2825 Airview Boulevard
Kalamazoo, MI 49002

 

 

NOTICE OF 2008 ANNUAL MEETING OF SHAREHOLDERS OF STRYKER CORPORATION

 

 

Date:  April 23, 2008

 

Time:  2:00 p.m., Eastern Time

 

Place:  Radisson Plaza Hotel & Suites at The Kalamazoo Center, Kalamazoo, Michigan

 

Items of Business:

 

 

We invite all shareholders to attend the meeting. At the meeting, you will hear a report on our business and have a chance to meet our directors and executive officers. Our 2007 Annual Report is enclosed.

 

Only shareholders of record on February 29, 2008 may vote at the meeting.

 

Your vote is important. Please vote your shares promptly. To vote your shares, you may use the internet or call the toll-free telephone number as described on your proxy card, or complete, sign, date and return your proxy card.

 

Thomas R. Winkel

Secretary

 

March 14, 2008

 

 

Important Notice Regarding Availability of
Proxy Materials for the Shareholders Meeting
on April 23, 2008

 

The proxy statement, our 2007 Annual Report and a link to the means to vote by internet are available at www.stryker.com/investor/proxymaterials.

TABLE OF CONTENTS

 

2825 Airview Boulevard
Kalamazoo, MI 49002

 

 

PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
April 23, 2008

 

 

 

We are providing these proxy materials in connection with the solicitation by the Board of Directors of proxies to be used at the annual meeting of shareholders of Stryker to be held on April 23, 2008 and at any adjournment of the meeting. The solicitation will begin on or about March 14, 2008.

 

What am I voting on?

 

You will be voting on three proposals at our annual meeting:

 

 

What are the recommendations of the Board of Directors?

 

All shares represented by a properly executed proxy will be voted unless the proxy is revoked and, if a choice is specified, your shares will be voted in accordance with the specification. If no choice is specified, the proxy holders will vote your shares according to the recommendations of the Board of Directors, which are included in the discussion of each matter later in this Proxy Statement. In summary, the Board of Directors recommends that you vote:

 

 

In addition, the proxy holders may vote in their discretion with respect to any other matter that properly comes before the meeting.

 

Who is entitled to vote?

 

At the close of business on February 29, 2008, the record date for the meeting, 411,563,276 shares of our Common Stock were outstanding. For each proposal to be voted on, each shareholder is entitled to one vote for each share of Stryker Common Stock owned at that time.

How do I vote?

 

If you are a shareholder of record, you may vote by proxy in any of the following ways:

 

 

If you vote via the internet or by telephone, your vote must be received by 11:59 p.m., Eastern Time, on April 22, 2008.

 

You may also vote in person at the annual meeting or may be represented by another person at the meeting by executing a proxy designating that person.

 

If your shares are held in a stock brokerage account or by a bank or other holder of record, you are considered the beneficial owner of shares held in “street name.” The street name holder will provide you instructions that you must follow in order to have your shares voted.

 

If you hold your shares in street name and you wish to vote in person at the meeting, you must obtain a proxy issued in your name from the street name holder.

 

May I change my mind after submitting a proxy?

 

If you are a shareholder of record, you may revoke your proxy before it is exercised by:

 

 

If you are a beneficial owner of shares held in street name, you may submit new voting instructions by contacting your brokerage firm, bank or other holder of record.

 

What are broker non-votes?

 

A broker non-vote occurs when the broker, bank or other holder of record that holds your shares in street name is not entitled to vote on a matter without instruction from you and you do not give any instruction. Without instruction from you, brokers, banks and other street name holders may not vote your shares on the proposal to approve the 2008 Employee Stock Purchase Plan. They will have discretionary authority to vote on the election of directors and ratification of the appointment of Ernst & Young LLP.

 

What is the required vote?

 

In the election of directors, the eight nominees receiving the highest number of votes will be elected. Ratification of the appointment of Ernst & Young LLP and approval of the 2008 Employee Stock Purchase Plan require the affirmative vote of a majority of the votes cast on the proposal at the meeting. Votes that are withheld with respect to the election of directors and broker non-votes and abstentions on the other matters are not counted as votes cast.

 

Will the annual meeting be webcast?

 

You may access our annual meeting via webcast or telephone. Information about the webcast, which will include both the audio and the video presentation from the meeting, is available in the Calendar of Events area of the Investor section of our website at www.stryker.com. The telephone number to listen to the meeting is 800.798.2801

(United States) or 617.614.6205 (International) and the passcode is 70030737. An archived copy of the webcast will continue to be available on our website until June 30, 2008.

 

How do I obtain directions to the annual meeting?

 

Directions are available at www.stryker.com/investor/proxymaterials.

 

Can I access these proxy materials on the internet?

 

The proxy statement, our 2007 Annual Report and a link to the means to vote by internet are available at www.stryker.com/investor/proxymaterials.

 

Principal Shareholders

 

The following table sets forth certain information as of December 31, 2007 with respect to beneficial ownership of Common Stock by the only persons known by us to be the beneficial owners of more than 5% of our Common Stock.

 

 

 

 

Security Ownership of Directors and Executive Officers

 

The following table sets forth certain information about the ownership of Stryker Common Stock as of January 31, 2008 by our current directors, all of whom are standing for reelection, the five executive officers identified as our NEOs in the “Compensation Discussion and Analysis” on page 7 and all our executive officers and directors as a group.

 

 

 

 

We manage our business under the direction of our Board of Directors. The Board conducts its business through meetings of the Board and its committees. The Board has adopted Corporate Governance Guidelines that are available in the Corporate Governance area of the Investor section of our website at www.stryker.com. We will mail a copy to any shareholder upon request to the Secretary at 2825 Airview Boulevard, Kalamazoo, Michigan 49002. During 2007, the Board held seven meetings, including two special meetings. There were also a total of 16

committee meetings during 2007. Each director attended more than 75% of the total meetings of the Board and the committees on which he or she served in 2007. We expect our directors to attend the annual meeting of shareholders unless they have a schedule conflict or other valid reason. All the Board members attended the 2007 annual meeting.

 

Independent Directors

 

Under the listing standards of the New York Stock Exchange (“NYSE”), a director is not independent unless the Board determines that he or she has no material relationship with Stryker, either directly or through any organization with which he or she is affiliated that has a relationship with Stryker. Based on a review of the responses of the directors to questions about employment history, affiliation and family and other relationships and on discussions with the directors, the Board has determined that John W. Brown, Howard E. Cox, Jr., Louise L. Francesconi, Jerome H. Grossman, M.D., William U. Parfet and Ronda E. Stryker are independent under the NYSE listing standards. As a member of management, Stephen P. MacMillan, President and Chief Executive Officer, is not independent under the NYSE listing standards. As a result of fees paid to Donald M. Engelman, Ph.D. as a consultant to the Company, he is not independent under the NYSE listing standards.

