DEF 14A 1 d450302ddef14a.htm DEFINITIVE NOTICE & PROXY STATEMENT <![CDATA[Definitive Notice & Proxy Statement]]>
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934

Filed by the Registrant  x

Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨ Preliminary Proxy Statement

 

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

 

x Definitive Proxy Statement

 

¨ Definitive Additional Materials

 

¨ Soliciting Material Pursuant to §240.14a-12

COVIDIEN PUBLIC LIMITED COMPANY

 

(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):

 

x No fee required.

 

¨ 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):

 

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¨ Fee paid previously with preliminary materials.

 

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

 

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  (4) Date Filed:


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LOGO

January 24, 2013

Dear Shareholder,

You are cordially invited to attend the 2013 Annual General Meeting of Covidien plc, which will be held on Wednesday, March 20, 2013, at 11:00 a.m., local time, at the Conrad Dublin Hotel, Earlsfort Terrace, Dublin 2, Ireland. Details of the business to be presented at the meeting can be found in the accompanying Proxy Statement. We hope you are planning to attend the meeting. Your vote is important. Whether or not you are able to attend, I encourage you to submit your proxy as soon as possible so that your shares will be represented at the meeting.

On behalf of the Board of Directors and the management of Covidien, I extend our appreciation for your continued support.

 

Yours sincerely,
LOGO
José E. Almeida
Chairman, President and Chief Executive Officer

 

    2013 Proxy Statement


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COVIDIEN PUBLIC LIMITED COMPANY

Registered In Ireland – No. 466385

20 On Hatch, Lower Hatch Street

Dublin 2, Ireland

NOTICE OF 2013 ANNUAL GENERAL MEETING OF SHAREHOLDERS

TO BE HELD MARCH 20, 2013

The 2013 Annual General Meeting of Covidien plc (“Covidien” or the “Company”), a company incorporated under the laws of Ireland, will be held on March 20, 2013, at 11:00 a.m., local time, at the Conrad Dublin Hotel, Earlsfort Terrace, Dublin 2, Ireland for the following purposes:

 

  1. By separate resolutions, to elect as Directors for a period of one year, expiring at the end of the Company’s Annual General Meeting of Shareholders in 2014, the following individuals:

 

(a)    José E. Almeida    (e)   John M. Connors, Jr.    (i)   Dennis H. Reilley
(b)    Joy A. Amundson    (f)   Christopher J. Coughlin    (j)   Joseph A. Zaccagnino
(c)    Craig Arnold    (g)   Randall J. Hogan, III     
(d)    Robert H. Brust    (h)   Martin D. Madaus     

 

  2. To appoint Deloitte & Touche LLP as the independent auditors of the Company and to authorize the Audit Committee of the Board of Directors to set the auditors’ remuneration.

 

  3. To hold an advisory vote on the Company’s executive compensation.

 

  4. To approve the amended and restated Covidien Stock and Incentive Plan.

 

  5. To authorize the Company and/or any subsidiary of the Company to make market purchases of Company shares.

 

  6. To authorize the price range at which the Company can reissue shares that it holds as treasury shares. (Special Resolution)

 

  7. To amend the Company’s Articles of Association to expand the authority to execute instruments of transfer. (Special Resolution)

 

  8. To hold an advisory vote on the creation of distributable reserves for Mallinckrodt plc.

 

  9. To act on such other business as may properly come before the meeting or any adjournment thereof.

Proposals 1 through 5 and Proposal 8 are ordinary resolutions, requiring the approval of a simple majority of the votes cast at the meeting. Proposals 6 and 7 are special resolutions, requiring the approval of not less than 75% of the votes cast. The foregoing items are more fully described in the Proxy Statement accompanying this Notice of Annual General Meeting of Shareholders. Shareholders as of January 10, 2013, the record date for the Annual General Meeting, are entitled to vote on these matters.

During the meeting, management will also present and the auditors will report to shareholders on Covidien’s Irish Statutory Accounts for the fiscal year ended September 28, 2012.

By Order of the Board of Directors,

 

LOGO

John W. Kapples, Secretary

January 24, 2013

Whether or not you expect to attend the annual general meeting in person, we encourage you to cast your vote promptly so that your shares will be represented and voted at the meeting. Any shareholder entitled to attend and vote at the annual general meeting may appoint one or more proxies, who need not be a shareholder(s) of Covidien plc. If you wish to appoint as proxy any person other than the individuals specified on the Company’s proxy card, please contact the company secretary at our registered office.

This Proxy Statement, our Annual Report on Form 10-K for the fiscal year ended September 28, 2012 and our Irish Statutory Accounts are available to shareholders of record at www.proxyvote.com. These materials are also available in the Investor Relations section of our website at www.covidien.com.

 

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TABLE OF CONTENTS

 

GENERAL INFORMATION

     1   

Questions and Answers about Proxy Materials, Voting, Attending the Meeting and Other General Information

     1   

CORPORATE GOVERNANCE

     7   

Corporate Governance Guidelines

     7   

Independence of Nominees for Director

     7   

Director Nominations Process

     8   

Majority Vote for Election of Directors

     10   

Executive Sessions of the Board

     10   

Board Leadership Structure

     10   

Code of Ethics

     10   

Board Risk Oversight

     11   

Compensation Risk Assessment

     11   

Hedging Policy

     12   

Transactions with Related Persons

     12   

Communications with the Board of Directors

     12   

BOARD OF DIRECTORS AND BOARD COMMITTEES

     13   

General

     13   

Board Committees

     13   

Compensation of Non-Employee Directors

     15   

COMPENSATION OF EXECUTIVE OFFICERS

     18   

Compensation Discussion and Analysis

     18   

Compensation Committee Report on Executive Compensation

     36   

Executive Compensation Tables

     37   

SECURITY OWNERSHIP AND REPORTING

     52   

Security Ownership of Management and Certain Beneficial Owners

     52   

Section 16(a) Beneficial Ownership Reporting Compliance

     53   

AUDIT AND AUDIT COMMITTEE MATTERS

     54   

Audit and Non-Audit Fees

     54   

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services

     54   

Audit Committee Report

     55   

Equity Compensation Plan Information

     56   

PROPOSALS REQUIRING YOUR VOTE

     57   

Proposal 1:

  

Elect Directors

     57   

Proposal 2:

  

Appoint the independent auditors and authorize the Audit Committee to set their remuneration

     63   

Proposal 3:

  

An advisory vote on the Company’s executive compensation

     64   

Proposal 4:

  

Approve the amended and restated Covidien Stock and Incentive Plan

     65   

Proposal 5:

   Authorize the Company and/or any subsidiary of the Company to make market purchases of Company shares      74   

Proposal 6:

   Authorize the price range at which the Company can reissue shares that it holds as treasury shares      75   

Proposal 7:

   Amend the Company’s Articles of Association to expand the authority to execute instruments of transfers      76   

Proposal 8:

  

An advisory vote on the creation of Mallinckrodt distributable reserves

     77   

OTHER MATTERS

     78   

Presentation of Irish Statutory Accounts

     78   

Registered and Principal Executive Offices

     78   

Shareholder Proposals for the 2014 Annual General Meeting

     78   

United States Securities and Exchange Commission Reports

     79   

Delivery of Documents to Shareholders Sharing an Address

     79   

General

     79   

APPENDIX A—Amended and Restated Covidien Stock and Incentive Plan

     A-1   

 

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COVIDIEN PLC

PROXY STATEMENT

 

 

GENERAL INFORMATION

Questions and Answers about Proxy Materials, Voting, Attending the Meeting and Other General Information

 

   
Why did I receive this Proxy Statement?  

We are making this Proxy Statement available to you on or about January 24, 2013 on the Internet, or by delivering printed versions to you by mail, because our Board of Directors is soliciting your proxy to vote at the Company’s 2013 Annual General Meeting on March 20, 2013. This Proxy Statement contains information about the items being voted on at the Annual General Meeting and important information about Covidien.

 

This Proxy Statement and the following documents relating to the 2013 Annual General Meeting are available on our website at www.covidien.com/covidien/investor:

 

•    Our Internet Notice of Availability of Proxy Materials;

 

•    Our Annual Report to Shareholders, including our Annual Report on Form 10-K for the fiscal year ended September 28, 2012; and

 

•    Our Irish Statutory Accounts for the fiscal year ended September 28, 2012 and the reports of the Directors and auditors thereon.

 

   
How do I access the proxy materials and vote my shares?  

The instructions for accessing proxy materials and voting can be found in the information you received either by mail or email.

 

For shareholders who received a notice by mail about the Internet availability of proxy materials:    You may access the proxy materials and voting instructions over the Internet via the web address provided in the notice. In order to access this material and vote, you will need the control number provided on the notice you received in the mail. You may vote by following the instructions on the notice or on the website.

 

For shareholders who received a notice by e-mail:    You may access the proxy materials and voting instructions over the Internet via the web address provided in the e-mail. In order to vote, you will need the control number provided in the e-mail. You may vote by following the instructions in the e-mail or on the website.

 

For shareholders who received the proxy materials by mail:    You may vote your shares by following the instructions provided on the proxy card or voting instruction form. If you vote by Internet or telephone, you will need the control number provided on the proxy card or voting instruction form. If you vote by mail, please complete, sign and date the proxy card or voting instruction form and mail it in the accompanying pre-addressed envelope.

 

   
Who may vote at the Annual General Meeting and how many votes do I have?   If you owned ordinary shares of Covidien at the close of business on the record date, January 10, 2013, then you may vote at the Annual General Meeting by following the procedures outlined in this Proxy Statement. At the close of business on the record date, we had 471,647,463 ordinary shares outstanding and entitled to vote. Each ordinary share is entitled to one vote on each matter properly brought before the Annual General Meeting.

 

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May I vote my shares in person at the Annual General Meeting?  

Yes, you may vote your shares in person at the Annual General Meeting as follows.

 

If you are a shareholder of record and you wish to vote in person at the Annual General Meeting, you may do so. If you do not wish to attend yourself, you may also appoint a proxy or proxies to attend, speak and vote in your place. A proxy does not need to be a shareholder of Covidien. You are not precluded from attending, speaking or voting at the Annual General Meeting, even if you have completed a proxy form. To appoint a proxy other than the designated officers of the Company, please contact the Company Secretary at our registered office.

 

If you are a beneficial owner of shares and you wish to vote in person at the Annual General Meeting, you must obtain a legal proxy from the bank, brokerage firm or nominee that holds your shares. You will need to bring the legal proxy with you to the meeting and hand it in with a signed ballot that you can request at the meeting. You will not be able to vote your shares at the Annual General Meeting without a legal proxy and a signed ballot.

 

Even if you plan to attend the Annual General Meeting, we recommend that you also vote by proxy as described above so that your vote will be counted if you later decide not to attend the meeting.

 

   

What is the deadline for voting my shares if I do not vote in person at the Annual General Meeting?

 

 

If you are a shareholder of record, you may vote by Internet or by telephone until 5:00 p.m., United States Eastern Time, on March 19, 2013.

 

If you are a beneficial owner of shares held through a bank or brokerage firm, please follow the voting instructions provided by your bank or brokerage firm.

 

   
What is the difference between holding shares as a shareholder of record and as a beneficial owner of shares held in street name?  

Shareholder of Record.    If you hold ordinary shares and your name appears in the Register of Members of Covidien, you are considered the shareholder of record of those shares.

 

Beneficial Owner of Shares Held in Street Name.    If your ordinary shares are held in an account at a brokerage firm, bank, broker-dealer or other similar organization, then you are the beneficial owner of shares held in “street name.” As a beneficial owner, you have the right to direct your bank or brokerage firm how to vote the shares held in your account.

 

   
Can I change my vote after I have submitted my proxy?  

Yes. You have the right to revoke your proxy before it is voted at the Annual General Meeting, subject to the proxy voting deadlines described above. You may vote again on a later date within the proxy voting deadlines described above by Internet or by telephone (only your latest Internet or telephone proxy submitted prior to the meeting will be counted), or by signing and returning a new proxy card with a later date, or by attending the meeting and voting in person. However, your attendance at the Annual General Meeting will not automatically revoke your proxy unless you vote in person at the meeting or file a written instrument with the Secretary of Covidien at least one hour prior to the start of the meeting requesting that your prior proxy be revoked.

 

 

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What happens if I do not give specific voting instructions when I deliver my proxy?  

Shareholders of Record.    If you are a shareholder of record and you:

 

•   Indicate when voting by Internet or by telephone that you wish to vote as recommended by our Board of Directors; or

 

•   If you sign and return a proxy card without giving specific voting instructions,

 

then the Company-designated proxy holders will vote your shares in the manner recommended by our Board of Directors on all matters presented in this Proxy Statement and as the proxy holders may determine in their discretion regarding any other matters properly presented for a vote at the meeting.

 

Beneficial Owners of Shares Held in Street Name.    If you are a beneficial owner of shares and your bank or brokerage firm does not receive instructions from you about how your shares are to be voted, one of two things can happen, depending on the type of proposal. Pursuant to New York Stock Exchange (“NYSE”) rules, brokers have discretionary power to vote your shares with respect to “routine” matters, but they do not have discretionary power to vote your shares on “non-routine” matters. Pursuant to NYSE rules, the election of directors, the advisory vote on executive compensation and approval of the amended and restated Stock and Incentive Plan are considered non-routine matters. A bank or brokerage firm may not vote your shares with respect to non-routine matters if you have not provided instructions. This is called a “broker non-vote.” We strongly encourage you to submit your proxy and exercise your right to vote as a shareholder.

 

   
What is the “quorum” requirement for the Annual General Meeting?  

In order to conduct any business at the Annual General Meeting, holders of a majority of Covidien’s shares which are outstanding and entitled to vote on the record date must be present in person or represented by valid proxies. This is called a quorum. Your shares will be counted for purposes of determining if there is a quorum, whether representing votes for, against or abstained, or broker non-votes, if you:

 

•   are present and vote in person at the meeting;

 

•   have voted by Internet or by telephone; or

 

•   you have submitted a proxy card or voting instruction form by mail.

 

 

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Assuming there is a proper quorum of shares represented at the Annual General Meeting, how many shares are required to approve the proposals being voted upon at the Annual General Meeting?  

The voting requirements for each of the proposals are as follows:

 

  Proposal   Vote Required
 

1.    Elect directors

  Majority of votes cast
 

2.    Appoint the independent auditors and authorize the Audit Committee of the Board to set the auditors’ remuneration

  Majority of votes cast
 

3.    Advisory vote on executive compensation

  Majority of votes cast
 

4.    Amend and restate the Covidien Stock and Incentive Plan

  Majority of votes cast
 

5.    Authorization to make market purchases of company shares

  Majority of votes cast
   

6.    Authorization of the price at which the company can reissue shares held as treasury shares (Special Resolution)

  75% of votes cast
 

7.    Amend the Articles of Association to expand the authority to execute instruments of transfer (Special Resolution)

  75% of votes cast
 

8.    Advisory vote on the creation of Mallinckrodt distributable reserves

  Majority of votes cast
   
How are abstentions and broker non-votes treated?  

Abstentions and broker non-votes are considered present for purposes of determining the presence of a quorum. Abstentions and broker non-votes will not be considered votes properly cast at the Annual General Meeting. Because the approval of all of the proposals is based on the votes properly cast at the Annual General Meeting, abstentions and broker non-votes will not have any effect on the outcome of voting on these proposals.

 

   
Why did I receive a notice in the mail regarding the Internet availability of the proxy materials instead of a paper copy of the proxy materials?  

As explained in more detail below, we are using the “notice and access” system adopted by the U.S. Securities and Exchange Commission (the “SEC”) relating to delivery of our proxy materials over the Internet. As a result, we mailed to many of our shareholders a notice about the Internet availability of the proxy materials instead of a paper copy of the proxy materials. Shareholders who received the notice will have the ability to access the proxy materials over the Internet and to request a paper copy of the proxy materials by mail, by e-mail or by telephone. Instructions on how to access the proxy materials over the Internet or to request a paper copy may be found on the notice. In addition, the notice contains instructions on how shareholders may request proxy materials in printed form by mail or electronically by e-mail on an ongoing basis. This notice of Internet availability of proxy materials also serves as a Notice of Meeting.

 

 

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What are the “notice and access” rules and how do they affect the delivery of the proxy materials?  

The SEC’s notice and access rules allow us to deliver proxy materials to our shareholders by posting the materials on an Internet website, notifying shareholders of the availability of the proxy materials on the Internet and sending paper copies of proxy materials upon shareholder request. We believe that the notice and access rules allow us to use Internet technology that many shareholders prefer, continue to provide our shareholders with the information they need and, at the same time, assure more prompt delivery of the proxy materials. The notice and access rules also lower our cost of printing and delivering the proxy materials and minimize the environmental impact of printing paper copies.

 

   
Why didn’t I receive a notice in the mail about the Internet availability of the proxy materials?  

Shareholders who previously elected to access the proxy materials over the Internet will not receive a notice in the mail about the Internet availability of the proxy materials. Instead, you should have received an e-mail with links to the proxy materials and the proxy voting website. Additionally, we mailed copies of the proxy materials to shareholders who previously requested to receive paper copies instead of the notice.

 

If you received a paper copy of the proxy materials, you may elect to receive future proxy materials electronically by following the instructions on your proxy card or voting instruction form. Choosing to receive your future proxy materials by e-mail will help us conserve natural resources and reduce the costs of printing and distributing our proxy materials. If you choose to receive future proxy materials by e-mail, you will receive an e-mail with instructions containing a link to the website where those materials are available and a link to the proxy voting website. Your election to receive proxy materials by e-mail will remain in effect until you terminate it.

 

   
How do I attend the Annual General Meeting?  

All shareholders are invited to attend the Annual General Meeting.

 

Shareholders of Record.    For admission to the Annual General Meeting, shareholders of record should bring picture identification to the Registered Shareholders check-in area, where ownership will be verified. If you would like someone to attend on your behalf, please contact the Company Secretary at our registered office prior to the meeting.

 

Beneficial Owners of Shares Held in Street Name.    Those who have beneficial ownership of ordinary shares held by a bank, brokerage firm or other nominee should come to the Beneficial Owners check-in area. To be admitted, beneficial owners must bring picture identification, as well as proof from their banks or brokers that they owned Covidien ordinary shares on January 10, 2013, the record date for the Annual General Meeting.

