of Biogen Idec. Dr. Pickett has not yet been assigned to any Board committees. Age 62.
     
 
     
(PHOTO)   Stuart M. Essig, Director Since 2005
President and Chief Executive Officer of Integra LifeSciences Holdings Corporation, or Integra, since December 1997. Prior to joining Integra, Mr. Essig supervised the medical technology practice at Goldman, Sachs & Co. as a managing director. Mr. Essig had ten years of experience at Goldman Sachs serving as a senior mergers and acquisitions advisor to a broad range of domestic and international medical technology, pharmaceutical and biotechnology clients. Mr. Essig holds an A.B. from the Woodrow Wilson School of Public and International Affairs at Princeton University and an M.B.A. and Ph.D. in Financial Economics from the University of Chicago, Graduate School of Business. Mr. Essig is a director of Integra, St. Jude Medical, Inc. and AdvaMed. Board Committees: Audit Committee, Compensation and Management Development Committee (Chair) and Corporate Governance Committee. Age 46.
     
     
(PHOTO)   Augustus A. White, III, M.D., Ph.D., Director Since 2001
Ellen and Melvin Gordon Professor of Medical Education, Professor of Orthopaedic Surgery, and former Master of the Oliver Wendell Holmes Society at the Harvard Medical School and Professor of Orthopaedic Surgery at the Harvard-MIT Division of Health Sciences and Technology; and Orthopaedic Surgeon-in-Chief, Emeritus, at the Beth Israel Deaconess Medical Center in Boston. Dr. White previously served as the Chief of Spine Surgery at Beth Israel and Director of the Daniel E. Hogan Spine Fellowship Program. He is a graduate of the Stanford University Medical School, holds a Ph.D. from the Karolinska Institute in Stockholm and an A.B. from Brown University, and graduated from the Advanced Management Program at the Harvard Business School. Dr. White is a director of Orthologic Corp. Board Committees: Compensation and Management Development Committee, Corporate Governance Committee and Science and Technology Committee (Chair). Age 71.
 
   
 
Continuing Directors Whose Present Terms Expire in 2010
     
(PHOTO)   Larry C. Glasscock, Director Since 2001
Chairman of WellPoint, Inc. since November 2005. Mr. Glasscock also served as President and Chief Executive Officer of WellPoint, Inc. from November 2004 (following the merger between Anthem, Inc. and WellPoint Health Networks Inc.) until his retirement from day-to-day operations in June 2007. Mr. Glasscock served as Chairman, President and Chief Executive Officer of Anthem, Inc. from May 2003 to November 2004 and served as President and Chief Executive Officer of Anthem, Inc. from July 2001 to May 2003. Mr. Glasscock is a director of WellPoint, Inc. and Sprint Nextel Corporation. Board Committees: Audit Committee (Chair), Compensation and Management Development Committee and Corporate Governance Committee. Age 59.
     


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

     
Continuing Directors Whose Present Terms Expire in 2010 (continued)
     
(PHOTO)   John L. McGoldrick, Director Since 2001 and Non-Executive Chairman since December 2007
Senior Vice President, External Strategy Development, International AIDS Vaccine Initiative since May 2006. Mr. McGoldrick served as Executive Vice President of Bristol-Myers Squibb Company, or Bristol-Myers Squibb, from October 2005 until his retirement in April 2006. He held the position of Executive Vice President and General Counsel of Bristol-Myers Squibb from January 2000 to October 2005. Prior to that, he held the position of Senior Vice President, General Counsel and President, Medical Devices Group from December 1998 to January 2000. Mr. McGoldrick is a graduate of Harvard College and the Harvard Law School. Board Committees: Compensation and Management Development Committee, Corporate Governance Committee (Chair) and Science and Technology Committee. Age 67.

 
PROPOSAL 1. ELECTION OF DIRECTORS
 
Four directors are to be elected at the meeting for one-year terms ending at the 2009 annual meeting. At the recommendation of the Corporate Governance Committee, the Board has nominated David C. Dvorak, Robert A. Hagemann, Arthur J. Higgins and Cecil B. Pickett, Ph.D. for election at this annual meeting. Unless proxy cards are otherwise marked, the persons named as proxies will vote all proxies received for the election of each of the nominees.
If a nominee is unable or unwilling to serve as a nominee at the time of the annual meeting, the persons named as proxies may vote for a substitute nominee designated by the Board to fill the vacancy or for the balance of the nominees, leaving a vacancy. Alternatively, the Board may reduce its size. The Board has no reason to believe that any of the nominees will be unwilling or unable to serve if elected as a director.
As previously reported, we and other major U.S. orthopaedic manufacturers settled an ongoing federal investigation into our financial relationships with consulting orthopaedic surgeons with the U.S. Attorney’s Office for the District of New Jersey in September 2007. Following the announcement of the settlement, two shareholder derivative actions were filed in Kosciusko Superior Court in Warsaw, Indiana in October 2007. The plaintiffs seek to maintain the actions against six of our current directors and two former directors. The plaintiffs claim, among other things, breaches of fiduciary duty by the individual defendants which allegedly allowed misconduct to occur, including illegal payments to doctors, and caused us financial harm, including the cost of our settlement with the federal government.
Our Restated Certificate of Incorporation obligates us to indemnify our officers and directors to the fullest extent permitted by Delaware law, provided that their conduct complied with certain requirements. We are obligated to advance defense costs to our directors, subject to the individual’s obligation to repay such amount if it is ultimately determined that the individual was not entitled to indemnification. In addition, our indemnity obligation can, under certain circumstances, include indemnifiable judgments, penalties, fines and amounts paid in settlement in connection with those actions. We did not advance any defense costs in 2007 to any of our current or former directors in connection with the derivative actions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” EACH OF THE FOUR NOMINEES FOR DIRECTOR. 


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

EXECUTIVE COMPENSATION
 
 
Compensation Committee Report
 
The Compensation and Management Development Committee of the Board of Directors consists of the five directors named below, each of whom meets the independence standards of the Board’s Corporate Governance Guidelines, the New York Stock Exchange listing standards and applicable securities laws.
We reviewed and discussed with management the Compensation Discussion and Analysis that follows this report. Based on our review and discussions with management, we recommended to the Board of Directors that the Compensation Discussion and Analysis be included in Zimmer’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and this proxy statement.
 
Compensation and Management Development Committee
 
Stuart M. Essig, Chairman
Larry C. Glasscock
Arthur J. Higgins
John L. McGoldrick
Augustus A. White, III, M.D., Ph.D.
 
Compensation Discussion and Analysis
 
Overview
 
This Compensation Discussion and Analysis supplements the more detailed information in the tables and narrative discussion that follows the tables. Our goal is to provide stockholders with a better understanding of our executive compensation practices and the decisions made concerning the compensation payable to our executive officers, including the persons named in the Summary Compensation Table, or the named executive officers, that appears on page 20.
The Board of Directors has delegated to the Compensation and Management Development Committee, which we refer to as the committee in this section of the proxy statement, key aspects of the Board’s oversight responsibilities with respect to the design and administration of our executive compensation program. The committee also approves compensation paid to our executive officers, including the named executive officers. The report of the committee appears above.
While our executive compensation practices and related plans were originally patterned on those of our former parent, and we still follow some of these legacy practices, our practices and plans have evolved and will continue to change as circumstances warrant. Our executive compensation practices are affected by the highly competitive nature of the orthopaedics industry and the location of our executive offices in Warsaw, Indiana. A number of the leading orthopaedic manufacturers in the world have significant operations in and around Warsaw, Indiana, which means that there are opportunities for experienced orthopaedic executives in this community. On the other hand, the fact that Warsaw, Indiana, is a small community in a predominantly rural area presents challenges to attracting executive talent from other industries and parts of the country.
Several major events had significant effects on our executive compensation for 2007, including the appointment of a new Chief Executive Officer, or CEO, and a new Chief Financial Officer, or CFO, in May. We discuss the compensation-related aspects of those decisions in more detail below under “– Compensation for New CEO and CFO.” In addition, the $169.5 million civil settlement payment we made to the federal government in the third quarter affected the level of cash incentive payouts for 2007.
 
Major Elements of Compensation
 
There are three major elements of our executive compensation program: base salary, annual cash incentives and equity-based incentives. On occasion, we establish special project incentives. Our retirement plans and welfare benefits are generally available to all employees, including executive officers, and we also provide a limited range of perquisites or other benefits.
Base Salaries.  We use base salary as a recruiting and retention tool and to recognize individual performance and responsibility through annual merit reviews and promotional increases.
Annual Cash Incentives.  We create opportunities each year for additional cash compensation that are tied to the achievement of annual performance objectives. We use our Executive Performance Incentive Plan, or EPIP, for this purpose. Each executive officer is eligible for an award opportunity in an amount based upon a percentage of his or her base salary. The executive officers believed to have the greatest responsibility for our overall performance in the coming year are assigned the highest percentages so that more of their total compensation is tied to achievement of objective performance measures.
The performance objectives used in the EPIP are established by the committee at the beginning of each year. In recent years, the committee has set specific goals for three performance measures – adjusted earnings per share (weighted at 50%),


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

consolidated revenue (weighted at 25%) and consolidated free cash flow (weighted at 25%) – derived from the operating plan approved by the Board of Directors for that year. This allocation is consistent with the committee’s belief that earnings per share is the performance measure that correlates most directly with stockholder value.
Actual payouts under the EPIP depend upon the extent to which we achieve the performance measure goals. Payouts generally range from 0% of a specified percentage of base salary if we fail to achieve at least 85% of the goal, to 200% of the specified percentage if we achieve 120% or more of the goal. Payouts cannot exceed two times the specified percentage of base salary. The level of payouts for 2007 was affected by the impact of the third quarter civil settlement payment on earnings per share and consolidated cash flow. For additional information regarding the performance measure goals and the 2007 EPIP awards, see “Executive Officer Compensation Tables and Notes – Summary Compensation Table – Narrative Discussion – 2007 EPIP Target Award Opportunities.”
The Board of Directors has approved an amended EPIP which will be considered by stockholders at this meeting. See “Proposal 3. Approval of the Amended Zimmer Holdings, Inc. Executive Performance Incentive Plan” beginning on page 46.
Equity-Based Incentives.  We make equity-based awards under stockholder-approved plans to provide incentives over periods longer than one year and to align the interests of our executives with those of our stockholders. These incentives take the form of stock options, restricted stock, restricted stock units, or RSUs, and performance shares. Performance shares are, and other types of awards in the discretion of the committee may be, conditioned upon achievement of performance goals.
The committee typically approves awards of stock options on an annual basis to management-level employees at its December meeting and sets a future date as the actual grant date at that time. For 2007, the grant dates followed the release of our fourth quarter and full-year 2006 earnings. The committee also made mid-year equity-based awards to our new CEO and CFO and two other executive officers in connection with their respective promotions. We do not backdate stock options or issue stock options with exercise prices below the fair market value of our common stock on the grant date. We do not purposely schedule grant dates to precede favorable information or follow unfavorable disclosures.
Stock options generally become exercisable in four equal installments on the first through the fourth anniversaries of the grant date. Restricted stock and RSUs become non-forfeitable over a multi-year period. The committee typically provides a reward to retirement-eligible employees who have made contributions over a sustained period by accelerating the vesting of stock options granted under our management stock incentive plan held for at least one year from the grant date upon the employee’s retirement. The employee will continue to have the original option term to exercise such options. Our practice of accelerating the vesting of options upon an employee’s retirement is consistent with the practices of our peer group and allows us to use stock options as an effective long-term equity-based incentive for employees who, based on their age and years of service with us, are retirement eligible.
In addition, the vesting of stock options granted under our management stock incentive plan held for at least one year by an employee who has reached age 60 generally will accelerate. If the employee terminates employment under circumstances not meeting the definition of “retirement” under the plan, the employee will only have three months from the date of termination to exercise such options. This benefit, which is significantly less than the benefit afforded to retirement-eligible participants, enhances our ability to compete for, and provide meaningful equity-based incentives to, more experienced candidates who may be amenable to a late-stage career move but who are not eligible for retirement as defined in our stock incentive plans.
The terms and conditions of stock options granted to employees based outside the United States may vary to comply with local law or to obtain the full benefit of applicable tax laws in those jurisdictions.
Plan provisions allowing for accelerated vesting of stock options upon retirement or attainment of age 60 generally have not been considered when determining the type or number of awards granted to a particular executive in a given year.
The committee may delegate authority to our CEO to grant a limited number of equity-based awards for purposes of attracting new employees and rewarding employee performance. He cannot grant awards to executive-level employees or new hires for executive-level positions. The aggregate number of shares underlying all such grants by the CEO may not exceed 150,000 per year. The CEO subsequently reports any such grants he makes to the committee.
The committee made grants of performance-based RSUs in mid-2007 to our CEO, CFO and two other executive officers in connection with their respective promotions. These performance-based RSUs are tied to our performance over an 18-month period. The committee also made grants of RSUs to a group of management-level employees, including our executive officers, in December 2007, which vest in two installments over the next two years. These grants were intended to provide an incentive to those management-level employees to remain employed through the critical implementation phase of the Deferred Prosecution Agreement and Corporate Integrity Agreement we entered into in September 2007. In addition to the awards made in 2007, performance shares that had been granted in 2006 were outstanding during 2007. These performance shares are tied to our performance over a three-year period ending December 31, 2008. Additional information on equity-based awards to the named executive officers, including the performance measures and goals set by the committee for the 2007 performance-based RSU grants and 2006 performance share grants, can be found in the tables and accompanying narrative discussion which follow this discussion and analysis.