 

Board Committees

 

Our Board has three principal committees. The current membership, number of meetings held during 2007 and the function performed by each of these committees are described below. These committees act under written charters approved by the Board. These charters are available in the Corporate Governance area of the Investor section of our website at www.stryker.com and we will mail them to any shareholder upon request to the Secretary at 2825 Airview Boulevard, Kalamazoo, Michigan 49002. The applicable committee and the Board review and reassess the charters annually.

 

None of the members of any of the committees is or ever has been an employee of the Company. The Board determined at its meeting in April 2007 that the members of each committee meet the independence standards for that committee within the meaning of the NYSE listing standards and applicable SEC regulations.

 

Audit Committee — Mr. Parfet (Chair), Mr. Cox, Ms. Francesconi and Dr. Grossman currently are members of the Audit Committee. The Audit Committee met five times during 2007. The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors. It meets with management and the Company’s independent registered public accounting firm throughout the year and reports the results of its activities to the Board of Directors. Further information regarding the role of the Audit Committee is contained in its charter that is available in the Corporate Governance area of the Investor section of our website at www.stryker.com. For further information, see “Audit Committee Report” on page 38. The Board has determined that Mr. Parfet is an “audit committee financial expert” for purposes of applicable SEC rules.

 

Compensation Committee — Mr. Cox (Chair), Mr. Parfet and Ms. Stryker currently are members of the Compensation Committee, which met five times during 2007. The purpose of the Compensation Committee is to assist the Board in discharging its overall responsibilities relating to executive and stock-based compensation. The Committee reviews and approves corporate goals and objectives relevant to the compensation of the President and Chief Executive Officer and other executive officers prior to the beginning of each year, evaluates their performance for the current year in light of those goals and establishes compensation levels for the upcoming year, including salary and bonus targets. The Committee also administers and grants awards under the Company’s stock option and other equity-based compensation plans. Except in the case of the President and Chief Executive Officer, management provides recommendations to the Committee concerning salary, bonus potential and equity-based awards for our executive officers. The President and Chief Executive Officer’s compensation is subject to final approval by the independent directors. For further information, see the Compensation Committee’s charter that is available in the Corporate Governance area of the Investor section of our website at www.stryker.com. Also, see “Compensation Discussion and Analysis” beginning on page 7.

Our Compensation Committee has the authority to retain and terminate a compensation consulting firm in order to assist the Committee in the evaluation of executive or non-employee director compensation. For 2007, the Committee retained the Hay Group, Inc. to assist the Committee by:

 

 

The Compensation Committee considers Hay Group to be independent because it has inquired and found no existing conflicts of interest in the services or relationships of Hay Group with Stryker and Hay Group reports directly and solely to the Compensation Committee. Hay Group is not expressly prohibited from providing other services to the Company or management; however, no other services were performed by Hay Group for Stryker in 2007. We notify the Compensation Committee of any other potential services, including related fees, which Hay Group might be asked to perform. The Compensation Committee has established a requirement that the Committee Chair pre-approve any additional Hay Group services if the associated fees would exceed $10,000 in any year.

 

Governance and Nominating Committee — Ms. Francesconi (Chair), Mr. Parfet and Ms. Stryker currently serve on the Governance and Nominating Committee. The Governance and Nominating Committee, which met five times during 2007, makes recommendations to the Board regarding individuals for nomination as a director and committee assignments, oversees the evaluation of the Board and management and considers other matters relating to corporate governance. For further information, see the charter of the Governance and Nominating Committee that is available in the Corporate Governance area of the Investor section of our website at www.stryker.com.  When seeking to identify an individual to become a director to fill a new position or vacancy, the Committee will consult with incumbent directors, management and others. The Committee will consider, among other factors, the background and reputation of potential candidates in terms of character, personal and professional integrity, business and financial experience and acumen, how a person would complement the other directors in terms of expertise, diversity of opinion and experience and a person’s availability to devote sufficient time to Board duties. Shareholders may recommend director candidates for consideration by the Governance and Nominating Committee by writing to the Secretary at 2825 Airview Boulevard, Kalamazoo, Michigan 49002, giving the candidate’s name, relationship, if any, to the shareholder making the recommendation, biographical data and qualifications. The submission should also include a statement from the candidate consenting to being considered and, if nominated and elected, to serving as a director.

 

Compensation Committee Interlocks and Insider Participation

 

No member of the Compensation Committee has served as one of our officers or employees at any time. None of our executive officers serves as a member of the compensation committee of any other company that has an executive officer serving as a member of our Board of Directors. None of our executive officers serves as a member of the board of directors of any other company that has an executive officer serving as a member of our Compensation Committee.

 

Lead Director/Executive Sessions of Non-Management Directors

 

Pursuant to the recommendation of the Governance and Nominating Committee, Mr. Parfet has been designated the lead independent director, with responsibility for coordinating the activities of the other independent directors. Mr. Parfet chairs the executive session held in conjunction with each meeting of the Board to provide an opportunity for the non-management directors to discuss topics of concern without any member of management being present. At least once a year, an executive session of only the independent directors is held.

 

Contacting the Board of Directors

 

Shareholders and other interested persons may communicate directly with the Board on a confidential basis by mail to Stryker Board of Directors at 2825 Airview Boulevard, Kalamazoo, Michigan 49002. All such

communications will be received directly by the Chair of the Governance and Nominating Committee and will not be screened or reviewed by any Stryker personnel.

 

Code of Conduct/Code of Ethics

 

We have adopted a Code of Conduct applicable generally to our employees, officers and directors in the performance of their duties and responsibilities and a Code of Ethics applicable to the President and Chief Executive Officer, Chief Financial Officer and Controller. The Code of Conduct and Code of Ethics are posted in the Corporate Governance area of the Investor section of our website at www.stryker.com and we will mail them to any shareholder upon request to the Secretary at 2825 Airview Boulevard, Kalamazoo, Michigan 49002.

