COMPENSATION DISCUSSION AND ANALYSIS
This section includes information regarding, among other things, the overall objectives of our compensation program for our NEOs and each element of compensation that we provide. Please read this section in conjunction with the detailed tables and narrative descriptions of our NEO compensation under "Executive Compensation" beginning on page 29.
The names and titles of our NEOs for purposes of this Proxy Statement are:
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Name
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Title
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Kevin A. Lobo
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Chairman and CEO
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Glenn S. Boehnlein
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Vice President, Chief Financial Officer ("CFO")
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Timothy J. Scannell
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President and Chief Operating Officer ("COO")
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Robert S. Fletcher
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Vice President, Chief Legal Officer(1)
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Viju S. Menon
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Group President, Global Quality and Operations
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______________
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(1)
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Mr. Fletcher joined the Company as Vice President, Chief Legal Officer on April 22, 2019.
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Stryker has a history of delivering solid financial results. Our executive pay programs have played a significant role in our ability to attract, motivate and retain the experienced executive team that has successfully driven our financial results over time.
The primary elements of compensation for our NEOs in 2019 were salary, bonus and stock awards. The stock awards granted to our NEOs generally consisted of performance stock units and stock options, except in the case of Mr. Fletcher, who received restricted stock units in connection with joining the Company in April 2019. Our savings and retirement plans are typically defined contribution plans that match a portion of employee contributions and have historically included an annual discretionary contribution of 7% of salary and bonus for all eligible U.S.-based employees. We do not maintain any defined benefit pension plans for our NEOs. We believe the limited perquisites and personal benefits we provide to our NEOs are conservative to market.
Our Compensation Committee believes that our compensation practices for our NEOs are appropriate in the context both of Stryker's performance and the interests of our shareholders. Among the considerations in this regard are:
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An important part of our executive compensation philosophy is the alignment of the compensation of our NEOs with the interests of our shareholders and achievement of key business objectives;
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In 2019, the value of the variable, performance and stock-based compensation elements for the NEOs averaged 87% of the total value of the primary compensation elements (salary, actual bonus and stock awards). See "Summary Compensation Table" on page 29;
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Our NEO bonus plans are based on challenging performance goals that, if met, should result in profitable, sustained business performance over the long term and be reflected in stock price increases over time. The NEOs' payouts for 2019 averaged 142% of target as a result of performance that, overall, was above 2019 bonus plan goals that were generally more challenging than prior year actual results;
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Stock-based compensation realized by our NEOs is tied directly to the interests of our shareholders via stock price performance and, for performance stock units, based on financial performance relative to pre-established financial goals for a three-year performance period. The payout related to the 2017 grant of performance stock units, which is discussed under "2017 Performance Stock Units: Results for the 2017-2019 Performance Period" beginning on page 24, was 200% of target as a result of performance that reached the maximum goal for both sales growth relative to a comparison group of companies and average adjusted diluted net earnings per share growth;
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We monitor a comparison group of medical technology and related companies to ensure that our compensation programs are within observed competitive practices, review trends and practices with assistance from the Compensation Committee's independent compensation consultant and make adjustments as deemed appropriate by the Compensation Committee; and
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We evaluate key risk issues related to compensation and, in this regard, engaged a third-party independent consultant to conduct a risk assessment of executive compensation programs in 2019 as discussed under "Compensation Risks" beginning on page 16 and believe that our executive compensation practices do not create risks that are reasonably likely to have a material adverse effect on Stryker.
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The Compensation Committee considered the results of the advisory shareholder vote on executive compensation at our 2019 annual meeting of shareholders at which the executive compensation program for our NEOs as disclosed in the proxy statement for that meeting was approved by 97% of the votes cast. The Compensation Committee continues to believe that our executive compensation policies, practices and programs are appropriate and, in light of the results of the advisory vote, believes our shareholders feel the same.
We believe that our executive compensation program, which is a key component of our ability to attract, motivate and retain talented, qualified executives, should be designed to provide a meaningful level of total compensation that is aligned with organizational and individual performance and with the interests of our shareholders. The Compensation Committee believes that, consistent with the emphasis on rewarding executives for enhancing the Company's growth and profitability (as described more fully in "Why We Chose Particular Performance Metrics and Goals" on page 21), the Company's bonus plans should focus executives on a mix of financially-oriented as well as qualitative goals that reinforce a balance in achieving short-term and long-term goals and are aligned with shareholder returns over
time. The bonus plans contain maximums on the payouts that can be earned in any year. The Company's long-term equity incentive compensation program likewise is intended to provide executives with a personal financial interest in the Company's long-term success (as described more fully in "Long-Term Incentive Compensation" beginning on page 23). The Compensation Committee believes that the Company's incentive programs balance risk and the potential reward to executives in a manner that is appropriate to the circumstances and in the best interests of the Company's shareholders over the long term.
The principal objectives of our executive compensation policies and practices are to:
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Attract, motivate and retain talented executives who drive the Company's success;
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Structure compensation packages with a significant percentage of compensation earned as variable pay based on performance, which balances risk with the potential reward;
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Align incentives with measurable corporate, business area and individual performance, both financial and non-financial;
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Provide flexibility to adapt to changing business needs;
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Align total compensation with shareholder value creation; and
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Establish compensation program costs that are reasonable, affordable and appropriate.
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Executive Compensation Philosophy
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In setting compensation levels for our executives, the Compensation Committee considers information from our comparison companies and broader compensation surveys. We position total pay opportunities for our senior executive roles with the intent they be competitive relative to comparable roles in the market, taking into account a range of factors, including: (i) the Company’s or business unit’s general performance relative to competitors; (ii) the difficulty of the Company’s or business unit’s performance targets; (iii) the scope of the executive’s role relative to the normal scope of this role at comparable companies; and (iv) the executive’s tenure, experience, level of individual performance, and potential to contribute to our future growth. Although we review and consider the compensation provided by our comparison companies, broader compensation surveys and the results of the benchmarking studies described below under "The Role of Benchmarking in Our Executive Compensation Decisions," we do not benchmark our NEOs' compensation to a specific percentile of the market or of our comparison companies. Rather, we consider such data in addition to the factors described in (i) through (iv) above.