 

Registration will begin at 10:30 a.m., local time, and the Annual General Meeting will begin at 11:00 a.m., local time. For directions to the Annual General Meeting, please call us at +353 1 438-1700.

 

   
How will voting on any other business be conducted?  

Other than matters incident to the conduct of the Annual General Meeting, we do not know of any business or proposals to be considered at the Annual General Meeting other than those set forth in this Proxy Statement. If any other business is proposed and properly presented at the Annual General Meeting, the proxies received from our shareholders give the proxy holders the authority to vote on the matter at their discretion.

 

 

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Who will count the votes?  

Broadridge Financial Solutions, Inc. will act as the inspector of elections and will tabulate the votes.

 

   
Who will pay the costs of soliciting the proxies?  

We will pay the costs of soliciting proxies. Proxies may be solicited on behalf of Covidien by directors, officers or employees of Covidien in person or by telephone, facsimile or other electronic means. We have retained D. F. King & Co., Inc. to assist in solicitation of proxies and have agreed to pay D. F. King $17,000, plus out-of-pocket expenses, for these services. As required by the SEC and the NYSE, we also will reimburse brokerage firms and other custodians, nominees and fiduciaries, upon request, for their reasonable expenses incurred in sending proxies and proxy materials to beneficial owners of our ordinary shares.

 

   
Who is Covidien’s transfer agent?  

Our transfer agent is Computershare Shareowner Services LLC. All communications concerning accounts of shareholders of record, including address changes, name changes, inquiries as to requirements to transfer Covidien stock and similar issues, can be handled by calling toll-free 1-866-210-6572 (U.S.) or +1-201-680-6578 (outside the U.S.) or by accessing Computershare’s website at www.computershare.com.

 

   
Where can I find more information about Covidien?  

For other information about Covidien, you can visit our website at www.covidien.com. We make our website content available for information purposes only. It should not be relied upon for investment purposes, and it is not incorporated by reference into this Proxy Statement.

 

 

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CORPORATE GOVERNANCE

Our Board of Directors believes that good governance requires not only an effective set of specific practices, but also a culture of responsibility throughout an organization, and governance at Covidien is intended to achieve both. The Board also believes that good governance ultimately depends on the quality of an organization’s leadership, and it is committed to recruiting and retaining directors and officers of proven leadership ability and personal integrity.

Corporate Governance Guidelines

The Board has adopted governance guidelines which are designed to assist the Company and the Board in implementing effective corporate governance practices. The governance guidelines, which are reviewed annually by the Nominating and Governance Committee, address, among other things:

 

   

director responsibilities;

 

   

composition and selection of the Board, including qualification standards and independence guidelines;

 

   

majority voting for directors;

 

   

the role of an independent Lead Director;

 

   

Board committee establishment, structure and guidelines;

 

   

officer and director stock ownership requirements;

 

   

meetings of non-employee directors;

 

   

director orientation and continuing education;

 

   

Board access to management and independent advisors;

 

   

communication with directors;

 

   

Board and committee self-evaluations;

 

   

succession planning and management development reviews;

 

   

CEO performance reviews;

 

   

recoupment, or “claw-back”, of executive compensation;

 

   

ethics and conflicts of interest; and

 

   

policy on shareholder rights plans.

The governance guidelines are posted on our website at www.covidien.com.

Independence of Nominees for Director

As noted above, the governance guidelines include criteria adopted by the Board to assist it in making determinations regarding the independence of its members. The criteria, summarized below, are consistent with the NYSE listing standards regarding director independence. To be considered independent, the Board must determine that a director does not have a material relationship, directly or indirectly, with Covidien. In assessing independence, the Board considers all relevant facts and circumstances. In particular, when assessing the materiality of a director’s relationship with the Company, the Board considers the issue not just from the standpoint of the director, but also from that of the persons or organizations with which the director has an affiliation. A director will not be considered independent if he or she:

 

   

is, or has been within the last three years, an employee of Covidien;

 

   

has an immediate family member who is, or has been within the last three years, an executive officer of Covidien;

 

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is a current partner or employee of our auditor;

 

   

has an immediate family member who is a current partner of our auditor or who is an employee of our auditor and personally works on our audit;

 

   

has been, or has an immediate family member who has been, within the last three years, a partner or employee of our auditor who personally worked on our audit during that time;

 

   

is, or an immediate family member is, or has been within the last three years, employed as an executive officer of a public company that has or had on the compensation committee of its Board an executive officer of Covidien (during the same period of time);

 

   

has, or has an immediate family member who has, received more than $120,000 in direct compensation from Covidien, other than director and committee fees, in any twelve month period within the last three years;

 

   

is a current employee, or has an immediate family member who is a current executive officer, of a company that has made payments to, or received payments from, Covidien for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million or 2% of such other company’s consolidated gross revenues; or

 

   

is, or his or her spouse is, an executive officer, director or trustee of a charitable organization to which Covidien’s contributions, not including our matching of charitable contributions by employees, exceed, in any single year within the last three fiscal years, the greater of $1 million or 2% of such organization’s total charitable receipts during that year.

The Board has considered the independence of its members in light of these independence criteria. In connection with its independence considerations, the Board has reviewed Covidien’s relationships with organizations with which our directors are affiliated and has determined that such relationships, other than that with Tyco International Ltd. (“Tyco International”), from whom we spun in 2007, were established in the ordinary course of business. The Board has determined that none of these current business relationships are material to us, any of the organizations involved, or our directors. Based on these considerations, the Board has determined that each of our directors and each of the director nominees, other than José E. Almeida, our Chairman, President and Chief Executive Officer, satisfies the criteria and is independent. These independent directors are: Joy A. Amundson, Craig Arnold, Robert H. Brust, John M. Connors, Jr., Christopher J. Coughlin, Timothy M. Donahue, Randall J. Hogan, III, Martin D. Madaus, Dennis H. Reilley and Joseph A. Zaccagnino. Each independent director is expected to notify the chair of the Nominating and Governance Committee, as soon as reasonably practicable, of changes in his or her personal circumstances that may affect the Board’s evaluation of his or her independence.

Director Nominations Process

The Nominating and Governance Committee is responsible for developing the general criteria, subject to approval by the full Board, for use in identifying, evaluating and selecting qualified candidates for election or re-election to the Board. The Nominating and Governance Committee periodically reviews with the Board the appropriate skills and characteristics required of Board members in the context of the current make up of the Board. Final approval of director candidates is determined by the full Board, and invitations to join the Board are extended by the Chairman of the Board on behalf of the entire Board.

The Nominating and Governance Committee, in accordance with the Board’s governance guidelines, seeks to create a Board that is strong in its collective knowledge and has a diversity of skills and experience with respect to accounting and finance, management and leadership, vision and strategy, business operations, business judgment, industry knowledge, corporate governance and global markets. When the Committee reviews a potential new candidate, the Committee looks specifically at the candidate’s qualifications in light of the needs of the Board and the Company at that time, given the then current mix of director attributes.

 

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As described in our Corporate Governance Guidelines:

 

   

directors should be individuals of the highest ethical character and integrity;

 

   

directors should have demonstrated management ability at senior levels in successful organizations, including as the chief executive officer of a public company or as the leader of a large, multifaceted organization, including government, educational and other non-profit organizations;

 

   

each director should have the ability to provide wise, informed and thoughtful counsel to senior management on a range of issues and be able to express independent opinions, while at the same time working as a member of a team;

 

   

directors should be free from any conflict of interest or business or personal relationship that would interfere with the duty of loyalty owed to the Company; and

 

   

directors should be independent of any particular constituency and be able to represent all shareholders of the Company.

The Committee assesses independence and also monitors compliance by the members of the Board with the requisite qualifications under NYSE listing standards for populating the Audit, Compensation and Human Resources and Nominating and Governance Committees. Directors may not serve on more than four public company boards of directors (including Covidien) or, if the director is employed as CEO of a publicly traded company, no more than three public company boards of directors (including Covidien). No person may stand for election as a director after reaching age 72.

As provided in its charter, the Nominating and Governance Committee will consider nominations submitted by shareholders. To recommend a nominee, a shareholder should write to our Secretary at Covidien’s registered address, 20 On Hatch, Lower Hatch Street, Dublin 2, Ireland. Any such recommendation must include:

 

   

the name and address of the candidate;

 

   

a brief biographical description, including his or her occupation for at least the last five years, and a statement of the qualifications of the candidate, taking into account the qualification requirements set forth above; and

 

   

the candidate’s signed consent to serve as a director if elected and to be named in the Proxy Statement.

The recommendation must also include documentary evidence of ownership of Covidien ordinary shares if the shareholder is a beneficial owner, as well as the date the shares were acquired and the name and address of the shareholder, as required by the Company’s Articles of Association.

To be considered by the Nominating and Governance Committee for nomination and inclusion in the Company’s Proxy Statement for the 2014 Annual General Meeting, shareholder recommendations for director must be received by our Secretary no later than September 26, 2013. Once the Secretary receives the recommendation, we will deliver a questionnaire to the candidate requesting additional information about the candidate’s independence, qualifications and other information that would assist the Nominating and Governance Committee in evaluating the candidate, as well as certain information that must be disclosed about the candidate in the Company’s Proxy Statement, if nominated. Candidates must complete and return the questionnaire within the time frame provided to be considered for nomination by the Nominating and Governance Committee.

The Nominating and Governance Committee also receives suggestions for director candidates from Board members and, in its discretion, may also employ a third-party search firm to assist in identifying candidates for director. All 10 of our nominees for director are current members of the Board. In evaluating candidates for director, the Committee uses the guidelines described above, and evaluates shareholder candidates in the same manner as candidates proposed from all other sources. Based on its evaluation, the Nominating and Governance Committee recommended each of the nominees for election by the shareholders. More information regarding each director nominee’s qualifications can be found in Proposal 1 later in this Proxy Statement.

 

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Majority Vote for Election of Directors

Directors are elected by the affirmative vote of a majority of the votes cast by shareholders at the Annual General Meeting and serve one-year terms. Any nominee for director who does not receive a majority of the votes cast is not elected to the Board and the position on the Board that would have been filled by such nominee will become vacant.

Executive Sessions of the Board

The independent directors meet in executive session, without members of management present, at each regularly scheduled Board meeting and at such other times as may be deemed appropriate. These executive sessions may include a discussion with the Chief Executive Officer.

Board Leadership Structure

From June 2007 through September 2008, the positions of Chairman of the Board and Chief Executive Officer were held by separate people, due in part to the fact that the Company was a newly independent stand-alone public company, no longer part of a conglomerate, and also to the fact that the Board was newly constituted and unfamiliar with the Chief Executive Officer. In September 2008, after the Company had completed one full fiscal year as an independent Company, the Board reassessed this structure. Based in part on the strong governance structure laid down by the non-executive Chairman, the Chief Executive Officer’s performance during the Company’s first full fiscal year as a stand-alone public company, the Board’s increasing familiarity and comfort with the Chief Executive Officer and the potential efficiencies of having the Chief Executive Officer also serve in the role of Chairman of the Board, the Board decided to revise its structure. The Board appointed Mr. Donahue as Independent Lead Director and appointed Mr. Meelia, our Chief Executive Officer at the time, as the Chairman of the Board. Effective upon Mr. Meelia’s retirement from the Board of Directors in March 2012, the Board, taking into consideration the demonstrated efficiencies of having the Chief Executive Officer also serve in the role of Chairman of the Board, appointed Mr. Almeida, our President and Chief Executive Officer, to serve as Chairman of the Board.

The Chairman of the Board provides leadership to the Board and works with the Board to define its structure and activities in the fulfillment of its responsibilities. In conjunction with the Lead Director, the Chairman of the Board sets the Board agendas with Board and management input, facilitates communication among directors, works with the Lead Director to provide an appropriate information flow to the Board and presides at meetings of the Board of Directors and shareholders. The Lead Director works with the Chairman of the Board and other Board members to provide strong, independent oversight of the Company’s management and affairs. Among other things, the Lead Director approves Board meeting agendas as well as the quality, quantity and timeliness of information sent to the Board, serves as the principal liaison between the Chairman of the Board and the independent directors and chairs an executive session of the independent directors at each regularly scheduled Board meeting. A more detailed description of the roles and responsibilities of the Chairman of the Board and of the Lead Director is set forth in our Corporate Governance Guidelines. Mr. Donahue, who currently serves as Lead Director, has decided not to stand for re-election to our Board of Directors at the 2013 Annual General Meeting. The Board of Directors will appoint a new Lead Director in connection with Mr. Donahue’s retirement from the Board.

Code of Ethics

We have adopted the Covidien Guide to Business Conduct, which applies to all of our employees, officers and directors. The Guide to Business Conduct meets the requirements of a “code of ethics” as defined by SEC regulations and applies to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as well as all other employees, as indicated above. The Guide to Business Conduct also meets the requirements of a code of business conduct and ethics under the listing standards of the NYSE. The Guide to Business Conduct is posted on our website at www.covidien.com under the heading “Investor Relations—Corporate Governance.” We disclose any material amendments to the Guide to Business Conduct, as well as any waivers for executive officers or directors, on our website.

 

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Board Risk Oversight

Our Board of Directors oversees an enterprise-wide approach to risk management designed to support the achievement of organizational objectives, including strategic objectives, to improve long-term organizational performance and enhance shareholder value. A fundamental part of risk management is not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the company. The involvement of the full Board of Directors in setting the Company’s business strategy is a key part of its assessment of management’s appetite for risk and also a determination of what constitutes an appropriate level of risk for the Company. The full Board of Directors participates in an annual enterprise risk management assessment, which is led by the Company’s general counsel. In this process, risk is assessed throughout the business, focusing on three primary areas of risk: financial risk, legal/compliance risk and operational/strategic risk.

While the Board of Directors has the ultimate oversight responsibility for the risk management process, various committees of the Board also have responsibility for risk management. In particular, the Audit Committee focuses on financial risk, including internal controls, and receives an annual risk assessment report from the Company’s internal auditors. The Company’s Compliance Committee assists the Board of Directors in fulfilling its oversight responsibility with respect to regulatory, healthcare compliance and public policy issues that affect the Company and works closely with the Company’s legal and regulatory groups. In addition, in setting compensation, the Compensation and Human Resources Committee strives to create incentives that encourage a level of risk-taking behavior consistent with the Company’s business strategy. As discussed below, the Compensation and Human Resources Committee recently conducted a compensation risk assessment. Finally, the Company’s Nominating and Governance Committee conducts an annual assessment of the risk management process and reports its findings to the Board.

Compensation Risk Assessment

At the Compensation and Human Resources Committee’s direction, representatives of the Company’s human resources and legal departments conducted a risk assessment of the Company’s compensation policies and practices during fiscal 2012. This risk assessment consisted of a review of cash and equity compensation provided to Company employees, with a focus on compensation payable to senior executives and incentive compensation plans which provide variable compensation to other Company employees based upon Company and individual performance. The Compensation and Human Resources Committee and its independent consultant reviewed the findings of this assessment and agreed with the conclusion that our compensation programs are designed with the appropriate balance of risk and reward in relation to the Company’s overall business strategy and do not create risk that is reasonably likely to have a material adverse effect on the Company. The following characteristics of our compensation programs support this finding:

 

   

our use of different types of compensation vehicles that provide a balance of long- and short-term incentives with fixed and variable components;

 

   

the cap on awards to limit windfalls;

 

   

our practice of looking beyond results-oriented performance in assessing the contributions of a particular executive;

 

   

our share ownership guidelines;

 

   

our executive compensation recoupment policy;

 

   

our claw-back policy for equity awards; and

 

   

the ability of the Compensation and Human Resources Committee to reduce incentive payouts if deemed appropriate.

 

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Hedging Policy

The Company’s Insider Trading Policy prohibits employees, including directors and named executive officers, from entering into puts, calls, cashless collars, options or similar rights and obligations involving Covidien securities, other than the exercise of a Company-issued stock option.

Transactions with Related Persons

The Board’s Nominating and Governance Committee is responsible for the review and, if appropriate, approval or ratification of “related-person transactions” involving Covidien or its subsidiaries and related persons. Under SEC rules, a related person is a director, nominee for director, executive officer or a beneficial owner of 5% or more of Covidien’s shares, and their immediate family members. Our Board of Directors has adopted written policies and procedures that apply to any transaction or series of transactions in which the Company or a subsidiary is a participant, the amount involved exceeds $100,000 and a related person has a direct or indirect material interest.

Covidien personnel in the legal and finance departments review transactions involving related persons. If they determine that a related person could have a material interest in such a transaction, the transaction is forwarded to the Nominating and Governance Committee for review. The Nominating and Governance Committee determines whether the related person has a material interest in a transaction and may, in its discretion, approve, ratify, rescind or take other action with respect to the transaction. The Nominating and Governance Committee reviews all material facts related to the transaction and takes into account, among other factors it deems appropriate, whether the transaction is on terms no less favorable to the Company than terms generally available to an unaffiliated third-party under the same or similar circumstances, the extent of the related person’s interest in the transaction and, if applicable, the availability of other sources of comparable products or services. The following transaction was considered and ratified by the Nominating and Governance Committee:

Bryan C. Hanson, one of our named executive officers, is Group President-Surgical Solutions. Mr. Hanson’s brother-in-law is employed by Covidien but not within the Surgical Solutions business unit. In fiscal 2012, Mr. Hanson’s brother-in-law received total cash compensation of approximately $357,000 and equity awards consisting of 483 restricted stock units and options to purchase 2,195 ordinary shares. His compensation was commensurate with that of his peers.

Communications with the Board of Directors

The Board has established a process for interested parties to communicate with members of the Board. If you have a concern, question or complaint regarding our compliance with any policy or law, or would otherwise like to contact the Board, you may reach the Board via email at board.directors@covidien.com. A direct link to this email address can be found on our website at www.covidien.com under the heading “Investor Relations—Corporate Governance—Contact Covidien Board.” You may also submit communications in writing to a special address or by phone to a toll-free number that are published on our website at www.covidien.com under the heading “Contact Us—Ombudsman.” Inquiries may be submitted anonymously and confidentially.