 

Certain Relationships and Related Party Transactions

 

Riccardo Montozzi, who is employed as the Business Unit Director of our MedSurg Group in Italy, is the son-in-law of Luciano Cattani, who was Vice President; Group President, International until December 31, 2007. Mr. Montozzi was hired by Stryker on December 3, 2001 and has held his current position since January 20, 2003. During 2007 Mr. Montozzi’s salary was $146,191, his bonus was $40,027, he was granted a stock option to purchase 2,000 shares and he received benefits on par with what we generally make available to our Italy-based employees in a similar role. Mr. Montozzi is employed in Italy and paid in Euros. The dollar amounts for Mr. Montozzi have been calculated using an exchange rate of 1.3701 Dollars per Euro, the average of the 2007 monthly average exchange rates.

 

Under our Related Party Transactions Policy, which is in writing and was adopted by the Board of Directors, the Audit Committee must approve or ratify transactions involving directors, executive officers or principal shareholders or members of their immediate families or entities controlled by any of them or in which they have a substantial ownership interest in which the amount involved exceeds $120,000 and that are otherwise reportable under SEC disclosure rules. Such transactions include employment of immediate family members of any director or executive officer. Management advises the Audit Committee at its regularly scheduled meeting in February of each year and at subsequent meetings of any such transaction that is proposed to be entered into or continued and seeks approval. In the event any such transaction is proposed and a decision is required prior to the next regularly scheduled meeting of the Audit Committee, it may be presented to the Audit Committee Chair for approval, in which event the decision will be reported to the full Audit Committee at its next meeting. The Audit Committee approved Mr. Montozzi’s continued employment at its February 2008 meeting.

 

In January 2008, Amy MacMillan, an adjunct Assistant Professor and Instructor of Marketing at Western Michigan University and the wife of our President and Chief Executive Officer, became a director of a company that has provided dining and catering services to certain Stryker locations since January 2006. The cost to Stryker for these services was approximately $750,000 in 2007, which represented less than 2% of the annual revenues of that company. The company provided services on terms that we believe were competitive with the amounts that Stryker would have paid to other companies for such services. Mrs. MacMillan has no ownership interest in that company and receives no compensation other than a nominal director’s fee. While not required under our Related Party Transactions Policy or the SEC disclosure rules, Mr. MacMillan has disclosed Mrs. MacMillan’s directorship to our Audit Committee, which approved continued dealings with that company on competitive terms.

 

This section includes information regarding, among other things, the overall objectives of our compensation program 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 25 of this Proxy Statement.

Named Executive Officers

 

The names and titles of our named executive officers (“NEOs”) for 2007 are:

 

 

Mr. Cattani is employed in Italy and paid in Euros. Dollar amounts in this Proxy Statement with respect to Mr. Cattani have been calculated using an exchange rate of 1.3701 Dollars per Euro, the average of the 2007 monthly average exchange rates.

 

Overview of Key Items from this Compensation Discussion and Analysis

 

The primary elements of compensation for our NEOs are salary, bonus and stock options. Our savings and retirement plans are typically defined contribution (e.g., 401(k)) plans that match a portion of employee contributions and have historically included an annual discretionary contribution of 7% of salary and bonus. Perquisites and personal benefits are limited. Our severance plans are discretionary in most instances.

 

An important part of our Executive Compensation Philosophy is the alignment of the compensation of our NEOs with the interests of our shareholders. In 2007, for four of the five NEOs, the variable, performance-based elements — bonus and stock option grants valued using the Black-Scholes method — represented 80% or more of the total of the primary compensation elements. These elements represented 63% of the primary compensation elements for the other NEO. Our NEO Bonus Plans are based on difficult performance goals that, if met, should be reflected in stock price increases over time. Stock options granted to the NEOs will have value only to the extent that the stock price increases above the option exercise prices. We believe that we have a significant retention hold on our NEOs since each would forfeit a substantial amount of stock option value if he were to leave Stryker.

 

At Stryker, we consistently set high goals and have a history of continuously achieving our goals. In 2007, seven of our eight key product groups recorded double-digit sales growth. The overall Company constant currency sales growth of 14% represented the seventh consecutive year that we achieved double-digit sales growth on a Company-wide basis. Our adjusted earnings growth in 2007 was 20%, as it has approximated for much of our history. Our shareholders have been rewarded by our success, as have our NEOs and other employees. Our compound annualized stock price growth rate for the ten-year period through 2007 was 23%. The annual dividend paid in 2007 doubled to 22 cents per share and the 2008 payment was increased by another 50% to 33 cents per share.

 

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.

 

Compensation Objectives

 

We compete for executive talent in a highly competitive, global industry. We believe that our executive compensation program, which is a key component in our ability to attract and retain talented, qualified executives, should be designed to provide a meaningful level of total compensation that is aligned with organizational and individual performance.

 

The principal objectives of our executive compensation policies and practices are to:

 

 

 

Executive Compensation Philosophy

 

During 2007, we documented an Executive Compensation Philosophy to formalize the objectives of our compensation practices. The Philosophy specifies compensation elements, defines the purpose for each element and generally expresses the target positioning of compensation levels that we desire to achieve over time. We believe it is important to have a written philosophy to serve as an ongoing reference point for future executive compensation decisions. Because we have an objective of flexibility in our compensation programs and of the need to adapt to the changing business environment and individual considerations, we understand there will be variations from the Philosophy. We also recognize that changes to an individual NEO’s compensation elements, for example to meet desired market positioning indicated in the Philosophy, may be phased in over multiple years. We have considered our NEO compensation in light of our Philosophy starting with compensation decisions for 2008. The 2007 compensation decisions described in this Proxy Statement were made in late 2006 or early 2007, prior to the Compensation Committee’s approval of the Philosophy. We generally do not expect significant changes in future executive compensation as a direct result of implementing the Philosophy, although there may be other factors that result in such changes. See “President and Chief Executive Officer Compensation,” beginning on page 21, for a discussion of changes made in the 2008 compensation of our President and Chief Executive Officer.

 

The Executive Compensation Philosophy is summarized in the table on the following page. Each compensation element, along with an explanation of why we make decisions about the element, is described in detail under “Compensation Elements” commencing on page 11. We discuss our approach to defining a comparison market on the following page under “The Role of Benchmarking in our Executive Compensation Decisions.”

Compensation Elements, Purpose and Target Positioning to Market

 

 

Underlying our Executive Compensation Philosophy is the desire to provide mechanisms that facilitate and encourage long-term ownership of Stryker stock. Our stock ownership guidelines, which require senior management to accumulate and retain significant stock ownership positions over time, reinforce this Philosophy. For more information, see “Executive and Non-Employee Director Stock Ownership Guidelines” on page 20.