Individual compensation elements, along with an explanation of how we make decisions about each element, are described in detail under "2019 Compensation Elements" beginning on page 20.
Underlying our executive compensation philosophy is the desire to facilitate and encourage long-term ownership of our Common Stock. Our stock ownership guidelines reinforce this element of our philosophy by requiring senior management to accumulate and retain significant stock ownership positions over time. For more information, see "Executive and Non-Employee Director Stock Ownership Guidelines" beginning on page 26.
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The Role of Benchmarking in Our Executive Compensation Decisions
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We regularly review our compensation policies, practices and programs to determine if they are both appropriate and responsive to our business needs. Factors that were considered in determining the NEO compensation adjustments for 2019 included the results of the Company as a whole and, where applicable, the specific business areas of the Company for which each NEO was responsible, the individual's performance, changes in compensation levels over recent years, performance against bonus plan goals, comparisons among roles internally, cost to the Company and market comparison data. Although we monitor the competitive landscape closely and our current practice is to conduct an external market benchmarking of our NEO compensation levels and practices annually, we have not focused solely on market comparison data when establishing compensation levels. The Compensation Committee applies judgment and discretion when evaluating the appropriateness of using market comparison data as it does when determining any compensation amount or outcome.
In mid-2018, Semler Brossy conducted a market benchmarking study in connection with establishing NEO compensation and the results were among the factors considered when 2019 compensation decisions were made, which are discussed in detail under "2019 Compensation Decisions" on page 20. The data provided to the Compensation Committee by Semler Brossy showed compensation levels consisting of the primary elements of total compensation: salary, bonus and long-term incentive awards. The study concluded that, for the NEOs who were serving in an NEO position at the time of the study and for which a sufficient number of comparable benchmark positions at comparison companies could be identified, target cash compensation levels and the grant value of long-term incentive awards were, on average, generally consistent with our executive compensation philosophy.
The comparison group companies used in the 2018 benchmarking study were:
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Abbott Laboratories
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Bristol-Myers Squibb Company
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Quest Diagnostics Incorporated
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Agilent Technologies, Inc.
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Cerner Corporation
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Thermo Fisher Scientific Inc.
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Allergan plc
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Danaher Corporation
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Varian Medical Systems, Inc.
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Baxter International Inc.
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Eli Lilly and Company
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Zimmer Biomet Holdings, Inc.
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Becton, Dickinson and Company
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Laboratory Corporation of America Holdings
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Boston Scientific Corporation
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Medtronic plc
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The comparison group was developed by Semler Brossy and members of our Human Resources department and approved by the Compensation Committee. Similar to prior years, the comparison companies used in the 2018 study were selected based on comparability to Stryker in terms of business focus and company size. The 2018 comparison group, overall, encompassed the following:
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Product competitors or companies in the medical technology industry, as well as within adjacent industries, with which we compete for executive talent;
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Companies with significant global operations; and
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Companies with revenues and market capitalizations of similar scale to Stryker.
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Semler Brossy conducted an additional benchmarking study in mid-2019 using the same comparison group that was used in the 2018 study. The results of the 2019 study indicated that for the NEOs who were serving in an NEO position at the time of the study and for which a sufficient number of comparable benchmark positions at comparison companies could be identified, target cash compensation levels and the grant value of long-term incentive awards were, on average, generally consistent with our executive compensation philosophy. The results of the 2019 benchmarking study were one of the factors considered when the 2020 compensation decisions for the NEOs were made in February 2020. Those decisions are summarized on page 28 and will be discussed in further detail in the proxy statement for our 2021 meeting.
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Management's Role in Determining Executive Compensation
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The Compensation Committee makes all final decisions regarding NEO compensation, except that the compensation of the Chief Executive Officer is subject to final approval by the independent members of the Board. The Chief Executive Officer's role in determining executive compensation includes making recommendations on compensation decisions for members of our executive leadership team other than himself after reviewing information provided by our Vice President, Chief Human Resources Officer and other members of the Human Resources department. Management's role in determining executive compensation includes:
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Developing, summarizing and presenting information and analyses to enable the Compensation Committee to execute its responsibilities, as well as addressing specific requests for information from the Compensation Committee;
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Attending Compensation Committee meetings as requested to provide information, respond to questions and otherwise assist the Compensation Committee;
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Developing individual NEO bonus plans for consideration by the Compensation Committee and reporting to the Compensation Committee regarding achievement against the bonus plans; and
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Preparing stock-based award recommendations for the Compensation Committee's approval, which includes providing the Compensation Committee with regular updates on run rate (the rate at which stock awards are being awarded under our equity plans) and overhang (a measure of potential earnings dilution from stock awards) levels, and reporting to the Compensation Committee at the end of the performance period regarding the number of performance stock units earned based on achievement of the pre-established goals.
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Semler Brossy performs a similar role for the Board with respect to compensation recommendations for the Chief Executive Officer and the non-employee directors.
