Baxter International Inc.

One Baxter Parkway

Deerfield, Illinois 60015

 

 

March 18, 2009

 

Dear Shareholder:

 

You are invited to attend Baxter’s Annual Meeting of Shareholders on Tuesday, May 5, 2009, at 10:30 a.m., Central Time, at the Chicago Cultural Center, 78 East Washington Street, Chicago, Illinois. Registration will begin at 9:00 a.m., and refreshments will be served.

 

Details of the business to be conducted at the Annual Meeting are included in the attached Notice of Annual Meeting of Shareholders and Proxy Statement.

 

In accordance with Securities and Exchange Commission rules, Baxter has elected to deliver its proxy materials over the Internet to a majority of shareholders, which allows shareholders to receive information on a more timely basis, while lowering the company’s printing and mailing costs and reducing the environmental impact of the Annual Meeting.

 

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

 

Very truly yours,

 

Robert L. Parkinson, Jr.

Chairman of the Board

and Chief Executive Officer

Baxter International Inc.

One Baxter Parkway

Deerfield, Illinois 60015

 

 

March 18, 2009

 

Notice of Annual Meeting of Shareholders

 

The 2009 Annual Meeting of Shareholders of Baxter International Inc. will be held at the Chicago Cultural Center, 78 East Washington Street, Chicago, Illinois, on Tuesday, May 5, 2009 at 10:30 a.m., Central Time, for the following purposes:

 

 

The Board of Directors recommends a vote FOR Items 1 and 2 and AGAINST Item 3. Shareholders of record at the close of business on March 9, 2009 will be entitled to vote at the meeting.

 

By order of the Board of Directors,

 

David P. Scharf

Corporate Secretary

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY
MATERIALS FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 5, 2009

 

This Proxy Statement relating to the 2009 Annual Meeting of Shareholders and the Annual Report to Shareholders for the year ended December 31, 2008 are available at http://materials.proxyvote.com/071813.

 

 

Proxy Statement

 

The accompanying proxy is solicited on behalf of the Board of Directors for use at the Annual Meeting of Shareholders to be held on Tuesday, May 5, 2009. On or about March 18, 2009, Baxter began mailing to shareholders a Notice of Internet Availability of Proxy Materials containing instructions on how to access proxy materials via the Internet and how to vote online (www.proxyvote.com). Shareholders who did not receive the Notice will continue to receive a paper or electronic copy of the proxy materials, which Baxter also began sending on or about March 18, 2009.

 

 

 

 

 

 

 

 

 

If you participate in householding and wish to receive a separate Notice of Internet Availability of Proxy Materials or set of proxy materials, or if you wish to receive separate copies of future Notices, annual reports and proxy statements, please call 1-800-542-1061 or write to: Broadridge Financial Solutions, Inc., Householding Department, 51 Mercedes Way, Edgewood, New York 11717. The company will deliver the requested documents to you promptly upon your request.

 

Any shareholders of record who share the same address and currently receive multiple copies of proxy materials who wish to receive only one copy of these materials per household in the future may contact Broadridge Financial Solutions at the address or telephone number listed above. If you hold your shares through a broker, bank or other nominee, please contact your broker, bank, or other nominee to request information about householding.

 

 

If you elect electronic delivery, the company will discontinue mailing the proxy materials to you beginning next year and will send you an e-mail message notifying you of the Internet address or addresses where you may access next year’s proxy materials and vote your shares. You may discontinue electronic delivery at any time.

 

 

Proposal 1 — Election of Directors

 

Baxter’s Board of Directors currently consists of thirteen members and is divided into three classes. The directors in each class serve three-year terms. The Board has nominated the four current directors of Baxter whose terms expire at the 2009 Annual Meeting for re-election as directors.

 

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

 

All of the nominees have indicated their willingness to serve if elected, but if any should be unable or unwilling to stand for election, proxies may be voted for a substitute nominee designated by the Board of Directors. No nominations for directors were received from shareholders, and no other candidates are eligible for election as directors at the 2009 Annual Meeting. Unless proxy cards are otherwise marked, the individuals named as proxies intend to vote the shares represented by proxy in favor of all of the Board’s nominees.

 

Set forth below is information concerning the nominees for election as well as information concerning the current directors in each class continuing after the Annual Meeting of Shareholders. The Board of Directors recommends a vote FOR the election of each of the director nominees.

 

Nominees for Election as Directors (Term Expires 2012)

 

 

Directors Continuing in Office (Term Expires 2010)

 

 

Directors Continuing in Office (Term Expires 2011)

 

 

Board of Directors

 

Baxter’s Board of Directors currently consists of thirteen members. The Board has determined that each of the following twelve current directors satisfies Baxter’s independence standards and the New York Stock Exchange’s listing standards for independence: Walter E. Boomer, Blake E. Devitt, John D. Forsyth, Gail D. Fosler, James R. Gavin III, M.D., Ph.D., Peter S. Hellman, Wayne T. Hockmeyer, Ph.D., Joseph B. Martin, M.D., Ph.D., Carole J. Shapazian, Thomas T. Stallkamp, K. J. Storm and Albert P.L. Stroucken. Please refer to the section entitled “Corporate Governance — Director Independence” on page 9 of this Proxy Statement for a discussion of Baxter’s independence standards.

 

During 2008, the Board held 8 meetings. All directors attended 92% or more of the aggregate meetings of the Board and Board committees on which they served and average attendance was in excess of 97%. In accordance with Baxter’s Corporate Governance Guidelines, which express the company’s expectation that directors attend the annual meeting of shareholders, all of the company’s directors attended the annual meeting of shareholders held on May 6, 2008.

 

Committees of the Board

 

The standing committees of the Board of Directors are the Audit Committee, Compensation Committee, Corporate Governance Committee, Finance Committee, and Public Policy Committee. Each committee consists solely of independent directors, as defined by the rules of the New York Stock Exchange, and is governed by a written charter. All committee charters are available on Baxter’s website at www.baxter.com under “Corporate Governance — Board of Directors — Committees of the Board” and in print upon request by writing to: Corporate Secretary, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015.

 

Audit Committee

 

The Audit Committee is currently composed of Blake E. Devitt (Chair), Gail D. Fosler, Thomas T. Stallkamp, K. J. Storm and Albert P.L. Stroucken, each of whom is independent under the rules of the New York Stock Exchange. The Board has determined that Messrs. Devitt, Stallkamp, Storm and Stroucken each qualify as an “audit committee financial expert” as defined by the rules of the Securities and Exchange Commission. The Audit Committee is primarily concerned with the integrity of Baxter’s financial statements, system of internal accounting controls, the internal and external audit process, and the process for monitoring compliance with laws and regulations. Its duties include: (1) reviewing the adequacy and effectiveness of Baxter’s internal control over financial reporting with management and the independent and internal auditors, and reviewing with management Baxter’s disclosure controls and procedures; (2) retaining and evaluating the qualifications, independence and performance of the independent registered public accounting firm; (3) approving audit and permissible non-audit engagements to be undertaken by the independent registered public accounting firm; (4) reviewing the scope of the annual internal and external audits; (5) reviewing and discussing earnings press releases prior to their release; (6) holding separate executive sessions with the independent registered public accounting firm, the internal auditor and management; and (7) discussing guidelines and policies governing the process by which Baxter assesses and manages risk. The Audit Committee met 11 times in 2008. The Audit Committee Report appears on page 37.