 

The target market positioning referenced in the Philosophy identifies general market compensation levels to which we will target compensation in typical situations. In this respect, the Philosophy is a guideline against which the Compensation Committee evaluates individual NEO compensation decisions; however, the Compensation Committee may also take into account other factors such as performance, tenure and experience. As a result, there may be variances from the target positioning for certain compensation elements for some individuals. We had not previously used specific market data to measure our competitiveness to market, except for the President and Chief Executive Officer position.

 

The Role of Benchmarking in our Executive Compensation Decisions

 

We regularly review, revise and amend our compensation policies, practices and programs to determine if they are both appropriate and responsive to our business needs. We do not establish compensation levels by focusing exclusively on market comparison data and historically have not found it necessary to conduct extensive external market benchmarking of our executive compensation levels or practices. We conducted a market benchmarking study for the President and Chief Executive Officer position prior to establishing Mr. MacMillan’s 2007

compensation. That study is described in the section “President and Chief Executive Officer Compensation” on page 21. The Compensation Committee applies judgment and discretion when evaluating both the use (or exclusion) of market comparison data, as it does when determining any compensation amount or outcome.

 

In late 2007, management undertook a market compensation benchmarking study covering each of our NEOs in order to improve our understanding of the compensation practices of other medical technology companies as well as our overall positioning of compensation in that market generally. The market benchmarking study was not relevant to 2007 compensation decisions, as those decisions were made in early 2007, before the study was started. The comparison group for the 2007 study was substantially the same as the companies listed on page 21. The results of the benchmarking study were one of the factors considered when making our 2008 NEO compensation decisions.

 

To the extent benchmarking to a comparison market is a factor in our compensation decisions, we must necessarily make assumptions that we believe are reasonable and prudent. When examining compensation practices and making market benchmarking comparisons, it is a common practice to make informed estimates and apply judgment while using the best available, although limited, data on compensation practices and pay levels. The compensation comparison market for NEO benchmarking comparisons is generally structured to focus on companies from which we might seek to hire executives or to whom we may lose executives. We believe such companies are generally, but may not exclusively be, those that offer competing products to ours in the medical technology industry. When we use market data, we attempt to make the data more comparable by focusing on factors such as approximately similar revenue, market capitalization or employment size as well as companies whose business operations and complexity are similar to ours. The comparison companies may change from year to year as a result of changes in factors such as growth rates, acquisitions, divestitures, going public or becoming privately held and product changes. The comparison companies could also vary by individual position. For example, the market for a Group President of a business group may vary from the market for a Chief Financial Officer due to the differences in relevant background necessary for each role. Given the issues listed above and many other factors that inherently limit the overall precision of most market benchmarking processes, we choose to review and apply judgment to the comparison market data on a case-by-case and year-by-year basis. An example of such a judgment might be establishing reasonable ranges (e.g., plus or minus 15% of any determined market benchmark compensation level) when making comparisons of a compensation element to the benchmark data or drawing any conclusions about the specific competitiveness of that element. Our Philosophy indicates target positioning to market as a range of competitiveness (i.e., “near market median between the 45^th and 60^th percentile”) in order to accommodate factors such as those mentioned above.

 

Any market comparison analysis we conduct is a point of reference considered in conjunction with other analytical and reference factors when evaluating and determining executive compensation. The results of the businesses each NEO is responsible for are the most significant factor in determining NEO compensation adjustments. Other analytical and reference factors considered when determining 2007 compensation included changes in an individual’s compensation elements over recent years, performance against Bonus Plan goals, overall performance of each individual and stock ownership levels as compared to our ownership guidelines.

 

Compensation Elements

 

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 relative value of their job to other positions in the Company. We review each NEO’s salary and performance annually and make decisions about adjustments and amounts. Factors that we may consider in determining the executive’s salary include comparisons among positions internally, performance, job experience or unique role responsibilities. Base salary increases for 2007 were reviewed with the Compensation Committee in November 2006 and then approved by the Compensation Committee, and the independent directors of the Board in the case of the President and Chief Executive Officer, in February 2007. The effective date of changes in NEO base salary varies due to differences in merit pay adjustment cycles among our businesses. Base

salary rate increases from 2006 to 2007 are shown in the following table. The actual salary earned for those years is shown in the Salary column of the “Summary Compensation Table” on page 25.

 

 

Mr. MacMillan’s increase reflects a subjective determination made by the Compensation Committee and approved by the independent directors, based primarily on a comparison of compensation levels among chief executive officers in the medical technology comparison group (identified in the table on page 21), the level of Stryker performance in 2006, historical salary increases Mr. MacMillan has received and his time and proficiency in the job. The Compensation Committee reviewed and approved increases for the other NEOs after receiving recommendations from the President and Chief Executive Officer. We determined Mr. Bergy’s salary increase after consideration of his compensation level relative to our other NEOs and executives, past salary adjustments he has received and overall increases during recent years in the scope, responsibility level and complexity of the Chief Financial Officer position. Increases for each of the other NEOs reflect subjective evaluations and decisions based on the scope of his responsibilities, the size and level of performance in 2006 of the businesses for which he was responsible and his time and proficiency in the job.

 

Annual Bonus:  The individually structured short-term Bonus Plans are intended to motivate and reward the NEOs for achieving and exceeding specific annual performance goals. For Mr. MacMillan and Mr. Bergy, the focus of the goals was primarily on total Stryker performance. In the case of the other NEOs, the main focus was on performance of the businesses for which they were responsible, with specified qualitative measures being additional factors. The following table provides the target bonus, maximum potential bonus, actual bonus payment and actual payment as a percentage of target for each NEO in 2007:

 

 

The actual bonus payments earned by the NEOs exceeded the target levels because each of the Bonus Plans included an opportunity to earn an overachievement award of an additional 20% of target bonus if the Company’s constant currency sales grew from the prior year by 15%, to $5.9 billion, and if the NEOs met the other overachievement factors. For Mr. MacMillan and Mr. Bergy, the overachievement factor required not only that the Company achieve the sales growth but also budgeted earnings per share and cash from operations goals. The overachievement factor for Group level NEOs required the same Company performance and that the individual NEO’s business group achieve 95% of its operating income goal. The Company achieved 14% constant currency sales growth, exceeding the target constant currency sales growth rate of 12.3%, and each of the NEOs met the other applicable overachievement bonus factors, so each earned a prorated (between target and maximum) overachievement bonus of 12.83% of target bonus in 2007.