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2019 Compensation Decisions
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The Compensation Committee reviewed and approved the 2019 cash compensation levels for our NEOs other than Mr. Lobo after receiving recommendations from Mr. Lobo and our Vice President, Chief Human Resources Officer. The 2019 cash compensation levels for Mr. Lobo were reviewed and approved by the Compensation Committee and independent directors of the Board after receiving recommendations from Semler Brossy. The recommendations and ultimate 2019 cash compensation levels for all of the NEOs reflected subjective evaluations and decisions based on the scope of each NEO's responsibilities in his current role, the level of performance in 2018 of the business areas for which he was responsible (if applicable), his time and proficiency in the job, comparisons of pay levels relative to similar positions within the Company (if applicable) and consideration of the other factors described under "Executive Compensation Philosophy" on page 19. The following table summarizes the annualized 2019 base salary (effective as of March 1, 2019 except for Mr. Fletcher, as described below), the 2019 target bonus and the respective percentage increase relative to 2018 for both of those amounts for each NEO:
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Name
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2019 Annualized Base Salary ($)
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% Increase Relative to 2018
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2019 Target Bonus ($)
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% Increase Relative to 2018
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Kevin A. Lobo
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1,236,000
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3.0
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%
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1,854,000
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3.0
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%
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Glenn S. Boehnlein
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660,000
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10.0
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%
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594,000
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16.5
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%
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Timothy J. Scannell
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775,000
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3.3
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%
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775,000
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3.3
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%
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Robert S. Fletcher(1)
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515,000
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—
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250,868
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—
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Viju S. Menon
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515,000
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3.0
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%
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437,750
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3.0
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%
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______________
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(1)
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Mr. Fletcher's annualized base salary was effective as of his start date in April 2019 and his 2019 target bonus amount was prorated to reflect his start date.
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In addition, performance stock units and stock options were awarded to all of the NEOs in February 2019, except Mr. Fletcher who was awarded restricted stock units in connection with joining the Company in April 2019. See "Long-Term Incentive Compensation" beginning on page 23.
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2019 Compensation Elements
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Each of the compensation elements and its purpose is described below.
Base Salary: Base salary is provided to our NEOs to compensate them for the basic value of their job, their time and proficiency in the position and the value of their job relative to other positions in the Company. We review each NEO's salary and performance annually and make decisions about amounts and adjustments. Factors that are considered in determining the executive's salary include performance, job experience, individual role responsibilities, comparisons among positions internally and market comparison data. Base salary levels for 2019 were approved by the Compensation Committee or, in the case of Mr. Lobo, the independent members of the Board.
Annual Bonus: The individually structured short-term bonus plans are intended to motivate and reward our NEOs for achieving and exceeding specific annual performance goals. The primary focus of the 2019 bonus goals for our NEOs was total Stryker performance. For 2019, each NEO's bonus plan designated a threshold level of performance for each measure that had to be achieved before any bonus could begin to be earned for that measure. Each 2019 bonus plan included an opportunity to earn an overachievement bonus of up to an additional 100% of target bonus, which is included in the "Maximum Bonus Opportunity" column in the table below, if 2019 goals for sales on a constant currency basis, adjusted operating income and adjusted diluted net earnings per share were achieved.
Sales on a constant currency basis excludes the impact of changes in foreign currency exchange rates that affect the comparability and trend of sales. Sales on a constant currency basis is calculated by translating the actual results at the foreign currency exchange rate used when establishing the target amounts at the beginning of the year. When calculating payouts related to sales on a constant currency basis, adjusted operating income and adjusted operating income margin, the impact of acquisitions that occur during the year is typically excluded as values related to potential acquisitions are not included in the bonus targets established early in the year. Adjusted operating income and adjusted operating income margin are both non-GAAP financial measures. Information with respect to adjustments made to GAAP operating income and GAAP diluted net earnings per share in 2019, which resulted in the adjusted operating income and adjusted diluted net earnings per share used in the calculation of the NEOs' bonus awards, are described under "2019 Bonus Plans" beginning on page 22 and "Appendix A — Reconciliation of the Most Directly Comparable GAAP Measure to Non-GAAP Financial Measure".
In order for any payout to occur related to the overachievement bonus metrics, 95% of the adjusted operating income goal must have been achieved. If achieved, 50% of the target amount for each overachievement metric would be eligible for payout. In order to be eligible for the remaining 50% of target for each overachievement metric, adjusted operating income margin performance could not have been more than 20 basis points below the target goal.
The individual NEO bonus plans are discussed in detail under "2019 Bonus Plans" beginning on page 22. The table below provides the target bonus, maximum potential bonus reflecting the overachievement award opportunity discussed above, actual bonus payment and actual payment as a percentage of target for each NEO in 2019:
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Name
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Target Bonus ($)
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Maximum Bonus Opportunity ($)
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Actual Bonus Payment ($)
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Payment as Percentage of Target
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Kevin A. Lobo
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1,854,000
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3,708,000
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2,632,309
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142
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%
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Glenn S. Boehnlein
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594,000
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1,188,000
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843,361
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142
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%
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Timothy J. Scannell
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775,000
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1,550,000
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1,100,345
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142
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%
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Robert S. Fletcher(1)
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250,868
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501,737
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356,183
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142
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%
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Viju S. Menon
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437,750
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875,500
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621,517
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142
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%
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______________
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(1)
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Reflects prorated amounts as a result of joining the Company in April 2019. Mr. Fletcher also received a sign-on bonus payment of $75,000 in connection with joining the Company in April 2019, which is not reflected in the table above. The sign-on bonus amount served as an inducement for Mr. Fletcher to join the Company and approximated the prorated 2019 projected bonus amount that Mr. Fletcher forfeited upon his departure from his prior employer.
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Under our Executive Bonus Plan, the Board and Compensation Committee may make adjustments to final bonus determinations within the framework of the maximum bonuses that can be awarded under the terms of the Executive Bonus Plan.
Our Executive Bonus Plan has a recoupment provision that is applicable in the event of either a material restatement of our financial statements as a result of misconduct or an officer's material misconduct or negligence that results in a material violation of a law or regulation or material Company policy. See "Recoupment Policy" on page 27 for information regarding our recoupment policy that applies to all cash and equity incentive payments made pursuant to awards granted to elected corporate officers after 2014.