Compensation Committee

 

The Compensation Committee is currently composed of John D. Forsyth (Chair), Walter E. Boomer, Peter S. Hellman, Carole J. Shapazian and Thomas T. Stallkamp. The Compensation Committee exercises the authority of the Board relating to employee benefit plans and is responsible for the oversight of compensation generally. The Compensation Committee may delegate its authority to subcommittees when appropriate. While the Committee has delegated its authority with respect to day-to-day plan administration and interpretation issues and certain off-cycle equity grants, no authority for the compensation of executive officers or directors has been delegated by the Committee. The Committee’s duties include: (1) making recommendations for consideration by the Board, in executive session, concerning the compensation of the Chief Executive Officer; (2) determining the compensation of executive officers (other than the Chief Executive Officer) and advising the Board of such determination; (3) making recommendations to the Board with respect to incentive compensation plans and equity-based plans and exercising the authority of the Board concerning benefit plans; (4) serving as the administration committee of the company’s equity plans; and (5) making recommendations to the Board concerning director compensation. The Corporate Governance and Compensation Committees work together to establish a link between Mr. Parkinson’s performance and decisions regarding his compensation. All compensation actions relating to Mr. Parkinson are subject to the approval of the independent directors of the Board. The Compensation Committee met 3 times in 2008. The Compensation Committee Report appears on page 34.

 

The Compensation Committee has directly engaged George B. Paulin, Chairman and Chief Executive Officer of Frederic W. Cook & Co., Inc., as its compensation consultant. Additionally, Hewitt Associates assists the Committee with the compilation of market data from time to time. Mr. Paulin reports directly and exclusively to the Committee and his firm provides no other services to Baxter except advising on executive and Board compensation matters. He provides analyses and recommendations that inform the Committee’s decisions, but he does not decide or approve any compensation actions. During 2008, he advised the Committee Chairman on setting agenda items for Committee meetings; reviewed management proposals presented to the Committee; evaluated market data compiled by Hewitt Associates; and conducted a review of the structure and level of compensation for non-employee directors.

 

Corporate Governance Committee

 

The Corporate Governance Committee is currently composed of James R. Gavin III, M.D., Ph.D. (Chair), Blake E. Devitt, John D. Forsyth and Joseph B. Martin, M.D., Ph.D. The Corporate Governance Committee assists and advises the Board on director nominations, corporate governance and general Board organization and planning matters. Its duties include: (1) developing criteria, subject to approval by the Board, for use in evaluating and selecting candidates for election or re-election to the Board and assisting the Board in identifying and attracting qualified director candidates; (2) selecting and recommending that the Board approve the director nominees for the next annual meeting of shareholders and recommending persons to fill any vacancy on the Board; (3) determining Board committee structure and membership; (4) reviewing at least annually the adequacy of Baxter’s Corporate Governance Guidelines; (5) overseeing the succession planning process for management, including the Chief Executive Officer; (6) developing and implementing an annual process for evaluating the performance of the Chief Executive Officer; and (7) developing and implementing an annual process for evaluating Board and committee performance. The Corporate Governance Committee met 4 times in 2008.

 

Finance Committee

 

The Finance Committee is currently composed of K. J. Storm (Chair), Gail D. Fosler, Peter S. Hellman, Wayne T. Hockmeyer, Ph.D. and Albert P.L. Stroucken. The Finance Committee assists the Board in fulfilling its responsibilities in connection with the company’s financial affairs. The Finance Committee reviews and, subject to the limits specified in its charter, approves or makes recommendations or reports to the Board regarding: (1) proposed financing transactions, capital expenditures, acquisitions, divestitures and other transactions; (2) dividends; (3) results of the management of pension assets; and (4) risk management relating to the company’s hedging activities, use of derivative instruments and insurance coverage. The Finance Committee met 6 times in 2008.

Public Policy Committee

 

The Public Policy Committee is currently composed of Wayne T. Hockmeyer, Ph.D. (Chair), Walter E. Boomer, James R. Gavin III, M.D., Ph.D., Joseph B. Martin M.D., Ph.D. and Carole J. Shapazian. The Public Policy Committee is primarily concerned with the review of the policies and practices of Baxter to ensure that they are consistent with Baxter’s social responsibility to act with integrity as a global corporate citizen to employees, customers and society. The Committee’s duties include: (1) addressing the company’s responsibilities with respect to the health and safety of employees, consumers and the environment; (2) overseeing, reviewing and making recommendations to the Corporate Responsibility Office as set forth in the company’s Code of Conduct; (3) reviewing and making recommendations regarding Baxter’s Quality and Regulatory programs and performance; and (4) reviewing and making recommendations on the company’s Government Affairs Program, including the company’s political contributions and positions with respect to pending legislative and other initiatives, and political advocacy activities. The Public Policy Committee met 4 times in 2008.

 

Corporate Governance

 

Director Independence

 

To be considered independent, the Board must affirmatively determine that a director does not have any direct or indirect material relationship with Baxter (either directly or as a partner, shareholder or officer of an organization that has a relationship with Baxter). Baxter’s Corporate Governance Guidelines require that the Board be composed of a majority of directors who meet the criteria for “independence” established by rules of the New York Stock Exchange.

 

In making its independence determinations, the Board considers transactions, relationships and arrangements between Baxter and entities with which directors are associated as executive officers, directors and trustees. When these transactions, relationships and arrangements exist, they are in the ordinary course of business and are of a type customary for a global diversified company such as Baxter. More specifically, with respect to each of the three most recent fiscal years, the Board evaluated for directors Fosler and Stroucken, the annual amount of purchases by Baxter from the company where he or she serves as an executive officer, and determined that the amount of purchases in each fiscal year was below two percent of the consolidated gross revenues of each of those companies during the companies’ last completed fiscal year.

 

Corporate Governance Guidelines

 

Baxter’s Board of Directors has long adhered to corporate governance principles designed to ensure effective corporate governance. Since 1995, the Board of Directors has had in place a set of corporate governance guidelines reflecting these principles. Baxter’s current Corporate Governance Guidelines cover topics including, but not limited to, director qualification standards, director responsibilities (including those of the lead director), director access to management and independent advisors, director compensation, director orientation and continuing education, succession planning and the annual evaluations of the Board and its committees. Baxter’s Corporate Governance Guidelines are available on Baxter’s website at www.baxter.com under “Corporate Governance — Guidelines” and in print upon request by writing to: Corporate Secretary, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015.

 

Code of Conduct

 

Baxter has adopted a code of conduct that applies to all members of Baxter’s Board of Directors and all employees of the company, including the Chief Executive Officer, Chief Financial Officer, Controller and other senior financial officers. Any amendment to, or waiver from, a provision of the Code of Conduct that applies to Baxter’s Chief Executive Officer, Chief Financial Officer, Controller or persons performing similar functions will be disclosed on the company’s website, at www.baxter.com under “Corporate Governance.” The Code of Conduct is available on Baxter’s website at www.baxter.com under “Corporate Governance — Ethics & Compliance” and in print upon request by writing to: Ethics & Compliance, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015.

Executive Sessions

 

The non-employee directors of the Board met in executive session without management at every regularly scheduled meeting during 2008 pursuant to Baxter’s Corporate Governance Guidelines. The Audit Committee is required by its charter to hold separate sessions during at least five committee meetings with each of the internal auditor, the independent registered public accounting firm and management. The Corporate Governance and Compensation Committees also meet in executive session as deemed appropriate.

 

Lead Director

 

Baxter’s lead director is currently Walter E. Boomer. Pursuant to Baxter’s Corporate Governance Guidelines, General Boomer presides at all executive sessions of the Board and acts as the liaison between the non-management directors and the Chairman of the Board. In addition, the lead director serves as the contact person to facilitate communications by Baxter employees and shareholders directly with the non-management members of the Board. The Corporate Governance Committee recommends a lead director to the full Board for approval on an annual basis.

 

Communicating with the Board of Directors

 

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

 

Nomination of Directors

 

It is the policy of the Corporate Governance Committee to consider candidates for director recommended by shareholders, members of the Board and management. The Corporate Governance Committee also considers directors recommended by the independent search firm retained by the Board to help identify and evaluate potential director nominees. The Corporate Governance Committee evaluates all candidates for director in the same manner regardless of the source of the recommendation. Shareholder recommendations for candidates for director should include the information required by Baxter’s Bylaws and be sent to the Corporate Governance Committee, c/o Corporate Secretary, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015.