All concerns and inquiries are received and reviewed promptly by our Ombudsman. Any concerns relating to accounting, internal controls or audit matters are reviewed with the Audit Committee. All concerns will be addressed by the Ombudsman, with assistance from the Office of the General Counsel as necessary, unless otherwise instructed by the Audit Committee or the Lead Director. The status of all outstanding concerns is summarized to the Audit Committee on a regular basis, and any concern that is determined to be either (1) an immediate threat to the Company or (2) concerns a senior Company official (any executive officer or any direct report to the CEO) is immediately communicated to the Chair of the Audit Committee. The Chair of the Audit Committee or the Lead Director may determine that certain matters should be presented to the full Board and may direct the retention of outside counsel or other advisors in connection with any concern addressed to them. The Covidien Guide to Business Conduct prohibits any employee from retaliating against anyone for raising or helping to resolve an integrity question.

 

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BOARD OF DIRECTORS AND BOARD COMMITTEES

General

Our business, property and affairs are managed under the direction of the Board of Directors, which currently is comprised of 11 members. Directors are kept informed of our business through discussions with the Lead Director, the Chairman of the Board and Chief Executive Officer and other officers, by reviewing materials provided to them, and by participating in meetings of the Board and its committees. During our 2012 fiscal year, the Board held seven meetings. All of our directors attended over 75% of the total of all meetings of the Board and the committees on which they served during their terms in office in fiscal 2012. Our Corporate Governance Guidelines provide that Board members are expected to attend each Annual General Meeting. Except for Ms. Amundson, who joined our Board in June 2012, all of our current Board members attended our 2012 Annual General Meeting.

Board Committees

The Board has a separately designated Audit Committee established in accordance with the Securities Exchange Act of 1934, as well as a Compensation and Human Resources Committee, a Nominating and Governance Committee, a Compliance Committee and a Transactions Committee. Assignments to, and chairs of, the committees are recommended by the Nominating and Governance Committee and selected by the Board. The committees report on their activities to the Board at each regular Board meeting.

The table below provides Board and committee membership information as of the date of this Proxy Statement.

 

     Audit
Committee
  Compensation
and Human
Resources
Committee
  Nominating
and
Governance
Committee
  Compliance
Committee
  Transactions
Committee

Non-Employee Directors

Joy A. Amundson

  X                

Craig Arnold

  X                

Robert H. Brust

  Chair               X

John M. Connors, Jr.

      X            

Christopher J. Coughlin

              Chair   X

Timothy M. Donahue(1)

      Chair   X       Chair

Randall J. Hogan, III

  X                

Martin D. Madaus

          X   X    

Dennis H. Reilley

      X   X        

Joseph A. Zaccagnino

          Chair   X   X

Employee Director

José E. Almeida(2)

                   

Number of Meetings
Held in Fiscal 2012

  13   7   9   5   2

 

  (1) Lead Director. Retiring from the Board in March 2013.

 

  (2) Chairman of the Board.

 

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Audit Committee

The Audit Committee monitors the integrity of our financial statements, the independence and qualifications of the independent auditors, the performance of our internal auditors and independent auditors, our compliance with legal and certain regulatory requirements and the effectiveness of our internal controls. The Audit Committee is also responsible for selecting, retaining, evaluating, setting the remuneration of and, if appropriate, recommending the termination of our independent auditors. The members of the Audit Committee are Joy A. Amundson, Craig Arnold, Robert H. Brust and Randall J. Hogan, III, each of whom is independent under SEC rules and NYSE listing standards applicable to audit committee members. Mr. Brust is the Chair of the Audit Committee. The Board has determined that Mr. Brust and Mr. Hogan are audit committee financial experts. The Audit Committee held thirteen meetings during fiscal 2012. The Audit Committee operates under a charter approved by the Board of Directors, which is posted on our website at www.covidien.com.

Compensation and Human Resources Committee

The Compensation and Human Resources Committee reviews and approves compensation and benefits policies and objectives, determines whether our officers and employees are compensated according to those objectives and carries out the Board’s responsibilities relating to the compensation of our executives. The members of the Compensation and Human Resources Committee are John M. Connors, Jr., Timothy M. Donahue and Dennis H. Reilley, each of whom is independent under NYSE listing standards. Mr. Donahue is the Chair of the Compensation and Human Resources Committee. The Compensation and Human Resources Committee held seven meetings during fiscal 2012. The Compensation and Human Resources Committee operates under a charter approved by the Board of Directors, which is posted on our website at www.covidien.com.

Nominating and Governance Committee

The Nominating and Governance Committee is responsible for identifying individuals qualified to become Board members, recommending to the Board the director nominees for election at the Annual General Meeting, developing and recommending to the Board a set of corporate governance guidelines, and taking a general leadership role in our corporate governance. The Nominating and Governance Committee also reviews the succession planning process relating to the Chief Executive Officer and the Company’s other senior executive officers, as well as the Company’s management development process. The members of the Nominating and Governance Committee are Timothy M. Donahue, Martin D. Madaus, Dennis H. Reilley and Joseph A. Zaccagnino, each of whom is independent under NYSE listing standards. Mr. Zaccagnino is the Chair of the Nominating and Governance Committee. The Nominating and Governance Committee held nine meetings during fiscal 2012. The Nominating and Governance Committee operates under a charter approved by the Board of Directors, which is posted on our website at www.covidien.com.

Compliance Committee

The Compliance Committee assists the Board in fulfilling its oversight responsibility with respect to regulatory, healthcare compliance and public policy issues that affect the Company. The members of Compliance Committee are Christopher J. Coughlin, Martin D. Madaus and Joseph A. Zaccagnino, each of whom is independent under NYSE listing standards. Mr. Coughlin serves as the Chair of the Compliance Committee. The Compliance Committee held five meetings during fiscal 2012. The Compliance Committee operates under a charter approved by the Board of Directors, which is posted on our website at www.covidien.com.

Transactions Committee

The Transactions Committee was created by the Board of Directors to maximize the efficiency of the Board’s review and approval process relating to merger, acquisition and divestiture transactions. The members of Transactions Committee are Robert H. Brust, Christopher J. Coughlin, Timothy M. Donahue and Joseph A. Zaccagnino, each of whom is independent under NYSE listing standards. Mr. Donahue serves as the Chair of the Transactions Committee. The Transactions Committee held two meetings during fiscal 2012.

 

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COMPENSATION OF NON-EMPLOYEE DIRECTORS

The Board of Directors has approved a compensation structure for non-employee directors consisting of equity awards, an annual cash retainer and, for some positions, supplemental cash retainers.

Cash Retainers

Board Members. Each non-employee Director receives an annual cash retainer which is generally paid on a quarterly basis. Directors joining the Board other than on the first day of a quarter receive a cash retainer pro-rated for the number of days served during their initial quarter of service. During fiscal 2012, the annual cash retainer was $100,000.

Committee Chairs. The Chairs of the Nominating and Governance Committee and the Compliance Committee receive a supplemental annual cash retainer of $10,000. The Chairs of the Audit Committee and the Compensation and Human Resources Committee receive a supplemental annual cash retainer of $15,000.

Committee Members. Each member of the Audit Committee (including the Chair) and each member of the Compensation and Human Resources Committee (including the Chair) also receives a supplemental annual cash retainer of $5,000.

Lead Director. The Lead Director receives a supplemental annual cash retainer of $25,000.

Equity Awards

Restricted Units. At the time of our 2012 Annual General Meeting, each non-employee director, other than Dr. Madaus and Ms. Amundson, received an annual grant of restricted units with a value of $145,000. Dr. Madaus and Ms. Amundson, who joined our Board in December 2011 and June 2012, respectively, received restricted unit grants in amounts pro-rated for their respective service periods. Directors joining the Board three or more months before the vesting date of the outstanding annual Director award receive an equity award, pro-rated for the number of days served from date of appointment through the vesting of such outstanding Director award. The fiscal 2012 awards vest on the date of the Company’s 2013 Annual General Meeting. Restricted units also accrue dividend equivalent units until the restricted units vest and shares are issued. Going forward, we expect that each non-employee director will receive an annual grant of restricted stock units on or around the date of each Annual General Meeting.

Other

Directors from time to time may make use of tickets to various sporting events provided by the Company; for the year ended September 28, 2012, the aggregate incremental cost to the Company of these amounts was substantially less than $10,000 per director. Pursuant to Covidien’s Matching Gift Program, the Company matches employee contributions to charitable organizations up to $10,000 and director contributions to charitable organizations up to $25,000. Directors are also reimbursed for reasonable out-of-pocket expenses incurred in attending Board, Board committee, and shareholder meetings and are also permitted to use the corporate aircraft to travel to and from such meetings.

Director Share Retention and Ownership Guidelines

As set forth in our Corporate Governance Guidelines, all non-employee directors are required to hold at least 12,500 Covidien shares. In determining a director’s ownership, shares held directly as well as shares underlying restricted units subject to time-based vesting and their accompanying dividend equivalent units are included. Shares underlying unexercised stock options are not included in the calculation. Directors have five years from becoming subject to these ownership guidelines to attain this ownership threshold. Each of our

 

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directors has holdings in excess of this requirement, with the exception of Mr. Brust and Dr. Madaus. Mr. Brust and Dr. Madaus have until July 2014 and December 2016, respectively, to attain this ownership threshold.

The following table provides information concerning the compensation paid by us to each of our non-employee directors for the fiscal year ended September 28, 2012. Compensation for José E. Almeida, our President and Chief Executive Officer, is shown in the Summary Compensation Table on page 37. Mr. Almeida receives no compensation for his services as a director.

2012 Director Compensation Table

 

Name  

Fees Earned or
Paid in Cash

($)

 

Stock Awards(1)

($)

 

Other
Compensation(2)

($)

 

Total

($)

(a)   (b)   (c)   (g)   (h)
         

Joy A. Amundson

  $30,865(3)   $111,240   $25,000   $167,105
         

Craig Arnold

  $105,000(3)   $145,018     $250,018
         

Robert H. Brust

  $120,000(4)   $145,018   $25,000   $290,018
         

John M. Connors, Jr.

  $105,000(5)   $145,018   $25,000   $275,018
         

Christopher J. Coughlin

  $110,000(6)   $145,018   $25,000   $280,018
         

Timothy M. Donahue

  $145,000(7)   $145,018   $10,000   $300,018
         

Kathy J. Herbert

  $52,500(5)       $52,500
         

Randall J. Hogan, III

  $105,000(3)   $145,018   $1,000   $251,018
         

Martin D. Madaus

  $83,333(8)   $186,298   $25,000   $294,631
         

Richard J. Meelia(9)

  $50,000     $104,483   $154,483
         

Dennis H. Reilley

  $103,750(5)   $145,018     $248,768
         

Joseph A. Zaccagnino

  $110,000(10)   $145,018   $10,000   $265,018

 

(1) 

The amounts in column (c) reflect the aggregate grant date fair value of restricted units granted in fiscal 2012, calculated in accordance with Accounting Standards Codification 718. The grant date fair value does not necessarily correspond to the actual value that will be recognized by each director, which will likely vary based on a number of factors, including our financial performance, stock price fluctuations and applicable vesting. As of September 28, 2012, each current director listed in the table above, other than Dr. Madaus and Ms. Amundson, had 2,712 restricted units (including dividend equivalent units) outstanding; Dr. Madaus had 3,484 restricted units outstanding and Ms. Amundson had 2,137 restricted units outstanding. As of September 28, 2012, each director listed in the table above, other than Dr. Madaus and Ms. Amundson, held options to purchase 9,600 ordinary shares received as compensation for serving on our board during 2007, our first year as an independent public company. No stock options were granted to non-employee directors in fiscal 2012.

 

(2) 

Other than for Mr. Meelia, reflects Company match, up to $25,000, of directors’ charitable contributions pursuant to Covidien’s Matching Gift Program.

 

(3) 

Includes annual retainer and Audit Committee member retainer. The amounts paid to Ms. Amundson are pro-rated for her term of service; she joined the board in June 2012.

 

(4) 

Includes annual retainer, Audit Committee member retainer and Audit Committee Chair retainer.

 

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(5) 

Includes annual retainer and Compensation and Human Resources Committee member retainer. The amounts paid to Ms. Herbert are pro-rated through March 2012, the end of her term as a director.

 

(6) 

Includes annual retainer and Compliance Committee Chair retainer.

 

(7) 

Includes annual retainer, Compensation and Human Resources Committee Chair retainer, Compensation and Human Resources Committee member retainer and Lead Director retainer.

 

(8) 

Represents annual retainer pro-rated for Dr. Madaus’ term of service; he joined the Board on December 1, 2011.

 

(9) 

Following his July 2011 retirement as President and Chief Executive Officer, Mr. Meelia agreed to continue to serve as Chairman of the Board for a transition period of not more than one year. Mr. Meelia retired as Chairman in March 2012. The amount reported in column (b) represents the annual board retainer, pro-rated through March 2012. Mr. Meelia did not receive any additional compensation for serving as Chairman of the Board. The amount reported in column (g) represents payment for office space rental and administrative support for Mr. Meelia during our 2012 fiscal year.

 

(10) 

Includes annual retainer and Nominating and Governance Committee Chair retainer.

 

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COMPENSATION OF EXECUTIVE OFFICERS

Compensation Discussion and Analysis

This Compensation Discussion and Analysis (“CD&A”) relates to our Chief Executive Officer, Chief Financial Officer and the three other most highly compensated executive officers in our 2012 fiscal year.

Executive Summary

The Compensation and Human Resources Committee (the “Compensation Committee”) has adopted an integrated executive compensation program that is intended to align our named executive officers’ interests with those of our shareholders and to promote the creation of shareholder value without encouraging excessive or unnecessary risk-taking. Additionally, the Compensation Committee has tied a majority of our named executive officers’ compensation to a number of key performance measures that contribute to or reflect shareholder value. Specifically, in addition to a base salary, our named executive officers’ compensation package includes an annual incentive compensation program that is based on the Company’s attainment of objective pre-established financial performance metrics and long-term equity awards consisting of stock options, performance units and restricted units.

Despite a challenging market environment, the Company finished fiscal 2012 with solid operating performance, meeting its publicly stated goals of mid-single digit sales growth, double-digit adjusted earnings growth and strong cash flow. For the sixth consecutive year, the Company improved adjusted gross margin and increased research and development investment at a double-digit pace to promote its future growth. Emerging markets continued to be a key focus area, as overall sales grew 16% in 2012, led by an even stronger increase of 26% in the BRIC (Brazil, Russia, India, China) countries.

During the year, the Company also made significant progress in its portfolio management activities. First, the Company made seven strategic acquisitions, adding several fast-growing, high margin products to its portfolio. Combined, these portfolio additions represent a market opportunity of more than $4 billion with excellent growth prospects. Second, the Company announced plans to spin off its Pharmaceuticals business, a transaction that is expected to be completed in mid-2013. Finally, the Company launched more than 25 new products across the business.

In 2012, the Company again generated strong cash flow and increased its commitment to return a minimum of 50% of free cash flow annually to shareholders, up from its previous target of 25% to 40% of free cash flow. We define free cash flow as cash provided by operating activities minus capital expenditures. The Company also increased its dividend by 16%, the fourth consecutive double-digit annual increase, and announced plans to increase the dividend payout ratio over time.

As a result of our positive financial results for fiscal 2012, payouts under the 2012 annual incentive plan to our named executive officers at the corporate level were made at 110% of target performance level. The Company’s adjusted net income and free cash flow exceeded the 2012 annual incentive plan target performance level, while sales growth was slightly below target performance level.

Other significant aspects of our executive compensation programs for fiscal 2012 are reflected in the following actions taken by the Compensation Committee:

 

   

Increased the proportion of long term incentive value awarded in the form of performance units to further emphasize the Company’s pay-for-performance philosophy.

 

   

Adjusted the structure of our fiscal 2012 annual incentive plan to place a greater emphasis on the strategic focus metrics by instituting threshold, target and maximum performance measures to determine the performance multiplier for each strategic focus metric rather than linking such performance multipliers to a core financial metric.

 

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Reviewed and approved the conclusions of a compensation risk assessment conducted by management, as discussed in the section entitled “Compensation Risk Assessment”, beginning on page 11 of this Proxy Statement.

In addition, the Compensation Committee considered the results of the management say-on-pay proposal presented to shareholders for approval in fiscal 2011. After considering the strong support the proposal received as well as the Committee’s view of the value of consistency from year to year in both our approach to compensation and the selection of balanced elements of compensation, the Committee concluded that no changes to the elements of compensation for our named executive officers from fiscal 2011 to fiscal 2012 were necessary in light of the shareholders’ vote, although as noted above the Committee implemented a number of changes to our incentive arrangements. As a result, our compensation policies and decisions, explained in detail in this CD&A, continue to be focused on long-term financial performance to drive shareholder value. The Company has indicated that it will provide an advisory vote on executive compensation (say-on-pay) on an annual basis.

Executive Compensation Governance Structure

The Company is committed to integrity and the highest standards of ethical conduct. The following aspects of the Company’s compensation program reinforce that commitment and illustrate our commitment to good governance:

 

   

more than two-thirds of compensation for named executive officers is performance-based (incentive bonus, performance-based restricted units, stock options);

 

   

share ownership guidelines to promote long-term ownership, long-term shareholder perspective and responsible practices;

 

   

executive incentive compensation recoupment (claw-back) policy to promote accountability;

 

   

forfeiture of awards and recoupment of profits realized on equity awards in the event of a termination of employment for cause;

 

   

cap on incentive awards to limit windfalls; and

 

   

no tax assistance (gross-ups) for named executive officers on any perquisites other than relocation benefits provided pursuant to Company policy.

Executive Compensation Philosophy

Our compensation program is designed to reflect and advance the following core principles:

 

   

Align Interests. Compensation should strongly align the interests of our executive officers and shareholders.

 

  Ø How we achieve this goal: We emphasize long-term incentive awards that motivate executives to create shareholder value and share ownership guidelines which promote a long-term shareholder perspective.

 

   

Support Effective Governance. Compensation should support effective governance.