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

We require management-level employees to sign a non-competition agreement as a condition of receiving an equity award. In addition, the award agreement provides that, if the employee breaches the non-competition agreement, the committee may require the employee to forfeit his or her award, even if vested. To the extent an award has previously been exercised or becomes non-forfeitable, the committee may require the employee to return any shares of common stock he or she received upon the exercise or cash proceeds received upon sale.
 
Compensation Philosophy
 
We design our executive compensation program to attract, retain and motivate highly qualified executives and to align their interests with the interests of our stockholders. The ultimate goal of our program is to increase stockholder value by providing executives with appropriate incentives to achieve our business objectives. We seek to achieve this goal through a program that rewards executives for superior performance, as measured by both financial and non-financial factors. In the case of our executive officers, we intentionally make a greater proportion of their total compensation subject to the achievement of objective performance measures which we believe reflect increases in stockholder value. We also encourage executives to act as equity owners by requiring them to meet the stock ownership requirements discussed below under “– Stock Ownership Guidelines for Executive Officers.”
Management provides the committee with recommendations on the compensation of the executive officers other than the CEO. These recommendations include specific amounts for base salaries, target cash incentive opportunities and equity-based awards for the executive officers. These recommendations are developed initially by our human resources department with the assistance of management’s compensation consultant. We consider such factors as compensation history, tenure, responsibilities and retention concerns to maintain consistency among our executives. These recommendations are then reviewed, and may be changed, by our CEO who also considers his own subjective assessment of the performance of each executive officer other than himself. The committee gives significant consideration to the recommendations of management, but also considers information and advice provided by the committee’s compensation consultant, Watson Wyatt & Company, or Watson Wyatt, whose activities are described in more detail below under “– Compensation Consultants.” The committee itself is responsible for reviewing the performance of the CEO, without the CEO’s participation, and determines his compensation. The committee considers our performance on an operational and financial basis and the committee’s assessment of the CEO’s contributions during the year and overall performance.
The compensation philosophy the committee employs is to set each major compensation element at levels which approximate a specific percentile of market, based on data obtained from published salary survey sources, as follows:
 
    Base pay at approximately the 50th percentile,
 
    Annual cash incentive opportunities at the target level at approximately the 65th percentile, and
 
    Equity-based incentives in the form of stock options, restricted stock and other equity-based awards with a value that equates to approximately the 75th percentile.
 
We have used above-median targets for annual cash incentives and equity-based incentives since we became an independent public company in 2001. As explained above, this approach makes a greater proportion of total compensation tied to the achievement of objective performance measures. The target percentiles shown above are derived from the survey data and not the peer group discussed below.
The committee reviews the relative pay differences for different executive officers considering not only the market targets described above, but also the responsibilities of the executive which includes the nature of the executive’s duties, number of direct reports and other factors. The committee believes that the position of CEO has the greatest opportunity to impact our performance and to ensure that our most senior executives exhibit the behavior necessary to meet our business and compliance objectives. Similarly, we believe that an effective CFO is vital to our success, as he not only supervises key business and financial operations, but has significant responsibilities in our ongoing disclosure obligations. Accordingly, the committee has historically set total target cash compensation (base salary plus target bonus opportunity) for the CEO at a multiple of the total compensation of the next most highly compensated executive officer who has been the CFO. In 2007, the new CEO and CFO were promoted from other positions within the company. They did not have the same longevity as their predecessors and, as a result, the historic differences between the compensation of the CEO and CFO and the other executive officers have been significantly compressed.
Finally, as the importance of our international operations has increased, it is critical for us to attract and retain qualified executive talent outside of the United States. There is significant competition for experienced international executives. We must offer compensation that reflects competitive concerns, higher costs of living and local custom and practice to retain these individuals.
Our objective is to provide a total pay opportunity that is competitive with our closest competitors, but which also places a greater emphasis on equity-based compensation. When the actual pay of our executive officers is in alignment with our performance, this approach effectively aligns the interests of the executives with those of our stockholders.


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

The committee assessed whether our 2007 compensation was consistent with the compensation philosophy explained above by asking Watson Wyatt to conduct a market review. The committee reviewed an analysis of 2007 compensation for each executive officer, including base salary, annual cash bonus, annual cash compensation (base salary plus annual cash bonus), long-term incentives and total direct compensation (annual cash compensation plus long-term incentives). This information was then compared to competitive pay level compensation collected from our peer group and from published compensation surveys. On an overall basis, the base salaries of our executive officers for 2007 were at the 25th percentile for the peer group and the 50th percentile for the survey data. Annual cash incentives at the target level were at the same percentiles. Long-term incentives were at the 50th percentile for the peer group and the 75th percentile for the survey data. This resulted in total direct compensation at the target level equal to the 50th percentile for the peer group and at or above the 75th percentile for the survey data.
 
Compensation Consultants
 
As it has for several years, Watson Wyatt acted as the committee’s consultant during 2007. Typically, the firm provides the committee with advice on compensation program design and best practices and produces the comparative information derived from the peer group and published survey data that the committee reviews. Major activities conducted during 2007 consisted of: (1) advising the committee on and helping to develop the compensation packages for our new CEO and CFO; (2) conducting a pay-for-performance analysis of our executive compensation over a three-year period; (3) preparing a market review of our 2007 executive compensation; and (4) preparing “tally sheets” for our executive officers that were considered when making compensation decisions for 2008. Watson Wyatt also reviewed and made recommendations for changes in our non-employee director compensation program. The firm’s activities are discussed at greater length in various parts of this discussion and analysis.
In May 2007, we engaged Steven Hall and Partners to serve as consultant to our human resources department and company management. Steven Hall and Partners compared our company compensation plans against our peer group companies for various forms of equity and long-term incentive plan designs, and provided recommendations, as well as advice on other compensation related matters. Steven Hall and Partners also assists the human resources department and management in providing the committee with recommendations for base salary, target bonus percents and long-term incentive awards for executive officers, except for the CEO. The specific recommendations are typically discussed with Watson Wyatt as the committee’s compensation consultant. The final recommendations are then reviewed by the committee which frequently makes adjustments to the final determinations. In addition, Steven Hall and Partners acts as a resource to the human resources department and management in analyzing the compensation information from and recommendations made by Watson Wyatt.
 
Benchmarking
 
It has been our practice for many years to compare our compensation practices with the practices of a group of other U.S. public companies, comprised of direct competitors and other bio-medical manufacturers of comparable size based on revenue and market capitalization. With Watson Wyatt’s assistance, the committee monitors the continuing relevancy of the companies in the peer group and makes changes as companies alter their focus, merge or are acquired, or as new competitors emerge.
The peer group for 2007 consisted of C.R. Bard, Inc.; Baxter International Inc.; Becton, Dickinson and Company; Biogen Idec Inc.; Biomet, Inc.; Boston Scientific Corporation; Covidien Ltd.; Genzyme Corporation; Medtronic, Inc.; St. Jude Medical, Inc.; Stryker Corporation; and Thermo Fisher Scientific Inc. Biomet, Inc. was removed effective January 1, 2008 due to its acquisition by private investors.
The committee uses information derived from the peer group to assess our compensation practices. It also considers more general market data obtained from published salary survey sources. The comparative data is for the previous year and therefore does not reflect compensation levels or trends on a real-time basis.
Management and its consultant also use data from other large healthcare companies to develop incentive plan design and other aspects of executive compensation other than pay levels.
 
Pay-for-Performance Analysis
 
The “pay-for-performance” analysis that the committee reviewed in 2007 compared the compensation of our five most senior executives, both in terms of realizable pay and realized pay, to comparable executives of the peer group for a three-year period from 2004 to 2006. The analysis also compared the three year compounded average annual growth rates for three performance metrics – earnings per share, revenue and cash flow – as well as total stockholder return for the period. The analysis yielded a number of findings, including:
 
    the realized pay of our named executive officers was low relative to our composite performance as compared to the peer group;


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

 
    the ratio of realizable pay to pay opportunity for the named executive officers was in the bottom 10% of the peer group; and
 
    the realizable pay of the named executive officers represented a smaller portion of our net income than the comparable executives at most of the peer group companies.
The analysis demonstrated that, while we were a top performer in the period with respect to the three performance metrics used, we lagged the peer group in total stockholder return for the period, which directly impacted the realizable gain from stock option grants during the period. Our pay opportunity was above, while our realizable pay was below, the peer group median and our named executive officers realized approximately 30% of their target opportunity during the period.
The committee discussed the findings of the report and concluded that incremental adjustments in our compensation program may be warranted, but major changes in design were not needed, in order to improve the alignment of executive pay to our performance.
The committee also considered the market review of our 2007 executive compensation which is discussed above and in the narrative following the Summary Compensation Table beginning on page 24.
 
Other Compensation
 
Special Incentives.  On occasion, the committee has created opportunities for additional cash compensation based on the success of a specific project. An example of this is the special project incentive program we adopted to accomplish integration and expense savings and efficiencies or “synergies” following our 2003 acquisition of Centerpulse AG. There were no special compensation incentive arrangements during 2007 and none approved to date for 2008.
Perquisites.  We provide executive officers with a limited range of perquisites or other benefits not generally available to all salaried employees. We do not provide executives with company cars or car allowances unless they are living overseas and such practices are consistent with local custom. We maintain two club memberships in Northeastern Indiana for business use by sales and management personnel and pay the cost of a small number of club memberships internationally. Non-business use of our aircraft is limited and infrequent. The committee reviews our CEO’s non-business use of our aircraft on an annual basis. The CEO is taxed on the imputed income (computed using Standard Industry Fare Level rates) attributable to all such use and we do not provide any additional income to him to pay the taxes on the imputed income.
We provide all management-level employees who relocate their principal residence at our request with benefits provided under our relocation assistance program, including, for example, reimbursement of temporary housing and moving expenses.
Disability Compensation.  Executive officers based in the U.S. may participate in the Restated Zimmer, Inc. Long-Term Disability Income Plan for Highly Compensated Employees. This plan is funded from our general assets and individual disability insurance policies we pay for. The plan provides disability benefits, as a percentage of total compensation, that are comparable to benefits provided to employees whose compensation is not limited for purposes of determining benefits payable under our base long-term disability insurance plan.
Retirement and Other Post-Employment Benefits.  Executives based in the U.S. may be eligible to participate in our 401(k) savings and investment plan, or SIP, and the benefit equalization plan, or BEP/SIP, that supplements the SIP, our defined benefit pension plan, or RIP, the benefit equalization plan, or BEP/RIP, that supplements the RIP and our retiree medical plan. We originally established the RIP, the BEP/RIP and the BEP/SIP at the time of our separation from our former parent in 2001. Under the terms of an Employee Benefits Agreement between our former parent and us, we agreed to establish plans that were substantially identical in all material respects to corresponding plans offered by the former parent. Since 2001, we have continued to offer these plans and the SIP in an effort to remain market competitive, to retain talented employees, to assist employees in preparing for retirement, to provide income to employees following retirement and, in the case of the benefit equalization plans, to provide benefits to eligible executives that are comparable, as a percentage of compensation, to benefits provided to employees whose compensation is not limited by the annual compensation limit under U.S. law. We believe that the total retirement benefits we provide are comparable to the retirement benefits provided by other companies within the medical device and biotech industries. The RIP, the BEP/RIP and the retiree medical plan are only available to executives hired before September 2, 2002. This was taken into account when we determined to provide enhanced benefits to affected employees under our SIP. Additionally, the cost of providing post-employment benefits generally affects decisions regarding the types and amounts of other compensation and benefits that we may offer our employee population as a whole, but the provision of, or named executive officer’s accumulated benefit under, our retirement plans generally does not affect decisions regarding the types or amounts of other compensation paid to that named executive officer in a given year. These plans are discussed in greater detail in the narrative following the Pension Benefits in 2007 table beginning on page 32.
Employment and Similar Agreements.  We do not have employment agreements with any of our executive officers. However, we have entered into change in control severance agreements with each of them. These agreements are intended to maintain continuity of management, particularly in the context of a transaction in which we undergo a change in control. These agreements are “double triggered,” which means that an executive is only entitled to severance payments if (1) we experience a change in control as defined in the agreement and (2) the executive’s employment with us is terminated. See “Executive Officer


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

Compensation Tables and Notes – Potential Payments Upon Termination of Employment – Change in Control Arrangements” on page 39 for a more detailed description of the material terms of these agreements.
 