 

Pursuant to Baxter’s Corporate Governance Guidelines, nominees for director must:

 

 

The Corporate Governance Guidelines also provide that directors are selected on the basis of talent and experience. Diversity of background, including diversity of gender, race, ethnic or national origin, age, and

experience in business, government and education and in healthcare, science, technology and other areas relevant to the company’s activities are factors in the selection process. As a majority of the Board must consist of individuals who are independent, a nominee’s ability to meet the independence criteria established by the New York Stock Exchange is also a factor in the nominee selection process.

 

Once a candidate has been identified, the Corporate Governance Committee may collect and review publicly available information regarding the person to assess whether the person should be considered further. If the Corporate Governance Committee or its Chair determines that the candidate warrants further consideration, the Corporate Governance Committee and the external search firm retained by the Committee will engage in a process that includes a thorough investigation of the candidate, an examination of his or her business background and education, research on the individual’s accomplishments and qualifications, an in-person interview and reference checking. If this process generates a positive indication, the lead director, the members of the Committee and the Chairman of the Board will meet separately with the candidate and then confer with each other regarding their respective impressions of the candidate. If the individual was positively received, the Committee will then recommend the individual to the full Board for election. If the full Board agrees, the Chairman of the Board is then authorized to extend an offer to the individual candidate.

 

Baxter’s Stock Ownership Guidelines for Executive Officers and Directors

 

Baxter’s stock ownership guidelines provide that the Chief Executive Officer is required to achieve ownership of Baxter common stock valued at six times annual base salary and each of the other executive officers is required to achieve ownership of Baxter common stock valued at four times annual base salary, in each case within five years of becoming an executive officer. As of December 31, 2008, each named executive officer has satisfied his or her stock ownership requirement, except for Mr. Davis who was appointed to his position in May 2006 and is expected to meet his stock ownership requirement within the applicable five-year period.

 

Baxter’s Corporate Governance Guidelines require that after five years of Board service, each director is to hold common stock equal to five times the annual cash retainer provided to directors. As of December 31, 2008, all of Baxter’s directors hold at least the required amount of common stock, except for Dr. Hockmeyer who was elected to the Board in September 2007 and is expected to satisfy the stock ownership requirement within the applicable five-year period.

 

Executive Compensation

 

Compensation Discussion and Analysis

 

The Compensation Committee has designed a compensation program that is straightforward and driven by a few key principles and objectives, with pay for performance being the most significant structural element of the program. The compensation package awarded to each named executive officer primarily consists of a base salary, a cash bonus and equity awards.

 

Year in Review

 

Despite the challenging economic environment, Baxter’s financial position remains strong. Baxter reported net income for 2008 of $2.0 billion, or $3.16 per diluted share, an increase of 18% and 21%, respectively, over 2007. Baxter also generated record operating cash flows of $2.5 billion in 2008, with cash flow from operations improving by more than $200 million. Due to the strong cash flow generated from the company’s operations in 2008, Baxter was able to invest $868 million in research and development while returning value to shareholders in the form of share repurchases, dividends and capital improvements. Baxter achieved the guidance it issued for sales growth and exceeded its diluted earnings per share guidance for full year 2008. This strong financial performance was a significant factor in the compensation decisions that were made with respect to the company’s 2008 performance.

 

A comparison of the performance of Baxter’s common stock against the performance of its peers provides another perspective on Baxter’s overall performance over the last few years and is another factor that the Committee considered when making compensation decisions. The following graph compares the change in Baxter’s

cumulative total shareholder return (including reinvested dividends) on Baxter’s common stock with the Standard & Poor’s 500 Composite Index and the Standard and Poor’s 500 Health Care Index during each of the past five years.

 

 

As illustrated in the graph above, Baxter’s total shareholder return declined by approximately 6% in 2008 while outperforming the Standard and Poor’s 500 Health Care Index by approximately 17% in the same period.

 

Mr. Parkinson received total compensation of $16,006,611 for his service as Baxter’s Chief Executive Officer and Chairman of the Board in 2008, primarily driven by strong company and individual performance in 2008 and 2007 (as equity awards were made in early 2008 based, in part, on 2007 performance). Mr. Parkinson’s compensation reflects the role he plays in establishing Baxter’s strategic agenda and long-range plan, meeting the challenges that arise in the day-to-day operations of a company as large and diverse as Baxter and leading the company in an increasingly challenging global economic environment. Mr. Parkinson’s 2008 compensation also reflects the Board’s annual review of competitive market data. Although his compensation is determined using the same methodology as used for each of the other named executive officers, Mr. Parkinson’s compensation is significantly higher than the compensation paid to any of the other named executive officers as his responsibilities and obligations at Baxter are significantly greater than those of any of the other named executive officers.

 

Each of the other named executive officers received total compensation for his or her 2008 performance as follows: Mr. Davis, $3,621,789; Ms. Amundson, $4,552,740; Mr. Arduini, $3,775,228; and Mr. Greisch, $5,109,923. The compensation paid to Ms. Amundson, Mr. Arduini and Mr. Greisch reflects the relative performances of the segments of the business for which these officers were responsible during 2008 and 2007 (as equity awards were made in early 2008 based, in part, on 2007 performance). The $804,817 increase in compensation paid to Mr. Davis in 2008 over 2007 reflects the Committee’s efforts to move his compensation towards compensation commensurate with that which is paid to chief financial officers at companies in Baxter’s peer group (as defined below) as Mr. Davis gains experience in his role.

 

Consistent with past years, the most significant component of the total compensation paid to the named executive officers in 2008 was in the form of equity. The grant-date fair value of the equity awards granted to Mr. Parkinson in 2008 represented approximately 65% of his overall compensation. The grant-date fair value of the equity awards granted to the other named executive officers in 2008 represented approximately 58% of their overall compensation. The greater emphasis on equity awards in Mr. Parkinson’s compensation is consistent with the Committee’s view that with his greater responsibilities more of his compensation should be based on the company’s future performance. These grants are described below.

 

Compensation Philosophy

 

Baxter’s compensation program is designed to:

 

 

The objective of the program is to compensate Baxter’s executive officers in a manner that is consistent with these principles, aligns the interests of management and shareholders, drives sustained and superior performance relative to the company’s peers and motivates, retains and attracts executive talent.

 

Structure of Compensation Program

 

Pay for Performance

 

Pay for performance is the most significant structural element of Baxter’s compensation program. Annual performance against financial targets (adjusted earnings per share, adjusted sales and return on invested capital) drives the payout of cash bonuses. Baxter’s three-year growth in shareholder value relative to the company’s peer group determines the payout under 50% of the company’s annual equity awards, which are granted in the form of performance share units. The overall performance of Baxter’s common stock determines the value of the remainder, which is granted in the form of stock options. The Committee’s assessment (or the Board’s in the case of Mr. Parkinson) of how each officer performs his or her job impacts earned cash bonuses and equity awards.

 

Financial Targets

 

For the last three years, the Committee selected adjusted earnings per share, adjusted sales and return on invested capital as the financial measures on which to assess the company’s performance for purposes of funding the cash bonus pool. The relative weight assigned to each of these measures was 50%, 25%, and 25%, respectively, for each of the last three years. If each financial measure is met in a given year, then the cash bonus pool is funded at two times the target cash bonus for each executive officer covered by the bonus pool.

 

The Committee selected adjusted earnings per share (EPS) and adjusted sales, as these are of immediate interest to shareholders and are the primary two measures as to which Baxter regularly provides guidance to the market. Adjusted EPS is the most heavily weighted measure, as the Committee believes it is a straightforward measure of the company’s current ability to generate value that is well understood by shareholders. The table below provides adjusted EPS and adjusted sales targets for 2008, 2007 and 2006 as well as actual results in these years.

 

 

 

 

The company calculates adjusted EPS for purposes of funding the cash bonus pool the same way it calculates adjusted EPS when it publicly announces its results — that is, the special items that are excluded from EPS to arrive at adjusted EPS are the same regardless of how the company is using the measure. Adjusted sales is net sales excluding the impact of foreign currency fluctuations using budgeted exchange rates. Baxter uses adjusted sales (rather than sales) as a target for the same reason that Baxter provides sales guidance excluding the impact of foreign currency fluctuations — that is, the company believes it provides a better perspective on underlying sales growth.