 

  Ø How we achieve this goal: We hold Company officers to share ownership guidelines to promote long-term ownership, long-term shareholder perspective and responsible practices; we cap awards to limit windfalls; we encourage simplicity and transparency in plan design; we establish clear processes for administering equity and employee benefit plans; and, in assessing the contributions of a particular executive officer, the Compensation Committee looks not only to results-oriented performance, but also to how those results were achieved—whether the decisions and actions leading to the results were consistent with the values of the Company—and the long-term impact of those decisions.

 

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Reflect Total Rewards Perspective. Compensation should be based on a total rewards perspective with an explicit role for each element.

 

  Ø How we achieve this goal: There is an explicit role for each element of compensation and we make compensation decisions regarding each element with a view to the aggregate value and effect of all other elements.

 

   

Pay Competitively. We should pay competitively, but not excessively, in order to attract and retain talented executive officers who can achieve our long-term strategic goals and create shareholder value.

 

  Ø

How we achieve this goal: We offer total rewards that generally target the market median based on a review of peer companies in the medical devices and pharmaceutical industries and, as appropriate, general industry and which are fair and reasonable in light of the executive officer’s responsibilities, experience and performance, with the ability to pay above the 50th percentile for high performers and/or specialized talent. Actual compensation may fall above or below the 50th percentile based on a variety of factors, including, among others, individual performance and the unique challenges of a particular position.

 

   

Support Company’s Business and Talent Strategy. Compensation should support our business strategy in the areas of customer focus, globalization, operational excellence and innovation as well as our talent strategy.

 

  Ø How we achieve this goal: We recognize individual performance through merit increases and individual adjustments to equity grant levels; we standardize pay levels and programs across the Company to facilitate cross-Company career progression; we use equity grants to signal potential and nurture career commitment; and we emphasize pay-for-performance through annual and long-term incentive plans rather than retirement benefits or entitlements such as perquisites.

 

   

Balance all Reward Elements. Our reward elements should be balanced, with an emphasis on performance-based compensation.

 

  Ø How we achieve this goal: We utilize a mix of incentive plans that balance short- and long-term objectives, provide potential upside for exceeding performance targets (capped at a market-competitive degree of leverage) with downside risk for missing performance targets. We balance retention with reward for shareholder value creation, while also seeing that the elements, individually and in the aggregate, do not encourage excessive risk-taking. We establish long-term performance metrics consistent with our ability to quantify long-term goals, in a meaningful way, with respect to these metrics.

 

   

Clear Compensation Goals and Practices. Compensation goals and practices should be transparent and easy to communicate, both internally and externally.

 

  Ø How we achieve this goal: We clearly and consistently communicate our total rewards philosophy to executives, limit the number of separate compensation plans/programs we provide, minimize the number of performance metrics per plan, promote continuity in plan design, align executive programs across the Company and enhance the motivational value of compensation by regularly communicating progress against goals.

 

   

Effective Target-Setting. Target setting is a key activity and should be conducted in a rigorous manner resulting in targets that reflect stretch yet are achievable.

 

  Ø How we achieve this goal: In establishing performance targets, we strive to incentivize employees to innovate and collaborate without taking excessive risks. The Compensation Committee draws from a variety of sources when it establishes targets, including information regarding the historical performance of the Company and competitors, anticipated market dynamics and growth rates, Company business strategy, Company financial forecasts and guidance as well as management and Board judgment.

 

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2012 Compensation Elements and Decisions

Our compensation program for named executive officers has three major components, all of which are designed to work together to drive a complementary set of behaviors and outcomes.

 

  v Base salary. Base salary is intended to reflect the market value of the named executive officer’s role, with differentiation for individual capability.

 

  v Annual incentive compensation. Annual incentive compensation in the form of a market-competitive, performance-based cash bonus is designed to focus our executives on pre-set objectives each year and drive specific behaviors that foster short-term and long-term growth and profitability.

 

  v Long-term incentive awards. Long-term incentive compensation generally consists of grants of stock options, restricted units with time-based vesting and restricted units with performance-based vesting, which we refer to as performance units. Long-term incentive compensation is designed to recognize executives for their contributions to the Company, to highlight the strategic significance of each named executive officer’s role, to promote retention and to align the interests of named executive officers with the interests of our shareholders in long-term growth and stock performance, rewarding executives for shareholder value creation.

When assessing and setting compensation, the Compensation Committee focuses on base salary, total cash compensation (consisting of base salary and annual incentive compensation) and total direct compensation (consisting of base salary, annual incentive compensation and long-term incentive awards). Named executive officers also participate in various employee benefit programs, as described on page 31 of this CD&A.

Mr. Trudeau. In addition to the components of compensation noted above, in connection with his joining the Company in February 2012 as President of the Company’s Pharmaceuticals business, Mr. Trudeau received a cash signing bonus of $225,000 as well as certain relocation benefits. The Company also entered into a Letter Agreement with Mr. Trudeau which gives him the right to receive certain enhanced benefits upon the consummation of a strategic transaction such as the spin-off or sale of the Company’s Pharmaceuticals business. In recruiting Mr. Trudeau to ultimately serve as the chief executive officer of a spun-off public Pharmaceuticals company, the Compensation Committee determined it was appropriate to offer these additional benefits to Mr. Trudeau.

Total Rewards – Driving Performance and Behavior

Two of the core principles of the Company’s compensation philosophy, as articulated above, are that compensation should support effective governance, and that compensation should be viewed from a total rewards perspective, considering each compensation element with a view to the aggregate value and effect of all other compensation elements. Accordingly, in setting compensation, the Compensation Committee considers whether the compensation elements, individually and in the aggregate, create incentives that encourage behavior consistent with the overall interests of the Company.

In determining compensation packages for our named executive officers, the Compensation Committee seeks to strike an appropriate balance between fixed and variable compensation and between short- and long-term compensation. We believe that making a significant portion of our named executive officers’ compensation variable and long-term supports our pay-for-performance executive compensation philosophy while also mitigating potential excessive risk-taking behavior.

 

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The following table illustrates, for fiscal 2012, the distribution of value among base salary, target annual incentive cash awards and long-term equity incentives (based on the dollar value awarded by the Compensation Committee, before conversion to the various forms of equity awards—see the “Long-Term Incentive Awards” section of this CD&A) for our Chief Executive Officer and for the other named executive officers. Of total direct compensation, 87% of our CEO’s and 78% of the other named executives’ was variable.

Pay Mix

 

      CEO    Other NEOs

Long-term
Incentives

(Equity)

   70%    60%
     

Annual
Incentives

(Cash)

   17%    18%
     

Base Salary

(Cash)

   13%    22%

Base Salary

Base salaries are paid in order to provide a fixed component of compensation for the named executive officers. Each named executive officer’s base salary is designed to be competitive with comparable positions in our peer group companies and market data, generally targeting the market median, with high performers and/or specialized talent receiving above the 50th percentile. The components of market data are described in the “How We Determine Compensation—Peer Group Reviews and Market Data” section of this CD&A. Actual compensation may be above or below market median based on a variety of factors, including the complexity and unique challenges of the position and the individual skills, experience, background and performance of the executive. In setting base salaries for named executive officers for calendar year 2012 (other than for Mr. Trudeau, who joined the Company in February 2012), the Compensation Committee reviewed, among other things, a summary prepared by its independent compensation consultant, Steven Hall & Partners, which detailed each named executive officer’s 2011 base salary and total cash compensation compared to 2012 market data. The Compensation Committee approved base salary increases, which became effective January 2, 2012, as follows:

 

Executive Officer    2011 Base Salary(1)     2012 Base Salary(1)      % Change  

José E. Almeida

     $1,100,000 (2)      $1,175,000         6.8

Charles J. Dockendorff

     $742,500        $772,200         4.0

Bryan C. Hanson

     $520,000 (2)      $540,800         4.0

Peter L. Wehrly

     $525,000 (2)      $540,800         3.0

Mark C. Trudeau

     N/A (3)      $650,000         N/A   

 

  (1) The Compensation Committee sets base salaries on a calendar year basis. Accordingly, the base salary amounts noted in this table, which represent calendar year base salaries, differ from the base salary amounts set forth in the Summary Compensation Table because the Summary Compensation Table reports amounts actually earned during our fiscal year, from September to September.

 

  (2) The named executive officer’s base salary was increased to this amount, effective July 1, 2011, in connection with his assuming an expanded role in the Company. While this was not the named executive officer’s salary for the entire calendar 2011, this base salary is what the Compensation Committee reviewed when setting base salaries for fiscal 2012, as it represents compensation appropriate for the expanded role.

 

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  (3) As Mr. Trudeau joined the Company on February 1, 2012, no base salary for calendar 2011 is presented.

In setting Mr. Almeida’s compensation when he was named Chief Executive Officer in fiscal 2011, the Compensation Committee considered, among other things, the compensation of Chief Executive Officers of peer companies, the compensation of the Company’s then President and Chief Executive Officer and the business experience of Mr. Almeida. For his initial year as President and Chief Executive Officer, the Compensation Committee established Mr. Almeida’s compensation at the 35th percentile of compensation paid to Chief Executive Officers of our peer companies to allow for increases in his compensation as he develops as Chief Executive Officer. Based on Company performance, as well as an assessment of Mr. Almeida’s value to the Company, a review of total direct compensation and a comparison to market data, the Committee determined that Mr. Almeida’s base salary for calendar 2012 should be increased to just under the 50th percentile of market.

The salary increases for Messrs. Dockendorff, Hanson and Wehrly were based on a consideration of individual performance, assessment of the value of the individual to the Company, a review of total direct compensation and a comparison to market data as discussed in the “How We Determine Compensation” section of this CD&A.

The Compensation Committee approved the base salary increases for Messrs. Dockendorff, Hanson and Wehrly to promote consistency with our philosophy of compensating executive officers competitively, but not excessively, based on a review of peer companies in the medical devices and pharmaceutical industries and market data. Following the annual base salary increases for 2012, Mr. Hanson was just above the 50th percentile of base salary compensation paid to executives in comparable positions, based on market data, while, for their respective positions, Mr. Dockendorff was moderately above the 75th percentile and Mr. Wehrly was just below the 50th percentile. The Compensation Committee believed that it was appropriate to compensate Mr. Dockendorff at this level because of his consistently high performance and long-term contributions to the Company as well as his key role during fiscal 2011 in furthering a number of the Company’s most important strategic initiatives which resulted in improved gross margin performance, strong cash flow and double-digit earnings per share growth. In addition, Mr. Dockendorff received the highest possible Talent and Leadership Review (“TLR”) performance rating in recognition of his successes during the year. TLR performance ratings are discussed in the “How We Determine Compensation—Talent and Leadership Review” section of this CD&A.

To establish the base salary payable to Mr. Trudeau, the Compensation Committee considered a market study prepared by its independent compensation consultant, Steven Hall & Partners. This market study included information regarding base salary, annual cash incentive awards and the value of equity awards and compiled data derived from a number of sources, including the 2011 Radford Global Technology Survey, the 2011 Towers Watson US General Industry Executive Database, the 2011 Hewitt US General Industry/Retail Total Compensation Measurement, the Towers Watson 2010/2011 Survey Report on Top Management Compensation, and the 2011 US Mercer Benchmark Database – Executive. The Compensation Committee’s independent compensation consultant weighted each of these surveys based on company revenue and industry, resulting in a weighting of 80% for general industry companies with median revenue of $1.8 billion and the remaining 20% weighted equally between pharmaceutical and biotechnology companies and medical devices and technology companies with median revenue of $2.2 billion. The intent of this weighting was to utilize the survey data for companies that replicate, in particular, the revenue generated by the Company’s Pharmaceuticals business, which is around $2.0 billion. Given the planned spin-off of the Company’s Pharmaceuticals business and the intent that Mr. Trudeau would serve as the chief executive officer of the spun-off company, the Compensation Committee benchmarked Mr. Trudeau’s position as the chief executive officer of a standalone pharmaceuticals company. Based upon its review of the market study prepared by its independent compensation consultant, the Compensation Committee established a base salary for Mr. Trudeau that is moderately below the 25th percentile of market to allow for increases in his compensation upon becoming a chief executive officer and to provide the compensation committee of the spun-off company latitude in establishing the compensation for Mr. Trudeau upon the Pharmaceuticals business becoming a separate, publicly-traded company.

 

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Annual Incentive Compensation

Annual incentive compensation supports the Compensation Committee’s pay-for-performance philosophy and aligns individual goals with Company goals. Under our annual incentive plan, which is an element of our 2007 Stock and Incentive Plan, employees are eligible for annual incentive cash awards based on the Company’s attainment of objective pre-established performance metrics. Consistent with its past practice, the Compensation Committee structured the 2012 annual incentive plan as follows:

 

   

At the beginning of the fiscal year, the Compensation Committee established performance measures and goals, which included the financial and strategic metrics being assessed, performance targets for each metric, including threshold annual performance requirements to earn an award, and maximum performance scores.

 

   

Also at the beginning of the fiscal year, the Compensation Committee set individual target awards for each executive, expressed as a percentage of base salary, based on the executive’s level of responsibility and upon an examination of compensation information from our peer group and market data.

 

   

After the close of the fiscal year, the Compensation Committee received a report from management regarding Company and business unit performance against the pre-established performance goals. Awards were based on each named executive officer’s individual award target percentage and the overall Company and/or individual business unit’s performance relative to the specific performance goal, as certified by the Compensation Committee.

Setting Annual Performance Metrics. The Compensation Committee sets the performance metrics as well as the performance targets for each metric. There are two primary classifications of performance metrics utilized in the annual incentive plan, Core Financial Metrics and Strategic Focus Metrics. Each performance metric represents part of the total award calculation, with the Core Financial Metrics accounting for, in the aggregate, 70% of the performance score and the Strategic Focus Metrics accounting for, in the aggregate, 30% of the performance score.

Core Financial Metrics. For the fiscal 2012 annual incentive plan, the Core Financial Metrics applicable to Messrs. Almeida and Dockendorff, both of whom served as executive officers at the corporate level, were based on Company sales growth and Company adjusted net income. The Core Financial Metrics applicable to Mr. Trudeau, who heads our Pharmaceuticals business, were sales growth and operating income for the Pharmaceuticals business. The Core Financial Metrics applicable to Mr. Hanson, who runs our Surgical Solutions group, were sales growth and operating income for Surgical Solutions. The Core Financial Metrics applicable to Mr. Wehrly, who runs our Respiratory & Monitoring Solutions, Vascular Therapies and Developed Markets businesses, were sales growth and operating income for Respiratory & Monitoring Solutions, Vascular Therapies and Developed Markets. The Compensation Committee chose sales growth and net/operating income as performance measures because they are important drivers of shareholder value and are key metrics in the Company’s strategic plan.

Strategic Focus Metrics. For fiscal 2012, the Strategic Focus Metric applicable to Messrs. Almeida and Dockendorff was based on Company cash flow. The Strategic Focus Metric applicable to Mr. Trudeau was gross margin for the Pharmaceuticals business. The Strategic Focus Metric applicable to Messrs. Hanson and Wehrly was sales growth for the Company’s emerging markets business. The Compensation Committee decided to use cash flow and sales growth as performance measures because strong cash flow performance and increased sales growth of the emerging markets business remain key strategic priorities of the Company. The Company used gross margin as a performance measure for the Pharmaceuticals business in order to focus on profit without encouraging undue risk and to incent performance on a more granular level.

Establishing Minimum Performance Goals. In addition to setting the performance metrics, at the beginning of the fiscal year the Compensation Committee also established threshold, target and maximum performance requirements. For fiscal 2012, the threshold performance requirement established for at least one of the Core

 

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Financial Metrics applicable to each named executive officer had to be achieved in order for any payout to be made to the executive under the annual incentive plan. If the maximum performance requirement for a metric applicable to a named executive officer is exceeded, any payout associated with that metric is capped at the maximum performance level. For fiscal 2012, the Company exceeded the minimum performance levels at the applicable Company and business unit levels.

For the Core Financial Metrics and the Strategic Focus Metrics, thresholds and maximums for fiscal 2012 were as follows:

 

Performance Metric   Threshold   Maximum

Sales Growth

(Company, Surgical Solutions and Emerging Markets)

 

2.5 percentage points

below target

 

3.5 percentage points

above target

Sales Growth

(Pharmaceuticals)

 

2.6 percentage points

below target

 

3.5 percentage points

above target

Sales Growth

(Respiratory, Vascular Therapies and Developed Markets)

 

2.8 percentage points

below target

 

3.1 percentage points

above target

Net Income

(Company)

  93% of target   107% of target

Cash Flow

(Company)

  90% of target   110% of target
Operating Income (business unit levels)   95% of target   110% of target
Gross Margin (Pharmaceuticals)  

1.0 percentage point

below target

 

1.0 percentage point

above target

Calculating Performance Scores. If the applicable threshold for at least one Core Financial Metric is met, then a performance multiplier for each performance metric is determined and the overall performance score is calculated. For each performance metric (whether a Core Financial Metric or a Strategic Focus Metric), the performance multiplier would be 0 if performance is below threshold, 0.5x if performance is at threshold, 1x if performance is at target and 2x if performance is at or above the maximum performance level; with the performance multiplier for performance between threshold and maximum being determined by linear interpolation.

The performance multiplier for each performance metric is multiplied by the weighting percentage to obtain a performance score for that metric. The performance scores for each metric are added together and that total is then multiplied by the individual’s target award amount to determine the actual award amount.

 

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The table below summarizes the performance metrics, weights, targets, actual results and the resulting performance multipliers and scores that determined the fiscal 2012 annual incentive cash awards for our named executive officers.