Compensation for New CEO and CFO
 
In 2006, J. Raymond Elliott, who had served as our CEO since 2001, announced his intention to retire as President and CEO during 2007. The Board of Directors conducted an extensive search for a successor CEO, considering both external and internal candidates. As part of the CEO succession process, the committee worked with Watson Wyatt and outside counsel to develop compensation arrangements for a new CEO.
Watson Wyatt provided the committee with data which compared the 2006 compensation for our CEO with our peer group and a larger group of Fortune 1000 companies that hired a new CEO from outside of the organization in 2005 or 2006. The data used included base salary, annual incentives, long-term incentives, inducement awards (sign-on or promotion related) and total direct compensation. The data demonstrated that external CEO hires typically received a median total direct compensation approximately 15% greater than the median total direct compensation of the predecessor CEO, while an internal candidate was more likely to receive total direct compensation approximately 25% less than the predecessor CEO (although the internal candidate’s compensation would significantly increase from the internal candidate’s compensation for the previous year). The committee used this data to develop possible compensation packages for both an external and an internal candidate consistent with our compensation philosophy.
In April 2007, following the Board of Directors’ approval of Mr. Dvorak as a possible successor CEO, the parties reached agreement on the following principal components:
 
    an increase in annual base salary from $415,000 to $700,000, which was $50,000 less than Mr. Elliott’s 2006 base salary and below the 25th percentile of our peer group;
 
    an increase in his target EPIP award for 2007 from 60% to 100% of base salary, which was consistent with Mr. Elliott’s 2006 target award, market data provided by Watson Wyatt and the committee’s philosophy to target the 65th percentile of market; and
 
    a promotional award of long-term incentives consisting of (1) a grant of 100,000 non-qualified stock options vesting 25% per year commencing May 1, 2008, (2) a maximum award of 57,000 RSUs subject to performance conditions for a performance period ending December 31, 2008, and (3) an award of restricted shares having a grant date fair value of $2,000,000 vesting ratably on the third, fourth and fifth anniversaries of the grant date.
The committee approved these compensation arrangements subject to Mr. Dvorak’s appointment as CEO by the full Board of Directors.
On April 25, 2007, Mr. Leno, who had served as our CFO since 2001, advised us of his intention to resign to pursue other business opportunities. The Board of Directors promoted Mr. Crines, who had previously served as our Senior Vice President, Finance, Operations, and Corporate Controller and Chief Accounting Officer, to the position of Executive Vice President, Finance and CFO. The committee increased Mr. Crines’ compensation at the time of his appointment, the principal components of which are:
 
    an increase in annual base salary from $315,000 to $415,000, which was $100,000 less than Mr. Leno’s base salary and slightly above the 25th percentile of the peer group;
 
    an increase in his target EPIP award for 2007 from 50% to 60% of base salary, which was consistent with Mr. Leno’s 2007 target award, market data provided by Watson Wyatt and the committee’s philosophy to target the 65th percentile of market; and
 
    a promotional award of long-term incentives consisting of (1) a grant of 25,000 non-qualified stock options vesting 25% per year commencing May 1, 2008, (2) a maximum award of 13,334 RSUs subject to performance conditions for a performance period ending December 31, 2008, and (3) an award of restricted shares having a grant date fair value of $1,000,000 vesting ratably on the third, fourth and fifth anniversaries of the grant date.
In approving these compensation arrangements for the promoted officers, the committee recognized that they provided for compensation that was less than the amounts contemplated by the committee’s compensation philosophy. The primary reason for this difference was that the officers were new to their respective roles. The committee plans to consider future incremental increases in compensation, in addition to possible annual merit increases and market adjustments, to bring their compensation more in line with the compensation philosophy.
 
Stock Ownership Guidelines for Executive Officers
 
Our executive officers must meet stock ownership guidelines the Board of Directors has established in order to align their interests more closely with those of our stockholders. The committee oversees compliance with these guidelines and periodically reviews the guidelines. The guidelines require (1) our Chief Executive Officer to own shares with a value equal to at least five


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

times his base salary; (2) other designated executive officers, including the other named executive officers, to own shares with a value equal to at least three times the executive’s base salary; and (3) other executive officers to own shares with a value equal to at least two times the executive’s base salary. All shares owned by an executive officer count toward these guidelines, including shares owned indirectly, shares held in our 401(k) savings plan or Employee Stock Purchase Plan, as well as restricted shares, RSUs and performance shares (at the target award level). In addition, one-half of the gain on vested stock options is counted toward these guidelines. All executive officers are currently in compliance with the guidelines or are pursuing approved plans that will enable them to achieve compliance within the five-year time frame prescribed in the guidelines. We have approved procedures by which every executive officer must obtain clearance prior to selling any shares of our common stock, in part to ensure no officer falls out of compliance with the stock ownership guidelines.
In addition, our policies prohibit our executives from engaging in any transaction in which they may profit from short-term speculative swings in the value of our stock. This includes “short sales” (selling borrowed securities which the seller hopes can be purchased at a lower price in the future) or “short sales against the box” (selling owned, but not delivered securities) and buying or selling “put” and “call” options (publicly available rights to sell or buy securities within a certain period of time at a specified price) or the like. Any other transactions involving our stock or derivative securities that could affect ownership by an executive, such as entering into “zero cost collars” or variable prepaid forward contracts and transfers to pooled investment vehicles, must be pre-cleared pursuant to our procedures.
 
Tax and Accounting Considerations
 
Section 162(m).  Section 162(m) of the Internal Revenue Code, or the Code, limits the deductibility of compensation paid to the most highly-compensated executive officers of U.S. public companies to $1,000,000 per year unless the compensation qualifies as performance-based. The committee’s policy is to take into account Section 162(m) in establishing compensation of our executives. However, the deductibility of some types of compensation payments can depend upon the timing of the vesting or an executive’s exercise of previously granted awards. Interpretations of and changes in applicable tax laws and regulations as well as other factors beyond our control also can affect deductibility of compensation. For these and other reasons, the committee has determined that it will not necessarily seek to limit executive compensation to that sum which is deductible under Section 162(m) of the Code. In 2007, the impact of the Section 162(m) limitation on our after-tax compensation expense was not material.
The EPIP and our equity-based incentive plans contain performance-based conditions and have been approved by stockholders so that payments under those plans will not be limited by Section 162(m). We believe that the awards made under these plans qualify as performance-based compensation. We will continue to monitor developments and assess alternatives for preserving the deductibility of compensation payments and benefits to the extent reasonably practicable, consistent with our compensation policies and what we believe is in the best interests of our stockholders. We are submitting an amended EPIP to the stockholders for consideration at this meeting so that compensation payable under the plan will continue to qualify as performance-based compensation. See “Proposal 3. Approval of the Amended Zimmer Holdings, Inc. Executive Performance Incentive Plan” beginning on page 46.
Section 409A.  On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, changing the tax rules applicable to nonqualified deferred compensation arrangements. As amended, Section 409A of the Code affects the payments of certain types of deferred compensation to key employees. The Internal Revenue Service finalized Section 409A regulations in 2007, and affected plans must now be amended before January 1, 2009 to conform with these new rules. We believe we are operating in good faith compliance with the statutory provisions which were effective January 1, 2005, and Internal Revenue Service guidance. We discuss our nonqualified deferred compensation arrangements on pages 34 and 35.
Accounting for Stock-Based Compensation.  Beginning on January 1, 2006, we began accounting for stock-based payments in accordance with the requirements of Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), using the modified-prospective method. In accordance with this method, we did not adjust our financial statements for earlier periods to reflect the effect of SFAS 123(R).
Financial Statement Restatements.  Section 302 of the Sarbanes-Oxley Act of 2002 provides that, in the event that a U.S. public company is required to prepare an accounting restatement due to the material noncompliance of the company, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer must reimburse the company for (1) any bonus or other incentive-based or equity-based compensation received by that person from the company during the 12-month period following the first public issuance or filing with the Securities and Exchange Commission (whichever first occurs) of the financial document embodying such financial reporting requirement; and (2) any profits realized from the sale of securities of the company during that 12-month period. We have not adopted a specific policy with respect to the recovery of compensation in the event of a financial statement restatement which is broader than the statutory requirements.


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

 
The following tables set forth information regarding compensation paid to each of the persons who acted as our Chief Executive Officer or Chief Financial Officer during 2007 and our three other most highly compensated executive officers based on total compensation earned, excluding increases in pension value.
 
SUMMARY COMPENSATION TABLE
 
                                                                 
                        Change in
       
                        Pension
       
                        Value and
       
                        Nonqualified
       
                    Non-Equity
  Deferred
       
            Stock
  Option
  Incentive Plan
  Compensation
  All Other
   
        Salary
  Awards(1)
  Awards(2)
  Compensation(3)
  Earnings(4)
  Compensation(5)
  Total
Name and Principal Position
  Year   ($)   ($)   ($)   ($)   ($)   ($)   ($)
(a)   (b)   (c)   (e)   (f)   (g)   (h)   (i)   (j)
David C. Dvorak(6)     2007       605,731       266,151       1,827,280       409,889       125,367       39,836       3,274,254  
President and CEO
    2006       400,000       715,097       1,302,962       379,600       81,144       19,092       2,897,895  
James T. Crines(6)     2007       381,923       249,472       1,137,935       162,182       134,430       18,843       2,084,785  
Executive Vice President, Finance and CFO
                                                               
Bruno A. Melzi     2007       523,415 (7)     (182,917 )     1,186,763       193,403 (7)     67,140 (7)     457,225 (7)     2,245,029 (7)
Chairman, Europe,
    2006       467,841 (7)     691,514       1,302,450       355,692 (7)     74,591 (7)     455,610 (7)     3,347,698 (7)
Middle East and Africa
                                                               
Sheryl L. Conley     2007       380,000       (152,538 )     1,126,177       168,492       204,881       18,895       1,745,907  
Group President,
    2006       370,000       571,273       1,074,117       373,964       224,637       17,649       2,631,640  
Americas and Global Marketing and Chief Marketing Officer
                                                               
Stephen H.L. Ooi     2007       340,880 (8)     23,973       1,205,765       127,389 (8)           43,590 (8)     1,741,597 (8)
President, Asia Pacific
                                                               
J. Raymond Elliott(6)     2007       692,308       (811,293 )     6,062,717             1,819,727       223,699       7,987,158  
Former CEO
    2006       750,000       2,478,357       6,882,978       1,140,416       612,505       123,865       11,998,121  
Sam R. Leno(6)     2007       181,731       (975,883 )                 295,531       21,353       (477,268 )
Former CFO
    2006       510,000       1,120,959       1,866,868       464,730       238,835       24,493       4,225,885  
(1)  Represents the dollar amount recognized for financial statement reporting purposes with respect to stock awards in accordance with SFAS 123(R). During 2007, as a result of changes in our estimate of the number of performance shares granted January 18, 2006 that will vest, we reversed certain compensation expense relating to these performance shares that had been recognized for financial statement reporting purposes in 2006 in accordance with SFAS 123(R). Amounts reported in this column for 2007 for Mr. Dvorak, Mr. Melzi, Ms. Conley and Mr. Elliott have been reduced (in some cases below zero) by the reversed expense. Amounts reported for 2007 for Mr. Crines and Mr. Ooi have not been reduced by the reversed expense, because the expense recognized in 2006 for these executive officers has not been reported in the Summary Compensation Table.
 
Mr. Leno forfeited unvested performance shares and shares of restricted stock when he resigned effective May 4, 2007. In accordance with SFAS 123(R), we reversed compensation expense relating to the forfeited shares that had been recognized for financial statement reporting purposes in 2006. As a result, the amount reported in this column for 2007 for Mr. Leno is negative.
 