The Compensation Committee recommended the bonus plan target opportunity and goals for the Chief Executive Officer position and the independent directors approved them at meetings in February 2019. The actual payment for Mr. Lobo was approved by the independent directors in February 2020 based on his accomplishments as measured under his individual bonus plan. The Compensation Committee reviewed and approved the bonus targets and actual payments for the other NEOs after receiving recommendations from the Chief Executive Officer.
Why We Chose Particular Performance Metrics and Goals
We generally established our 2019 bonus goals with a focus on our budget and growth over actual prior year outcomes. We used sales and earnings goals as the primary measures in the NEO bonus plans for the following reasons:
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These are key measures that are the objectives of our strategic plan;
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These metrics focus our NEOs on growth and profitability, which are important for our long-term success;
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The goals for these metrics generally align with our annual budget; and
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We believe these are primary measures our investors monitor in evaluating our performance and making investment decisions regarding Stryker stock.
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2019 Bonus Plans
The 2019 annual bonus goals and weightings for the NEOs are shown in the table on page 23. The following information is relevant to an understanding of that table:
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Threshold is the performance required before any bonus accrues. Performance below the threshold level results in no bonus payment for that performance measure. Results for all quantitative measures are prorated between threshold and target. Meeting the target goal results in the payment of 100% of bonus opportunity for the particular measure.
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The table expresses the goals for quantitative performance measures as a percentage change from 2018 actual results to show the degree of improvement required relative to the prior year to achieve bonus plan payment levels.
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Bonus plan goals are based on the Company's financial results as reported in conformance with GAAP but may be adjusted at the Compensation Committee's discretion to reflect the impact of specified corporate transactions, changes in foreign currency exchange rates, accounting or tax changes and other extraordinary or nonrecurring events so that the operating results of the Company are calculated on a comparable basis from year to year. Information with respect to adjustments made to GAAP operating income in 2019 that resulted in the adjusted operating income used in the calculation of the NEOs' bonus awards is set forth in the following reconciliation (dollar values in millions):
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Item
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Year Ended
December 31, 2019
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Operating income, as reported
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$2,713
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Acquired inventory stepped up to fair value
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67
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Other acquisition and integration-related charges
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208
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Amortization of purchased intangible assets
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464
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Restructuring-related and other charges
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226
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Medical device regulations
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62
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Recall-related matters
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192
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Regulatory and legal matters
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(24
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Net currency adjustments
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67
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Operating income attributable to acquisitions that occurred during 2019
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7
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Adjusted operating income for bonus calculation
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$3,982
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•
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Refer to "Appendix A — Reconciliation of the Most Directly Comparable GAAP Measure to Non-GAAP Financial Measure" for information with respect to adjustments made to GAAP diluted net earnings per share in 2019 that resulted in the adjusted diluted net earnings per share used in the calculation of the NEOs' bonus awards.
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For performance measures that are qualitative in nature, the determination of performance requires subjective evaluations rather than quantifiable calculations of levels of goal achievement. These subjective performance evaluations for 2019 were made by the Compensation Committee after considering recommendations from Mr. Lobo in the case of each of the other NEOs and by the independent directors in the case of Mr. Lobo, in each case after consideration was given to the individual's performance with respect to the goal. The threshold payment for qualitative measures is zero percent.
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Payout for each overachievement metric generally begins when performance exceeds the budgeted value for the respective metric and is prorated between the threshold and target overachievement levels.
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Bonus Plans for our NEOs
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2019 Threshold
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2019 Target
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Threshold
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Threshold as Percentage Change Over 2018 Actual
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Potential Payment as Percentage of Total Target Bonus
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Target
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Target as Percentage Change Over 2018 Actual
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Potential Payment as Percentage of Total Target Bonus
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Core Bonus Potential:
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Adjusted operating income
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$3.496 bil.
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(0.6
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)%
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10
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%
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$3.884 bil.
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10.4
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%
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20
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%
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Adjusted operating income margin
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26.09%
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0.9
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%
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10
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%
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26.29%
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1.7
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%
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20
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%
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Constant currency sales
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$13.886 bil.
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2.1
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%
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20
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$14.772 bil.
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8.6
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%
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40
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%
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Functional goal(1)
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—
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—
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0
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%
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—
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—
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20
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%
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40
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%
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100
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%
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Overachievement Bonus Potential:
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Adjusted operating income
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$3.884 bil.
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10.4
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%
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0
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%
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$4.079 bil.
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16.0
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%
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50
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%
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Constant currency sales
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$14.772 bil.
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8.6
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%
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0
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%
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$15.363 bil.
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13.0
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%
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25
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%
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Adjusted diluted net earnings per share
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$8.10
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10.8
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%
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0
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%
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$8.59
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17.5
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%
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25
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%
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0
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%
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100
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%
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(1) Functional goals for the NEOs are listed in the following table:
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Name
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Functional Goal
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Kevin A. Lobo
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Qualitative assessment of his efforts in leading the Company's multi-year cost transformation initiative, driving commercial model innovation, strengthening the Company's leadership bench strength, and improving the Company's diversity and inclusion.
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Glenn S. Boehnlein
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Qualitative assessment of his contributions to the execution of the Company's cost transformation initiative and implementing the Company's Finance transformation program with a focus on global shared services.
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Timothy J. Scannell
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Qualitative assessment of his contributions to the execution of the Company's cost transformation initiative, driving success in the integration of the Company's recent acquisitions and developing a consistent commercial model to address the changing landscape of the healthcare market.
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Robert S. Fletcher
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Qualitative assessment related to his efforts of driving improvement in the Company's enterprise risk management and global compliance programs.
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Viju S. Menon
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Qualitative assessment of his contributions to the execution of the Company's cost transformation initiative and continuing the transformation of the Company's global supply chain organization.