Fiscal 2012 Annual Incentive Plan Design Summary

 

Executive Officer  

Performance

Metric

  Weight     Performance
Target(1)
    Performance
Results
    Performance
Multiplier
    Performance
Score
 
           (dollars in millions)                
             

José E. Almeida

Charles J. Dockendorff

 

Net Income

(Company)

    35%        $2,073        $2,108        1.239x        43%   
 

Sales Growth

(Company)

    35%        3.7%        3.5%        .965x        34%   
 

Cash Flow

(Company)

    30%        $2,000        $2,020        1.100x        33%   

Performance Score Total

  

    110%   

Bryan C. Hanson

 

Operating Income

(business unit)

    35%        (2)      (2)      .637x        22%   
 

Sales Growth

(business unit)

    35%        (2)      (2)      0x        0%   
 

Sales Growth

(Emerging Markets)

    30%        11.1%        15.2%        2x        60%   

Performance Score Total

  

    82%   

Peter L. Wehrly

 

Operating Income

(business unit)

    35%        $1,245        $1,312        1.542x        54%   
 

Sales Growth

(business unit)

    35%        5.1%        5.2%        1.037x        36%   
 

Sales Growth

(Emerging Markets)

    30%        11.1%        15.2%        2x        60%   

Performance Score Total

  

    150%   

Mark C. Trudeau

 

Operating Income

(Pharmaceuticals)

    35%        $350        $360        1.283x        45%   
 

Sales Growth

(Pharmaceuticals)

    35%        2.6%        3.3%        1.201x        42%   
 

Gross Margin

(Pharmaceuticals)

    30%        43.6%        45.6%        2x        60%   

Performance Score Total

  

    147%   

 

  (1) The performance metrics established for compensation purposes include non-GAAP financial measures which exclude the effects of potential special or non-operating items which the Compensation Committee believes may mask the underlying operating results and/or business trends of the Company or business unit, as applicable. The categories of these potential extraordinary items are specified at the beginning of the fiscal year when the performance measure is approved and, for the 2012 annual incentive plan, included certain restructuring charges, revenue adjustments related to businesses exited or sold, acquisitions, goodwill or other intangible asset impairment charges, shareholder and other litigation charges and certain legacy tax matters.

 

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For the 2012 annual incentive plan, the performance targets were calculated as follows:

 

   

Sales growth is the total change in net trade sales for fiscal year 2012 in US dollars, calculated using fiscal 2011 foreign exchange rates, divided by fiscal year 2011 net trade sales.

 

   

Net income is a non-GAAP financial measure which excludes the items noted above.

 

   

Operating income is the operating income of the applicable business unit, calculated using the foreign exchange rate applied in setting the business unit’s annual operating plan in order to eliminate the effect of currency fluctuations.

 

   

Cash flow means free cash flow, which is net cash provided by operating activities minus capital expenditures.

 

   

Gross margin is gross margin dollars divided by net sales dollars, where gross margin dollars is calculated by adjusting sales primarily for product costs, variances in plant, freight costs, royalties, warehousing, inventory adjustments and exchange rate fluctuations.

 

  (2) The business unit financial goals were set at levels consistent with and necessary to achieve the Company-wide financial performance goals reflected in this chart, and thus reflect a similar degree of difficulty as the Company-wide criteria. Because we do not provide business unit level guidance, we are not disclosing these competitively sensitive goals.

The table below sets forth the 2012 annual incentive plan award target percentages, as well as the threshold, target, maximum and actual award payments approved for each of our named executive officers. The actual award payments are also reported in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table and the threshold, target and maximum bonus amounts are also reported in the “Estimated Future Payouts Under Non-Equity Incentive Plan Awards” column of the Grants of Plan-Based Awards Table.

Fiscal Year 2012 Annual Incentive Awards

 

Executive Officer  

Target

Percentage

    Threshold(1)     Target     Maximum(2)     Actual  

José E. Almeida

    130%        $763,750        $1,527,500        $3,055,000        $1,682,517   

Charles J. Dockendorff

    85%        $328,185        $656,370        $1,312,740        $722,981   

Bryan C. Hanson

    80%        $216,320        $432,640        $865,280        $355,965   

Peter L. Wehrly

    80%        $216,320        $432,640        $865,280        $650,127   

Mark C. Trudeau

    80%        $260,000        $520,000        $1,040,000        $507,252 (3) 

 

  (1) Threshold award payments are 50% of target award payments.

 

  (2) Maximum award payments are 200% of target award payments.

 

  (3) Mr. Trudeau’s actual award is pro-rated for the number of days during fiscal 2012 that he served as President of our Pharmaceuticals business.

In setting individual target percentages for fiscal 2012, the Compensation Committee reviewed, for each named executive officer (other than Mr. Trudeau, who joined the Company in February 2012), the target percentages applicable in fiscal 2011, the total cash compensation established for fiscal 2011 and the projected cash compensation for fiscal 2012, considering how the total cash compensation of each named executive officer compared to peer group and related market data. The Compensation Committee also took into account the day-to-day responsibilities of each named executive officer. Following this review, and in light of peer group data and the overall compensation of each named executive officer, the Compensation Committee determined that the fiscal 2011 award target percentage remained appropriate for Mr. Dockendorff and should be increased for Messrs. Hanson and Wehrly, in-line with the expanded roles these two named executive officers assumed in July 2011. Following the setting of individual target percentages for fiscal 2012, Mr. Almeida was just above the

 

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50th percentile of total cash compensation (i.e., base salary plus the annual incentive bonus payable if target performance is attained) paid to executives in comparable positions, based on market data, while, for their respective positions, Mr. Dockendorff was just above the 75th percentile, Mr. Hanson was just above the 50th percentile and Mr. Wehrly was just below the 50th percentile. With respect to Mr. Trudeau, the Compensation Committee utilized the same methodology as used to establish base salary when establishing his individual target percentage, selecting a percentage that would result in an annual incentive bonus that, if target performance is attained, is significantly below the 50th percentile and which, when combined with his base salary, provides Mr. Trudeau with total cash compensation (i.e., base salary and target bonus opportunity) that is just above the 25th percentile of market.

Mr. Almeida’s target percentage was significantly higher than those of other named executive officers given his position as Chief Executive Officer and the significant responsibilities that accompany that position. His target percentage, as with the target percentages for each of the other named executive officers, was in-line with market data.

Long-Term Incentive Awards

The Compensation Committee uses long-term incentive compensation in the form of equity awards to deliver competitive compensation that recognizes employees for their contributions to the Company and aligns the interests of named executive officers with shareholders by focusing them on long-term growth and stock performance. Recognizing that long-term incentives are generally the most significant element of total remuneration at the senior level and also acknowledging that long-term incentives are a crucial part of the “total rewards” compensation package that the Company offers, during fiscal 2011 the Compensation Committee, with input from its consultant, conducted a review of the Company’s long-term incentive structure.

The Compensation Committee examined a number of potential long-term incentive vehicles for equity grants, considering the pros and cons of each. The Compensation Committee also considered the proportion of long-term incentive value to be allocated to vehicles with time-based vesting versus vehicles with performance-based vesting. Based on this evaluation, the Compensation Committee determined that the long-term incentive vehicles of stock options, restricted units and performance units continued to serve the Company well. To emphasize the Company’s pay-for-performance philosophy, the Compensation Committee did, however, deem it appropriate to increase the proportion of long-term incentive value allocated to performance units. The Compensation Committee also reviewed the performance share plan payout curve and determined that relative total shareholder return (total shareholder return for the Company as compared to total shareholder return of companies comprising a healthcare industry index), measured over the three-year performance period, continued to be the appropriate metric for performance units. Total shareholder return in the top quartile of peer group performance is a key long-term financial goal of the Company. The healthcare industry index selected by the Compensation Committee for the fiscal 2012 grant is comprised of the Company as well as 17 healthcare companies that generally replicate the Company’s mix of businesses and includes all of the members of the peer group established by the Company for purposes of establishing fiscal 2012 compensation.

When setting long-term incentive compensation for named executive officers, the Compensation Committee employs the process described in the “How We Determine Compensation—Peer Group Reviews and Market Data” section of this CD&A. In determining the dollar value of the fiscal 2012 annual long-term incentive award for each named executive officer (other than for Mr. Trudeau, who joined the Company in February 2012), the Compensation Committee also considered individual performance, including TLR performance ratings, the officer’s total direct compensation (i.e., base salary, annual incentive compensation and long-term incentive compensation in the aggregate) and mix of compensation for the previous fiscal year, the resulting compensation mix projected for fiscal 2012, previous equity grants and the dollar value of the proposed equity grant relative to market data and to proposed equity grants for other executive officers. After the Compensation Committee established a dollar value for each named executive officer’s fiscal 2012 annual long-term incentive compensation award, that dollar value was then allocated between stock option, restricted unit and performance unit awards, with the exact number of restricted units and performance units based on the closing price of a

 

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Company share on the grant date and the exact number of stock options based on such closing price and the applicable Black-Scholes ratio. The dollar value awarded to each named executive officer for fiscal 2012 grants was allocated between the long-term incentive vehicles as follows:

 

   

40% of the dollar value was allocated to performance units with performance-based vesting over a three-year vesting period based on relative total shareholder return;

 

   

40% of the dollar value was allocated to stock options with a four-year vesting period; and

 

   

20% of the dollar value was allocated to restricted units with time-based vesting over a four-year vesting period.

The Compensation Committee considers this allocation appropriate, as performance-orientation is reflected in performance units and stock options (which only have value to the extent the Company’s stock price increases from the stock price on the grant date), while grants of restricted units allow the program to support retention, even in down stock markets. In addition, the Compensation Committee took into consideration the fact that consistency of program vehicles is likely to enhance employee understanding of the function and benefits of the long-term incentives offered.

Following the Compensation Committee’s determination of the dollar value of long-term incentive compensation awarded to each named executive officer for the fiscal 2012 annual long-term incentive awards, Mr. Almeida was significantly below the 50th percentile of long-term incentive compensation paid to executives in comparable positions, based on market data, while, for their respective positions, Mr. Dockendorff was just below the 75th percentile, Mr. Hanson was between the 50th and 75th percentile and Mr. Wehrly was just below the 50th percentile. With respect to Mr. Trudeau, the Compensation Committee utilized the same methodology as used to establish base salary and individual target percentage, selecting a value for the long-term incentive award that was significantly below the 25th percentile.

The table below compares the dollar value awarded by the Compensation Committee to each named executive officer as long-term incentive compensation during 2012 versus the dollar value awarded to each named executive officer during fiscal 2011.

Long-Term Incentive Compensation

 

         
Executive Officer   Award Type   Fiscal 2011(1)     Fiscal 2012(1)     % Change  
         

José E. Almeida

  Annual     $3,100,000        $6,250,000        102%   
    Promotion     $3,792,000 (2)       N/A        N/A   
    Total     $6,892,000        $6,250,000        -9%   
         

Charles J. Dockendorff

  Annual     $2,400,000        $2,400,000        0%   
         

Bryan C. Hanson

  Annual     $770,000        $1,680,000        118%   
    Promotion     $264,167 (3)       N/A        N/A   
    Asia Growth     $423,700 (4)       N/A        N/A   
    Total     $1,457,867        $1,680,000        15%   
         

Peter L. Wehrly

  Annual     $600,000        $1,400,000        133%   
    Promotion     $318,750 (3)       N/A        N/A   
    Asia Growth     $468,000 (4)       N/A        N/A   
    Total     $1,386,750        $1,400,000        1%   
         

Mark C. Trudeau

  Pro-Rated Annual     N/A        $1,192,000        N/A   
    New Hire     N/A        $350,000        N/A   
    Total     N/A        $1,542,000 (5)      N/A   

 

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  (1) The amounts in the table above differ from the grant date fair value of the awards reported in the Grants of Plan-Based Awards Table. The amounts in the table above are the dollar amounts awarded by the Compensation Committee while the grant date fair value of each award reported in the Grants of Plan-Based Awards Table is the award value for accounting purposes. The award value for accounting purposes is calculated by application of a Monte Carlo simulation model for performance units and by application of the Black-Scholes ratio for stock options.

 

  (2) Represents a grant made in connection with Mr. Almeida’s election as President and Chief Executive Officer.
  (3) Represents a grant made in connection with the promotion of these executive officers.

 

  (4) Represents a grant under the Asia Growth Incentive Plan.

 

  (5) The Compensation Committee granted to Mr. Trudeau an annual long-term incentive award with a value of $1.3 million which, when pro-rated to reflect the number of days during fiscal 2012 that he served as President of our Pharmaceuticals business, resulted in an award of $1.192 million. The amounts reported include the pro-rated annual equity award of $1.192 million and an additional equity award of $350,000 to compensate Mr. Trudeau for equity he forfeited when he left his former employer to join Covidien.

For fiscal 2012, the value of annual long-term incentive awards (which excludes the promotion and other special awards) for Messrs. Almeida, Hanson and Wehrly increased significantly while the value for Mr. Dockendorff stayed the same. Messrs. Almeida, Hanson and Wehrly received significant increases in annual long-term incentive award values from 2011 to 2012 because the 2011 value was based on market data for their previous positions while the 2012 value reflects the expanded roles in which each currently serves.

The value of Mr. Almeida’s 2012 long-term incentive award was lower than the value of his 2011 long-term incentive awards due to the fact that his 2012 award was a single annual grant while his 2011 awards consisted of an initial annual award as well as an award made in connection with his election as President and Chief Executive Officer. A significant portion of this award consists of restricted units which do not vest until the third anniversary of the award, at which time the award vests in full. This cliff-vesting feature is intended to incent Mr. Almeida over a three year period above and beyond the incentive provided by the annual grant and other part of this grant, both of which vest in equal installments each year over a four-year period.

Total Direct Compensation

In establishing the three major components of compensation payable to our named executive officers—base salary, annual incentive compensation and long-term incentive awards—the Compensation Committee assessed each component against market data applicable to the respective component. The Compensation Committee also considered the total direct compensation payable to named executive officers, which aggregates all three major components of compensation, so that the Compensation Committee could assess each named executive officer’s total compensation against market data. Following the establishment of all three major components of compensation payable to our executive officers, Mr. Almeida was just below the 50th percentile of total direct compensation paid to executives in comparable positions, based on market data, while, for their respective positions, Mr. Dockendorff was just below the 75th percentile, Mr. Hanson was between the 50th and 75th percentile, Mr. Wehrly was just above the 50th percentile and Mr. Trudeau was moderately below the 25th percentile of market.

The Compensation Committee believed that the level of overall compensation for each named executive officer was appropriate, particularly with respect to Mr. Dockendorff given his exceptional performance in leading the Company’s sustainable productivity initiative in order to drive operational efficiency and fuel further growth and his receipt of the highest possible TLR performance rating and with respect to Messrs. Hanson and Wehrly, given their expanded roles.

 

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Other Benefits

Retirement Benefits

We maintain retirement plans to assist our named executive officers with retirement income planning and increase the attractiveness of employment with us. For our named executive officers, we currently provide:

 

   

a tax-qualified defined contribution 401(k) plan, the Covidien Retirement Savings and Investment Plan, that is available to all eligible United States employees (the “Retirement Savings Plan”); and

 

   

a non-qualified deferred compensation plan, the Covidien Supplemental Savings and Retirement Plan, in which executive officers and other senior employees may participate.

For more information regarding our non-qualified deferred compensation plan, see “Non-Qualified Deferred Compensation” below.

Health and Welfare and Other Benefits

Health and Welfare Benefits. As part of our overall compensation offering, our health and welfare benefits are intended to be competitive with peer companies. The health and welfare benefits we provide to our named executive officers are offered to all of our eligible United States-based employees and include medical, dental, prescription drug, vision, life insurance, accidental death and dismemberment, business travel accident, personal and family accident, flexible spending accounts, short- and long-term disability coverage and the employee assistance program. The Company also provides Mr. Almeida with supplemental long-term disability insurance, which commenced when he became our President and Chief Executive Officer on July 1, 2011. The Company does not provide tax assistance with respect to premiums paid by the Company for this insurance coverage (i.e., no “gross-ups”).

Perquisites. Although the Company does not have a perquisite program, the Compensation Committee determined that it was in the Company’s and the executives’ best interests to establish an executive physical program which offers comprehensive and coordinated annual physical examinations at a nominal cost to the Company. Other than the executive physical program and the limited use of corporate aircraft described below, we do not provide our named executive officers with any perquisites. The Compensation Committee believes that the emphasis on performance-based compensation, rather than on entitlements such as perquisites, is consistent with its compensation philosophy.

Airplane Usage. The Compensation Committee believes that it is important to have a corporate aircraft policy due to the security and efficiency benefits that such a policy provides to us. Personal travel for our named executive officers is permitted only if such use is at no incremental cost to the Company and is approved in advance by the Chief Executive Officer or if there are unusual circumstances, such as a medical or family emergency, that the Chairman of the Compensation Committee or the Chief Executive Officer believe warrant such use. Additionally, our policy was amended during 2012 to permit our Chief Executive Officer to use our corporate aircraft for personal travel, up to forty (40) block hours per fiscal year. Pursuant to current income tax rules applicable to personal use of aircraft, the Company imputes income to named executive officers for any personal use based on the Standard Industry Fare Level rates set by the Civil Aeronautics Division of the Department of Transportation. This imputed income amount is included in a named executive officer’s earnings at the end of the year and reported as W-2 income to the Internal Revenue Service. The Company does not provide tax assistance with respect to this imputed income (i.e., no “gross-ups”).

Employee Stock Purchase Plan. We maintain a broad-based employee stock purchase plan which provides eligible employees, including our named executive officers, with the opportunity to purchase Company shares. We believe that providing an employee stock purchase plan is consistent with our philosophy that compensation should align the interests of executive officers and shareholders and promote a long-term shareholder

 

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perspective. Eligible employees authorize payroll deductions to be made for the purchase of Company shares. The Company provides a fifteen percent (15%) matching contribution on up to $25,000 of an employee’s payroll deductions in any calendar year. All shares are purchased on the open market by a designated broker. Mr. Wehrly participated in the employee stock purchase plan in 2012.

Severance and Change in Control Benefits

The Company maintains executive severance and change in control benefit plans. The Compensation Committee believes that providing severance and change in control benefits to our named executive officers is appropriate, given the fact that these are standard benefits provided by peer companies and also given the need to provide for continuity of management in the event of an actual or threatened change in control.

Severance Plan. Under the severance plan, benefits are payable to any named executive officer upon an involuntary termination of employment for any reason other than cause, permanent disability or death. Severance benefits, in the form of base salary, bonus and health benefits are generally payable for 18 months (24 months for our Chief Executive Officer) following termination of employment.