 

The Compensation Committee determined Mr. MacMillan’s Bonus Plan target and goals and the independent directors approved them in February 2007. Mr. MacMillan’s actual payment was approved in February 2008 based on his accomplishments as measured under his individual Bonus Plan. The Compensation Committee reviewed and approved the bonus targets and payments for the other NEOs after receiving recommendations from the President and Chief Executive Officer at its meetings in February 2007 and 2008. The actual payments were based on the

performance of the business groups for which each NEO was responsible as measured against the targets in his Bonus Plan.

 

For 2007, each NEO’s Bonus Plan, in addition to a target, required a threshold level of performance for each measure that had to be achieved before any bonus could begin to be earned for that measure. Bonus Plan payments could have been 0% or up to 20% above the target value, depending on performance results for the year. The target, threshold and maximum goals approved by the Compensation Committee were subject to modification during the year to reflect acquisitions or divestitures. The individual NEO Bonus Plans are summarized later in this section under “2007 Bonus Plans.” In addition, under the Executive Bonus Plan, the Compensation Committee had the ability to authorize a higher bonus amount than the individual NEO Bonus Plans but did not do so in 2007.

 

Why We Chose Particular Performance Metrics and Goals

 

Stryker uses sales, earnings and cash from operations as the primary measures in the Bonus Plans for the following reasons:

 

 

We generally established our goals with a focus on growth over actual prior year outcomes, our budget or both. We build our budget with a goal of continuing to deliver for our shareholders — e.g., sustaining 20% or better adjusted earnings per share growth each year.

 

Historical Analysis of NEO Achievement of Bonus Plan Goals

 

The following information is useful to an understanding of the difficulty associated with achievement of the goals established for our NEOs in the 2007 Bonus Plans:

 

 

 

 

 

 

 

 

 

We believe the goals that are established and delivered on, both Company-wide and for our business Groups, are difficult to achieve. We consistently outperform our competitors on key growth measures. Additionally, during each of the past seven years we have delivered double-digit sales growth and 20% adjusted earnings growth on a Company-wide basis, which is something few other Fortune 500 companies have accomplished.

 

2007 Bonus Plans

 

The 2007 annual bonus objectives, weightings and goals for each NEO, other than the overachievement factor discussed on page 12, are shown in the tables that follow. The following information is relevant to an understanding of those tables:

 

 

 

Mr. MacMillan — President and Chief Executive Officer

 

 

 

 

Mr. Bergy — Vice President and Chief Financial Officer

 

 

 

 

Mr. Johnson — Vice President; Group President, MedSurg

 

 

 

 

Mr. Kemler — Vice President; Group President, Biotech, Spine, Osteosynthesis and Development (“BSOD”)

 

 

 

 

Mr. Cattani — Vice President; Group President, International

 

 

 

 

Long-term Incentive Compensation:  Long-term incentives at Stryker are nonqualified stock options, the ultimate value of which is dependent on increases in our stock price. Stock options 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:

 

 

Stock option awards have historically met these objectives and we believe they continue to be the most appropriate long-term incentive mechanism for the Company.

 

Our awards of nonqualified stock options have ten-year terms and typically vest 20% per year over five years from the grant date, with grant prices equal to the closing price on the day before the grant date. For Mr. Cattani, as was the case with all Italy-based stock option recipients in 2007, we modified our vesting schedule to 0%, 0%, 60%, 20% and 20% over the first five years in order to maximize tax effectiveness in light of recent changes in Italian tax laws. Our plans prohibit repricing options without shareholder approval and do not include a “reload” feature — which means the recipient is only able to exercise the number of shares in the original stock option grant.

 

Management makes recommendations to the Compensation Committee about the stock option award levels and terms. Stock option awards for NEOs other than Mr. MacMillan were approved by the Compensation Committee after receiving recommendations from the President and Chief Executive Officer. Stock option award levels for the NEOs are determined after we give consideration to a number of factors, but the final number of options awarded is ultimately a subjective decision. While the Compensation Committee did not apply specific performance measures or weightings to determine the individual NEO stock option awards in 2007, factors considered included the level of responsibility and position within the Company, demonstrated performance over time, value to our future success, the degree of retention hold from prior awards, Company or business group performance in recent years and comparisons among positions internally. We also consider, in the aggregate for the Company, share availability under our equity plans, the financial expense of stock grants and potential shareholder dilution from awards. We monitor overhang — a measure of potential earnings dilution from stock options — as well as run rate — the rate at which stock option grants are being awarded from our equity plans — as additional inputs to our stock award decisions.

Mr. MacMillan received no stock option award in 2007 because of the special 1,000,000 share stock option award made to him in 2006 (see “President and Chief Executive Officer Compensation” beginning on page 21). The table below shows the 2007 stock option grants to each of the other NEOs.

 

 

 

 

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, as well as a nonqualified supplemental retirement plan — the Stryker Corporation Supplemental Savings and Retirement Plan (“Supplemental Plan”) — in which certain employees, including the NEOs other than Mr. Cattani, may participate. The purpose of these Plans is to assist our employees and executives with retirement income planning 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 his Plan eligible compensation and individual contribution rate. The Company also makes a discretionary contribution in March of each year equal to 7% of the prior year’s eligible compensation for all employees eligible under the Plans, including the NEOs. The amounts contributed for 2007 on behalf of each NEO and his account balance under the Supplemental Plan, along with a description of the Plans, are provided in the “2007 Nonqualified Deferred Compensation” table and narrative following the table (see page 31). Mr. Cattani does not participate in the 401(k) and Supplemental Plans as he is not an eligible U.S. employee. The Company makes payments on behalf of Mr. Cattani and other local employees to the government pension program in Italy as required by Italian law and on a similar basis as all Italy-based employees. We have defined benefit programs for some employees in certain international locations; however, no NEO participates in any defined benefit plan sponsored by Stryker.

 

Health and Welfare Benefits Plans:  We provide other benefits such as medical, prescription, dental, vision, life insurance and disability coverage to each NEO under benefits plans that we offer to all our eligible U.S.-based employees, or in the case of Mr. Cattani, to our Italy-based employees. The benefits plans are part of our overall total compensation offering and provide appropriate health care coverage and security for our employees and their families at costs affordable to the Company. The NEOs, except for Mr. Cattani, generally have no additional Company-paid health benefits. We provide Mr. Cattani, similar to other Italy-based employees, supplemental accidental death and dismemberment insurance and reimburse certain health care expenses for him and his family members. The Company does not pay for any form of post-retirement health care benefits to any employee.