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Long-Term Incentive Compensation: In February 2019, our then NEOs were awarded performance stock units and stock options. Mr. Fletcher received restricted stock units in connection with joining the Company in April 2019 that were granted to him to compensate for the forfeiture of stock awards at his prior employer and to create a retention incentive with Stryker. The performance stock units granted to the NEOs on February 6, 2019 will be earned based on the achievement of a pre-established threshold level of three-year average adjusted diluted net earnings per share growth, with the actual number of shares earned being determined based on the actual average adjusted diluted net earnings per share growth as well as sales growth performance relative to a comparison group of companies over the 2019 to 2021 performance period. Any earned performance stock units will vest and, along with any associated dividend equivalents, be settled in Common Stock in March 2022 following completion of the three-year performance period. The number of performance stock units ultimately earned can range from 0% to 200% of the target award.
The stock options granted on February 6, 2019 to our NEOs have an exercise price of $179.35 per share. The exercise price for the stock options granted to our NEOs is equal to the closing price of our Common Stock as reported for NYSE Composite Transactions on the last trading day before the grant date. Such stock options have ten-year terms, vest as to 20% of the underlying shares on each of the first five anniversaries of the grant date and are subject to the other terms and conditions generally applicable to stock options granted to other officers and key employees. Our equity incentive plans prohibit repricing stock options without shareholder approval.
The restricted stock units granted to Mr. Fletcher on April 30, 2019 vest one-third on each of the first three anniversaries of the grant date.
The details of the 2019 stock awards grants to the NEOs are provided in the "2019 Grants of Plan-Based Awards" table on page 30. Stock awards in 2019 for other key employees generally consisted of stock options and restricted stock units. Performance stock units, stock options and restricted stock units are granted to provide employees with a personal financial interest in Stryker's long-term success, encourage retention through vesting provisions and enable us to compete for the services of employees in an extremely competitive market and industry. Objectives of the long-term incentive portion of our compensation package include:
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Aligning the personal and financial interests of management and other employees with shareholder interests;
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•
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Balancing near-term considerations with a focus on improving the business and creating shareholder value over the long-term; and
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•
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Providing a means to attract, motivate and retain a skilled management team.
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Management made recommendations to the Compensation Committee about the stock award levels and terms for the NEOs other than the Chief Executive Officer, recommendations for whom were made by Semler Brossy to the Compensation Committee. The stock award
levels for the NEOs other than the Chief Executive Officer were approved by the Compensation Committee after receiving recommendations from the Chief Executive Officer, and for the Chief Executive Officer were approved by the Compensation Committee subject to final approval by the independent members of the Board, which subsequently occurred. A number of factors are considered in determining the stock award levels for the NEOs, but the final award is ultimately a subjective decision. While the Compensation Committee did not apply specific performance measures or weightings to determine the individual NEO awards of performance stock units and stock options in 2019, factors considered included the level of responsibility and position within the Company, demonstrated performance over time, value to our future success, the level of retention value from prior awards, Company and business area performance in recent years, comparisons among positions internally, market comparison data and the other factors described under "Executive Compensation Philosophy" on page 19. The Compensation Committee also considered, in the aggregate for the Company, share availability under our equity plans, annual run rate, the financial expense of stock awards and potential shareholder dilution.
The terms and conditions of our stock awards include recoupment provisions that are applicable in the event of a violation of the non-compete agreement to which each recipient has agreed. See "Recoupment Policy" on page 27 for information regarding our recoupment policy that applies to all cash and equity incentive payments made pursuant to awards granted to elected corporate officers after 2014.
2017 Performance Stock Units: Results for the 2017-2019 Performance Period
In 2017, the Company granted performance stock units to members of our then executive leadership team. The vesting of all 2017 performance stock units ("2017 PSUs") was contingent on the achievement of certain specified performance metrics over a three-year performance period from January 1, 2017 to December 31, 2019. The 2017 PSUs were subject to a threshold performance target of the Company’s achievement of average adjusted diluted net earnings per share growth of 3.0% or greater as of the last day of the performance period (the "Threshold Performance Target"). The Compensation Committee chose this measure as the Threshold Performance Target for the 2017 PSUs in order to require that a minimum level of earnings growth be achieved before any portion of the 2017 PSUs would vest. If the Threshold Performance Target was achieved, grantees would become eligible to vest in up to 200% of their 2017 PSUs, subject to further achievement of two equally weighted financial measures (average adjusted diluted net earnings per share growth and average sales growth relative to a comparison group of companies) over the same three-year performance period. The Compensation Committee chose these as measures for the 2017 PSUs in order to focus the executive leadership team on longer-term growth and profitability. The Compensation Committee also believed that it was important to have a measure that assessed the Company's growth on a relative basis, which resulted in the use of average sales growth relative to a comparison group. We believe our investors monitor these measures in evaluating our performance and making investment decisions regarding Stryker stock.
Following the completion of the three-year performance period, the Compensation Committee determined in March 2020 that the Threshold Performance Target had been achieved and, accordingly, our NEOs were eligible to vest in up to 200% of their 2017 PSUs. Under the terms of the 2017 PSUs, once the Threshold Performance Target is achieved, the Compensation Committee can exercise negative discretion to reduce the number of 2017 PSUs that vest for our NEOs. If the Threshold Performance Target was achieved, then vesting of 50% of each NEO’s 2017 PSUs was based on the Company’s achievement of average sales growth relative to a comparison group of companies and the remaining 50% of each NEO’s 2017 PSUs was based on the Company’s achievement of average adjusted diluted net earnings per share growth. The 2017 PSUs vested and, along with the associated dividend equivalents, were settled in Common Stock on March 21, 2020.