                             
              2007 Expense
    2006 Expense
 
Name
  Type of Award   Grant Date     ($)     ($)  
David C. Dvorak
  RSUs     12/12/07       106,305        
    Performance-Based RSUs     07/19/07              
    Restricted Stock     05/01/07       266,358        
    Performance Shares     01/18/06       (212,000 )     609,609  
    Restricted Stock     01/14/04       105,488       105,488  
                             
Total
                266,151       715,097  
                             
James T. Crines
  RSUs     12/12/07       45,968          
    Performance-Based RSUs     07/19/07                
    Restricted Stock     05/01/07       133,179          
    Restricted Stock     01/14/04       70,325          
                             
Total
                249,472          
                             
Bruno A. Melzi
  RSUs     12/12/07       37,773        
    Performance Shares     01/18/06       (220,690 )     631,777  
    Restricted Stock     01/02/02             53,738  
    Restricted Stock     08/07/01             5,999  
                             
Total
                (182,917 )     691,514  


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

                             
              2007 Expense
    2006 Expense
 
Name
  Type of Award   Grant Date     ($)     ($)  
Sheryl L. Conley
  RSUs     12/12/07       42,084        
    Performance Shares     01/18/06       (194,622 )     565,274  
    Restricted Stock     08/07/01             5,999  
                             
Total
                (152,538 )     571,273  
                             
Stephen H.L. Ooi
  RSUs     12/12/07       23,973          
                             
Total
                23,973          
                             
J. Raymond Elliott
  Performance Shares     01/18/06       (811,293 )     2,327,598  
    Restricted Stock     01/02/02             120,760  
    Restricted Stock     08/07/01             29,999  
                             
Total
                (811,293 )     2,478,357  
                             
Sam R. Leno
  Performance Shares     01/18/06       (905,558 )     905,558  
    Restricted Stock     01/14/04       (70,325 )     70,325  
    Restricted Stock     07/16/01             145,076  
                             
Total
                (975,883 )     1,120,959  

 
 
For a discussion of the assumptions made in the valuation, see Note 3 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.
(2)  Represents the dollar amount recognized for financial statement reporting purposes with respect to nonqualified stock option awards in accordance with SFAS 123(R), as follows:
 
                             
              2007 Expense
    2006 Expense
 
Name
  Type of Award   Grant Date     ($)     ($)  
 
David C. Dvorak   Stock Options     05/01/07       421,667        
    Stock Options     02/06/07       296,691        
    Stock Options     01/18/06       314,188       314,188  
    Stock Options     01/18/05 (a)     164,090       164,090  
    Stock Options     01/18/05       244,179       244,179  
    Stock Options     01/14/04       386,465       386,465  
    Stock Options     01/13/03             194,040  
                             
Total
                1,827,280       1,302,962  
                             
James T. Crines
  Stock Options     05/01/07       105,417          
    Stock Options     02/06/07       211,922          
    Stock Options     01/18/06       291,338          
    Stock Options     01/18/05 (a)     114,859          
    Stock Options     01/18/05       170,925          
    Stock Options     01/14/04       243,474          
                             
Total
                1,137,935          
                             
Bruno A. Melzi(b)
  Stock Options     02/06/07       1,186,763        
    Stock Options     01/18/06             1,302,450  
                             
Total
                1,186,763       1,302,450  
                             
Sheryl L. Conley
  Stock Options     02/06/07       211,922        
    Stock Options     01/18/06       291,338       291,338  
    Stock Options     01/18/05 (a)     135,188       135,188  
    Stock Options     01/18/05       201,173       201,173  
    Stock Options     01/14/04       286,556       286,556  
    Stock Options     01/13/03             159,863  
                             
Total
                1,126,177       1,074,117  
                             
Stephen H.L. Ooi(c)
  Stock Options     02/06/07       423,844          
    Stock Options     01/18/06       293,242          
    Stock Options     01/18/05 (a)     114,859          
    Stock Options     01/18/05       170,925          
    Stock Options     01/14/04       202,895          
                             
Total
                1,205,765          


21


 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

                             
              2007 Expense
    2006 Expense
 
Name
  Type of Award   Grant Date     ($)     ($)  
 
J. Raymond Elliott(d)
  Stock Options     01/18/06       2,399,250       2,399,250  
    Stock Options     01/18/05 (a)     879,334       879,334  
    Stock Options     01/18/05       1,308,533       1,308,533  
    Stock Options     01/14/04       1,475,600       1,475,600  
    Stock Options     01/13/03             820,260  
                             
Total
                6,062,717       6,882,978  
                             
Sam R. Leno(e)
  Stock Options     01/18/06             1,866,868  
                             
Total
                      1,866,868  

     (a)  These stock options were subject to vesting conditions based on our actual 2005 performance. Options vested as to performance continue to be subject to time-based vesting requirements.
 
     (b)  Under the age and service provisions of our stock option plan, if Mr. Melzi elected to retire, he would immediately vest in options that have been held for at least one year (“retiree treatment”). Accordingly, the SFAS 123(R) expense for stock options granted to Mr. Melzi is recognized over a one-year service period.
 
     (c)  Mr. Ooi will become eligible for retiree treatment in 2008. Accordingly, the SFAS 123(R) expense for stock options granted to Mr. Ooi in 2007 is recognized over a two-year service period.
 
     (d)  Mr. Elliott became eligible for retiree treatment in 2007. Accordingly, the SFAS 123(R) expense for stock options granted to Mr. Elliott in 2006 was recognized over a two-year service period.
 
     (e)  Under the provisions of our stock option award agreement, Mr. Leno immediately vested in options that had been held for at least one year because he had reached age 60. Accordingly, the SFAS 123(R) expense for stock options granted to Mr. Leno in 2006 was recognized over a one-year service period.
 
For a discussion of the assumptions made in the valuation of our stock options, see Note 3 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.
 
(3)  Includes the following awards under the EPIP and the Supplemental Performance Incentive Plan. For more information regarding these plans, see “Compensation Discussion and Analysis – Major Elements of Compensation – Annual Cash Incentives” and “– Other Compensation – Special Incentives” on pages 13-14 and 17, respectively, and the narrative discussion beginning on page 24.
 
                         
          Supplemental
       
          Performance Incentive
       
Name
  EPIP($)     Plan (2006)($)     Total($)  
 
David C. Dvorak
                       
2007
    409,889             409,889  
2006
    279,600       100,000       379,600  
James T. Crines
                       
2007
    162,182             162,182  
Bruno A. Melzi(7)
                       
2007
    193,403             193,403  
2006
    272,518       83,174       355,692  
Sheryl L. Conley
                       
2007
    168,492             168,492  
2006
    258,630       115,334       373,964  
Stephen H.L. Ooi(8)
                       
2007
    127,389             127,389  
J. Raymond Elliott
                       
2007
                 
2006
    873,750       266,666       1,140,416  
Sam R. Leno
                       
2007
                 
2006
    356,490       108,240       464,730  
 
 
(4)  Amounts reported consist of the following:
 
                                 
    RIP Aggregate
  BEP/RIP Aggregate
  Aggregate Change in
   
    Change in Actuarial
  Change in Actuarial
  Actuarial Present Value of
   
    Present Value of
  Present Value of
  Accumulated Benefit under
   
    Accumulated
  Accumulated
  Trattamento Fine Rapporto,
   
Name
  Benefit($)(a)   Benefit($)(a)   an Italian pension plan($)   Total($)
 
David C. Dvorak
                               
2007
    24,130       101,237             125,367  
2006
    16,205       64,939             81,144  
James T. Crines
                               
2007
    36,073       98,357             134,430  
Bruno A. Melzi
                               
2007
                67,140 (b)     67,140 (b)
2006
                74,591 (c)     74,591 (c)


22


 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

                                 
    RIP Aggregate
  BEP/RIP Aggregate
  Aggregate Change in
   
    Change in Actuarial
  Change in Actuarial
  Actuarial Present Value of
   
    Present Value of
  Present Value of
  Accumulated Benefit under
   
    Accumulated
  Accumulated
  Trattamento Fine Rapporto,
   
Name
  Benefit($)(a)   Benefit($)(a)   an Italian pension plan($)   Total($)
 
Sheryl L. Conley
                               
2007
    46,690       158,191             204,881  
2006
    27,577       197,060             224,637  
Stephen H.L. Ooi
                               
2007
                       
J. Raymond Elliott
                               
2007
    183,027       1,636,700             1,819,727  
2006
    47,071       565,434             612,505  
Sam R. Leno
                               
2007
    32,473       263,058             295,531  
2006
    38,324       200,511             238,835  

     (a)  Amounts represent the increase in the actuarial present value of the accumulated benefit under the RIP and the BEP/RIP from December 31, 2006 to December 31, 2007 and from December 31, 2005 to December 31, 2006, respectively. The accumulated benefit is the benefit to which the executive would be entitled had he or she terminated employment as of December 31 of such year and elected to commence his or her benefit at the earliest age at which he or she would receive an unreduced benefit, assuming he/she had met the eligibility conditions, payable as a monthly benefit for as long as the executive lived. The expected benefit payments are discounted using interest and mortality assumptions to produce the present value of the accumulated benefit as of December 31 of such year. The assumed interest rate for 2007 is 6.16%; the assumed interest rate for 2006 is 6.14%; and the mortality assumption for both years is based on the 1994 Group Annuity Mortality Tables for men and women. Mr. Ooi does not participate in a defined benefit pension plan. Because Mr. Elliott retired and Mr. Leno resigned prior to December 31, 2007, the year-end actuarial present value of accumulated benefits for each is equal to the benefits paid to him in 2007 plus the present value of future benefits.
 
     (b)  Amount represents the increase in the actuarial present value of the accumulated benefit from December 31, 2006 to December 31, 2007 calculated in Euros for the period, with the difference converted to U.S. Dollars using the average exchange rate for the year ended December 31, 2007 of 1 EUR = 1.36662 USD.
 
     (c)  Amount represents the increase in the actuarial present value of the accumulated benefit from December 31, 2005 to December 31, 2006 calculated in Euros for the period, with the difference converted to U.S. Dollars using the average exchange rate for the year ended December 31, 2006 of 1 EUR = 1.25622 USD.
(5)  Amounts reported in 2007 consist of the following:
 
                                                         
    Mr. Dvorak     Mr. Crines     Mr. Melzi(7)     Ms. Conley     Mr. Ooi(8)     Mr. Elliott     Mr. Leno  
Company matching contributions to the SIP
  $ 10,125     $ 10,125     $     $ 9,878     $     $ 9,878     $ 8,178  
Company matching contributions to the BEP/SIP
    17,133       7,062             6,975             21,029        
Company-paid life insurance premiums
    2,208       1,656             2,042             3,968       1,150  
Incremental cost of non-business use of company aircraft(a)
    10,370                               139,785       2,938  
Holiday and unused vacation pay
                128,301                   49,039       9,087  
Payment in lieu of company contribution to National Pension Authority pursuant to Italian law
                283,305                          
Company-paid supplemental health insurance premiums and claims
                2,210             3,505              
Annual medical check-up
                1,244                          
Company contributions to Fondo Mario Negri, an Italian pension plan
                9,873                          
Incremental cost of company-provided automobile(b)
                32,292             7,919              
Automobile allowance
                            9,282              
Incremental cost of company-provided employee driver(c)
                            4,310              
Country club dues
                            850              
Central Provident Fund (CPF) allowance
                            1,273              
Voluntary company contributions to CPF
                            16,451              
Total
  $ 39,836     $ 18,843     $ 457,225     $ 18,895     $ 43,590     $ 223,699     $ 21,353  
     (a)  We calculate incremental cost of non-business use of corporate aircraft based on the variable operating costs to us, including fuel costs, trip-related maintenance, crew travel expenses, landing/ramp fees, the amount, if any, of disallowed tax deductions associated with such use and other miscellaneous variable costs. We do not include in the calculation of incremental costs fixed costs that do not change based on usage, such as pilots’ salaries, the lease costs of the aircraft, and the cost of maintenance not related to trips. The executive is taxed on the imputed income (computed using Standard Industry Fare Level rates) attributable to 100% of his non-business use of corporate aircraft. We do not provide any additional income to the executive to pay the taxes on the imputed income.
 
     (b)  This amount includes all costs incurred during the year for fuel, maintenance, insurance and licenses.
 
     (c)  This amount represents the portion (16%) of the salary and benefits paid to the employee driver that was attributable to transporting Mr. Ooi and his family.
 
(6)  Messrs. Dvorak and Crines were promoted to their current positions effective May 1, 2007. Mr. Elliott resigned from the Board of Directors and retired as an employee effective November 30, 2007. Mr. Leno resigned effective May 4, 2007.

23


 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

 
(7)  Mr. Melzi’s compensation is paid in Euros and has been converted to U.S. Dollars for purposes of this table (a) for 2007 compensation, using the average exchange rate for the year ended December 31, 2007 of 1 EUR = 1.36662 USD, and (b) for 2006 compensation, using the average exchange rate for the year ended December 31, 2006 of 1 EUR = 1.25622 USD.
 
(8)  Mr. Ooi’s compensation is paid in Singapore Dollars and has been converted to U.S. Dollars for purposes of this table using the average exchange rate for the year ended December 31, 2007 of 1 SGD = .662991 USD.
 