The use of budgeted exchange rates allows Baxter to evaluate final performance on the same foreign currency basis that was used for setting the target and establishing the budget.

 

Return on invested capital (ROIC) is the internal cash earnings measure that the company uses to assess how effectively it is allocating and utilizing capital in its operations. ROIC is calculated by dividing cash flows from operations (excluding the impact of interest expense) by average invested capital. Baxter does not provide guidance on ROIC nor does it disclose ROIC in its public filings; however, for years 2008, 2007 and 2006, Baxter achieved 100.0%, 104.7% and 114.7% of its respective ROIC targets. The Committee selected ROIC as the third measure in order to balance the more immediate EPS and sales goals, helping to ensure a focus on efficient and value-maximizing investment and appropriate long-term management of capital. Improving ROIC requires disciplined management of working capital and is inherently challenging because of the measure’s focus on increasing cash flows relative to improved retained earnings. As the company becomes more profitable it becomes more difficult to show significant ROIC improvement due to the impact of increases in retained earnings on the denominator of the measure — that is, as the denominator grows the company is required to generate more cash flows from operations than in the prior year to improve its ROIC. As discussed above under “Year in Review,” Baxter reported net income for 2008 of $2.0 billion, an increase of 18% over 2007.

 

Performance Against Peers

 

As a healthcare company, Baxter operates in a rapidly changing environment. Accordingly, encouraging its officers to focus on the long-term performance of the company is particularly important to Baxter. The performance share units that were awarded to named executive officers in March 2008 were designed to reward strong long-term performance by the company relative to the healthcare companies in its peer group. These grants focus on the healthcare companies in the peer group, as these are the primary companies with which Baxter competes for talent, investor capital and market position.

 

The payout of shares of Baxter common stock resulting from the vesting of the performance share units granted in 2008 will be based on Baxter’s change in total shareholder value versus the change in total shareholder value of the healthcare companies included in Baxter’s peer group during the three-year performance period commencing with the year in which the performance share units are awarded (January 1, 2008 — December 31, 2010). Growth in shareholder value will be measured based on the following formula:

 

 

The performance share units will pay out in shares of Baxter common stock in a range of 0% to 200% of the number of performance share units awarded. The table below shows how the company’s growth in shareholder value against its peers correlates with the 0% to 200% range of payouts.

 

The performance share units will pay out linearly between each set of data points above the 25^th percentile and below the 85^th percentile. For example, if Baxter performs at a 40^th percentile rank, each named executive officer will receive the number of shares equal to 57% of his or her award of performance share units. As it is possible that there will be no payout under the performance share units, these awards are completely “at-risk” compensation. Further, in order to pay out at the 100% target level, Baxter must outperform its peers at the 60^th percentile.

 

Performance of Baxter Common Stock

 

The performance of Baxter common stock determines the value of the stock options and restricted stock units that have been granted to the named executive officers.

 

Individual Performance

 

The Committee (or the full Board in the case of Mr. Parkinson) assesses the individual performance of each executive officer in making compensation decisions related to cash bonuses and equity awards. The Committee’s assessment of individual performance is inherently subjective and requires significant input from Mr. Parkinson. Essentially the Committee (or the Board in the case of Mr. Parkinson) assesses how well an officer fulfilled his or her obligations in the past year. This assessment includes consideration of how well the operations or function for which an officer is responsible performed during the year. One factor that the Committee (or the Board in the case of Mr. Parkinson) evaluates in making assessments of individual performance is how well an officer performed against the performance goals set for such officer for the relevant year. Consideration is given in these discussions for not only whether an objective was met but also how the objective was met including how appropriately the officer prioritized meeting an objective relative to the officer’s other responsibilities. Mr. Parkinson’s goals and his self-evaluation are reviewed with the Committee and the full Board. Mr. Parkinson reviews the performance goals and self-evaluations of each of the other executive officers and shares his insights and recommendations with the Committee. The goals set for each named executive officer for 2008 reflected the diversity of the company’s business and the wide range of responsibilities that are attributed to each of these officers. For example, Mr. Parkinson had approximately 50 performance goals for 2008 covering the following areas: financial performance, organizational development/human resources, corporate strategy/business development, innovation/R&D, quality/regulatory, operational excellence, board relations/governance, constituent relations and leadership. The adjustments that are made to such officer’s compensation based on his or her performance are not directly correlated to the number of goals that an officer has achieved. The Committee believes that this type of rigid correlation could motivate an officer to focus on achieving his or her performance goals rather than on fulfilling his or her job responsibilities in a manner that is in the best interest of the company and its shareholders. Instead, the Committee (or the Board in the case of Mr. Parkinson) uses this information to facilitate a discussion of each officer’s performance and then makes adjustments to cash bonuses and equity grants on a discretionary basis.

 

Baxter’s Peer Group and Use of Peer Group Data

 

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

 

Baxter’s use of peer group data is consistent among the named executive officers in that the baseline (i.e. percentile target) that is set for an element of compensation applies to all officers regardless of position. However, differences in the compensation paid to comparable officers at companies in the peer group do result in higher target amounts for officers depending on their position. For example, the compensation targets set for Mr. Parkinson based

on peer group data are significantly higher than those set for any of the other named executive officers despite being set using the same percentile targets.

 

Since October 2006, Baxter’s peer group has included other companies of similar size and selected healthcare peers. These selected healthcare peers include all of the companies in the Standard & Poor’s 500 Health Care Index for which data is available, except for distribution companies, insurance providers, hospitals, nursing homes and consultants. The target peer group is comprised of approximately 115 companies (of which approximately 35 are healthcare companies). The actual number of companies in the peer group fluctuates from year to year based on the number of companies for which information is available to Hewitt Associates.

 

As discussed above under “Pay for Performance — Performance Against Peers,” payouts under the performance share units granted in 2008 will be determined based on Baxter’s change in total shareholder value versus the change in total shareholder value of the healthcare companies included in Baxter’s peer group. As of December 31, 2008, the healthcare companies that will be used to determine the payout under the performance share units granted in 2008 are set forth below.

 

 

Elements of Executive Compensation

 

Base Salaries

 

Base salaries are paid in order to provide a fixed component of compensation for the named executive officers. For each of the last three years, base salary target levels for all named executive officers were set within a range that is competitive with the 50^th percentile of salaries paid to comparable officers at companies in the peer group. The Committee selected the 50^th percentile as the positioning for base salaries because, as they are the only fixed component of compensation, they are less appropriately used to motivate performance and thus, the Committee determined to set them at a reasonably competitive mid-point.

 

The Committee sets actual individual base salaries higher or lower than targeted base salaries for any reason that the Committee deems relevant. Factors that the Committee considered for 2008 base salaries included how long an officer has been at Baxter and in his or her current role, the impact of his or her position on the company’s results and the quality of the overall experience an officer brings to his or her role. With respect to Mr. Davis, the Committee used its discretion to set Mr. Davis’s 2008 base salary at a level lower than what was competitive with the 50^th percentile of the peer group, given the amount of time he has served in his role relative to similarly situated officers at peer companies. Base salaries for all of the other named executive officers were at, or modestly below, the 50^th percentile of salaries paid to comparable officers in the peer group.

 

Cash Bonuses

 

Cash bonuses are intended to reward company and individual performance by providing officers with an opportunity to receive additional cash compensation based on both the company’s performance relative to the financial targets described above and the Committee’s assessment of how well an officer performed his or her role during the applicable year.