 

Perquisites:  We provide limited perquisites and personal benefits based on considerations unique to each NEO position. We believe our perquisites practices are conservative. In 2007, we paid country club fees for Mr. MacMillan at the Kalamazoo Country Club and paid for the costs (exam, travel and personal income tax impact) associated with an annual physical examination performed at our request. We provided Mr. Cattani a vehicle and driver consistent with local market practice, for which there was nominal non-business use in 2007, a physical examination performed at the Company’s request and payment of personal income tax liabilities incurred as a result of several perquisites and benefits. We also provided Mr. Cattani with life insurance coverage for which we pay the premiums. Mr. MacMillan, Mr. Bergy, Mr. Johnson and Mr. Kemler participated in a business planning meeting in 2007 and their spouses accompanied them. We have determined under SEC disclosure rules that a personal benefit should be attributed for certain meeting expenses, including the full incremental costs for their spouses to attend.

The values of the above perquisites and other personal benefits are included in the “All Other Compensation” column of the “Summary Compensation Table” (see page 25) for 2007. We provide these perquisites for varying reasons. Mr. MacMillan’s club membership is consistent with business requirements of the President and Chief Executive Officer role. Paying life insurance premiums for Mr. Cattani and providing him use of a car and driver is in accordance with customary practice in Italy. The use of car and driver assists him in efficient use of his time by enabling him to conduct Company business during local travel. Executive physicals are requested by the Company for all NEOs to help monitor their health and wellness and any personal health risks associated with our investment in these individuals.

 

Impact of Decisions Regarding One Compensation Element on Decisions About Other Compensation Elements

 

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. Decisions related to one compensation element (e.g., bonus payment earned) generally do not materially affect decisions regarding any other compensation element (e.g., stock option grants) since 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 option grants to align recipients with the Company’s long-term performance and enhance our retention hold on recipients.

 

Our 401(k) and Supplemental Plans and the Italian government plan covering Mr. Cattani are either defined contribution programs and/or plans that do not carry potential future liabilities to the Company. Guaranteed payment requirements, typically associated with a defined benefit pension plan, are not part of the Plans covering our NEOs. Accordingly, decisions about our savings and retirement plans do not typically impact decisions related to salary or bonus decisions and vice versa. Decisions about other compensation elements are not specifically factored into decisions related to our severance arrangements and termination agreements. Our severance and potential termination payments (summarized on pages 20 and 33) do not have design features that increase our future payment obligations based on current decisions regarding other compensation elements. Potential payments that would be due to Mr. MacMillan under his employment agreement that expires by its terms on May 31, 2008 if his employment were terminated prior to that date are for fixed dollar amounts. His agreement does not provide features, such as multiples of salary and bonus payments, nor accelerate future payments, nor does it require payment of income taxes he would owe.

 

Positions at higher levels at Stryker generally have a greater emphasis on variable pay elements of bonus and stock options, although no specific formula, schedule or structure is currently applied in establishing the percentage of total compensation delivered through each compensation element.

 

Management’s Role in Determining Executive Compensation

 

The Compensation Committee makes all final decisions regarding NEO compensation, with the exception of the President and Chief Executive Officer, whose compensation is subject to final approval by the independent members of the Board of Directors. The President and Chief Executive Officer’s role in determining executive compensation is to make recommendations on compensation decisions for those other than himself after reviewing information provided by management staff. This management staff consists of the Vice President and Secretary and the Vice President, Human Resources and other members of that department. During 2007, their role in determining executive and non-employee director compensation included:

 

 

 

Executive and Non-Employee Director Stock Ownership Guidelines

 

Encouraging long-term ownership of Stryker stock among our management is an important aspect of our executive compensation policies and practices. This reflects our conviction that all senior executives should have meaningful actual share ownership positions in the Company in order 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 and corporate officers, including the NEOs, and operating division presidents and vice presidents. The Compensation Committee periodically reviews the guideline requirements to ensure they continue to be appropriate. The Compensation Committee receives an annual update from management on the progress toward the ownership goals. The guidelines include a requirement 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 and sell shares, once vested, as long as they continue to meet the ownership guidelines. However, provisions of Mr. MacMillan’s 2006 stock option grant require that he must exercise in cash at least 5,000 options within a year of each of the first eight anniversaries of the grant and that the shares acquired, net of any shares withheld for payment of income taxes, must be held as long as he is President and Chief Executive Officer. He must also continue to hold for at least one year after any other option exercise at least 25% of any shares he acquires upon exercise in excess of the annual 5,000 share minimum.

 

Our stock ownership requirements are:

 

 

Stock owned includes shares owned outright, including 401(k) Plan shares, but does not include stock options. As of December 31, 2007, all of our non-employee directors and all of the NEOs are at or above the applicable stock ownership guideline requirement.

 

Our NEOs are prohibited from hedging any economic risk that may be associated with their ownership in Stryker stock. Our Insider Trading Policy prohibits the use of derivative securities (e.g., put or call options) or short sales or “selling short against the box” (short selling securities that a person already owns).

 

Employment Agreements and Severance Policy

 

We generally do not provide employment agreements, with the exception of unique circumstances or if such agreements are customary in foreign countries. We have an employment agreement with Mr. MacMillan and, until December 31, 2007, had an employment agreement with Mr. Cattani. Mr. MacMillan’s five-year employment agreement, which was entered into in connection with his employment in June 2003 and will expire by its terms on May 31, 2008, is described under “President and Chief Executive Officer Compensation” beginning on the following page. The objective of the agreement was to provide security to Mr. MacMillan and his family during his initial employment term in recognition of his accepting employment with the Company over other opportunities that were available to him. The remaining potential payment due to Mr. MacMillan if his employment were terminated prior to the agreement’s expiration is quantified under “Executive Compensation — Potential Payments Upon Termination” on page 33.

Pursuant to an agreement entered into on December 7, 2007, Mr. Cattani reduced his role and responsibilities with the Company commencing January 1, 2008. He will serve as Executive Vice President for International Public Affairs. Mr. Cattani has agreed to devote an average of at least three full working days a week to his new responsibilities in 2008, two full working days a week during 2009 and one full working day a week in 2010 through expiration of the agreement on July 1. His compensation, which will be paid in Euros but is estimated here in Dollars assuming an exchange rate of 1.3701 Dollars per Euro, the average of the 2007 monthly average exchange rates, will be $529,544 in 2008, $352,938 in 2009 and $88,234 for the six-month period in 2010. The agreement requires 12 months’ written notice of termination by either party. The agreement provides that the Company will continue to contribute to the costs of life, accident and health insurance for Mr. Cattani and provide him with a car and driver for business purposes, similar to his current arrangement. The agreement provides a one-year period after termination during which Mr. Cattani will not engage in competition with Stryker nor solicit or hire any of its employees, consultants or agents.