Narrative Discussion
 
The following narrative provides additional information with respect to the compensation reported in the Summary Compensation Table.
2007 Base Salaries.  The 2007 base salaries for the named executive officers were as follows:
 
                 
          Percentage
 
Name
  2007 Base Salary     Increase from 2006  
 
David C. Dvorak(1)
  $ 700,000       175.0 %
James T. Crines(2)
  $ 415,000       138.3 %
Bruno A. Melzi(3)
  $ 523,415       3.2 %
Sheryl L. Conley
  $ 380,000       2.7 %
Stephen H.L. Ooi(4)
  $ 340,880       2.8 %
J. Raymond Elliott(5)
  $ 750,000       0.0 %
Sam R. Leno(6)
  $ 525,000       2.9 %
(1)  Mr. Dvorak’s 2007 base salary was originally $415,000, an increase of 3.8% from his base salary in 2006. His 2007 base salary was increased to $700,000 effective May 1, 2007, when he was promoted to his current positions.
 
(2)  Mr. Crines’ 2007 base salary was originally $315,000, an increase of 5.0% from his base salary in 2006. His 2007 base salary was increased to $415,000 effective May 1, 2007, when he was promoted to his current positions.
 
(3)  Mr. Melzi’s compensation is paid in Euros and has been converted to U.S. dollars for purposes of the above table using the average exchange rate for the year ended December 31, 2007 of 1 EUR = 1.36662 USD.
 
(4)  Mr. Ooi’s compensation is paid in Singapore Dollars and has been converted to U.S. dollars for purposes of the above table using the average exchange rate for the year ended December 31, 2007 of 1 SGD = .662991 USD.
 
(5)  In 2006, Mr. Elliott announced his intention to retire as CEO during 2007.
 
(6)  Mr. Leno resigned effective May 4, 2007.
 
No change was made to Mr. Elliott’s base salary due to his announced retirement.
2007 EPIP Target Award Opportunities.  The 2007 target EPIP award opportunities for the named executive officers were 60% of base salary for Mr. Dvorak (increased to 100% in May 2007); 50% for Mr. Crines (increased to 60% in May 2007); 50% of base salary for Mr. Melzi; 60% of base salary for Ms. Conley; and 50% of base salary for Mr. Ooi. These percentages of base salary were the same as used for the same executive positions in the prior year. Mr. Leno forfeited his award opportunity, which had been set at 60% of base salary, upon his resignation. Had Mr. Leno remained an employee through the end of 2007, he would have received a payout of approximately $233,000. Mr. Elliott was not given a 2007 EPIP award opportunity because of his announced retirement.
The goals for the performance measures used in the EPIP for 2007 were originally set by the committee on the basis of the 2007 operating plan approved by the Board of Directors. The goals for adjusted earnings per share and consolidated revenue were set in December 2006 and the goals for consolidated free cash flow were set in February 2007. Actual payouts could range between 0% and 200% of the specified percentage of the executive’s base salary based upon actual 2007 performance.
The following are the performance measures and original goals for each of the performance measures set by the committee:
 
                         
    Target   Minimum   Maximum
 
Adjusted Earnings per Share
  $ 3.91/share     $ 3.32/share     $ 4.69/share  
     
    (In millions)
Consolidated revenue
  $ 3,836     $ 3,261     $ 4,603  
Consolidated free cash flow
  $ 866     $ 736     $ 1,039  


24


 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

The sum of the weighted performance for each performance measure was to be applied to the following payout schedule to determine the award. Each performance measure was capped at 120% of target and had a threshold of 85% of target with linear interpolation between 120% and 85%.
 
         
% of Performance Measure Goal
  % of Award Target  
 
120+
    200  
100
    100  
85
    55  
Less than 85
    0  
Adjusted earnings per share had to equal or exceed the target level ($3.91) in order for payments to exceed 100% of target. We calculate adjusted earnings per share for this purpose by excluding from earnings per share computed under generally accepted accounting principles any acquisition and integration expenses and purchase accounting adjustments.
In May 2007, the Board of Directors considered the impact of acquisitions we made in the first four months of 2007 on our operating plan. The Board concluded that these acquisitions would have a material impact on our 2007 operations and approved changes to the operating plan. Two of the performance measures used in the EPIP that were derived from the 2007 operating plan – consolidated revenue and consolidated free cash flow – were changed. The budgeted amount for consolidated revenue increased from $3.8 billion to $3.9 billion and the budgeted amount for consolidated free cash flow was reduced from $866 million to $785 million.
Since the 2007 EPIP goals had been derived from the operating plan, the committee considered whether adjustments should be made in the goals for the two performance measures to provide a more accurate assessment of our actual performance. The committee compared how the original goals would operate under the updated projections and the impact of changing the goals to track the changes made in the revised 2007 operating plan. The committee also reviewed the impact of a change in goals on the projected bonus payout for each executive officer and a number of other factors and concluded that the changes were appropriate.
Accordingly, the committee approved revising the goals for the consolidated revenue and consolidated free cash flow performance measures for 2007 under the EPIP as follows:
 
                         
    Target   Minimum   Maximum
    (In millions)
 
Consolidated revenue
  $ 3,884     $ 3,301     $ 4,661  
Consolidated free cash flow
  $ 785     $ 667     $ 942  
As explained above in “Compensation Discussion and Analysis,” the level of payouts for 2007 was affected by the impact of the $169.5 million civil settlement payment we made to the federal government in the third quarter of 2007 to settle an ongoing investigation into financial relationships between orthopaedic manufacturers and consulting orthopaedic surgeons. Accordingly, payouts were made in an amount equal to 73.9% of the specified percentage of each executive’s base salary. See footnote 3 to the Summary Compensation Table for the awards paid to each of the named executive officers.
2007 Equity Awards.  For information on the equity awards made in 2007 to the named executive officers, see the narrative discussion following the Grants of Plan Based Awards in 2007 table on page 27.


25


 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

GRANTS OF PLAN BASED AWARDS IN 2007
 
The following Grants of Plan Based Awards in 2007 table provides additional information about equity and non-equity incentive plan awards and stock and option awards granted to the named executive officers during the year ended December 31, 2007. The non-equity incentive plan awards were granted under the EPIP and all other awards were granted under the Zimmer Holdings, Inc. 2006 Stock Incentive Plan, or the 2006 Plan.
 
                                                                                                         
                                                    All Other
    All Other
                   
                                                    Stock
    Option
          Grant Date
       
                                                    Awards:
    Awards:
    Exercise
    Fair Value
    Closing
 
                                                    Number of
    Number of
    or Base
    of Stock
    Market
 
                Estimated Future Payouts Under
    Estimated Future Payouts
    Shares of
    Securities
    Price of
    and
    Price on
 
          Date of Comp.
    Non-Equity Incentive Plan Awards(1)     Under Equity Incentive Plan Awards(2)     Stock or
    Underlying
    Option
    Option
    Date of
 
    Grant
    Committee
    Threshold
    Target
    Maximum
    Threshold
    Target
    Maximum
    Units(3)
    Options(4)
    Awards(5)
    Awards(6)
    Grant
 
Name
  Date     Action     ($)     ($)     ($)     (#)     (#)     (#)     (#)     (#)     ($/Sh)     ($)     ($/Sh)  
(a)   (b)           (c)     (d)     (e)     (f)     (g)     (h)     (i)     (j)     (k)     (l)        
 
David C. Dvorak
                305,060       554,654       1,109,308                                                  
      02-06-07       12-08-06                                                 52,500       83.68       1,294,650       83.99  
      05-01-07       04-30-07                                                 100,000       88.76       2,530,000       88.66  
      05-01-07       04-30-07                                           22,532                   1,997,687        
      07-19-07       07-19-07                         10,450       19,000       57,000                         920,123        
      12-12-07       12-07-07                                           37,360                   2,551,314        
James T. Crines
                120,704       219,462       438,923                                                  
      02-06-07       12-08-06                                                 37,500       83.68       924,750       83.99  
      05-01-07       04-30-07                                                 25,000       88.76       632,500       88.66  
      05-01-07       04-30-07                                           11,266                   998,844        
      07-19-07       07-19-07                         2,445       4,445       13,334                         215,282        
      12-12-07       12-07-07                                           16,155                   1,103,225        
Bruno A. Melzi
                143,939 (7)     261,708 (7)     523,415 (7)                                                
      02-06-07       12-08-06                                                 52,500       83.68       1,294,650       83.99  
      12-12-07       12-07-07                                           13,275                   906,550        
Sheryl L. Conley
                125,400       228,000       456,000                                                  
      02-06-07       12-08-06                                                 37,500       83.68       924,750       83.99  
      12-12-07       12-07-07                                           14,790                   1,010,009        
Stephen H.L. Ooi
                94,809 (8)     172,380 (8)     344,761 (8)                                                
      02-06-07       12-08-06                                                 37,500       83.68       924,750       83.99  
      12-12-07       12-07-07                                           8,425                   575,343        
J. Raymond Elliott
                                                                             
Sam R. Leno(9)
                173,250       315,000       630,000                                                  
      02-06-07       12-08-06                                                 75,000       83.68       1,849,500       83.99  
(1)  Amounts shown in this column represent the executives’ annual EPIP incentive opportunity. See “Compensation Discussion and Analysis – Major Elements of Compensation – Annual Cash Incentives” and the narrative discussion following the Summary Compensation Table for more information about the EPIP awards.
 
(2)  Amounts shown in this column represent performance-based RSUs granted to Messrs. Dvorak and Crines in connection with their respective promotions on May 1, 2007. See “Compensation Discussion and Analysis – Compensation for New CEO and CFO” and the narrative discussion below for more information about these awards.
 
(3)  Amounts shown in this column include restricted stock awards granted to Messrs. Dvorak and Crines in connection with their respective promotions on May 1, 2007 and RSUs granted to executives on December 12, 2007. See “Compensation Discussion and Analysis – Major Elements of Compensation – Equity-Based Incentives” and “– Compensation for New CEO and CFO” and the narrative discussion below for a description of the material terms of these awards.
 
(4)  Amounts shown in this column represent stock options granted to Messrs. Dvorak and Crines in connection with their respective promotions on May 1, 2007 and stock options granted to executives on February 6, 2007. See “Compensation Discussion and Analysis – Major Elements of Compensation – Equity-Based Incentives” and “– Compensation for New CEO and CFO” for a description of the material terms of these awards.
 
(5)  The committee set the exercise price of stock options at fair market value on the date of grant. The 2006 Plan defines “fair market value” as the average of the high and low selling prices of our common stock on the New York Stock Exchange on the date of grant. An exercise price in excess of fair market value may be used for employees based outside the United States.
 
(6)  Amounts represent the grant date fair value of equity incentive plan awards and stock and option awards computed in accordance with SFAS 123(R). With respect to the equity incentive plan awards, amounts represent the grant date fair value of a threshold number of performance-based RSUs. For a discussion of the assumptions made in the valuation of our equity awards, see Note 3 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.
 
(7)  Mr. Melzi’s compensation is paid in Euros and has been converted to U.S. Dollars for purposes of this table using the average exchange rate for the year ended December 31, 2007 of 1 EUR = 1.36662 USD.


26


 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

 
(8)  Mr. Ooi’s compensation is paid in Singapore Dollars and has been converted to U.S. Dollars for purposes of this table using the average exchange rate for the year ended December 31, 2007 of 1 SGD = .662991 USD.
 
(9)  Mr. Leno forfeited the awards shown in this table upon his resignation effective May 4, 2007.
 