Target Setting

 

For each of the last three years, cash bonus targets for all named executive officers were set within a range that is competitive with the 60^th percentile of cash bonuses paid to comparable officers at companies in Baxter’s peer group. As the ultimate payout of a cash bonus is driven primarily by achievement of financial targets, the Committee sets the target amounts at the 60^th percentile to further motivate officers to meet the financial targets. The Committee has the discretion to adjust each officer’s target as it deems appropriate. Typical reasons for adjusting cash bonus targets are how long an officer has been in his or her current role, how the officer’s role fits within the structure of the organization and how the officer’s base salary has increased historically. The last factor is relevant as the peer group data is in the form of a multiple of an officer’s base salary. With respect to Mr. Davis, the Committee continues to move his cash bonus target towards compensation commensurate with the bonus compensation paid to similarly situated officers at peer companies. Accordingly, the Committee used its discretion to set Mr. Davis’s target cash bonus at 85% of his salary, which was less than the 92% that would have been competitive with the 60^th percentile, but did represent a 5% increase over his 2007 target. Cash bonus targets for all of the other named executive officers were at the 60^th percentile of cash bonuses paid to comparable officers in the peer group.

 

Determination of 2008 Payouts

 

As the company met each of its financial targets for its 2008 performance, the bonus pool was funded at two times the target cash bonus for each executive officer covered by the bonus pool. The Committee then used “negative discretion” to determine the actual cash bonus amount that was paid to each named executive officer. The “negative discretion” that was used took into account the Committee’s view of how well each officer performed his or her responsibilities during 2008. More specifically, in applying its negative discretion, the Committee adjusted each officer’s cash bonus target for company performance and then individual performance. As a result, the actual cash bonus paid to each named executive officer was calculated using the following formula: (x) the product of such officer’s cash bonus target and the company performance adjustment percentage multiplied by (y) an officer’s individual performance adjustment percentage.

 

Company Performance.  Based on how the company performed against each of its 2008 financial targets and the relative weighting of these targets, each officer’s cash bonus was adjusted to 130% of target. This adjustment was lower than the adjustment of 145% made in the prior year based on how the company performed against its 2007 financial targets. This reduced adjustment percentage led to a decrease in cash bonuses paid to all of the named executive officers other than Mr. Davis (as a result of the increase in his target bonus discussed above), which is consistent with the company’s pay for performance philosophy.

 

Individual Performance.  Based on the Committee’s assessment of each officer’s performance, each officer’s cash bonus target was adjusted further in a range of 90% to 140%. Ms. Amundson was at the high end of this range with a 140% adjustment due to her performance as President of BioScience, the company’s highest-performing segment in 2008. Revenues generated from the BioScience segment in 2008 represented 43% of the company’s overall revenues and increased 16% over 2007. Mr. Davis was also at the high end of the range with a 140% adjustment due to his contributions to the company’s strong financial performance in 2008 as well as his role in managing the risks and challenges associated with the current global economic environment and the volatility in global financial markets. Mr. Greisch received an adjustment of 130% due to his strong performance overseeing Baxter’s international operations during a year in which approximately 60% of Baxter’s revenues were generated outside of the United States. Mr. Arduini received an adjustment of 90% due to his performance as President of Medication Delivery, a segment that while performing solidly in 2008 continued to address issues with its infusion pumps. Revenues generated from the Medication Delivery segment in 2008 represented 37% of the company’s overall revenues and increased 8% over 2007. Mr. Parkinson was paid a cash bonus of $2,708,940, which included an upward adjustment of 115%. This amount was determined taking into account the company’s strong financial performance in 2008, Mr. Parkinson’s contributions to this performance as well as his other leadership contributions (as discussed above under “Year in Review”), the fact that the company continues to address issues with its infusion pumps, and the amounts he is paid through other components of his compensation package. For more information on how performance was assessed, see “Pay for Performance — Financial Targets and — Individual Performance” above. The Committee believes that the methodology it uses in paying cash bonuses is consistent with providing compensation that reflects how an officer is valued within the company and the market place.

Equity Awards

 

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

 

Structure of Equity Compensation Program

 

In February 2007, the Committee restructured its equity compensation program to provide for annual equity grants to executive officers of performance share units and stock options rather than restricted stock units and stock options. The Committee also reduced the proportion of stock options from 70% to 50%. The replacement of restricted stock units with performance share units was driven by the Committee’s belief that as the recipients of these awards have the most responsibility for Baxter’s performance, the payout of a portion of their equity awards should be completely “at-risk.” As there are factors beyond the control of the officers that affect the company’s performance as measured against its peers, the Committee did retain stock options as an annual grant to recognize that it is in the best interest of the company to provide a certain amount of equity to officers that will vest as long as the officer continues to serve at Baxter, and will only have value as long as Baxter’s value continues to increase from the date of grant. The reduction in stock options in 2007 was influenced by market data that showed that companies were shifting away from stock options in favor of alternative performance-based awards and the Committee’s judgment regarding the appropriate balance between absolute and relative shareholder value in the executive officers’ total rewards.

 

2008 Equity Grants

 

In order to determine the size of equity grants to be awarded to each named executive officer during the 2008 annual grant process, the Committee reviewed market data on how much equity similarly situated officers were receiving at companies in Baxter’s peer group. This review focused on how much equity should be granted to each officer in order to be competitive with the 60^th percentile of equity awards provided to similarly situated officers at companies in Baxter’s peer group. The Committee (or the Board in the case of Mr. Parkinson) set targets that were above the median to motivate the named executive officers to outperform the other healthcare companies in the peer group and to reflect the significant at-risk component of this element. The target set for Mr. Davis was lower than what was competitive for the 60^th percentile of the peer group, given the amount of time he had served in his role relative to similarly situated officers at peer companies. In determining the actual amounts of the grants, the Committee (or the Board in the case of Mr. Parkinson) then used its discretion to increase each named executive officer’s 2008 target grant by 20%. The adjustments primarily reflected the Committee’s expectations of such officer’s future contributions to the company and assessment of such officer’s individual performance during 2007. In addition to his annual grants, Mr. Greisch received a one-time grant of 10,000 restricted stock units in June 2008 in recognition of the additional responsibilities for Global Manufacturing and Supply Chain that he assumed in April 2008.

 

Perquisites

 

Baxter provides a limited range of perquisites to its named executive officers. In 2008, the aggregate incremental cost associated with providing these perquisites, as further described below, was less than $10,000 for each named executive officer. Baxter permits limited personal travel on company aircraft due to the potential efficiencies associated with such use. All personal aircraft usage must be pre-approved by the Chief Executive Officer and any such aircraft usage, including by the Chief Executive Officer, is reviewed annually by the Compensation Committee. Baxter reimburses business-related spousal travel expenses and pays related entertainment and other incidental costs for executive officers and their spouses when such executive officers and spouses are invited to attend Board meetings or other business-related activities where the attendance of a spouse is expected. Baxter pays these expenses and costs as the business purpose served by having executive officers attend such

meetings is closely related to the benefits received. Baxter also pays for an annual physical exam for executive officers and believes this practice to be in the best interest of the company and its shareholders as the health of an executive officer is critical to an officer’s performance. Baxter reimburses executive officers for the tax payments related to business-related spousal travel (any personal use of company aircraft is not grossed-up) and annual physical exams (however, such gross-up has been discontinued effective as of January 1, 2009). The Committee believes this treatment is appropriate given the nature of the perquisites provided and the close link between these perquisites and the business purposes served by making them available. No named executive officer received reimbursements for taxes on an aggregate basis in an amount greater than $10,000 in 2008.

 

Retirement and Other Benefits

 

Baxter allows the named executive officers to participate in a pension program and deferred compensation plan in order to provide compensation that is reflective of such officers’ value in the market as well as to facilitate retirement savings as part of the total compensation program in a cost- and tax-effective way for the company. The pension plan was closed to new participants effective as of December 31, 2006.