The following is the comparison group of 16 companies used to determine the relative average sales growth performance for the 2017 PSUs:
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Abbott Laboratories
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General Electric Company (Healthcare Segment)
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Siemens Healthineers AG
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Baxter International Inc.
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Johnson & Johnson (Medical Devices & Diagnostics)
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Smith & Nephew plc
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Becton, Dickinson and Company
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Laboratory Corporation of America Holdings
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Thermo Fisher Scientific Inc.
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Boston Scientific Corporation
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Medtronic plc
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3M Company (Healthcare Segment)
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Fresenius Medical Care AG & Co. KGaA
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Quest Diagnostics Incorporated
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Zimmer Biomet Holdings, Inc.
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Royal Philips (combined segments of Diagnosis & Treatment and Connected Care)
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These companies were selected for comparison because, at the time the 2017 PSUs were granted, they competed with Stryker for market share and/or executive talent. Consistent with the terms of the 2017 PSUs, C.R. Bard, Inc., which was originally included in the comparison group when the 2017 PSUs were granted, was not included in the performance calculation because that company was acquired and did not report sales growth data for the entire performance period. In addition, as permitted by the terms and conditions applicable to the 2017 PSUs, the Compensation Committee modified the calculation of average sales growth to adjust for distortions caused by significant acquisitions and divestitures involving companies in the comparison group.
The table below presents the performance goals, the performance results for average adjusted diluted net earnings per share growth (to which no changes were made) and for relative average sales growth, as adjusted by the Compensation Committee as described above, and the calculated payouts for the 2017 PSUs:
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Average Adjusted Diluted Net Earnings Per Share Growth
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Below Minimum
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Minimum
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Target
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Maximum
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Actual
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Goal
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< 6.0%
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6.0%
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9.0%
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12.0%
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12.5%
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Earned 2017 PSUs, as % of Target
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0
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50
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100
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200
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200
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Weighted-Average (50%) Earned 2017 PSUs, as % of Target
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100
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Relative Average Sales Growth
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Percentile Ranking
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Actual
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Goal
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Below 33rd
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33rd
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50th
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75th and Above
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100th
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Earned 2017 PSUs as % of Target
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0
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50
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100
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200
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200
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Weighted-Average (50%) Earned 2017 PSUs, as % of Target
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100
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Total 2017 PSUs earned, as % of Target(1)
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200
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______________
(1) The value of the earned 2017 PSUs excludes the associated dividend equivalents.
For those NEOs who were granted 2017 PSUs, the number and market value of the 2017 PSUs that have been earned but remained unvested until March 21, 2020 are included in the "Number of Shares or Units of Stock That Have Not Vested" and "Market Value of Shares or Units of Stock That Have Not Vested" columns of the "Outstanding Equity Awards at 2019 Fiscal Year-End" table on page 32.
Retirement Plans: We offer a defined contribution 401(k) plan — the Stryker Corporation 401(k) Savings and Retirement Plan ("401(k) Plan") — that is available to all eligible U.S. employees, including the NEOs, as well as a nonqualified supplemental defined contribution plan — the Stryker Corporation Supplemental Savings and Retirement Plan ("Supplemental Plan") — in which certain employees, including the NEOs, may participate. The purpose of these plans is to assist our employees and executives with retirement income savings and increase the attractiveness of employment at Stryker. The Supplemental Plan is designed to provide a consistent level of benefit as a percentage of current compensation by restoring benefits that would otherwise be limited due to the covered compensation limits under the tax-qualified 401(k) Plan. The amounts of the Company's matching contribution to the accounts of each NEO are determined by the NEO's eligible compensation and individual contribution rate. Participants may contribute up to 75% of total eligible compensation (salary and bonus for the NEOs) under the 401(k) Plan and Supplemental Plan. Under the 401(k) Plan, we match fifty cents per dollar of the first 8% of compensation contributed by the employee up to the Internal Revenue Code limits ($19,000 annual deferral and $280,000 compensation in 2019). In addition to the Company match, the Company has historically made a discretionary contribution in March of each year equal to 7% of the prior year's eligible compensation for all employees eligible under the 401(k) Plan and Supplemental Plan, including the NEOs. The amounts contributed under the 401(k) Plan and the Supplemental Plan for 2019 on behalf of each NEO are included in the "All Other Compensation" column of the "Summary Compensation Table" on page 29. Additionally, the amounts contributed under the Supplemental Plan for 2019 on behalf of each NEO and his account balance under the Supplemental Plan, along with a description of the 401(k) Plan and Supplemental Plan, are provided in the table on page 33 and the associated narrative.
We have defined benefit pension programs for some employees in certain international locations; however, no NEO participates in any defined benefit pension plan sponsored by Stryker.
Health and Welfare Benefits Plans: We provide benefits, such as medical, prescription, dental, vision, life insurance and disability coverage, to each NEO under the same benefits plans that we offer to all our eligible U.S.-based employees. The benefits plans are part of our overall total compensation offering and provide appropriate healthcare coverage and security for our employees and their families at costs affordable to the Company. The Company does not pay for any form of post-retirement healthcare benefits for any employee.
Perquisites: We provide limited perquisites and personal benefits based on considerations unique to each NEO position. We believe our practices regarding perquisites are conservative to market. In 2019, we paid for costs associated with an executive physical examination for all of our NEOs who had such an examination. We also provided Mr. Menon with relocation assistance in 2019. The relocation benefits provided to Mr. Menon in 2019 were considered personal income and Mr. Menon received a tax gross-up payment in 2019 to offset the income taxes on these relocation benefits.