Narrative Discussion
 
The following narrative provides additional information concerning the 2007 equity-based awards reported in the foregoing table.
Stock Options.  In December 2006, the committee awarded stock options under the 2006 Plan to 1,035 employees with a grant date in February 2007. The fair value of these awards is $24.66 per option, as determined using a Black-Scholes option pricing model. The committee also awarded stock options under the 2006 Plan to Messrs. Dvorak and Crines and two other executive officers at the time of their respective promotions in May 2007. The fair value of these awards is $25.30 per option, as determined using a Black-Scholes option pricing model. No stock options were awarded to Mr. Elliott for 2007 because of his announced retirement. Mr. Leno forfeited the stock options granted to him during 2007. The forfeited stock options had a grant date fair value of $1,849,500.
Restricted Stock.  No awards of restricted stock were made under the 2006 Plan to the named executive officers except for the awards shown in the table for Messrs. Dvorak and Crines, which were made at the time of their respective promotions in May 2007. One-third of the shares vest on each of the third, fourth and fifth anniversaries of the grant date. The fair value of these awards is $88.66 per share, which was determined based upon the fair market value of our common stock on the date of grant.
Performance-Based RSUs.  The committee awarded performance-based RSUs under the 2006 Plan to Messrs. Dvorak and Crines and two other executive officers at the time of their respective promotions in May 2007. The fair value of these awards is $88.05 per share, which was determined based upon the fair market value of our common stock on the date of grant. These awards are tied to our performance over an 18-month performance period from July 1, 2007 through December 31, 2008. The end of this performance period coincides with the end of the three-year performance period established for the performance share awards granted to executives and other management-level employees in 2006. See the narrative discussion following the Outstanding Equity Awards at 2007 Fiscal Year-End table for more information about the 2006 performance share awards.
Once earned, the performance-based RSUs vest at the end of the 18-month performance period. The performance measure for the performance-based RSU awards, which is the same as the performance measure for the 2006 performance share awards, is the compound annual growth rate, or CAGR, of our adjusted earnings per share, or EPS, over the performance period. The CAGR goal was set at 17% for the 18-month period. No shares will be earned unless actual performance is at least 85% of the CAGR goal. If we achieve at least 85% of the CAGR goal, the threshold number of shares will be earned, if we achieve at least 100% of the CAGR goal, the target number of shares will be earned, and if we achieve 120% or more of the CAGR goal, the maximum number of shares will be earned. Neither the committee nor management has any discretion to pay out or increase the amount of the award if the minimum performance measure goal is not met.
RSUs.  In December 2007, the committee granted a total of 268,955 RSUs under the 2006 Plan. A total of 128,190 RSUs were granted to our nine executive officers. The fair value of these awards is $68.29 per share, which was determined based upon the fair market value of our common stock on the date of grant. One-half of the RSUs vest on each of the first and second anniversaries of the grant date, provided the grantee maintains continuous employment through the vesting date. This program is intended to provide an incentive to management-level employees to remain employed through the critical implementation phase of the Deferred Prosecution Agreement and Corporate Integrity Agreement we entered into in September 2007.


27


 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

OUTSTANDING EQUITY AWARDS AT 2007 FISCAL YEAR-END
 
                                                                     
    Option Awards(2)     Stock Awards  
           
                                      Equity
 
           
                                Equity
    Incentive Plan
 
           
                                Incentive Plan
    Awards:
 
           
                                Awards:
    Market or
 
           
                                Number of
    Payout Value
 
          Number of
    Number of
              Number of
    Market Value
    Unearned
    of Unearned
 
          Securities
    Securities
              Shares or
    of Shares or
    Shares, Units
    Shares, Units
 
          Underlying
    Underlying
              Units of
    Units of
    or Other
    or Other
 
          Unexercised
    Unexercised
    Option
        Stock That
    Stock That
    Rights That
    Rights That
 
    Grant Date or
    Options
    Options
    Exercise
        Have Not
    Have Not
    Have Not
    Have Not
 
    Performance
    (#)
    (#)
    Price(3)
  Option Expiration
    Vested(4)
    Vested(5)
    Vested(6)
    Vested(7)
 
Name
  Period(1)     Exercisable     Unexercisable     ($)   Date     (#)     ($)     (#)     ($)  
(a)         (b)     (c)     (e)   (f)     (g)     (h)     (i)     (j)  
 
David C. Dvorak
    05/01/2007             100,000     88.76     04/30/2017                                  
      02/06/2007             52,500     83.68     02/05/2017                                  
      01/18/2006       13,750       41,250     71.06     01/17/2016                                  
      01/18/2005       11,704       11,704     79.60     01/17/2015                                  
      01/18/2005       17,417       17,416     79.60     01/17/2015                                  
      01/14/2004       55,000       18,333     70.33     01/13/2014                                  
      01/13/2003       66,000           39.53     01/12/2013                                  
      01/02/2002       50,000           30.19     01/01/2012                                  
      12/03/2001       34,635           32.21     12/02/2011                                  
      01/14/2004                                   5,000       330,750              
      05/01/2007                                   22,532       1,490,492              
      12/12/2007                                   37,360       2,471,364              
      1/1/06 – 12/31/08                                               10,083       666,990  
      7/1/07 – 12/31/08                                               10,450       691,268  
James T. Crines
    05/01/2007             25,000     88.76     04/30/2017                                  
      02/06/2007             37,500     83.68     02/05/2017                                  
      01/18/2006       12,750       38,250     71.06     01/17/2016                                  
      01/18/2005       8,193       8,192     79.60     01/17/2015                                  
      01/18/2005       12,192       12,191     79.60     01/17/2015                                  
      01/14/2004       34,650       11,550     70.33     01/13/2014                                  
      01/13/2003       14,569           39.53     01/12/2013                                  
      01/02/2002       15,000           30.19     01/01/2012                                  
      01/02/2002       5,000           30.19     01/01/2012                                  
      01/14/2004                                   3,333       220,478              
      05/01/2007                                   11,266       745,246              
      12/12/2007                                   16,155       1,068,653              
      1/1/06 – 12/31/08                                               9,350       618,503  
      7/1/07 – 12/31/08                                               2,445       161,737  
Bruno A. Melzi
    02/06/2007             52,500     83.68     02/05/2017                                  
      01/18/2006       57,000           71.06     01/17/2016                                  
      01/18/2005       25,536           79.60     01/17/2015                                  
      01/18/2005       38,000           79.60     01/17/2015                                  
      01/14/2004       72,000           70.33     01/13/2014                                  
      12/12/2007                                   13,275       878,141              
      1/1/06 – 12/31/08                                               10,450       691,268  
Sheryl L. Conley
    02/06/2007             37,500     83.68     02/05/2017                                  
      01/18/2006       12,750       38,250     71.06     01/17/2016                                  
      01/18/2005       9,643       9,642     79.60     01/17/2015                                  
      01/18/2005       14,350       14,348     79.60     01/17/2015                                  
      01/14/2004       40,782       13,593     70.33     01/13/2014                                  
      01/13/2003       54,375           39.53     01/12/2013                                  
      01/02/2002       25,000           30.19     01/01/2012                                  
      01/02/2002       10,000           30.19     01/01/2012                                  
      09/06/2001       26,743           27.30     09/05/2011                                  
      08/07/2001       12,092           29.35     08/06/2011                                  
      03/06/2001       24,434           30.88     03/05/2011                                  
      03/07/2000       22,907           22.02     03/06/2010                                  
      01/03/2000       2,443           31.55     01/02/2010                                  
      01/04/1999       30,542           32.51     01/03/2009                                  
      12/12/2007                                   14,790       978,359              
      1/1/06 – 12/31/08                                               9,350       618,503  


28


 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

                                                                     
    Option Awards(2)     Stock Awards  
           
                                      Equity
 
           
                                Equity
    Incentive Plan
 
           
                                Incentive Plan
    Awards:
 
           
                                Awards:
    Market or
 
           
                                Number of
    Payout Value
 
          Number of
    Number of
              Number of
    Market Value
    Unearned
    of Unearned
 
          Securities
    Securities
              Shares or
    of Shares or
    Shares, Units
    Shares, Units
 
          Underlying
    Underlying
              Units of
    Units of
    or Other
    or Other
 
          Unexercised
    Unexercised
    Option
        Stock That
    Stock That
    Rights That
    Rights That
 
    Grant Date or
    Options
    Options
    Exercise
        Have Not
    Have Not
    Have Not
    Have Not
 
    Performance
    (#)
    (#)
    Price(3)
  Option Expiration
    Vested(4)
    Vested(5)
    Vested(6)
    Vested(7)
 
Name
  Period(1)     Exercisable     Unexercisable     ($)   Date     (#)     ($)     (#)     ($)  
(a)         (b)     (c)     (e)   (f)     (g)     (h)     (i)     (j)  
 
Stephen H.L. Ooi
    02/06/2007             37,500     83.68     02/05/2017                                  
      01/18/2006       9,625       28,875     71.06     01/17/2016                                  
      01/18/2005       8,193       8,192     79.60     01/17/2015                                  
      01/18/2005       12,192       12,191     79.60     01/17/2015                                  
      01/14/2004       28,875       9,625     70.33     01/13/2014                                  
      01/13/2003       48,333           39.53     01/12/2013                                  
      09/18/2002       25,000           37.13     09/17/2012                                  
      01/02/2002       7,000           30.19     01/01/2012                                  
      09/06/2001       4,011           27.30     09/05/2011                                  
      08/07/2001       7,310           29.35     08/06/2011                                  
      03/06/2001       11,199           30.88     03/05/2011                                  
      03/07/2000       11,199           22.02     03/06/2010                                  
      03/02/1999       9,163           31.88     03/01/2009                                  
      02/02/1998       814           25.37     02/01/2008                                  
      12/12/2007                                   8,425       557,314              
      1/1/06 – 12/31/08                                               7,058       466,887  
J. Raymond Elliott
    01/18/2006       210,000           71.06     01/17/2016                                  
      01/18/2005       94,080           79.60     01/17/2015                                  
      01/18/2005       140,000           79.60     01/17/2015                                  
      01/14/2004       280,000           70.33     01/13/2014                                  
      01/13/2003       279,000           39.53     01/12/2013                                  
      01/02/2002       65,100           30.19     01/01/2012                                  
      01/02/2001       101,807           35.45     01/01/2011                                  
      1/1/06 – 12/31/08                                               38,500       2,546,776  
Sam R. Leno(8)
                                                 

(1)  For a better understanding of this table, we have included an additional column showing the grant date of stock options, restricted stock and RSUs and the associated performance period for performance shares and performance-based RSUs.
 
Stock option grant dates prior to August 7, 2001 represent stock options granted prior to our spin-off from our former parent with respect to the former parent’s common stock. The number of underlying shares and exercise price shown represent the replacement on August 7, 2001 of the former parent’s option with an option to purchase our common stock which was intended to preserve the economic value of the option at the time of the spin-off. The number of shares covered by the replacement option was calculated by multiplying the number of the former parent’s shares under the original option by a factor of 2.03614, and the exercise price of the option was decreased by dividing the original exercise price by the same factor.
(2)  Stock options become exercisable in accordance with the following vesting schedule. Option awards may vest on an accelerated basis after the executive has held the award for at least one year if the executive reaches age 60 or retires.
 
     
Grant Date
 
Vesting
 
05/01/2007
  25% per year beginning on the first anniversary of the grant date
02/06/2007
  25% per year beginning on the first anniversary of the grant date
01/18/2006
  25% per year beginning on the first anniversary of the grant date
01/18/2005
  25% - 02/17/2006 following certification of our achievement of performance measures based on 2005 performance; 75% - ratably on the second through fourth anniversaries of the grant date
01/18/2005
  25% per year beginning on the first anniversary of the grant date
01/14/2004
  25% per year beginning on the first anniversary of the grant date
01/13/2003
  25% per year beginning on the first anniversary of the grant date
09/18/2002
  25% per year beginning on the first anniversary of the grant date
01/02/2002
  25% per year beginning on the first anniversary of the grant date
12/03/2001
  25% per year beginning on the first anniversary of the grant date
09/06/2001
  25% per year beginning on the first anniversary of the grant date
08/07/2001
  25% per year beginning on the first anniversary of the grant date
03/06/2001
  This award was subject to price thresholds for exercisability above the exercise price. As of 12/31/2003, all price thresholds had been attained. This award fully vested on the fourth anniversary of the grant date.
01/02/2001
  This award was subject to price thresholds for exercisability above the exercise price. As of 12/31/2003, all price thresholds had been attained. This award fully vested on the fourth anniversary of the grant date.
03/07/2000
  This award was subject to price thresholds for exercisability above the exercise price. As of 12/31/2003, all price thresholds had been attained. This award fully vested on the fourth anniversary of the grant date.


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

     
Grant Date
 
Vesting
 
01/03/2000
  This award was subject to price thresholds for exercisability above the exercise price. As of 12/31/2003, all price thresholds had been attained. This award fully vested on the fourth anniversary of the grant date.
03/02/1999
  25% per year beginning on the first anniversary of the grant date
01/04/1999
  This award was subject to price thresholds for exercisability above the exercise price. As of 12/31/2003, all price thresholds had been attained. This award fully vested on the fourth anniversary of the grant date.
02/02/1998
  331/3% per year beginning on the third anniversary of the grant date
 
(3)  Except as described in footnote 1 above, the option exercise price is equal to the average of the high and low selling prices of our common stock as reported by the New York Stock Exchange on the date of grant.
 
(4)  Restricted stock and RSU awards vest in accordance with the following schedule.
 
         
Grant Date
 
Vesting
 
Type of Award
 
12/12/2007
  50% per year beginning on the first anniversary of the grant date   RSUs
05/01/2007
  331/3% per year beginning on the third anniversary of the grant date   Restricted Stock
01/14/2004
  331/3% per year beginning on the third anniversary of the grant date   Restricted Stock
 
(5)  Market value is calculated by multiplying the number of shares in column (g) by $66.15, the closing price of our common stock as reported by the New York Stock Exchange on December 31, 2007.
 