 

Mr. Parkinson’s employment agreement provides for additional pension benefits tied to the number of years he remains employed at Baxter. In April 2007, Mr. Parkinson received an additional two years of service (five years in total) under the pension program upon his third anniversary of employment based on the terms of his employment agreement. The employment agreement further specifies that if Mr. Parkinson remains employed by Baxter for five years, he will receive two additional years of service (nine years in total). This additional service is credited under the supplemental pension plan. Mr. Parkinson’s employment agreement also provides that he is eligible for unreduced early retirement upon his termination of employment prior to age 65. Mr. Parkinson will not be eligible for the additional years of service, or an unreduced early retirement benefit, if his employment is terminated for cause (as defined in his employment agreement). The additional service credited to Mr. Parkinson in 2007 accounted for approximately 78% of the change in Mr. Parkinson’s accumulated pension value between December 31, 2006 and 2007. The other named executive officers participate in the pension program to the same extent and on the same terms as any other eligible Baxter employee. The distinction between the pension benefits available to Mr. Parkinson versus the other named executive officers is consistent with his level of responsibility within the company and how his position is valued in the market as determined at the time his agreement was originally negotiated. A more detailed discussion of the pension program is provided under the caption “Pension Benefits” on page 27 of this Proxy Statement. Each of the named executive officers also is eligible to participate in Baxter’s deferred compensation plan (which permits the officer to defer the receipt of covered compensation and receive a 3.5% company match, the terms of which are more fully described under the caption “Nonqualified Deferred Compensation” on page 29 of this Proxy Statement).

 

Executive Compensation Recoupment Policy

 

In February 2009, the Board adopted an executive compensation recoupment policy. This policy applies to all cash bonuses paid by Baxter under its 2007 Incentive Plan (or any successor plan) and all grants of equity awarded by the company to any person designated as an officer by the Board. Following any restatement of the company’s financial results that requires an amendment to any previously filed results or if an officer violates a restrictive covenant contained in any agreement between the company and such officer, the Board will review the facts and circumstances that led to the requirement for the restatement or the violation and take any actions it deems appropriate with respect to executive incentive compensation. With respect to a restatement, the Board will consider whether an officer received compensation based on performance reported, but not actually achieved, or was accountable for the events that led to the restatement, including any misconduct. Actions the Board may take include: recovery, reduction, or forfeiture of all or part of any bonus, equity, or other compensation previously provided or to be provided in the future; disciplinary actions; and the pursuit of any other remedies.

 

Post-Termination Compensation

 

Named executive officers may receive certain payments if Baxter undergoes a change in control and the officer ceases to be employed by the company. Mr. Parkinson would receive payments under his employment agreement and the other named executive officers would receive payments under their severance agreements. Providing for

payments in a change in control situation is consistent with market practice and helps ensure that if a change in control is in the best interest of the shareholders, officers have appropriate incentives to remain focused on their responsibilities before, during and after the transaction without undue concern for their personal circumstances. In addition to change in control payments, Mr. Parkinson would receive certain payments in the event he is terminated for any reason (other than for cause). The Committee believes that compensating Mr. Parkinson in these additional circumstances is appropriate in light of the value of his position in the market place, including as reflected in the negotiations accompanying the company’s hiring of Mr. Parkinson pursuant to his employment agreement. In consideration for these benefits, Mr. Parkinson and the named executive officers have agreed to be bound for two years from the date of his or her termination to non-competition, non-solicitation and non-disparagement covenants. The named executive officers’ severance benefits were not a significant factor in determining their other compensation elements because the Committee did not believe that such benefits, as provided, exceeded market practices of peer companies in a way that justified a reduction in any other elements or vice versa. For a more detailed discussion of these agreements, including the estimated amounts that would be payable assuming a termination date of December 31, 2008, please refer to the information under the caption “Potential Payments Upon Termination Following A Change in Control” on page 29 of this Proxy Statement.

 

Summary Compensation Table

 

The following table shows for the years indicated below the compensation provided by Baxter and its subsidiaries to its Chief Executive Officer, Chief Financial Officer and the three next most highly compensated executive officers for the year ended December 31, 2008. The five individuals identified in the Summary Compensation Table are referred to as the “named executive officers” throughout this Proxy Statement.

 

 

 

 

 

 

Effective with the company’s 2009 annual grants, dividends will not be paid during the vesting period but will be accrued and paid when and if the related shares of common stock are paid out.

 

 

Grants of Plan-Based Awards

 

 

 

 

Description of Certain Awards Granted in 2008

 

Performance Share Units.  Each named executive officer received a performance share unit grant in March 2008. The threshold, target and maximum payouts that each officer could receive under his or her award is disclosed under the “Estimated Future Payouts Under Equity Incentive Plan Awards” column in the “Grants of Plan-Based Awards” table above. The payout amounts under these awards will be earned based on Baxter’s growth in shareholder value relative to the growth in shareholder value of the healthcare peers included in Baxter’s peer group during the three-year performance period commencing on January 1, 2008. The payout of shares of Baxter common stock will range from 0% to 200% of the number of performance share units awarded. If an officer ceases to be employed at Baxter during the performance period (other than due to death, disability or retirement), such officer will forfeit any payout under his or her performance share units. If an officer who is “retirement eligible” (meaning he or she is at least 65 years of age, or at least 55 years of age with at least 10 years of service) retires after December 31, 2008, then his or her performance share units will remain eligible for payout at the end of the performance period. If an officer is terminated due to death or disability after December 31, 2008, his or her performance share units will pay out within 60 days at 100% of the target grant. Officers have no rights of a shareholder with respect to the performance share units until the performance period is complete, other than the right to receive cash payments equal to dividends paid on shares of Baxter common stock to the same extent as if each performance share unit was a share of common stock. Effective with the company’s 2009 grants, dividends will not be paid during the vesting period but will be accrued and paid when and if the related shares of common stock are paid out. For more information about these awards see “Compensation Discussion and Analysis — Structure of Compensation Program — Pay for Performance — Performance Against Peers” on page 14 of this Proxy Statement.

 

Stock Options.  Each named executive officer received a stock option grant in March 2008. These stock options vest one-third per year over a three-year period. The exercise price of each stock option awarded by Baxter to its executive officers under the company’s incentive compensation programs is the closing price of Baxter’s common stock on the date of grant, which is the date when the Compensation Committee acts to approve equity awards for senior executives. Generally, if an officer ceases to be employed at Baxter before his or her stock options vest, these options will expire on the date such officer’s employment is terminated unless such termination is due to death, disability or retirement. If an officer who is retirement eligible (as defined above) retires after December 31, 2008, then his or her stock options will continue to vest based upon their original vesting schedule. If an officer is terminated due to death or disability after December 31, 2008, his or her options will vest immediately and expire one year later. Each of these options expires on the ten-year anniversary of the grant date. These grants are reflected in the “All Other Option Awards” column in the “Grants of Plan-Based Awards” table above.

 

Restricted Stock Units.  Mr. Greisch received a one-time grant of 10,000 restricted stock units in June 2008 in recognition of the additional responsibilities for Global Manufacturing and Supply Chain that he had assumed in

April 2008. These restricted stock units vest three years from the grant date. Under the terms of this grant, Mr. Greisch has no rights of a shareholder with respect to the shares underlying the restricted stock units prior to vesting, other than the right to receive cash payments equal to dividends paid on shares of Baxter common stock to the same extent as if each restricted stock unit was a share of common stock. For any future grants of restricted stock units, dividends will not be paid during the vesting period but will be accrued and paid when and if the related shares of common stock are paid out. This grant is reflected in the “All Other Stock Awards” column in the “Grants of Plan-Based Awards” table above.

 

Employment Agreement with Chairman and Chief Executive Officer

 

Baxter and Robert L. Parkinson, Jr. entered into an employment agreement on April 19, 2004 in connection with Mr. Parkinson’s appointment as Chairman and Chief Executive Officer of Baxter. On December 12, 2008, this agreement was amended to conform the agreement to recent changes to Section 409A of the Internal Revenue Code of 1986, as amended, and the existing company compensation program applicable to employees generally (for example, the use of performance share units rather than restricted stock units and the diminution of perquisites), as well as to provide that the rolling two-year term of the agreement shall expire without further action effective January 30, 2016. These amendments did not have an impact on the compensation reported for Mr. Parkinson for his 2008 performance. There are no other employment agreements between Baxter and its named executive officers.