In December 2016, the Board, excluding Mr. Lobo, approved a policy regarding the personal use of Company aircraft by Mr. Lobo and his immediate family members. The Board believes the policy maximizes the efficient use of Mr. Lobo's travel time and helps to ensure his personal safety and security. Mr. Lobo is the only Stryker executive officer allowed to use Company aircraft for personal use. Such personal use is subject to an annual hour limitation, currently 40 hours, that is determined and reviewed annually by the Board. The benefit to Mr. Lobo associated with personal use of Company aircraft is imputed as income for tax purposes at Standard Industry Fare Level rates and he is responsible for paying the associated taxes.
In accordance with SEC disclosure requirements, the perquisites and other personal benefits are included in the "All Other Compensation" column of the "Summary Compensation Table" (see page 29) for 2019 and are identified for Mr. Lobo and Mr. Menon for each of whom the total value was $10,000 or greater.
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Impact of Decisions Regarding One Compensation Element on Decisions Regarding Other Compensation Elements
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Our practice is to review each NEO's compensation elements individually and monitor the total of the various elements. We consider each element and the total against our compensation objectives as stated in our executive compensation philosophy. Decisions related to one compensation element (e.g., bonus payment earned) generally do not materially affect decisions regarding any other element (e.g., stock award grants) because the objectives of each element differ. For example, we intend bonus payments to reward short-term performance for achievement of annual bonus plan goals, while we make decisions related to stock awards to align the interests of the recipients with the Company's long-term performance and enhance our retention hold on recipients.
Our 401(k) Plan and Supplemental Plan are funded on an annual basis and do not result in potential future liabilities to the Company. Decisions about these plans do not impact outcomes related to salary or bonus decisions for our NEOs and vice versa.
Positions at higher levels at Stryker generally have a greater emphasis on variable pay elements of bonus and stock awards, although no specific formula, schedule or structure is currently applied in establishing the percentage of total compensation delivered through any compensation element.
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Equity Plans and Equity-Based Compensation Award Granting Policy
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We have adopted a granting policy covering all stock awards, both off-cycle (including hire-on) and ongoing annual grants. Under the policy, stock awards are granted by the Compensation Committee, subject to approval by the Board in the case of grants to non-employee directors, and approval by the independent directors of the Board in the case of grants to the Chief Executive Officer. The Compensation Committee has delegated to the Chief Executive Officer the authority to make "off-cycle grants" to new employees as a result of the acquisition of another company, in situations where we are seeking to attract a senior level hire or recognize an employee for significant achievements or in other special circumstances. In 2019, we made off-cycle grants to new hires, including those who became employees as a result of an acquisition, and to select employees to recognize significant achievements and create retention incentives. Annual limits for off-cycle grants are defined both per individual employee (20,000 shares) and in the aggregate (300,000 shares), with shares issuable in connection with awards other than stock options being counted against such limits as 2.86 shares under our 2011 Long-Term Incentive Plan.
The fair market value of Stryker stock used to establish the exercise price of all options will be the closing sales price per share as reported for NYSE Composite Transactions for the last trading day prior to the grant date. No stock grant will be backdated and the timing of the public release of material information or the grant of any stock award will not be established with the intent of unduly benefiting a grantee under a stock award. Each annual grant and off-cycle grant of equity-based compensation will be awarded on a pre-determined date as follows:
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•
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The annual grant of stock awards for employees will generally be made on the date of the February meeting of the Board. The annual grant of stock awards for non-employee directors will generally be made on the date of the Board meeting that coincides with our annual meeting of shareholders. Any change in the annual grant date for employees or non-employee directors must be made with the prior approval of the Board.
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•
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Off-cycle awards may be granted by the Chief Executive Officer, pursuant to delegated authority from the Compensation Committee, on the first business day of May, August or November following the date of hire or the determination that an award is warranted in other circumstances. Off-cycle awards are reported to the Compensation Committee and the Board at their next regular meetings.
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Where permissible by law, we require U.S. employees who receive stock awards to sign a version of the Company's confidentiality, non-competition and non-solicitation agreement. The terms and conditions of our stock awards include recoupment provisions that are applicable in the event of a violation of the non-compete agreement to which each of our NEOs has agreed.
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Executive and Non-Employee Director Stock Ownership Guidelines
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Encouraging long-term ownership of Stryker stock among our management and directors is an important aspect of our executive compensation policies and practices. This reflects our conviction that all senior executives and non-employee directors should have meaningful share ownership positions in the Company to reinforce the alignment of the interests of management and our shareholders. Stryker has a stock ownership guideline policy in place for all non-employee directors, executive leadership team members and select other senior management positions in the Company. The policy provides that 25% of the net shares from option exercises not be sold until the participant exceeds the applicable ownership guideline. Executives and non-employee directors in compliance with the ownership guidelines may generally exercise stock options and sell the underlying shares, once vested, as long as they continue to meet the ownership guidelines. In 2019, our stock ownership requirements for our non-employee directors and NEOs were:
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Position
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Market Value of Stock Owned
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Expected Time Period to Comply
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Non-Employee Directors
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$500,000
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5 years
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Chief Executive Officer
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5 times salary
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5 years
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Other NEOs
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3 times salary
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5 years
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For stock ownership guideline calculation purposes, stock owned includes shares owned outright, including 401(k) Plan shares, as well as restricted stock units awarded (for employees, using an estimate of the net number of shares to be received after taxes; for non-employee directors, using the entire awarded amount as the Company generally does not withhold taxes upon vesting for non-employee directors), but does not include outstanding performance stock units or stock options. The Compensation Committee receives an annual update from management on compliance with the ownership guidelines. As of the Company's last annual measurement date of September 30, 2019, all of our non-employee directors and all of the NEOs subject to the ownership guidelines at that time were at or above the applicable stock ownership guideline requirement or projected to be by their targeted compliance date. The Compensation Committee periodically reviews the guideline requirements to ensure they continue to be appropriate. In that regard, the Compensation
Committee recommended in February 2020, and the full Board subsequently approved, an increase in the ownership guideline for our non-employee directors to $600,000, which is scheduled to be effective in May 2020.