 

We have no severance agreements in place with any NEO except for payments potentially due under the employment agreement with Mr. MacMillan. In the United States, we maintain a discretionary severance policy for all eligible employees, which could potentially include the NEOs other than Mr. MacMillan. This discretionary policy generally provides for two weeks of salary per year of service up to a maximum payment of one year’s salary for eligible employees. Our discretionary severance policy permits us to modify the payment amount, including increasing the amount, if circumstances warrant. In addition, we may elect to pay severance to NEOs outside the terms of the policy. In prior years, two former NEOs with long and successful careers with us expressed their desire to remain employed in roles with meaningful yet reduced responsibilities. These requests were considered and agreed to by the President and Chief Executive Officer and in each instance the employee’s compensation was reduced when the change in role occurred. We may choose to approve similar work arrangements with other NEOs in the future or make other arrangements.

 

President and Chief Executive Officer Compensation

 

Role of Benchmarking in Determining President and Chief Executive Officer Compensation: For purposes of its review of Mr. MacMillan’s compensation, we provided the Compensation Committee market information on chief executive officer compensation levels at a comparison group of medical technology companies. The comparison group companies were:

 

 

 

 

We determined the comparison group by considering publicly-traded companies that generally met the following criteria:

 

 

Management other than Mr. MacMillan developed the comparison group and the Compensation Committee approved the group. The data provided to the Compensation Committee showed compensation levels for each of the primary compensation elements — salary, bonus and long-term incentive values. We provided the data to the Compensation Committee both inclusive of and exclusive of the two largest comparison companies (Johnson & Johnson and Abbott Laboratories) to highlight any potential impact a comparison to these larger organizations might have in the resulting outcomes. The Committee observed that elements of Mr. MacMillan’s compensation package were below the median market levels of the comparison groups. The Compensation Committee considers reasonableness and competitiveness based on the market compensation information when making decisions regarding Mr. MacMillan’s compensation. Although the market benchmarking data is a consideration, the Compensation Committee exercises subjective judgment, factoring in Stryker’s compensation objectives and overall corporate performance and accomplishment of our strategic goals, when making decisions related to Mr. MacMillan’s compensation.

 

Base Salary:  Mr. MacMillan received a 5.6% salary increase, from $900,000 to $950,000, from 2006 to 2007. When making the decision to increase his salary, the Compensation Committee and independent directors considered the level of Company performance in 2006, the review of compensation levels of chief executive officer positions among the medical technology comparison group, his historical base salary increases and Mr. MacMillan’s time and proficiency in the job. In February 2008, the Compensation Committee and independent directors increased Mr. MacMillan’s salary to $1,200,000 in light of the exceptional performance of Mr. MacMillan and the Company during 2007 as well as a review of the results of the 2007 market benchmarking study that indicated Mr. MacMillan’s cash compensation was below the comparison group median. The following key 2007 accomplishments, among others, were considered in making this adjustment:

 

 

Annual Bonus:  Mr. MacMillan achieved substantially all of the performance goals of his 2007 Bonus Plan, resulting in a payment of $1,098,300 (110% of 2007 target and 25% higher than his actual bonus payment for 2006) including the overachievement bonus determined by Company sales growth. The 2007 Bonus Plan performance measures, goals and achievement outcomes are discussed under “Compensation Elements — Annual Bonus” on page 12. In February 2008, the Compensation Committee and independent directors increased Mr. MacMillan’s target bonus opportunity to $1,200,000 based on the same considerations listed above for his salary adjustment.

 

Long-term Incentive Compensation:  Mr. MacMillan was not granted stock options in 2007 due to a special 1,000,000 share option grant made to him in 2006, which was summarized in detail in last year’s Proxy Statement. The Board of Directors indicated at the time of the special grant that the special award would be in lieu of other stock-based awards that might otherwise be made to Mr. MacMillan until February 2011.

 

On May 31, 2007, 20,000 shares of restricted stock previously awarded to Mr. MacMillan vested. The closing stock price on the vesting date was $67.31. These restricted shares are part of Mr. MacMillan’s 2003 grant of 100,000 restricted shares in connection with his acceptance of employment at Stryker. Mr. MacMillan received a dividend payment on the remaining 40,000 shares of unvested restricted stock in January of 2007 in the amount of $8,800.

 

Other Compensation:  Mr. MacMillan also received other compensation elements — i.e., contributions to the 401(k) and Supplemental Plans and several perquisites — that were described in the discussion of compensation elements on page 18 and are quantified in the “Summary Compensation Table” and supporting tables commencing on page 25.

 

Employment Agreement:  We entered into a five-year employment agreement with Mr. MacMillan in connection with his employment as our President and Chief Operating Officer in June 2003. The agreement

expires on May 31, 2008, at which time Mr. MacMillan will be an at-will employee as is the case generally for our employees. Prior to May 31, 2008, if the Company terminates Mr. MacMillan’s employment without cause or he voluntarily terminates his employment with good reason, he would be entitled to receive a lump sum payment of $1,050,000, in addition to accrued amounts and a prorated bonus for 2008, and the remaining 20% of the restricted stock award granted upon Mr. MacMillan’s employment would immediately vest. In addition, if such termination occurs prior to May 31, 2008, Mr. MacMillan and his family will be entitled to continue to receive benefits under any benefits plan, program, practice or policy of the Company, including medical, dental, disability and group life insurance programs, for 12 months or any longer period that the plan, program, practice or policy provides. Mr. MacMillan has agreed to non-competition and non-solicitation of Stryker customers and employees for the two-year period following termination. Mr. MacMillan’s agreement also contains non-disclosure, confidentiality and non-disparagement provisions. Mr. MacMillan’s agreement does not include gross-up provisions with respect to the Company reimbursing him for income tax payments on amounts paid under the agreement.

 

Company Tax and Accounting Issues

 

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 considered accounting treatments include any that may apply to amounts awarded or paid to NEOs. The tax considerations include Sections 409A and 162(m) of the Internal Revenue Code (the “Code”).