(6)  Equity incentive plan awards vest in accordance with the following schedule.
 
         
Performance Period
 
Vesting
 
Type of Award
 
1/1/06-12/31/08
  Cliff vesting at the end of the performance period, to the extent earned   Performance Shares
7/1/07-12/31/08
  Cliff vesting at the end of the performance period, to the extent earned   Performance-Based RSUs
 
The number of shares and units reported in this column is based on achieving the threshold level of performance. Since Mr. Elliott retired prior to the end of the award period, he will be entitled only to 63% of the number of shares he would have earned had he remained employed throughout the entire award period, as determined after the end of the award period.
 
(7)  Market value is calculated by multiplying the number of shares in column (i) by $66.15, the closing price of our common stock as reported by the New York Stock Exchange on December 31, 2007.
 
(8)  Mr. Leno forfeited 75,000 stock options granted on February 6, 2007, 3,333 unvested shares of restricted stock and 14,979 performance shares (based on achieving the threshold level of performance) when he resigned effective May 4, 2007.
 
Narrative Discussion
 
Performance Shares.  In 2006, the committee granted executive officers performance shares under the 2001 Stock Incentive Plan, or 2001 Plan. This award is tied to our performance over a three-year period. Executive officers and other management-level employees participate in this program. In connection with this program, the overall size of the annual stock option grant to management level employees for 2006 was reduced.
Once earned, the performance shares vest at the end of the three-year performance period. The performance measure for this program used the compound annual growth rate, or CAGR, of our adjusted earnings per share, or EPS, over a three-year period beginning January 1, 2006 and ending December 31, 2008. The CAGR goal was set at 17% for the three year period. No shares will be earned unless actual performance is at least 85% of the CAGR goal. If we achieve at least 85% of the CAGR goal, the threshold number of shares will be earned, if we achieve at least 100% of the CAGR goal, the target number of shares will be earned, and if we achieve 120% or more of the CAGR goal, the maximum number of shares will be earned. Neither the committee nor management has any discretion to pay out or increase the amount of the award if the minimum performance measure goal is not met.
The executives have no voting or dividend rights with respect to the performance shares until the award is earned. An executive who terminates employment prior to the end of the three-year performance period due to death, disability or retirement will receive (or, if applicable, the executive’s estate will receive) a pro-rata portion of the performance shares that would have been earned (based on the company’s actual performance during the three-year performance period) had he or she remained employed through the end of the performance period. Unless otherwise determined by the committee, an executive who terminates employment during the performance period for any other reason would forfeit his or her performance shares. An executive’s performance shares may be earned prior to the end of the performance period if we experience a change in control, but payment of such earned performance shares would be subject to mandatory deferral until the earlier of the end of the three-year performance period or the executive’s termination of employment (other than termination of employment for “cause” or by the executive without “good reason”).
Forfeited Awards.  Upon his resignation, Mr. Leno forfeited 75,000 stock options that had a grant date fair value of $1,849,500 and 3,333 shares of restricted stock that had a grant date fair value of $234,393. He also forfeited his right to earn any performance shares for the three-year performance period ending December 31, 2008. The number of performance shares that Mr. Leno would have earned (had he remained employed throughout the entire award period) if the threshold level of performance is achieved for such three-year period is 14,979 shares. Because Mr. Elliott retired prior to the end of the three-year

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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

performance period, he will be entitled to receive only 63% of the number of shares he would have earned had he remained employed throughout the entire award period.
 
OPTION EXERCISES AND STOCK VESTED IN 2007
 
                                 
    Option Awards     Stock Awards  
    Number of Shares
    Value Realized
    Number of Shares
    Value Realized
 
    Acquired on Exercise
    on Exercise
    Acquired on Vesting
    on Vesting
 
Name
  (#)     ($)(1)     (#)     ($)(2)  
(a)   (b)     (c)     (d)     (e)  
 
David C. Dvorak
                2,500       196,700  
James T. Crines
    61,492       3,398,994       2,667       209,540  
Bruno A. Melzi
    98,721       5,334,504       2,966       232,475  
Sheryl L. Conley
                       
Stephen H.L. Ooi
    20,768       1,231,231              
J. Raymond Elliott
    360,618       19,644,331       6,666       522,481  
Sam R. Leno
    455,262       13,982,654       1,667       131,160  
(1)  Value realized is calculated on the basis of the difference between the exercise price and the closing price of our common stock as reported by the New York Stock Exchange on the date of exercise, multiplied by the number of shares of common stock underlying the options exercised.
 
(2)  Value realized is calculated on the basis of the closing price of our common stock as reported by the New York Stock Exchange on the date of vesting multiplied by the number of shares of common stock that vested.
 
PENSION BENEFITS IN 2007
 
 
                             
        Number of
    Present Value
    Payments
 
        Years
    of
    During
 
        Credited
    Accumulated
    Last Fiscal
 
        Service
    Benefit(2)
    Year
 
Name
  Plan Name(1)   (#)     ($)     ($)  
(a)   (b)   (c)     (d)     (e)  
 
David C. Dvorak
  RIP     6.135       106,898        
    BEP/RIP     6.135       289,714        
James T. Crines
  RIP     12.387       170,041        
    BEP/RIP     12.387       318,144        
Bruno A. Melzi
  Trattamento Fine Rapporto     17.817       673,711 (3)      
Sheryl L. Conley
  RIP     25.000       250,399        
    BEP/RIP     25.000       955,173        
Stephen H.L. Ooi(4)
                   
J. Raymond Elliott
  RIP     10.405       269,764       135,507 (5)
    BEP/RIP     16.000 (6)     5,302,050 (7)      
Sam R. Leno
  RIP     6.810       214,843       8,995 (8)
    BEP/RIP     6.810             973,217 (9)
(1)  The full name of the plan referred to as the RIP in the table is the Zimmer Holdings, Inc. Retirement Income Plan. The full name of the plan referred to as the BEP/RIP in the table is the Benefit Equalization Plan of Zimmer Holdings, Inc. and its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan.
 
(2)  The accumulated benefit is the benefit to which the executive would be entitled had he or she terminated employment on December 31, 2007 and elected to commence his or her benefit at the earliest age at which he or she would receive an unreduced benefit, assuming he/she had met the eligibility conditions, payable as a monthly benefit for as long as the executive lived. If the executive terminated employment during 2007, the accumulated benefit is the benefit the executive is receiving or is entitled to receive. The expected benefit payments are discounted using interest and mortality assumptions to produce the present value of the accumulated benefit as of December 31, 2007. The assumed interest rate is 6.16% and the mortality assumption is based on the 1994 Group Annuity Mortality Tables for men and women. For Mr. Elliott, the value of his BEP/RIP benefit is equal to the lump sum payment he is expected to receive in 2008.
 
(3)  Mr. Melzi’s compensation is paid in Euros and has been converted to U.S. Dollars for purposes of this table using the average exchange rate for the year ended December 31, 2007 of 1 EUR = 1.36662 USD.
 
(4)  Mr. Ooi is not eligible to participate in a defined benefit pension plan.
 
(5)  Mr. Elliott retired November 30, 2007. He received a partial lump sum payment from the RIP during 2007 and will receive a residual annuity over his/his spouse’s lifetime.
 
(6)  When we were separating from our former parent, the Board of Directors granted Mr. Elliott additional service credit of 5.595 years, in part because of his willingness to undertake responsibility for our spin-off from our former parent and our transition to an independent public company. The increase in his benefits attributable to the additional service credit will be paid in accordance with the BEP/RIP. The present value of the accumulated benefit attributable to the additional 5.595 years is $1,359,262.
 
(7)  Mr. Elliott retired November 30, 2007. He will receive this amount in 2008 from the BEP/RIP.
 
(8)  Mr. Leno resigned effective May 4, 2007 and will receive an annuity over his/his spouse’s lifetime.


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

 
(9)  Mr. Leno resigned effective May 4, 2007 and received this amount from the BEP/RIP during 2007.
 
Narrative Discussion
 
The following narrative describes the retirement plans our named executive officers participated in during 2007.
 
Retirement Income Plan.  The RIP covers all non-union U.S. employees who had become participants prior to September 2, 2002. Messrs. Dvorak and Crines and Ms. Conley are the only named executive officers who were active participants in the RIP at December 31, 2007. We pay the entire cost of the RIP. Participants cannot make contributions to the RIP.
Benefits under the RIP are determined based upon the following factors:
 
    Final average compensation which is equal to the average of the highest five consecutive years of pension compensation during the 10 years immediately prior to the executive’s date of termination.
 
    Pension compensation is equal to the executive’s annualized base salary plus regular incentive award payments received during the year.
 
    Pension compensation is limited to $225,000 for 2007 and $230,000 for 2008. This limit increases annually by inflation.
 
    Years of service include service earned while an employee of our former parent company. Service is capped at 40 years.
 
    Estimated Social Security benefit payable at age 65.
 
    Value of retirement benefits that will be paid from our former parent company’s retirement plan.
The retirement benefit payable at age 65 equals (a) 2% times final average compensation times years of service less (b) estimated Social Security benefit divided by 70 times years of service less (c) value of retirement benefits payable to the executive from the former parent company’s retirement plan.
Years of service in column (c) of the above table excluding service with the former parent would be 6.135 years for Mr. Dvorak, 6.0 years for Mr. Crines, and 6.0 years for Ms. Conley.
The executive may commence his or her retirement benefit prior to age 65. If the benefit commences prior to age 65, it is reduced to recognize that the executive will likely receive the benefit for more years than if he/she had waited until age 65 to commence the benefit. The reduction in the benefit depends upon the number of years of service the executive has accrued at retirement. The following table sets forth the percentage reduction in the benefit at each year from age 65 down to age 55.
 
                 
Retirement
  5 or More Years of
       
Age
  Service But Less Than 10     10 or More Years of Service  
 
65
    0 %     0 %
64
    10 %     0 %
63
    18 %     0 %
62
    26 %     0 %
61
    33 %     0 %
60
    39 %     0 %
59
    44 %     4 %
58
    49 %     8 %
57
    54 %     12 %
56
    58 %     16 %
55
    61 %     20 %
The executive may elect between a number of optional forms of annuity payments. In lieu of the annuity options, the executive may elect a lump sum distribution of the value of his/her benefit accrued as of December 31, 2002, plus an annuity option for the portion of his/her benefit accrued after December 31, 2002. All optional forms of payment are approximately equal to each other in value.
The RIP is a qualified plan under the Code and is funded entirely by us. We deposit contributions into a trust for the benefit of plan participants. The assets may only be used to pay participant’s retirement benefits and plan expenses.
Benefit Equalization Plan of the Retirement Income Plan. The BEP/RIP supplements the RIP. Like the RIP, the BEP/RIP is available only to executives who became employees before September 2, 2002. The plan generally uses the same benefit formula as the RIP described above with the following exceptions:
 
    Limitation on compensation is ignored.
 
    40 year service limitation is ignored.
 
    Regular incentive award payments paid during the year are replaced by regular incentive award payments earned during the year.


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

 
    An executive may receive a lump sum payment of his/her entire benefit if an affirmative election by the executive has been in effect for at least one year prior to the date of payment.
The executive’s benefit from the BEP/RIP is reduced by the benefit payable from the RIP. The primary purpose of the BEP/RIP is to provide the same retirement benefits to executives as a percent of compensation that an employee receives whose compensation has not been limited.
Ms. Conley is the only named executive officer whose expected years of service at age 65 of 43 years exceeds the 40 year limit.
The BEP/RIP is a “non-qualified plan” under the Code. We do not make contributions for the benefit of the plan participants into a trust. Therefore, when benefits are paid, they are distributed from our general assets. The promise to provide these benefits is limited to our ability to pay the benefits in the event of our bankruptcy or insolvency.
In 2001, the Board of Directors granted Mr. Elliott additional age and service credit for purposes of calculating his pension benefits and determining his eligibility for retiree health and life insurance benefits. The additional pension benefits will be paid from our general assets pursuant to the BEP/RIP or a similar, unfunded, nonqualified pension benefit arrangement, and will be offset by supplemental pension benefits payable to Mr. Elliott by our former parent. The present value of the accumulated benefit attributable to the additional service credit is shown in footnote 6 to the Pension Benefits in 2007 table.
In addition to Mr. Elliott, the committee has granted additional years of service in excess of a participant’s actual years of service only once. We do not expect the committee to grant any additional service credit in the future.
Executives Eligible for Early Retirement.  None of the named executive officers who were our employees at December 31, 2007 meet the conditions for early retirement.
Non-U.S. Pension Plans. We maintain a number of pension plans for our employees whose principal place of employment is outside the United States. These pension plans are governed, and in some cases mandated, by the laws of the applicable countries and can vary significantly from plan to plan. As a resident of Italy, Mr. Melzi’s pension benefits will be provided under plans regulated by Italian law and labor agreements. Mr. Melzi participates in a defined contribution type plan known as the Trattamento Fine Rapporto (TFR). We contribute a percentage of Mr. Melzi’s pay into the TFR. At the time of Mr. Melzi’s termination, he will be entitled to receive the account balance held for him in the TFR. As a resident of Singapore, Mr. Ooi will receive his pension benefit from the Central Provident Fund (CPF), which is a government-provided defined contribution plan. We contribute a percentage of Mr. Ooi’s pay into the CPF as required by Singapore law. We also contribute an additional voluntary contribution to the CPF. The portion of the additional voluntary contributions that exceeds the allowable limitations is returned to Mr. Ooi.
 