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Prohibition of Hedging and Pledging Transactions
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Our Insider Trading Guidelines prohibit short sales of and option trading on Stryker stock and prohibit our directors and officers, and other employees of Stryker subject to the Insider Trading Guidelines, and their designees from engaging in hedging transactions, such as (but not limited to) zero-cost collars, equity swaps, exchange funds and forward sale contracts, that may allow such individual to continue to own Stryker securities without the full risks and rewards of ownership. Our Insider Trading Guidelines also prohibit holding Stryker securities in a margin account or otherwise pledging Stryker securities as collateral for a loan, except for Stryker securities that had been pledged as of the effective date of the Insider Trading Guidelines or that already have been pledged at the time an individual becomes subject to the Insider Trading Guidelines.
In February 2015, our Board adopted a recoupment policy that applies uniformly to all cash and equity incentive payments made pursuant to awards granted to our elected corporate officers after 2014. Under this policy, the Compensation Committee may require recoupment from an elected officer if it determines that it is in the best interest of the Company to do so and the amount of the incentive compensation was based upon the achievement of certain financial results that were subsequently reduced due to a material restatement as a result of misconduct and would have been lower had it been based upon the restated financial results or the elected officer engaged in material misconduct or was negligent in exercising his or her supervisory responsibility to manage or monitor conduct or risks, in each case that resulted in a material violation of a law or regulation or a material Company policy relating to manufacturing, sales or marketing of our products, including improper payments to foreign officials to obtain or retain business, that caused significant harm to the Company. We will publicly disclose recoupment of compensation under this policy in situations where the Board determines that it is in the best interests of the Company and our shareholders to do so.
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Employment Agreements and Severance Policy
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We generally do not provide employment agreements, with the exception of unique circumstances or if such agreements are customary in foreign countries. We have no employment or severance agreement in place with any NEO. We have in the past made, and are likely in the future to make, separation payments to persons who were NEOs based on the specific facts and circumstances.
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Company Tax and Accounting Issues
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In general, consideration is given to the tax and accounting treatment of our compensation plans at the time of developing the plans, when making changes to plans, in light of any regulatory changes or when making specific compensation decisions related to individual elements. The accounting treatments considered include any that may apply to amounts awarded or paid to our NEOs. The tax considerations include Sections 162(m) and 409A of the Internal Revenue Code.
Deductibility of Executive Compensation: In evaluating the compensation programs covering our NEOs and making decisions related to payments, the Compensation Committee generally has considered the potential impact on the Company of Section 162(m) of the Internal Revenue Code. Prior to December 22, 2017, Section 162(m) generally eliminated the deductibility of compensation over $1 million paid to NEOs, other than the principal financial officer, excluding "performance-based compensation" meeting certain requirements. However, the Tax Cuts and Jobs Act (the “Act”), which became law on December 22, 2017, significantly amended Section 162(m). Pursuant to the Act, the definition of "covered employees" under Section 162(m) was amended to include a company's chief financial officer. The Act also eliminated the performance-based compensation exception with respect to tax years beginning January 1, 2018, provided that, the Act includes a transition rule with respect to compensation that is provided pursuant to a written binding contract that was in effect on November 2, 2017 and not materially modified after that date. Accordingly, commencing in 2018, the Company’s tax deduction with regard to compensation of “covered employees” is limited to $1 million per taxable year for each officer. The Compensation Committee generally intends to maximize deductibility of compensation under Section 162(m) to the extent consistent with our overall compensation program objectives and permitted under the Act's transition rule, but may authorize compensation that does not meet the requirements of Section 162(m), as amended by the Act, if it determines such payments are appropriate.
Share-Based Compensation: We account for compensation expense from our stock awards in accordance with the Compensation — Stock Compensation Topic of the Financial Accounting Standards Board Accounting Standards Codification ("FASB Codification") that requires companies to measure the cost of employee stock awards based on the grant date fair value and recognize that cost over the period during which a recipient is required to provide services in exchange for the stock awards, typically the vesting period. We consider the impact on the Company's compensation expense when determining and making stock awards.
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2020 Compensation Decisions
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The table below summarizes the 2020 compensation decisions that were made in February 2020 for the 2019 NEOs. These decisions will be more fully discussed in the proxy statement for our 2021 annual meeting.
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Name
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Annualized Base Salary ($)
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Target Bonus ($)(1)
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Number of Performance
Stock Units at Target (#)(2)
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Number of Stock Options (#)(3)
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Kevin A. Lobo
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1,275,000
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1,912,500
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24,960
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124,800
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Glenn S. Boehnlein
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680,000
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646,000
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7,396
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36,975
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Timothy J. Scannell
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800,000
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800,000
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12,018
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60,090
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Robert S. Fletcher
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535,000
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401,250
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3,236
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16,175
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Viju S. Menon
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535,000
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454,750
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4,392
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21,955
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______________
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(1)
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Each NEO bonus plan for 2020 includes an opportunity to earn an overachievement bonus of up to an additional 100% of target bonus based on sales on a constant currency basis and adjusted earnings metrics.
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(2)
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Key design features for the 2020 performance stock units include the following:
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•
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In order to earn any shares, a pre-established threshold level of three-year average adjusted diluted net earnings per share growth must be achieved, with the actual number of shares earned based on actual average adjusted diluted net earnings per share growth and sales growth relative to a comparison group of companies over the three-year performance period;
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•
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Payout range of 0% to 200% of the target award; and
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•
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Settled in Common Stock in early 2023 following the completion of the three-year performance period.
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(3) Stock options to purchase shares of the Company's Common Stock were granted at an exercise price of $216.35 per share (the closing price as reported for NYSE Composite Transactions on February 4, 2020, the last trading day before the grant date).