Change in Control Plan. Under the change in control plan, benefits are payable to any named executive officer upon an involuntary termination of employment or good reason resignation that occurs during a period shortly before and continuing after a change in control (a double trigger arrangement). Benefits are generally payable following termination in a lump sum cash payment equal to two times (2.99 times for our Chief Executive Officer) the sum of the executive’s base salary and the average of the executive’s bonus for the previous three fiscal years. Additional benefits provided upon a change in control termination include full vesting of outstanding equity awards, continued Company subsidy for health plan premiums for a 24 month period (36 months for our Chief Executive Officer) and outplacement services. Receipt of these benefits is conditioned upon the named executive officer signing a release of any claims against the Company. The Compensation Committee has carefully evaluated these arrangements and believes that it is important to provide named executive officers with protection in the event that their employment is terminated in connection with a change in control or their position is modified in such a way as to diminish their authority, responsibilities or compensation. Maintaining a double trigger for payment of change in control benefits helps to provide that protection while simultaneously precluding the named executive officer from receiving benefits solely due to a change in control (a single trigger arrangement). After carefully considering the issue, the Compensation Committee amended the change in control plan, effective October 1, 2011, to eliminate for all covered executive officers other than the Chief Executive Officer tax gross-up amounts which otherwise would have been payable as a result of the application of Internal Revenue Code Section 280G to certain payments made under the change in control plan.

In addition to the benefits described above, the Company has entered into a Letter Agreement with Mr. Trudeau providing Mr. Trudeau with certain enhanced benefits, including severance benefits, upon the consummation of a strategic transaction such as the spin-off or sale of the Company’s Pharmaceuticals business. The Letter Agreement is described in more detail below under the heading “Potential Payments upon Termination—Letter Agreement with Mr. Trudeau.”

How We Determine Compensation

Compensation Committee Role and Input from Management

The Compensation Committee is responsible for the Company’s executive compensation strategies, structure, policies and programs and must specifically approve compensation actions relating to our executive officers. For each executive officer, other than our Chief Executive Officer, the Compensation Committee relies on input from our Chief Executive Officer and our Senior Vice President of Human Resources in setting the officer’s performance objectives, evaluating the actual performance of the officer against those objectives and making appropriate salary and incentive awards. The Chief Executive Officer and Senior Vice President of Human Resources participate in Compensation Committee meetings, at the request of the Compensation

 

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Committee, to provide background information and explanations supporting compensation recommendations, including the results of the annual performance evaluations that our Chief Executive Officer conducts on each named executive officer, as well as a TLR performance rating. Additionally, in light of Mr. Almeida’s relationship with Mr. Hanson, who is Mr. Almeida’s brother-in-law, the Compensation Committee determined that it would be appropriate to provide for additional oversight of this process. Mr. Hanson’s performance assessments are conducted by the Chief Financial Officer and the Senior Vice President of Human Resources. In addition, the Compensation Committee reviews and approves all compensation actions relating to Mr. Hanson.

The Compensation Committee conducts the annual performance evaluation of our Chief Executive Officer. Generally, the process begins with the Compensation Committee approving an evaluation form which is then completed by the Chief Executive Officer as a self-evaluation. This completed self-evaluation is submitted to the full Board of Directors for review along with a blank evaluation for completion by each Director. The Compensation Committee’s independent consultant compiles the results of the evaluations and prepares a summary for the Compensation Committee. The Compensation Committee reviews and discusses the results, after which the Chairman of the Compensation Committee leads a further discussion with the full Board of Directors. Following this extensive discussion with the full Board of Directors, the Lead Director provides feedback to the Chief Executive Officer. The Compensation Committee uses these evaluations and discussions in setting the Chief Executive Officer’s compensation.

In setting Mr. Almeida’s compensation for fiscal 2012, which is done at the beginning of fiscal 2012, the Committee employed an alternative process from the one described above. Mr. Almeida’s initial compensation as Chief Executive Officer was established by the Compensation Committee following consideration of, among other things, the compensation of Chief Executive Officers of peer companies, the compensation of the Company’s then President and Chief Executive Officer and the business experience of Mr. Almeida. Based on Company performance, as well as an assessment of Mr. Almeida’s value to the Company, a review of total direct compensation and a comparison to market data, the Compensation Committee set Mr. Almeida’s compensation for fiscal 2012; they determined that it was premature to conduct a formal performance evaluation based on Mr. Almeida’s service as Chief Executive Officer for one quarter of fiscal 2011. Following the completion of fiscal 2012, Mr. Almeida’s first full year as Chief Executive Officer, the Compensation Committee expects to continue the annual performance evaluation process described above in setting Mr. Almeida’s compensation.

Compensation Consultants

The Compensation Committee has the sole authority to retain, compensate and terminate any independent compensation consultants of its choosing. During fiscal 2012, Steven Hall & Partners served as the Compensation Committee’s independent compensation consultant. The Compensation Committee has assessed the independence of Steven Hall & Partners and determined that the compensation consultant is independent and that no conflicts of interest exist currently or existed during fiscal 2012. Steven Hall & Partners reports directly to the Compensation Committee and does not provide services to, or on behalf of, any other part of our business. Steven Hall typically provides the Compensation Committee with advice on compensation program design and best practices and, as noted below, produces the comparative information derived from the peer group and published survey data that the Compensation Committee reviews. Major services provided during fiscal 2012 by Steven Hall & Partners under its engagement with the Compensation Committee included: (1) preparing the market study described below; (2) reviewing the Company’s compensation peer group; (3) analyzing the Company’s share allocation and utilization as compared with 10 peer companies; (4) providing regulatory updates; (5) assisting the human resources department in preparing the tally sheets reporting total compensation for each executive officer; and (6) assisting in the Chief Executive Officer evaluation process. Steven Hall & Partners is the only compensation consultant who played a role in determining or recommending the amount or form of executive compensation for fiscal 2012.

 

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Peer Group Review and Market Data

When reviewing compensation programs for the named executive officers, the Compensation Committee considers the compensation practices of specific peer companies and reviews compensation data from general industry published surveys.

In selecting the peer group from among companies with annual revenues generally within the range of one-half to two times our annual revenues, the Compensation Committee considered various other factors relating to similarly-situated medical device and pharmaceutical companies, including net income and market capitalization. The Compensation Committee reviews this peer group on an on-going basis and modifies it as circumstances warrant. Based on its review in 2012, the Compensation Committee determined that the peer group utilized in setting compensation for 2011 remained appropriate for 2012, as it continues to represent our primary competitors for capital, executive talent and, in some cases, business within our industry. The following table sets forth the peer group approved by the Compensation Committee for purposes of setting 2012 compensation (except for Mr. Trudeau), along with fiscal 2011 financial information for each. The table also includes information regarding Covidien’s relative position in the peer group in each of the categories.

 

Company   Fiscal Year
End
    Revenue     Net Income     Market Capitalization
at 3/30/2012
 
    (dollars in millions)  

Baxter International Inc.

    12/11        $13,893        $2,224        $33,257   

Becton, Dickinson & Company

    9/11        7,829        1,271        16,315   

Boston Scientific Corporation

    12/11        7,622        441        8,679   

Bristol-Myers Squibb Company

    12/11        21,244        3,709        56,974   

Eli Lilly & Company

    12/11        24,287        4,348        46,724   

Medtronic, Inc.

    4/11        15,933        3,096        40,781   

St. Jude Medical, Inc.

    12/11        5,612        826        14,200   

Stryker Corporation

    12/11        8,307        1,345        21,153   

Thermo Fisher Scientific, Inc.

    12/11        11,726        1,330        20,627   

Zimmer Holdings, Inc.

    12/11        4,452        761        11,450   
                                 

Covidien plc

    9/11        11,574        1,868        26,429   

Rank

            6 of 11        5 of 11        5 of 11   

Percentile

            55        62        60   

As noted above, the Compensation Committee also reviews a market study prepared by its independent compensation consultant (the results of which we refer to throughout this CD&A as the “market data”). The market data compiled by the Compensation Committee’s independent compensation consultant included information regarding base salary, annual cash incentive awards and the value of equity awards. The study included data derived from a number of sources, including the proxy statements of the Company’s peer group companies, a Towers Watson 2010/2011 Survey Report on Top Management Compensation, a 2011 Radford Global Technology Survey, the 2011 Towers Watson US General Industry Executive Database, the Hewitt 2011 General Industry/Retail Total Compensation Measurement, the 2011 US Mercer Benchmark Database—Executive and, for companies with revenue of approximately $12 billion, general industry data as well as data for the medical instruments, pharmaceuticals and bio-technology industries where available and as appropriate. The Compensation Committee did not strictly tie target compensation for our named executive officers to any one

 

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type of peer group data, but instead considered all of these sources in determining the appropriate level of compensation for our executives. Data drawn from our peer group proxy statements was given greater consideration for the chief executive officer and chief financial officer positions than for group head positions.

Use of Tally Sheets

In setting compensation for each named executive officer, in addition to reviewing market data, the Compensation Committee reviews each named executive officer’s total annual compensation from the previous four years. The Compensation Committee uses individual tally sheets prepared by our human resources department and the Compensation Committee’s compensation consultant as a presentation format to facilitate this review. The tally sheets identify the value of each pay element, including base salary, annual incentive bonus, sign-on bonus or other cash payments, long-term incentives, grant date value of equity awards and retirement benefits. The tally sheets also reflect current share ownership and equity awards held as well the value of termination and change-in-control payments under various potential termination and change-in-control scenarios. Reviewing the tally sheets helps the Compensation Committee to balance the various elements of compensation so that no one element is weighted too heavily and so that there is an appropriate mix between fixed and variable compensation and between short- and long-term compensation, consistent with our belief that our executive compensation program should not encourage excessive or unnecessary risk-taking.

Talent and Leadership Review

The Company utilizes a Talent and Leadership Review, or TLR, process to manage its talent and organizational capability with the goal of maximizing organizational excellence and business success. TLR assists the Company in understanding its leadership strengths and gaps, helps identify key and emerging talent and provides insight into current organizational capability versus strategic goals and objectives. As part of the TLR process, the Chief Executive Officer in conjunction with the Senior Vice President of Human Resources assigns to each executive officer a rating on two discrete dimensions: leadership behaviors and results. Three possible ratings can be assigned in each of these two dimensions: exceptional, effective, and not yet effective. While the TLR process is intended to assist in evaluating the needs of the Company from a human resources perspective, these performance ratings are also considered by the Chief Executive Officer in formulating compensation recommendations to the Compensation Committee. These performance ratings impacted both base salary decisions as well as decisions regarding the value of long-term incentive compensation awards.

Other Compensation Policies and Arrangements

Executive Compensation Recoupment Policy

Accountability is one of our core values. To encourage our senior executives to take responsibility and affirm the Company’s commitment to integrity and the highest standards of ethical conduct, to reinforce these values through our compensation program, and to support good governance practices, we maintain an Executive Compensation Recoupment Policy (the “Recoupment Policy”). The Recoupment Policy requires that the Company recoup, or “claw-back”, portions of incentive compensation paid to our executive officers if there is a restatement of the Company’s financial statements due to the material noncompliance by the Company with financial reporting requirements under applicable securities laws or regulations and the amount of incentive compensation that was awarded to an executive officer during the three (3) fiscal years immediately preceding the date of the restatement (or such other period as may be required under applicable securities laws or regulations) is higher than the amount of incentive compensation that would have been awarded to the executive officer had the financial results subject to the restatement been properly reported. For this purpose, incentive compensation includes any compensation determined to be incentive compensation pursuant to regulations to be issued by the SEC.

In addition, our equity awards are subject to a claw-back provision, pursuant to which we may recover the amount of any profit the named executive officer realized upon the exercise of options or vesting of other equity awards during the 12-month period that occurs immediately prior to the officer’s involuntary termination for cause.

 

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Executive Officer Share Retention and Ownership Guidelines

The Compensation Committee has determined that it is in the best interests of the Company for all named executive officers to have meaningful share ownership positions in Covidien in order to reinforce the alignment of management and shareholder interests. Accordingly, the Compensation Committee adopted share retention and ownership guidelines for named executive officers. Under these guidelines, named executive officers are expected to hold company equity with a value expressed as a multiple of base salary as follows:

 

Chief Executive Officer    5 times base salary
Other Named Executive Officers    3 times base salary

In determining an executive’s ownership, shares held directly as well as shares underlying restricted units subject to time-based vesting and their accompanying dividend equivalent units are included. Shares underlying unexercised stock options and unvested performance units and their accompanying dividend equivalent units are not included in the calculation. Executives are required to achieve the requisite ownership position within five years of first becoming subject to the share ownership guidelines. Messrs. Almeida and Dockendorff have each achieved shareholdings in excess of the applicable multiple set forth above. Messrs. Trudeau, Hanson and Wehrly, each of whom has become a named executive officer within the past year (Trudeau and Wehrly) or two (Hanson) are well on their way to satisfying the target holdings within the five year phase-in period. The Company’s Insider Trading Policy prohibits employees, including named executive officers, from engaging in transactions in puts, calls, cashless collars, options or similar rights and obligations involving Covidien securities, other than the exercise of a Company-issued stock option.

Deductibility of Executive Compensation

Internal Revenue Code Section 162(m) limits to $1 million the tax deduction available to public companies for annual compensation that is paid to covered employees (generally, the named executive officers other than the Chief Financial Officer), unless the compensation qualifies as performance-based or is otherwise exempt from Code Section 162(m). In evaluating compensation programs applicable to our named executive officers (including the 2007 Stock and Incentive Plan, under which our named executive officers receive annual incentive bonuses and equity awards), the Compensation Committee considers the potential impact on the Company of Code Section 162(m). The Compensation Committee generally intends to structure the Company’s executive compensation in a manner designed to qualify for deductibility under Code Section 162(m) when consistent with our overall compensation program objectives, while also maintaining maximum flexibility in the design of our compensation programs and in making appropriate payments to named executive officers.

Compensation Committee Report on Executive Compensation

The Compensation Committee is responsible for the oversight of the Company’s compensation programs on behalf of the Board of Directors. In fulfilling these responsibilities, the Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis set forth in this Proxy Statement.

Based on the review and discussions referred to above, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 28, 2012, and Proxy Statement for the 2013 Annual Meeting of Shareholders, each of which will be filed with the Securities and Exchange Commission.

Compensation and Human Resources Committee

Timothy M. Donahue, Chairman

John M. Connors, Jr.

Dennis H. Reilley

 

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Executive Compensation Tables

Summary Compensation

The information included in the Summary Compensation Table below reflects compensation of our named executive officers for the fiscal year ended September 28, 2012 (“fiscal 2012”) and, where applicable, the fiscal years ended September 30, 2011 and September 24, 2010. The “named executive officers” are our Chief Executive Officer, Chief Financial Officer and the three other most highly compensated executive officers in fiscal 2012. For a more complete understanding of the table, please read the narrative following the table.

SUMMARY COMPENSATION TABLE

 

Name and

Principal Position

  Fiscal
Year
   

Salary

($)

   

Bonus

($)

   

Stock
Awards

($)

   

Option
Awards

($)

   

Non-Equity
Incentive Plan
Compensation

($)

   

Change in
Pension Value
and
Non-Qualified
Deferred
Compensation
Earnings

($)

   

All Other
Compensation

($)

   

Total

($)

 
(A)   (B)     (C)     (D)     (E)     (F)     (G)     (H)     (I)     (J)  
           

José E. Almeida Chairman, President and Chief Executive Officer

   
 
 
2012
2011
2010
  
  
  
   
 
 
$1,154,808
$846,795
$732,885
  
  
  
          
 
 
$4,549,997
$5,224,971
$1,652,014
  
  
  
   
 
 
$2,699,141
$2,081,345
$1,507,744
  
  
  
   
 
 
$1,682,517
$1,125,587
$910,440
  
  
  
   

 

 


$402

$3

(3)  

  

  

   
 
 
$193,265
$128,666
$72,579
  
  
  
   
 
 
$10,279,728
$9,407,766
$4,875,665
  
  
  
           

Charles J. Dockendorff Executive Vice President and Chief Financial Officer

   
 
 
2012
2011
2010
  
  
  
   
 
 
$764,204
$734,800
$704,746
  
  
  
          
 
 
$1,747,191
$1,416,002
$1,357,019
  
  
  
   
 
 
$1,036,456
$1,255,281
$1,238,493
  
  
  
   
 
 
$722,981
$906,004
$849,541
  
  
  
   
 
 
$38,716
$68,419
$55,348
  
  
  
   
 
 
$115,745
$109,441
$94,639
  
  
  
   
 
 
$4,425,293
$4,489,947
$4,299,786
  
  
  
           

Bryan C. Hanson(1)
Group President, Surgical Solutions

   
 
2012
2011
  
  
   
 
$535,200
$467,330
  
  
          
 
$1,223,049
$1,010,069
  
  
   
 
$725,547
$541,137
  
  
   
 
$355,965
$626,578
  
  
   
 
(3)
$2,949
  
  
   
 
$529,980
$61,617
  
  
   
 
$3,369,741
$2,709,680
  
  
           

Peter L. Wehrly(2)
Group President, Vascular Therapies, Respiratory & Monitoring Solutions and Developed Markets

    2012        $536,546               $1,019,202        $604,623        $650,127               $151,828        $2,962,326   
           

Mark C. Trudeau(2) President, Pharmaceuticals

    2012        $420,000        $225,000        $945,965        $623,096        $507,252               $207,981        $2,929,294   

 

  (1) Mr. Hanson was not a named executive officer for fiscal 2010.

 

  (2) Neither Mr. Wehrly nor Mr. Trudeau was a named executive officer for fiscal 2010 or fiscal 2011.

 

  (3) The present value of the accumulated benefit decreased for Messrs. Almeida and Hanson. See “Change in Pension Value and Non-Qualified Deferred Compensation Earnings (Column H)” note below for more information.

Bonus (Column D) This column reflects a one-time sign-on bonus paid to Mr. Trudeau in connection with his commencement of employment with the Company on February 1, 2012.