NONQUALIFIED DEFERRED COMPENSATION IN 2007
 
 
                                         
    Executive
    Registrant
    Aggregate
    Aggregate
    Aggregate
 
    Contributions
    Contributions
    Earnings
    Withdrawals/
    Balance at
 
    in Last FY
    in Last FY
    in Last FY
    Distributions
    Last FYE
 
Name
  ($)(1)     ($)(2)     ($)(3)     ($)     ($)(4)  
(a)   (b)     (c)     (d)     (e)     (f)  
 
David C. Dvorak
    322,730       17,133       (37,159 )           1,918,095  
James T. Crines
    15,692       7,062       1,037             39,876  
Bruno A. Melzi
                             
Sheryl L. Conley
    24,800       6,975       5,613             96,422  
Stephen H.L. Ooi
                             
J. Raymond Elliott
    74,769       21,029       41,185       442,256       337,931  
Sam R. Leno
                10,651       181,214        
(1)  All of the amounts shown in this column are or were previously reported in the Summary Compensation Table, as follows:
 
                 
    Amount Reported as Salary
    Amount Reported as Non-Equity
 
    in the Summary Compensation
    Incentive Compensation in
 
    Table of this Proxy
    the Summary Compensation
 
    Statement
    Table of 2007 Proxy Statement
 
    ($)     ($)  
 
Mr. Dvorak
    57,110       265,620  
Mr. Crines
    15,692        
Mr. Melzi
           
Ms. Conley
    24,800        
Mr. Ooi
           
Mr. Elliott
    74,769        
Mr. Leno
           


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

 
(2)  The amounts shown in this column are reported in the Summary Compensation Table as part of All Other Compensation.
 
(3)  The amounts shown in this column are not reported as compensation in the Summary Compensation Table as they do not represent above-market or preferential earnings on deferred compensation.
 
(4)  Of the amounts shown in this column, the following amounts are or were previously reported in the Summary Compensation Table:
 
         
    Aggregate Amount Reported in
 
    the Summary Compensation
 
    Table of this and prior Proxy
 
    Statements
 
    ($)  
 
Mr. Dvorak
    1,613,120  
Mr. Crines
    22,754  
Mr. Melzi
     
Ms. Conley
    80,229  
Mr. Ooi
     
Mr. Elliott
    661,372  
Mr. Leno
    143,524  
 
The following is a description of the two plans that allowed executive officers to defer 2007 compensation.
Benefit Equalization Plan of the Zimmer Holdings, Inc. Savings and Investment Program. The BEP/SIP is a non-qualified plan that supplements the SIP. It provides an opportunity for eligible executives to make pre-tax deferrals once their base pay reaches the maximum compensation limit for tax-qualified plans. A participant may elect to defer under this plan, on a pre-tax basis, up to 30% of base pay in excess of the maximum compensation limit, which was $225,000 for 2007. A participant’s pre-tax savings contribution percentage under this plan will be equal to his or her total pre-tax and after-tax savings percentage under the SIP as of the beginning of a year and may not be changed during the year. Participants may also receive company contributions under this plan that they would otherwise forego under the SIP because of U.S. tax law limitations. Participants must initially elect to enroll in the BEP/SIP by December 31 of the year preceding the year in which contributions will be allocated to their accounts. Elections remain in effect for future years unless a participant elects, as of the beginning of a subsequent year, to suspend participation in either this plan or the SIP.
The plan does not offer any above-market rates of return. Participants may select from various investment alternatives to serve as the measure of investment earnings on their accounts. Investment alternatives under this plan are the same as those offered under the SIP with the exception of our company stock fund, which is not available under this plan. During 2007, the investment alternatives included two dozen different mutual funds from a number of different fund families. Our contributions follow the investment direction of participant contributions. Participants may change the investment direction of their existing account balances at any time by contacting the plan administrator. During 2007, the rates of return of the various investment alternatives available under the plan ranged from (14.04)% to 19.89%.
We do not hold contributions to the plan in a trust and, therefore, they may be subject to the claims of our creditors in the event of our bankruptcy or insolvency. When payments come due under the plan we distribute cash from our general assets. The plan does not permit loans. During employment, the plan permits withdrawals only for extreme financial hardship or unforeseen emergencies. A participant must withdraw all available funds from his or her SIP account before making a withdrawal from this plan. If a participant makes a withdrawal from this plan, his or her contributions to the plan will be suspended for the remainder of the year.
Unless a participant elects otherwise, his or her account balance will be paid in a single lump sum following termination of employment or retirement. A participant may irrevocably elect, however, prior to the beginning of each year, to defer receipt of the portion of his or her account balance attributable to that year’s contributions for a period of one to five years following retirement and/or to have that amount paid in equal annual installments following retirement over a period of (1) up to 15 years, (2) the participant’s life expectancy, or (3) the joint life expectancy of the participant and his or her designated beneficiary. Despite any election that a participant might have made, if the participant terminates employment prior to attaining age 55 with at least ten years of service, or if the participant’s account balance at the time of retirement is $15,000 or less, the participant’s account balance will be paid in a single lump sum following his or her termination of employment or retirement.
Executive Performance Incentive Plan.  The EPIP allows an executive to elect to defer, on a pre-tax basis, from 25% to 95% of his or her annual incentive award. To be effective, a participant must make the election by December 31 of the year preceding the year in which the annual incentive award would otherwise be payable.


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

The plan does not offer any above-market rates of return. Participants may select from various investment alternatives to serve as the measure of investment earnings on their accounts, including an equity index fund, a bond index fund and a company stock fund. Participants may change the investment direction of their existing account balances as of January 1 of any year. During 2007, the rates of return of the various investment alternatives available under the plan ranged from (15.18)% to 5.43%.
We do not hold contributions to the plan in a trust and, therefore, they may be subject to the claims of our creditors in the event of our bankruptcy or insolvency. When payments come due under the plan we distribute cash from our general assets. The plan does not permit loans or withdrawals during employment.
Unless a participant elects otherwise, his or her account balance will be paid in a single lump sum following termination of employment. A participant may irrevocably elect, however, prior to the beginning of each year, to defer receipt of the portion of his or her account balance attributable to that year’s contributions for a period of one to five years following termination and/or to have that amount paid in equal annual installments following termination over a period of (1) up to ten years, (2) the participant’s life expectancy, or (3) the joint life expectancy of the participant and his or her designated beneficiary.
Our obligation to make payments to a participant will terminate if, after termination of employment, the participant either discloses our confidential information to unauthorized persons or otherwise conducts himself or herself in a manner which the committee determines is contrary to our best interests.


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ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT
 
The table below reflects the estimated amount of compensation payable to each of the named executive officers in the event of termination of his or her employment. The table shows the potential compensation payable to each named executive officer upon a termination following a change in control, voluntary resignation, retirement, death, disability, involuntary with-cause termination and involuntary without cause termination. The table excludes certain amounts payable pursuant to plans that do not discriminate in favor of executive officers and that are available generally to all salaried employees. The amounts shown assume that termination of employment was effective as of December 31, 2007. Messrs. Elliott and Leno, who are listed in the preceding compensation tables as named executive officers, are not shown because they were not our employees at December 31, 2007. The amounts shown are only estimates of the amounts that would be payable to the executives upon termination of employment and do not reflect tax positions we may take or the accounting treatment of such payments. Actual amounts to be paid can only be determined at the time of separation.
 
                                                         
    Termination Scenario  
                                  Involuntary
    Involuntary
 
    Change in
    Voluntary
                      with
    without
 
Compensation Components
  Control($)     Resignation($)     Retirement($)     Death($)     Disability($)     Cause($)     Cause($)  
 
David C. Dvorak
                                                       
Severance – Salary(1)
    1,400,000                                      
Severance – EPIP Award(2)
    1,400,000                                      
Earned 2007 EPIP Award(3)
    409,889       409,889       409,889       409,889       409,889       409,889       409,889  
Stock Options(4)
    4,730,432       4,730,432       4,730,432       4,730,432       4,730,432       4,730,432       4,730,432  
Restricted Stock(5)
    1,821,242                   330,750       330,750             151,616  
RSUs(6)
    2,471,364                                      
Performance-Based RSUs(7)
    1,256,850                                      
Performance Shares(8)
    1,212,728                   444,660       444,660              
RIP(9)
    70,736       70,736       70,736       58,231       70,736       70,736       70,736  
Nonqual. Pension & Def. Comp.
                                                       
BEP/RIP(10)
    364,805       191,708       191,708       157,819       191,708       191,708       191,708  
BEP/SIP(11)
    260,763       260,763       260,763       260,763       260,763       260,763       260,763  
EPIP(12)
    1,657,332       1,657,332       1,657,332       1,657,332       1,657,332       1,657,332       1,657,332  
Health and Welfare(13)
    71,618                                      
Disability(14)
                            991,250              
Outplacement(15)
    25,000                                      
Gross-up(16)
    2,256,014                                      
James T. Crines
                                                       
Severance – Salary(1)
    830,000                                      
Severance – EPIP Award(2)
    498,000                                      
Earned 2007 EPIP Award(3)
    162,182       162,182       162,182       162,182       162,182       162,182       162,182  
Stock Options(4)
    1,107,027       1,107,027       1,107,027       1,107,027       1,107,027       1,107,027       1,107,027  
Restricted Stock(5)
    965,724                   220,478       220,478             101,011  
RSUs(6)
    1,068,653                                      
Performance-Based RSUs(7)
    294,037                                      
Performance Shares(8)
    1,124,550                   412,335       412,335              
RIP(9)
    112,519       112,519       112,519       101,071       112,519       112,519       112,519  
Nonqual. Pension & Def. Comp.
                                                       
BEP/RIP(10)
    344,669       210,521       210,521       189,103       210,521       210,521       210,521  
BEP/SIP(11)
    39,876       39,876       39,876       39,876       39,876       39,876       39,876  
Health and Welfare(13)
    26,344                                      
Disability(14)
                                         
Outplacement(15)
    15,000                                      
Gross-up(16)
    1,161,645                                      


36


 

ZIMMER HOLDINGS, INC.                                                                                                                                                                             2008 PROXY STATEMENT

                                                         
    Termination Scenario  
                                  Involuntary
    Involuntary
 
    Change in
    Voluntary
                      with
    without
 
Compensation Components
  Control($)     Resignation($)     Retirement($)     Death($)     Disability($)     Cause($)     Cause($)  
 
Bruno A. Melzi
                                                       
Severance – Salary(1)
                                         
Severance – EPIP Award(2)
                                         
Earned 2007 EPIP Award(3)
    193,403       193,403       193,403       193,403       193,403       193,403       193,403  
Stock Options(4)
                                         
Restricted Stock(5)
                                         
RSUs(6)
    878,141                                      
Performance Shares(8)
    1,256,850             460,845       460,845       460,845              
Non-U.S. Pension Plans
                                                       
Trattamento Fine Rapporto(17)
    673,711       673,711       673,711       673,711       673,711       673,711       673,711  
Fondo Mario Negri(18)
    151,605       151,605       151,605       151,605       151,605       151,605       151,605  
Termination Indemnity(19)
    2,192,842       274,105                               2,192,842  
Health and Welfare(13)
    102,507                                      
Outplacement(15)
    15,000                                      
Gross-up(16)
                                         
Sheryl L. Conley
                                                       
Severance – Salary(1)
    760,000                                      
Severance – EPIP Award(2)
    456,000                                      
Earned 2007 EPIP Award(3)
    168,492       168,492       168,492       168,492       168,492       168,492       168,492  
Stock Options(4)
    7,174,647       7,174,647       7,174,647       7,174,647       7,174,647       7,174,647       7,174,647  
Restricted Stock(5)
                                         
RSUs(6)
    978,359                                      
Performance Shares(8)
    1,124,550                   412,335       412,335              
RIP(9)