 

Mr. Parkinson’s agreement provides an annual base salary of not less than $1,300,000, subject to possible increase by the independent directors of the Board. He is eligible to participate in Baxter’s officer bonus and long-term incentive programs at a level commensurate with his position as Chief Executive Officer as determined by the independent directors of the Board, and to receive benefits to the same extent and on the same terms as those benefits provided by the company to its other senior executives including, but not limited to, health, disability, insurance and retirement benefits. In addition to these benefits, the agreement provides that if Mr. Parkinson remains employed for at least three years (which he achieved in 2007), his pension benefit will be determined as if he had completed five years of service, and if he remains employed for at least five years (or until April 2009), his pension benefit will be determined as if he had completed nine years of service (an additional four years credited, including the additional two years credited in 2007), in each case provided that Mr. Parkinson is not later terminated for cause. This additional service is credited under the supplemental pension plan. The agreement also provides that if Mr. Parkinson retires after his pension benefit is vested but before he is eligible for an unreduced early retirement benefit, and he is not terminated for cause, he will receive payments under the supplemental pension plan equal to the difference between an unreduced pension benefit (including the additional service credit described above) and his actual benefits received under the pension plan.

 

In consideration for his employment at Baxter, Mr. Parkinson will not compete with the company, directly or indirectly, for a period of two years after the termination of his employment. Mr. Parkinson has also agreed not to solicit or attempt to solicit any customer or supplier of the company nor solicit, persuade or induce any individual who is employed by the company or its subsidiaries to terminate such employment or enter into an employment relationship with another entity.

 

The agreement provides for certain payments in the event of Mr. Parkinson’s death, disability, termination without cause or due to constructive discharge, or termination following a change in control. For more information about these payments, please see “Potential Payments Upon Termination Following A Change in Control — Chairman and Chief Executive Officer” on page 30 of this Proxy Statement.

 

Outstanding Equity Awards at Fiscal Year-End

 

 

 

Option Exercises and Stock Vested

 

 

 

 

Pension Benefits

 

 

 

 

 

 

Baxter’s tax-qualified pension plan is a broad-based retirement income plan. The normal retirement (age 65) benefit equals (i) 1.75 percent of a participant’s “Final Average Pay” multiplied by the participant’s number of years of pension plan participation, minus (ii) 1.75 percent of a participant’s estimated primary social security benefit, multiplied by the participant’s years of pension plan participation. “Final Average Pay” is equal to the average of a participant’s five highest consecutive calendar years of earnings out of his or her last ten calendar years of earnings. In general, the compensation considered in determining the pension payable to the named executive officer includes salary and cash bonuses awarded under the officer bonus program. Although age 65 is the normal retirement age under the pension plan, the pension plan has early retirement provisions based on a point system. Under the point system, each participant is awarded one point for each year of pension plan participation and one point for each year of age. Participants who terminate employment after accumulating at least 65 points, and who wait to begin receiving their pension plan benefits until they have 85 points, receive an unreduced pension plan benefit regardless of their actual age when they begin receiving their pension plan benefits.

 

Baxter’s supplemental pension plan is offered to provide a benefit for the amount of eligible compensation that is disallowed as pensionable earnings under the pension plan pursuant to provisions of the Internal Revenue Code of 1986, as amended, that limit the benefit available to highly compensated employees under qualified pension plans. Accordingly, this plan is available to all employees eligible to participate in the pension plan whose benefit under the pension plan is limited by the Internal Revenue Code of 1986, as amended. Benefits under the supplemental pension plan will be paid at the same time and in the same form as benefits under the pension plan for participants whose pension commenced by December 31, 2008. As a result of new tax regulations that became effective on January 1, 2009, the company amended the supplemental plan to provide a time and form of payment that is independent of the pension plan. Beginning January 1, 2009, if the present value of a participant’s benefit in the supplemental plan does not exceed $50,000 when the participant terminates employment, such participant will be paid in a lump sum. If the present value of the benefit exceeds $50,000, the participant will be paid in an annuity commencing when the participant is first eligible for early retirement, regardless of whether the participant elects to commence his or her qualified plan benefit at that time. As permitted by the transitional rules under the new tax regulations, persons who were participants in the plan at the end of 2007 were given a one-time option to elect a different commencement date. Deferred salary and bonus amounts that may not be included under the pension plan are included in the supplemental plan. In addition, individual employment agreements may provide for additional pension benefits to be paid through the supplemental pension plan, such as those paid under Mr. Parkinson’s employment agreement.

 

Participation in the pension and supplemental pension plans was closed as of December 31, 2006. Any employees hired or rehired after that date will not be eligible to participate in the pension plan or supplemental pension plan, but instead will receive an additional employer contribution equal to 3% of his or her compensation in Baxter’s tax-qualified section 401(k) plan (and nonqualified deferred compensation plan if his or her compensation exceeds the compensation that can be taken into account under Baxter’s 401(k) plan). Employees who were hired prior to December 31, 2006, but who did not have a vested interest in the pension plan, were eligible to elect to cease accruing benefits in the pension plan (and supplemental plan, if applicable), and instead receive the additional employer contribution.

Nonqualified Deferred Compensation

 

 

 

 

A participant in Baxter’s deferred compensation plan may elect to defer a portion of his or her eligible compensation (up to 50% of base salary and up to 100% of eligible bonus) during the calendar year as long as the participant makes such election prior to the beginning of the calendar year. For named executive officers, eligible compensation under the deferred compensation plan includes a participant’s base salary and any annual cash bonus. Participants in the deferred compensation plan may select a subset of investment elections available to all eligible employees under Baxter’s tax-qualified section 401(k) plan. Amounts in a participant’s account are adjusted on a daily basis upward or downward to reflect the investment return that would have been realized had such amounts been invested in the investments selected by the participant. Participants may elect to change their investment elections once each calendar month. Baxter is also required to match contributions to the deferred compensation plan dollar-for-dollar up to 3.5% of a participant’s eligible compensation. Any participant who either was hired after December 31, 2006, or who elected as of January 1, 2008 not to continue to accrue benefits in the pension plan, receives a company contribution equal to 3.0% of his or her eligible compensation in excess of the compensation that is recognized in the tax-qualified section 401(k) plan, regardless of whether the participant is otherwise eligible to elect to defer a portion of his or her compensation. Deferrals under the plan are not recognized as eligible compensation for the qualified pension plan (but are recognized in the supplemental pension plan) or in calculating benefit pay under Baxter’s welfare benefit plan and result in lower compensation recognized for company matching under Baxter’s tax-qualified section 401(k) plan.

 

Participants may elect to be paid distributions either in a lump sum payment or in annual installment payments over two to fifteen years. Such election must be made when the participant first becomes eligible to participate in the plan. Distributions will be paid in the first quarter of the plan year following such participant’s termination of employment unless such participant is a “specified employee” as defined in Section 409A of the Internal Revenue Code of 1986, as amended. No distributions will be paid in connection with the termination of a specified employee until at least six months following such termination and any amounts that would have otherwise been paid during such six month period shall be accumulated and paid in a lump sum, without interest, at the expiration of such period. The plan was amended in 2008 to allow for one-time distribution elections under the Section 409A transition rules.

 

Potential Payments Upon Termination Following A Change in Control

 

In consideration for the benefits discussed below, each named executive officer has agreed to be bound for two years from the date of his or her termination to non-competition, non-solicitation and non-disparagement covenants. A condition for receiving the payments discussed below is the execution by the named executive officer of a customary release of claims in a form reasonably acceptable to the company.

Chairman and Chief Executive Officer

 

Mr. Parkinson’s employment agreement provides for certain payments in the event of Mr. Parkinson’s death, disability, termination without cause or due to constructive discharge, or termination following a change in control. The following table shows Baxter’s potential payment and benefit obligations to Mr. Parkinson upon his termination under each of these circumstances assuming such termination occurred on December 31, 2008.