Stock Awards (Column E) and Option Awards (Column F) These columns represent the aggregate grant date fair value, computed in accordance with Accounting Standards Codification 718 (“ASC 718”), of restricted unit, performance unit and stock option awards issued to each of our named executive officers during the 2010, 2011 and 2012 fiscal years, as applicable. Further information regarding the 2012 awards is included in the Fiscal 2012 Grants of Plan-Based Awards Table, the Outstanding Equity Awards at 2012 Fiscal Year-End Table and the Compensation Discussion and Analysis (“CD&A”), beginning on page 18.

 

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In the case of performance unit awards issued to all named executive officers as part of our 2012 annual equity award, the grant date fair value is based on the probable outcome of the market-based performance conditions, calculated based on the application of a Monte Carlo simulation model. The actual amounts which vest are determined at the end of the three-year performance cycle and are based on total shareholder return for the Company as compared to total shareholder return of companies comprising a healthcare industry index. Depending upon whether or to what extent the performance conditions are met, twice as many performance units may vest, or none may vest at all. Amounts in these columns do not correspond to the actual value that may be recognized by the named executive officers, which may be higher or lower based on a number of factors, including the Company’s performance, stock price fluctuations and applicable vesting. For additional information relating to assumptions made in the valuation for current year awards reflected in these columns, see Note 18 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 28, 2012.

Non-Equity Incentive Plan Compensation (Column G) The amounts reported in Column G represent annual incentive cash awards paid to the named executive officers under our 2012 Annual Incentive Plan. For information regarding the calculation of these awards, see the CD&A, beginning on page 18.

Change in Pension Value and Non-Qualified Deferred Compensation Earnings (Column H)

The amount reported in Column H for Mr. Dockendorff is attributable to the increase in the actuarial present value of his accumulated benefit under the frozen Kendall Pension Plan at September 28, 2012, as compared to September 30, 2011. The present value of the accumulated benefit decreased $5 for Mr. Almeida and decreased $149 for Mr. Hanson because of changes in assumptions regarding the interest crediting rate and discount rate. These changes in assumptions did not result in a decrease in Mr. Dockendorff’s benefit because he is within two years of the unreduced retirement age (60). Messrs. Wehrly and Trudeau are not eligible to participate in the Kendall Pension Plan because it was frozen before each commenced employment with the Company. For more information, see the 2012 Pension Benefits Table and related narrative.

Amounts in Column H also include above-market earnings on amounts credited to the Supplemental Savings Plan for Mr. Dockendorff. All investments offered under the Supplemental Savings Plan mirror investments offered under the Retirement Savings Plan (our 401(k) plan), except that the Supplemental Savings Plan includes an additional investment alternative, the Enhanced Moody’s Rate, which is available to eligible employees, including Mr. Dockendorff. During fiscal 2012, the Enhanced Moody’s Rate produced above-market earnings of $34,521 for Mr. Dockendorff. For more information, see the Fiscal 2012 Non-Qualified Deferred Compensation Table and related narrative.

All Other Compensation (Column I) The amounts reported in Column I represent the aggregate dollar amount for each named executive officer for Company contributions to the Retirement Savings Plan, Company credits to the Supplemental Savings Plan, personal benefits, insurance premiums, relocation benefits and tax reimbursements attributable to relocation benefits. The following table shows the specific amounts included in Column I of the Summary Compensation Table for fiscal 2012. For a more complete understanding of the table, please read the related narrative.

 

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ALL OTHER COMPENSATION

 

Name and

Principal Position

  Company
Contributions
to Retirement
Savings Plan
    Company
Credits to
Supplemental
Savings Plan
    Perquisites
and Other
Personal
Benefits
    Relocation
Benefits
    Tax
Reimbursements
on Relocation
Benefits
    Total  
(A)   (B)     (C)     (D)     (E)     (F)     (G)  
             

José E. Almeida
Chairman, President and Chief Executive Officer

    $14,821        $118,217        $60,227                      $193,265   
             

Charles J. Dockendorff
Executive Vice President and Chief Financial Officer

    $17,500        $98,245                             $115,745   
             

Bryan C. Hanson
Group President, Surgical Solutions

    $14,835        $54,291               $317,457        $143,397        $529,980   
             

Peter L. Wehrly
Group President, Vascular Therapies, Respiratory & Monitoring Solutions and Developed Markets

    $14,856        $28,796               $70,725        $37,451        $151,828   
             

Mark C. Trudeau
President, Pharmaceuticals

    $7,500        $2,975               $163,850        $33,656        $207,981   

Perquisites & Other Personal Benefits (Column D)

Mr. Almeida. The amount in Column D includes the following: $2,350 for an annual physical under the Company’s executive physical program; $17,123 for insurance premiums paid by the Company for supplemental long-term disability insurance; and $40,754 attributable to personal use of Company aircraft. The value of flights on corporate aircraft is based on the total variable incremental cost incurred by the Company in providing such flights, calculated on an annualized per hour basis. The variable costs associated with such flights include fuel, trip-related maintenance, crew travel expenses, on-board catering, landing and parking fees and other variable costs. As Company-owned aircraft are used predominantly for business purposes, we have not included fixed costs, such as pilots’ salaries, insurance and standard maintenance, which do not change based on usage. Mr. Almeida was taxed on the imputed income attributable to his personal use of Company aircraft and the value of insurance premiums paid by the Company during fiscal 2012 and the Company did not provide him with any tax assistance, i.e., no gross-ups, with respect to that income.

Grants of Plan-Based Awards

The following table provides information concerning the annual incentive cash awards and equity incentive awards granted to each of our named executive officers in fiscal 2012.

 

   

“AIP” is the annual incentive cash award payable pursuant to our 2012 Annual Incentive Plan.

 

   

“PSUs” are restricted unit awards subject to performance-based vesting, which we refer to as performance units.

 

   

“RSUs” are restricted unit awards subject to time-based vesting.

 

   

“Options” are nonqualified stock options subject to time-based vesting.

For a more complete understanding of the table, please read the related narrative.

 

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FISCAL 2012 GRANTS OF PLAN-BASED AWARDS

 

Name   Grant
Date
    Date of
Committee
Action
    Estimated Future Payouts Under
Non-Equity Incentive Plan
Awards
    Estimated Future Payouts
Under Equity Incentive
Plan Awards
   

All other
Stock
Awards:
Number of
Shares of
Stock or
Units

(#)

   

All other
Option
Awards:
Number of
Securities
Underlying
Options

(#)

    Exercise
or Base
Price of
Option
Awards
($/Sh)
   

Grant Date
Fair Value
of Stock
and Option
Awards

($)

 
     

Threshold

($)

    Target
($)
   

Maximum

($)

   

Threshold

(#)

   

Target

(#)

   

Maximum

(#)

         
(A)   (B)            (C)     (D)     (E)     (F)     (G)     (H)     (I)     (J)     (K)     (L)  

José E. Almeida

                                           

AIP

            $763,750        $1,527,500        $3,055,000                             

PSUs

    12/1/2011        11/16/2011                  26,911        53,821        107,642                  $3,299,981   

RSUs

    12/1/2011        11/16/2011                              26,911              $1,250,016   

Options

    12/1/2011        11/16/2011                                                                244,860        $46.45        $2,699,141   

Charles J. Dockendorff

                                           

AIP

            $328,185        $656,370        $1,312,740                             

PSUs

    12/1/2011        11/16/2011                  10,334        20,667        41,334                  $1,267,176   

RSUs

    12/1/2011        11/16/2011                              10,334              $480,014   

Options

    12/1/2011        11/16/2011                                                                94,025        $46.45        $1,036,456   

Bryan C. Hanson

                                           

AIP

            $216,320        $432,640        $865,280                             

PSUs

    12/1/2011        11/16/2011                  7,234        14,467        28,934                  $887,030   

RSUs

    12/1/2011        11/16/2011                              7,234              $336,019   

Options

    12/1/2011        11/16/2011                                                                65,820        $46.45        $725,547   

Peter L. Wehrly

                                           

AIP

            $216,320        $432,640        $865,280                             

PSUs

    12/1/2011        11/16/2011                  6,028        12,056        24,112                  $739,202   

RSUs

    12/1/2011        11/16/2011                              6,028              $280,001   

Options

    12/1/2011        11/16/2011                                                                54,850        $46.45        $604,623   

Mark C.Trudeau

                                           

AIP

            $260,000        $520,000        $1,040,000                             

PSUs

                                           

RSUs

    2/1/2012        11/28/2011                              18,115              $945,965   

Options

    2/1/2012        11/28/2011                                                                51,900        $52.22        $623,096   

Non-Equity Incentive Plan Awards (Columns C through E) The amounts reported in Columns C through E reflect threshold, target and maximum award amounts for fiscal 2012 pursuant to the 2012 Annual Incentive Plan, which is an element of our 2007 Stock and Incentive Plan. The actual amounts earned by each named executive officer pursuant to such awards are set forth in Column G of the Summary Compensation Table.

Equity Incentive Plan Awards (Columns F through H) The amounts reported in Columns F through H reflect threshold, target and maximum award amounts for the FY12-FY14 performance cycle pursuant to performance unit awards issued as part of our fiscal 2012 annual equity awards. The actual amounts, if any, earned by each named executive officer pursuant to such awards are determined by the Compensation Committee at the end of the three-year performance cycle and are based upon total shareholder return for the Company as compared to the total shareholder return of companies comprising a healthcare industry index (i.e., relative total shareholder return). Threshold, target and maximum award amounts are payable upon achievement of relative total shareholder return in the 25th, 50th and 75th percentile, respectively. Dividend equivalent units will be credited on performance unit awards only if, and to the extent that, dividends are payable on ordinary shares, and will vest only if the applicable performance criteria are satisfied. For more information regarding performance unit awards, see the CD&A beginning on page 18.

Stock Awards and Option Awards (Columns I and J) The amounts reported in Column I and Column J reflect the number of shares underlying restricted unit awards and stock option awards, respectively, that were granted as part of our fiscal 2012 annual equity awards and which vest one-quarter annually beginning on the first anniversary of the grant date. Dividend equivalent units will be credited on restricted unit awards only if, and to the extent that, dividends are payable on ordinary shares, and will vest according to the same schedule as the underlying restricted units.

 

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Grant Date Fair Value (Column L) In the case of performance unit awards issued as part of our 2012 annual equity awards, the grant date fair value is based on the probable outcome of the market-based performance conditions, calculated based on the application of a Monte Carlo simulation model. Depending upon whether or to what extent the respective performance conditions are met, the number of shares for which the performance units are settled may range from zero to 200%.

Outstanding Equity Awards at Fiscal Year-End

The following table provides information regarding outstanding stock option awards and unvested restricted unit and performance unit awards held by each named executive officer as of September 28, 2012. Restricted unit and performance unit awards listed in the table include dividend equivalent units credited on such awards. Dividend equivalent units vest according to the same schedule as the underlying restricted unit award and, in the case of performance unit awards, if the applicable performance criteria are satisfied. For a more complete understanding of the table, please read the footnotes that follow the table. Unless otherwise specified, the market value of outstanding stock awards in the table is calculated by multiplying the number of unvested restricted or performance units by $59.42, the closing price of our stock on September 28, 2012.

OUTSTANDING EQUITY AWARDS AT 2012 FISCAL YEAR-END

 

     Option Awards     Stock Awards  
Name   Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
   

Option
Exercise
Price

($)

    Option
Expiration
Date
   

Number of
Shares or
Units of Stock
That Have Not
Vested

(#)

   

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

($)

   

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

(#)

   

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

($)

 
(A)   (B)     (C)     (E)     (F)     (G)     (H)     (I)     (J)  
           

José E. Almeida

    33,554        0        $38.6485        11/20/2016        5,854 (8)       $347,845        30,800 (16)       $1,852,928   
      161,500        0        $43.0878        07/01/2017        7,699 (9)       $457,475        37,158 (17)       $2,207,928   
      113,595        37,865 (1)      $34.1500        11/30/2018        13,934 (10)       $827,958        108,976 (18)       $6,475,354   
      59,777        59,778 (2)      $47.6000        11/30/2019        56,527 (11)       $3,358,834           
      39,062        117,188 (3)      $42.9400        11/30/2020        5,596 (12)       $332,514           
      7,903        23,712 (4)      $54.2200        06/30/2021        27,244 (13)       $1,618,838           
      0        244,860 (5)       $46.4500        11/30/2021                                   
           

Charles J. Dockendorff

    32,457        0        $35.4533        03/25/2014        4,488 (8)       $266,677        25,300 (16)       $1,522,048   
      32,457        0        $45.6575        03/09/2015        6,325 (9)       $375,832        28,768 (17)       $1,709,395   
      25,009        0        $36.9903        11/21/2015        10,788 (10)       $641,023        41,846 (18)       $2,486,489   
      47,039        0        $38.6485        11/20/2016        10,462 (13)       $621,652           
      164,900        0        $43.0878        07/01/2017                 
      87,090        29,030 (1)      $34.1500        11/30/2018                 
      49,102        49,103 (2)      $47.6000        11/30/2019                 
      30,242        90,728 (3)      $42.9400        11/30/2020                 
      0        94,025 (5)       $46.4500        11/30/2021                                   
           

Bryan C. Hanson

    0        8,835 (1)      $34.1500        11/30/2018        1,365 (8)       $81,108        7,698 (16)       $463,112   
      0        14,945 (2)      $47.6000        11/30/2019        1,924 (9)       $114,324        9,228 (17)       $548,328   
      0        29,108 (3)      $42.9400        11/30/2020        3,461 (10)       $205,653        29,292 (18)       $1,740,531   
      2,636        7,909 (4)      $54.2200        06/30/2021        1,866 (12)       $110,878        20,314 (19)       $1,207,058   
      0        65,820 (5)       $46.4500        11/30/2021        7,323 (13)      $435,133                   
           

Peter L. Wehrly

    12,067        4,023 (6)      $32.3600        04/30/2019        1,240 (14)       $73,681        5,720 (16)       $344,115   
      11,102        11,103 (2)      $47.6000        11/30/2019        1,429 (9)       $84,911        7,190 (17)       $427,230   
      7,560        22,680 (3)      $42.9400        11/30/2020        2,696 (10)       $160,196        24,410 (18)       $1,450,442   
      3,181        9,544 (4)      $54.2200        06/30/2021        2,252 (12)       $133,814        22,438 (19)       $1,333,266   
      0        54,850 (5)       $46.4500        11/30/2021        6,102 (13)      $362,581                   
           

Mark C. Trudeau

    0        51,900 (7)       $52.2200        01/31/2022        18,261 (15)      $1,085,069                 

 

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Footnotes

Unless otherwise specified, stock option and restricted unit awards vest one-quarter annually, beginning on the first anniversary of the grant date.

 

(1) 

Represents stock options granted on December 1, 2008.

 

(2) 

Represents stock options granted on December 1, 2009.

 

(3) 

Represents stock options granted on December 1, 2010.

 

(4) 

Represents stock options granted on July 1, 2011 to Messrs. Almeida, Hanson and Wehrly in connection with their respective promotions.

 

(5) 

Represents stock options granted on December 1, 2011.

 

(6) 

Represents stock options granted on May 1, 2009 to Mr. Wehrly in connection with his commencement of employment with the Company.

 

(7) 

Represents stock options granted on February 1, 2012 to Mr. Trudeau in connection with his commencement of employment with the Company.

 

(8) 

Represents restricted units granted on December 1, 2008.

 

(9) 

Represents restricted units granted on December 1, 2009.

 

(10) 

Represents restricted units granted on December 1, 2010.

 

(11) 

Represents restricted units granted on July 1, 2011 to Mr. Almeida in connection with his promotion which vest in full on the third anniversary of the grant date.

 

(12) 

Represents restricted units granted on July 1, 2011 to Messrs. Almeida, Hanson and Wehrly in connection with their respective promotions.

 

(13) 

Represents restricted units granted on December 1, 2011.

 

(14) 

Represents restricted units granted on May 1, 2009 to Mr. Wehrly in connection with his commencement of employment with the Company.

 

(15) 

Represents restricted units granted on February 1, 2012 to Mr. Trudeau in connection with his commencement of employment with the Company; 6,756 of which vest one-third annually, beginning on the first anniversary of the grant date and 11,505 of which vest one-quarter annually, beginning on the first anniversary of the grant date.

 

(16) 

Represents performance units granted on December 1, 2009 that vested on October 4, 2012, shortly after the end of the FY10-FY12 performance cycle. The amounts reported in Column I and J are based on actual achievement, which was two hundred percent (200%) of target, and are valued by using the closing price of our stock on the vesting date, which was $60.16.

 

(17) 

Represents performance units granted on December 1, 2010 that vest at the end of the FY11-FY13 performance cycle if the applicable performance criteria have been satisfied. The amounts reported in this column are based on achievement of maximum performance through the end of fiscal 2012.

 

(18) 

Represents performance share units granted on December 1, 2011 that vest at the end of the FY12-FY14 performance cycle if the applicable performance criteria have been satisfied. The amounts reported in this column are based on achievement of maximum performance through the end of fiscal 2012.

 

(19) 

Represents performance share units granted on December 1, 2010 as part of the Asia Growth Initiative that vest at the end of the FY11-FY13 performance cycle if the applicable performance criteria have been satisfied. The amounts reported in this column are based on achievement of maximum performance, based upon above-target performance through the end of fiscal 2012.

Option Exercises and Stock Vested

The following table provides information regarding the number of Company stock options that were exercised by named executive officers during fiscal 2012 and the value realized from the exercise of such awards. The table also provides information regarding the vesting of restricted unit and performance unit awards during fiscal 2012.

 

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FISCAL 2012 OPTION EXERCISES AND STOCK VESTED

 

Name   Option Awards     Stock Awards  
 

Number of

Shares

Acquired

on Exercise

(#)

   

Value Realized

on Exercise

($)

   

Number of

Shares

Acquired

on Vesting

(#)

   

Value Realized

on Vesting

($)

 
(A)   (B)     (C)     (D)     (E)  

José E. Almeida

    40,794        $575,758        37,667        $1,712,322   

Charles J. Dockendorff

    0        $0        27,696        $1,247,831   

Bryan C. Hanson

    34,010        $479,773        9,106        $415,585   

Peter L. Wehrly

    0        $0        3,567        $182,358   

Mark C. Trudeau

    0        $0        0        $0   

Pension Benefits

Messrs. Almeida, Dockendorff and Hanson participate in the Kendall Pension Plan, which was frozen with respect to all future benefit accruals (except interest crediting on the cash balance benefit) as of July 1, 1995. The Pension Plan has two components:

 

   

a final average pay benefit, which was frozen as of May 31, 1990; and

 

   

a cash balance benefit.