 

Deductibility of Executive Compensation:  In evaluating the compensation programs covering our NEOs and making decisions related to payments, the Compensation Committee considers the potential impact on the Company of Section 162(m) of the Code. Section 162(m) eliminates the deductibility of compensation over $1 million paid to NEOs, excluding “performance-based compensation” meeting certain requirements. The Compensation Committee generally intends to maximize deductibility of compensation under Section 162(m) of the Code to the extent consistent with our overall compensation program objectives, while also maintaining maximum flexibility in the design of our compensation programs and in making appropriate payments to executives. The Compensation Committee may, however, choose to authorize compensation that does not meet the requirements of Section 162(m) if it determines such payments are appropriate.

 

Our individual NEO Bonus Plans, as summarized on pages 14 to 17, are operated within the structure of the Executive Bonus Plan which was approved by our shareholders in 2007 and is designed to meet the requirements of Section 162(m) of the Code. Our stock option grants, which are granted pursuant to our shareholder approved equity compensation plans, are also designed to meet the requirements of Section 162(m) so as to preserve our deduction for compensation resulting from NEO stock option exercises.

 

Share-Based Compensation:  We account for compensation expense from our stock option grants under the provisions of FAS 123R that requires companies to measure the cost of employee stock options 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 options, typically the vesting period. We adopted the provisions of FAS 123R on January 1, 2006 using the modified-retrospective transition method. We consider the Company’s compensation expense when determining and awarding stock option grants.

 

The Compensation Committee of the Board of Directors has reviewed and discussed with management the foregoing Compensation Discussion and Analysis and, on the basis of such review and discussions, has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

Submitted by:

 

Howard E. Cox, Jr, Chair

William U. Parfet

Ronda E. Stryker

 

Members of the Compensation Committee

 

Summary Compensation Table

 

The following table summarizes all compensation awarded to, earned by or paid to the Company’s NEOs during 2007 and 2006. The additional tables that follow the Summary Compensation Table are intended to be supporting presentations to the Summary Compensation Table. Most compensation elements in the supporting tables are aggregated and included in the Summary Compensation Table. You should refer to the section entitled “Compensation Discussion and Analysis” beginning on page 7 to help you understand the compensation practices and programs resulting in the compensation elements in these tables. A narrative description of the material factors necessary to understand the information in the Summary Compensation Table is provided following the table.

 

 

 

 

Salary.  The Salary column represents the base salary earned by the NEO during the reported year. This column includes the portion of payments deferred into our 401(k) and Supplemental Plans. Salary amounts represent the amounts paid to each individual and in the case of Mr. Johnson and Mr. Kemler vary from the 2007 salary rate amounts in the “Compensation Discussion and Analysis — Compensation Elements” section on page 11 due to the timing of their merit review cycle and the corresponding salary adjustments.

 

Bonus.  The Bonus column indicates discretionary cash payments made in 2006 to certain NEOs in addition to the formulaic outcomes of their 2006 Bonus Plan that are shown in the Non-Equity Incentive Plan Compensation column. There were no discretionary cash payments in 2007. Bonuses are paid in February of the year following the performance year. This column includes the portion of any such payment that each NEO deferred into our 401(k) and Supplemental Plans.

 

Stock Awards.  The Stock Awards column represents the dollar amount of share-based compensation expense recognized in the reported year for restricted stock granted to Mr. MacMillan in 2003. The amount

represents the portion of the 2003 grant vesting in the reported year (20,000 shares) at the stock price on the date the award was made ($33.67). None of the other NEOs have received restricted stock.

 

Option Awards.  The Option Awards column represents the dollar amount of share-based compensation expense recognized in the reported year for stock option awards granted to each of the NEOs for financial statement cost recognition purposes in accordance with FAS 123R values using the Black-Scholes option pricing model assumptions that are discussed in the narrative following the “2007 Grants of Plan-Based Awards” table on page 27. The following table sets forth the compensation cost recognized for 2007 awards or the portion of awards vesting in 2007 from prior grants as shown in the “Stock Awards” and “Option Awards” columns for Mr. MacMillan and the “Options Awards” column for the other NEOs.

 

 

Non-Equity Incentive Plan Compensation.  The Non-Equity Incentive Plan Compensation column reflects the Bonus Plan payment earned by the NEOs during the reported year and paid in February of the following year. This column includes any amounts that the NEO deferred into the 401(k) and Supplemental Plans.

 

All Other Compensation.  The All Other Compensation column includes the following items in 2007:

 

 

The total amounts paid by the Company in 2007 on behalf of the NEOs for perquisites and personal benefits described but not quantified on the preceding page are identified in the table below. These amounts are included in the All Other Compensation column.

 

 

Primary Compensation Elements.  The following table indicates the percentages of our three primary compensation elements of salary, actual bonus and stock option grant date value in relation to their total:

 

 

 

 

2007 Grants of Plan-Based Awards

 

The table below sets forth additional information regarding the range of annual Bonus Plan payout potential for 2007 and the option awards granted to the NEOs in 2007 that are disclosed in the Summary Compensation Table.

 

 

 

 

Estimated Possible Payouts Under Non-Equity Incentive Plan Awards.  Amounts in these columns represent the possible range, threshold to target to maximum, of cash payments possible under the 2007 Bonus Plans for the NEOs. The actual bonus could have been lower than threshold, including zero payments. The Summary Compensation Table shows the actual non-equity incentive plan payments received for 2007.

All Other Option Awards:  Number of Securities, Exercise or Base Price of Option Awards and Closing Market Price on the Date of Grant.  Awards are shown in number of shares. The exercise or base price of all option awards is the closing market price of Stryker Common Stock on the day before the grant date as required by our equity plans.

 

Grant Date Fair Value of Stock and Option Awards:  This column represents the grant date fair value of each stock option granted in 2007, computed in accordance with FAS 123R before allocating the expense to each vesting period. Options have a ten-year term and generally become exercisable as to 20% of the shares on each of the first five anniversary dates of the date of grant. For Mr. Cattani and all other Italy-based stock option recipients in 2007, we modified our vesting schedule to 0%, 0%, 60%, 20% and 20% over the first five years in order to maximize tax effectiveness in light of changes in Italian tax law.

 

The stock option FAS 123R values throughout this Proxy Statement have been calculated using the Black-Scholes option pricing model and the assumptions in the following table:

 

 

 

 

Outstanding Equity Awards at 2007 Fiscal Year-End

 

This table sets forth information as to unexercised options and shares of restricted stock held by the NEOs that have not vested at December 31, 2007.