 

 

 

 

In addition to the payments and obligations included in the table above, upon his termination for any reason, Mr. Parkinson would be entitled to any other payments or benefits due from the company in accordance with the terms of any employee benefit plans or arrangements generally available to all salaried employees, and any vested pension benefit earned upon his termination for any reason.

Other Named Executive Officers

 

In December 2006, each of the named executive officers (other than Mr. Parkinson) entered into a severance agreement with the company that provides for certain payments in the event Baxter undergoes a change in control and the officer is involuntarily terminated by the company or voluntarily terminates his or her employment with the company for good reason — that is, subject to a “double trigger.” These payments include:

 

 

The agreements were amended in 2008 to conform to recent changes to Section 409A of the Internal Revenue Code of 1986, as amended.

 

The severance agreements also provide that if the total payments or benefits to which a named executive officer is entitled in connection with a change in control (including amounts paid under the severance agreements or any other such plan, arrangement or agreement with the company such as other equity compensation programs) exceed 110% of the largest amount that would result in no portion of the total payments being subject to any excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended, the company will gross-up the severance payments to the officer to cover such excise tax. These amounts are reported in the “Tax Gross-Up” line of the table below.

 

The table set forth below shows Baxter’s potential payment and benefit obligations to each of the named executive officers (other than Mr. Parkinson) assuming that a change in control of the company has occurred and as a result the named executive officer either is terminated or terminates his or her employment for good reason on December 31, 2008. The accelerated vesting of equity awards that is included in the table below would occur as a result of the terms of the equity compensation programs governing these awards rather than the terms of the severance agreements.

 

 

 

 

 

Director Compensation

 

Non-employee directors are compensated for their service under Baxter’s non-employee director compensation plan with cash compensation and equity awards of stock options and restricted stock units. Baxter’s director compensation program utilizes equity awards in order to further align the interests of directors with Baxter shareholders.

 

Cash Compensation

 

Each non-employee director is paid a $60,000 annual cash retainer (increased to $65,000 effective as of January 1, 2009) and a $1,500 fee for each Board and each committee meeting attended. Each non-employee director who acts as the chair of any committee meeting is paid an additional $1,500 for each meeting chaired. The lead director is paid an additional annual cash retainer of $30,000. Non-employee directors are eligible to participate in a deferred compensation plan that allows for the deferral of all or any portion of cash payments until Board service ends and provides participants with a select subset of investment elections available to all eligible employees under Baxter’s tax-qualified section 401(k) plan.

 

Stock Options

 

Each non-employee director is entitled to receive a grant of stock options annually on the date of the annual meeting of shareholders. Under Baxter’s director compensation plan, the annual stock option grant value to each non-employee director is $60,000 (increased to $65,000 effective as of January 1, 2009) on the grant date, based on a Black-Scholes valuation of Baxter’s options as of that date. The stock options become exercisable on the date of the next annual meeting of shareholders, and may become exercisable earlier in the event of death, disability, or a change in control of Baxter.

 

Restricted Stock Units

 

Each non-employee director also receives an annual grant of restricted stock units on the date of the annual meeting of shareholders. The number of restricted stock units equals the quotient of $60,000 (increased to $65,000 effective as of January 1, 2009) divided by the closing sale price for a share of Baxter common stock on the date of the annual meeting. Directors have the option of deferring the receipt of the shares of stock underlying such restricted stock units until the earlier of three years from the grant date or termination from service as a director. The restricted stock units vest on the date of the next annual meeting of shareholders and may vest earlier in the event of death, disability, or a change in control of Baxter. Directors are credited with dividend equivalents on the shares underlying the restricted stock units and such dividends equivalents are reinvested in additional unvested restricted stock units. Directors have no other rights of a shareholder with respect to the shares underlying the restricted stock units prior to vesting.

 

Other Director Compensation

 

Directors are eligible to participate in the Baxter International Foundation matching gift program, under which Baxter’s foundation matches gifts made by employees and directors to eligible non-profit organizations, on the same terms as employees. The maximum gift total for a non-employee director participant in the program is $5,500 in any calendar year. Baxter also reimburses spousal travel and pays for meals and related entertainment and other incidental costs for directors and their spouses in connection with their attendance at any off-site meeting of the Board of Directors. Spouses are invited to attend the company’s annual meeting and are generally invited to travel to a Board meeting at a Baxter plant site every other year. The Committee believes these types of events help to create a sense of collegiality among the Board that is helpful to the directors in fulfilling their responsibilities as members of the Board. In no case did the aggregate incremental cost associated with providing these perquisites exceed $10,000 for any director in 2008.

 

Director Compensation Table

 

The following table provides information on 2008 compensation for non-employee directors who served during 2008.

 

 

 

 

Compensation Committee Report

 

The Compensation Committee is responsible for the oversight of Baxter’s compensation programs on behalf of the Board of Directors. In fulfilling its oversight 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 Baxter’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and Proxy Statement for the 2009 Annual Meeting of Shareholders, each of which will be filed with the Securities and Exchange Commission.

 

Compensation Committee

John D. Forsyth (Chair)
Walter E. Boomer
Peter S. Hellman
Carole J. Shapazian
Thomas T. Stallkamp

 

Security Ownership by Directors and Executive Officers

 

The following table sets forth information as of January 31, 2009 regarding beneficial ownership of Baxter common stock by executive officers, directors and director nominees.

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the company’s executive officers and directors and persons who own more than 10% of Baxter common stock to file initial reports of ownership and changes in ownership with the Securities and Exchange Commission. Based solely on the company’s review of the reports that have been filed by or on behalf of such persons in this regard and written representations from them that no other reports were required, the company believes that all persons filed the reports required by Section 16(a) of the Securities Exchange Act of 1934, as amended, on a timely basis during or with respect to 2008.

 

Certain Relationships and Related Transactions

 

The Board of Directors recognizes that related person transactions present a heightened risk of conflicts of interest. Accordingly, pursuant to Baxter’s Corporate Governance Guidelines, the Corporate Governance Committee has been charged with reviewing related person transactions regardless of whether the transactions are reportable pursuant to Item 404 of Regulation S-K under the Securities Exchange Act of 1934, as amended. For purposes of this policy, a “related person transaction” is any transaction in which the company was or is to be a participant and in which any related person has a direct or indirect material interest other than transactions that involve less than $50,000 when aggregated with all similar transactions. For any related person transaction to be consummated or to continue, the Corporate Governance Committee must approve or ratify the transaction. The Corporate Governance Committee will approve or ratify a transaction if the Committee determines that such transaction is in Baxter’s best interest. Related person transactions are reviewed as they arise and are reported to the Committee. The Committee also reviews materials prepared by the Corporate Secretary to determine whether any related person transactions have occurred that have not been reported. It is Baxter’s policy to disclose all related person transactions in the company’s applicable filings to the extent required by the Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules and regulations thereunder.

 

Audit Committee Report

 

Management is responsible for the preparation, presentation and integrity of Baxter’s consolidated financial statements and Baxter’s internal control over financial reporting. The independent registered public accounting firm of PricewaterhouseCoopers LLP (PwC) is responsible for performing an independent integrated audit of Baxter’s consolidated financial statements and the effectiveness of Baxter’s internal control over financial reporting. The Audit Committee’s responsibility is to monitor and oversee these processes.

 

In this context, the Audit Committee reports as follows:

 

 

Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that Baxter’s audited financial statements referred to above be included in Baxter’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 for filing with the Securities and Exchange Commission.

 

Audit Committee
Blake E. Devitt (Chair)
Gail D. Fosler
Thomas T. Stallkamp
K. J. Storm
Albert P.L. Stroucken

 

Audit and Non-Audit Fees

 

The table set forth below lists the fees billed to Baxter by PwC for audit services rendered in connection with the integrated audits of Baxter’s consolidated financial statements for the years ended December 31, 2008 and 2007, and fees billed for other services rendered by PwC during these periods.