Mr. Dockendorff is entitled to benefits payable pursuant to both components, while Messrs. Almeida and Hanson are entitled only to the cash balance benefit.

Participants retiring on their normal retirement date (age 65) are entitled to a monthly pension calculated as the sum of:

 

   

the benefit accrued under the provisions of the plan as in effect on June 1, 1990, including the value of the benefit derived from employee contributions; and

 

   

with respect to accruals on or after June 1, 1990, the actuarial equivalent of the participant’s current account.

The current account is credited with interest at the one-year Treasury bill rate in effect on January 1st for each calendar year and service credits as follows:

 

Tier

   Years of Benefit Service    Percent of Compensation

I

   0-2    4.75%

II

   3-9    5.25%

III

   10-14    6.00%

IV

   15-19    7.00%

V

   20+    7.50%

Participants desiring to retire before normal retirement age may do so after attaining age 55 and completing five years of continuous service. If a participant chooses to retire before normal retirement age, the applicable accrued benefit as of June 1, 1990 will be reduced by 0.33% per month for each month commencement precedes age 60. Mr. Dockendorff is currently eligible for retirement.

The following table provides information with respect to these pension benefits. For a more complete understanding of the table, please read the footnotes that follow the table.

 

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2012 PENSION BENEFITS

 

Name   Plan Name  

Number of Years

Credited Service1
(#)

   

Present Value of

Accumulated Benefit2
($)

   

Payments During

Last Fiscal Year
($)

 
(A)   (B)   (C)     (D)     (E)  
         

José E. Almeida

  Kendall Pension Plan(4)     0.2        $1,729          
         

Charles J. Dockendorff

  Kendall Pension Plan(3) Kendall Pension Plan(4)    
 
0.7
5.1
  
  
   
 
$14,010
$59,124
  
  
   
 

  
  
         

Bryan C. Hanson

  Kendall Pension Plan(4)     2.7        $8,717          
         

Peter L. Wehrly

                      
         

Mark C. Trudeau

                      

Footnotes

 

(1) The number of years of service credited under the Kendall Pension Plan for the named executive officers is less than the number of actual years of service because the years of credited service were frozen as of July 1, 1995.

 

(2) All assumptions are as detailed in accordance with the Accounting Standards Codification 715 (formerly referred to as SFAS 87) actuarial reports for the fiscal year ending September 28, 2012, with the exception of the following: (a) retirement age is the earliest age at which unreduced payment of all benefits can be received; and (b) no pre-retirement mortality, disability or termination is assumed. The amounts are calculated as being payable at age 60, the earliest retirement age at which an unreduced benefit is payable.

 

(3) Represents benefit payable under the final average pay component.

 

(4) Represents benefit payable under the cash balance component.

Non-Qualified Deferred Compensation

The following table provides information with respect to fiscal 2012 non-qualified deferred compensation for each named executive officer. For more information regarding information contained in the table and the material terms of our non-qualified deferred compensation plan, please read the related narrative and footnotes that follow the table.

FISCAL 2012 NON-QUALIFIED DEFERRED COMPENSATION

 

Name   

Executive

Contributions
in Last FY

($)

    

Registrant

Contributions
in Last FY

($)

    

Aggregate

Earnings
in Last FY

($)

    

Aggregate

Withdrawals/

Distributions

($)

    

Aggregate

Balance at

Last FYE

($)

 
(A)    (B)      (C)      (D)      (E)      (F)  
           

José E. Almeida

     $653,757         $118,217         $65,267                 $2,584,254   
           

Charles J. Dockendorff

     $0         $98,245         $969,257                 $13,921,298   
           

Bryan C. Hanson

     $257,789         $54,291         $213,853                 $1,376,764   
           

Peter L. Wehrly

     $0         $28,796         $11,877                 $90,074   
           

Mark C. Trudeau

     $59,500         $2,975         $2,275                 $64,750   

 

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Executive Contributions in Last Fiscal Year (Column B) Of the amounts reported in this column, the following amounts reflect deferrals from fiscal 2012 base salary that also are reported in Column C (Salary) of the Summary Compensation Table for fiscal 2012: Mr. Almeida, $203,522; Mr. Hanson, $163,803; and Mr. Trudeau, $59,500. The remaining amounts in this column for Messrs. Almeida and Hanson relate to the deferral of 2011 Annual Incentive Plan bonus payments paid in fiscal 2012, which payments are also included in Column G (Non-Equity Incentive Plan Compensation) of the Summary Compensation Table for fiscal 2011, the year in which they were earned.

Registrant Contributions in Last Fiscal Year (Column C) The amounts reported in Column C are included in Column I of the Summary Compensation Table for fiscal 2012.

Aggregate Earnings in Last Fiscal Year (Column D) The amounts reported in Column D include earnings credited to the named executive officer’s account in the Supplemental Savings Plan. Earnings on amounts credited to the Supplemental Savings Plan are determined by investment selections made by each named executive officer in investment alternatives that generally mirror investment choices offered under the Retirement Savings Plan (our 401(k) plan). With respect to amounts credited to a predecessor plan, eligible employees, including Mr. Dockendorff, are entitled to select the Enhanced Moody’s Rate as an investment alternative for amounts that were credited to such plan on their behalf prior to our assumption of the plan. The Enhanced Moody’s Rate is published in Moody’s Bond Record (or www.moodys.com) under the heading “Moody’s Long-Term Corporate Bond Yield Average” and is equal to the average corporate bond yield (based on seasoned bonds with remaining maturities of at least 20 years) published as of the fiscal year-end of the Company preceding the plan year for which the rate is to be used. During the 2012 fiscal year, the Enhanced Moody’s Rate was 4.635%, which exceeded 120% of the applicable federal long-term rate with compounding by 0.3075 percentage points. The excess attributable to this higher rate of return is also reported in Column H (Change in Pension Value and Non-Qualified Deferred Compensation Earnings) of the Summary Compensation Table for Mr. Dockendorff as above-market earnings for fiscal 2012 and is quantified in the related narrative.

Aggregate Balance at Last Fiscal Year End (Column F) The amounts reported in Column F include the following amounts reported in the Company’s Summary Compensation Tables for previous fiscal years: Mr. Almeida, $1,226,568; Mr. Dockendorff, $452,265; and Mr. Hanson $275,870.

Supplemental Savings Plan. Under the Supplemental Savings Plan, participants, including named executive officers, may defer up to 50% of their base salary and 100% of their annual bonus. We provide matching credits based on the participant’s deferred base salary and bonus at the same rate such participant is eligible to receive matching contributions under the Retirement Savings Plan and Company credits on any cash compensation (i.e., base and bonus) that the participant earns during a calendar year in excess of applicable IRS limits ($245,000 for 2011 and $250,000 for 2012). Participants are fully vested in matching and Company credits (including earnings on such credits) upon completion of two years of service. The Supplemental Savings Plan is a non-qualified deferred compensation plan that is maintained as an unfunded “top-hat” plan and is designed to comply with Internal Revenue Code Section 409A. Amounts credited to the Supplemental Savings Plan as participant deferrals or Company credits may also be credited with earnings (or losses) based upon investment selections made by each participant from investments that generally mirror investments offered under the Retirement Savings Plan. Participants may elect whether they will receive a distribution of their Supplemental Savings Plan account balances upon termination of employment or at a specified date. Distributions can be made in a lump sum or in up to 15 annual installments.

Under the Retirement Savings Plan, the Company makes an automatic contribution of three percent (3%) of an employee’s eligible pay, irrespective of whether the employee contributes to such plan. Additionally, we match fifty cents ($0.50) for every one dollar ($1.00) employees contribute, up to the first six percent (6%) of eligible pay. Employees who were credited with more than 20 years of service as of December 31, 2009 are “grandfathered” for a five (5) year period (i.e., until December 31, 2014) and continue to receive matching contributions in accordance with the formula in place on December 31, 2009. Mr. Dockendorff had more than 20

 

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years of service as of December 31, 2009 and is a “grandfathered” participant. Accordingly, we will continue to match, through December 31, 2014, seven dollars ($7.00) for every one dollar ($1.00) that Mr. Dockendorff contributes, up to the first five percent (5%) of eligible pay.

Potential Payments upon Termination

Severance Plan. For all of the named executive officers, severance benefits are payable pursuant to the Covidien Severance Plan for U.S. Officers and Executives. Under the Severance Plan, benefits are payable to eligible executives, including named executive officers, upon an involuntary termination of employment for any reason other than cause, permanent disability or death. Post-termination benefits consist of:

 

   

continuation of base salary for a period of 18 months (24 months for the Chief Executive Officer);

 

   

payment of 1.5 times the average of the executive’s bonus for the previous three fiscal years, paid over a period of 18 months (two times the average of the previous three fiscal year bonuses, paid over a period of 24 months for the Chief Executive Officer);

 

   

continuation of health and dental benefits at active employee rates for a period of up to 18 months (24 months for the Chief Executive Officer);

 

   

12 months accelerated vesting of unvested stock options;

 

   

12 months to exercise vested stock options (unless a longer period is provided in the applicable award agreement);

 

   

outplacement services, in our discretion, for up to 12 months; and

 

   

payment of a pro-rata portion of the executive’s annual incentive cash award for the fiscal year during which such executive’s employment terminates.

Upon a termination of employment other than for cause, including an involuntary termination of employment where the executive becomes eligible for severance benefits, executives, including named executive officers, forfeit all unvested restricted unit and performance unit awards and any stock options which do not vest within 12 months after the executive’s employment termination date.

Change in Control Plan. For all named executive officers, change in control severance benefits are payable pursuant to the Covidien Change in Control Severance Plan for Certain U.S. Officers and Executives. Under the Change in Control Plan, benefits are payable to eligible executives, including named executive officers, only if the plan’s double trigger requirements are satisfied, meaning that, in order to receive any of the following benefits, the executive must experience an involuntary termination of employment or good reason resignation during a period that begins 60 days before and ends 2 years after a change in control. Post-termination benefits consist of:

 

   

a single lump sum payment equal to 24 months of the executive’s base salary (36 months for the Chief Executive Officer, provided that the total base salary paid does not exceed 2.99 times his base salary);

 

   

a single lump sum payment equal to two times the average of the executive’s bonus for the previous three fiscal years (2.99 times the average of the previous three fiscal year bonuses for the Chief Executive Officer);

 

   

continuation of health and dental benefits at active employee rates for a period of up to 24 months (36 months for the Chief Executive Officer);

 

   

full vesting of unvested stock options;

 

   

12 months to exercise vested stock options (unless a longer period is provided in the applicable option agreement);

 

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full vesting of unvested restricted unit awards which are subject solely to time-based vesting;

 

   

full vesting of unvested performance unit awards if, and to the extent that, the Compensation Committee determines that the applicable performance criteria have been or will be attained or would have been attained during the 24-month period after the executive’s employment terminates (36-month period for the Chief Executive Officer);

 

   

outplacement services, in our discretion, for up to 12 months;

 

   

payment of a pro-rata portion of the executive’s annual incentive cash award for the fiscal year during which such executive’s employment terminates; and

 

   

for the Chief Executive Officer only, payment of a tax gross-up amount in the event that change in control payments to him exceed the applicable base amount (determined under Code Section 280G) by more than fifty thousand dollars ($50,000). For purposes of the Potential Payments Upon Termination Table, after applying the assumptions set forth below with respect to payments upon an assumed change in control termination, the Chief Executive Officer would not have been entitled to a tax gross-up payment. As discussed in the CD&A, effective October 1, 2011, the Company amended the change in control plan to eliminate tax gross-ups for all executive officers other than the Chief Executive Officer.

The payment of benefits under our Severance Plan and our Change in Control Plan is conditioned upon the executive executing a general release in favor of the Company and is subject to the terms of the Non-Competition, Non-Solicitation, and Confidentiality Agreement by and between the executive and the Company, under which the executive agreed not to disclose confidential Company information at any time and not to compete with the Company nor solicit our employees or customers, for a period of one year following termination of employment. We may cancel benefits that are payable or seek to recover benefits previously paid if the executive does not comply with these provisions or violates the release of claims. Payments may be delayed until six months after termination of employment if necessary to comply with Internal Revenue Code Section 409A.

Upon a termination of employment for cause, executives, including named executive officers, are not eligible for severance benefits under our Severance Plan or our Change in Control Plan and forfeit all unvested stock options, restricted unit and performance unit awards. In addition, the stock option, restricted unit and performance unit awards include a “claw-back” feature pursuant to which we may recover the amount of any profit the named executive officer realized upon the exercise of options, or the vesting of any restricted unit or performance unit award, during the 12-month period that occurs immediately prior to the executive officer’s involuntary termination of employment for cause. For purposes of our Severance Plan and our Change in Control Plan, as well as the “claw-back” feature discussed in the preceding sentence, “cause” means substantial failure or refusal of the named executive officer to perform the duties and responsibilities of his job as required by the Company, violation of any fiduciary duty owed to the Company, conviction of a felony or misdemeanor, dishonesty, theft, violation of Company rules or policy, including a violation of our Guide to Business Conduct, or other egregious conduct that has or could have a serious and detrimental impact on the Company and its employees.

Other Termination Benefits. The terms of our annual incentive plan and equity plan provide for certain benefits upon a named executive officer’s termination of employment due to death, disability or retirement. For this purpose, normal retirement occurs where an executive officer terminates employment after attaining age 60 and the sum of the executive’s age and years of service equals at least 70 and early retirement occurs where an executive officer terminates employment after attaining age 55 and the sum of the executive’s age plus years of service equals at least 60. Under the annual incentive plan, named executive officers are eligible to receive a pro-rated annual incentive cash award based on the number of days that the executive officer was employed by the Company during the fiscal year upon death, disability or normal or early retirement. Under the equity plan, named executive officers are eligible to receive full vesting of stock options, restricted units and performance

 

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units upon death, disability or normal retirement and pro-rated vesting of such awards upon early retirement, based on the number of whole months that the executive officer was employed by the Company during the applicable vesting period. As of the end of fiscal 2012, Mr. Dockendorff had satisfied the requirements for early retirement.

Letter Agreement with Mr. Trudeau. In connection with his joining the Company on February 1, 2012 as President of the Company’s Pharmaceuticals business, the Company entered into a Letter Agreement with Mr. Trudeau. The letter agreement provides for certain retention benefits in the event of a sale of the Company’s Pharmaceuticals business, including a sale bonus, a sale price bonus and an enhanced severance benefit. The sale bonus, which is payable upon a sale of the Pharmaceuticals business, equals the sum of Mr. Trudeau’s then-current base salary and the average of his annual incentive bonuses for the previous three fiscal years or, if Mr. Trudeau has not been employed long enough to receive annual incentive bonuses for three fiscal years, the average of the bonuses actually paid to him. The sale price bonus is payable only if the sale proceeds received by the Company upon a sale of the Pharmaceuticals business exceed a threshold amount and is capped at $1 million. The enhanced severance benefit, which is payable if, in connection with a sale of the Pharmaceuticals business, the Company involuntarily terminates Mr. Trudeau’s employment, the purchaser does not offer Mr. Trudeau a position after the consummation of the sale, or Mr. Trudeau resigns from employment for good reason within 12 months after the consummation of a sale, equals the severance Mr. Trudeau would be entitled to under the Severance Plan plus 1.5 times the sum of Mr. Trudeau’s then-current base salary and the average of Mr. Trudeau’s annual incentive bonus for the previous three fiscal years. The letter agreement requires the forfeiture of retention benefits in the event that Mr. Trudeau’s employment is terminated for cause. The letter agreement also subjects the payment of the retention benefits to Mr. Trudeau’s complying with the Covidien Guide to Business Conduct (or successor guide to business conduct), preserving confidentiality of the terms and conditions of any transaction or the status of any negotiations relating to any transaction, and cooperating with efforts surrounding a sale or spin-off transaction. The letter agreement applies the same definitions of “cause” and “good reason” that are used in our Change in Control Plan.

The table below reflects the amount of compensation that would become payable to each of our named executive officers under existing plans if the named executive officer’s employment had terminated on September 28, 2012, the last day of our 2012 fiscal year, given the named executive’s service levels as of such date and, if applicable, based on our closing stock price as of that date, which was $59.42. These benefits are in addition to benefits available prior to the occurrence of any termination of employment, including under then-exercisable stock options, and benefits available generally to salaried employees, such as distributions under the Retirement Savings Plan.

The actual amounts that would be paid upon a named executive officer’s termination of employment or in connection with a change in control can be determined only at the time of any such event. Due to a number of factors that may affect the amount of any benefits provided upon the events discussed below, actual amounts paid or distributed may be higher or lower than indicated in the table. Factors that could affect these amounts include the timing during the year of any such event, our stock price, the executive’s age and years of service, the attained level of performance for performance units, and any additional agreements or arrangements we may enter into in connection with any change in control or termination of employment. For a more complete understanding of the table, please read the narrative disclosures that follow the table.

 

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POTENTIAL PAYMENTS UPON TERMINATION

 

Name and Termination  Scenario  

Cash

Severance

    Bonus    

Option

Awards

   

Stock

Awards

   

Welfare

Benefits and

Outplacement

    Total  
(A)   (B)     (C)     (D)     (E)     (F)     (G)  

José E. Almeida

                                               

Involuntary termination (other than for cause)

    $4,081,225        $1,682,517        $2,788,954        $1,852,928        $49,296        $10,454,920   

Death or Disability

           $1,682,517        $6,893,819        $17,479,675               $26,056,011   

Change in Control Termination

    $6,101,432        $1,682,517        $6,893,819        $17,479,675        $59,431        $32,216,874   
                                                 

Charles J. Dockendorff

                                               

Involuntary termination (other than for cause)

    $2,393,444        $722,981        $1,827,058        $3,025,671        $43,659        $8,012,813   

Voluntary Termination (early retirement)

           $722,981        $1,141,657        $3,025,671               $4,890,309   

Death or Disability