Abbott Laboratories DEF 14A 2007
Documents found in this filing:
Statement Pursuant to Section 14(a) of
Please sign and promptly return your proxy in the enclosed envelope or vote your shares by telephone or using the Internet.
Notice of Annual Meeting
The Annual Meeting of the Shareholders of Abbott Laboratories will be held at Abbott's headquarters, 100 Abbott Park Road, at the intersection of Route 137 and Waukegan Road, Lake County, Illinois, on Friday, April 27, 2007, at 9:00 a.m. for the following purposes:
The board of directors recommends that you vote FOR Items 1 and 2 on the proxy card.
The board of directors recommends that you vote AGAINST Items 3 and 4 on the proxy card.
The close of business February 28, 2007 has been fixed as the record date for determining the shareholders entitled to receive notice of and to vote at the Annual Meeting.
Admission to the meeting will be by admission card only. If you plan to attend, please complete and return the reservation form on the back cover, and an admission card will be sent to you. Due to space limitations, reservation forms must be received before April 20, 2007. Each admission card, along with photo identification, admits one person. A shareholder may request two admission cards.
By order of the board of directors.
March 19, 2007
Solicitation of Proxies
The accompanying proxy is solicited on behalf of the board of directors for use at the Annual Meeting of Shareholders. The meeting will be held on April 27, 2007, at Abbott's headquarters, 100 Abbott Park Road, at the intersection of Route 137 and Waukegan Road, Lake County, Illinois. This proxy statement and the accompanying proxy card are being mailed to shareholders on or about March 19, 2007.
Information about the Annual Meeting
Who Can Vote
Shareholders of record at the close of business on February 28, 2007 will be entitled to notice of and to vote at the Annual Meeting. As of January 31, 2007, Abbott had 1,543,073,501 outstanding common shares, which are Abbott's only outstanding voting securities. All shareholders have cumulative voting rights in the election of directors and one vote per share on all other matters.
Cumulative voting allows a shareholder to multiply the number of shares owned by the number of directors to be elected and to cast the total for one nominee or distribute the votes among the nominees, as the shareholder desires. Nominees who receive the greatest number of votes will be elected. If you wish to cumulate your votes, you must sign and mail in your proxy card or attend the Annual Meeting.
Voting by Proxy
All of Abbott's shareholders may vote by mail or at the Annual Meeting. The bylaws provide that a shareholder may authorize no more than two persons as proxies to attend and vote at the meeting. Most of Abbott's shareholders may also vote their shares by telephone or the Internet. If you vote by telephone or the Internet, you do not need to return your proxy card. The instructions for voting by telephone or the Internet can be found with your proxy card.
Revoking a Proxy
You may revoke your proxy by voting in person at the Annual Meeting or, at any time prior to the meeting:
Discretionary Voting Authority
Unless authority is withheld in accordance with the instructions on the proxy, the persons named in the proxy will vote the shares covered by proxies they receive to elect the 13 nominees named in Item 1 on the proxy card. Should a nominee become unavailable to serve, the shares will be voted for a substitute designated by the board of directors, or for fewer than 13 nominees if, in the judgment of the proxy holders, such action is necessary or desirable. The persons named in the proxy may also decide to vote shares cumulatively so that one or more of the nominees may receive fewer votes than the other nominees (or no votes at all), although they have no present intention of doing so.
Where a shareholder has specified a choice for or against the ratification of the appointment of Deloitte & Touche LLP as auditors, or the approval of a shareholder proposal, or where the shareholder has abstained on these matters, the shares represented by the proxy will be voted (or not voted) as specified. Where no choice has been specified, the proxy will be voted FOR ratification of Deloitte & Touche LLP as auditors and AGAINST the shareholder proposals.
With the exception of matters omitted from this proxy statement pursuant to the rules of the Securities and Exchange Commission, the board of directors is not aware of any other issue which may properly be brought before the meeting. If other matters are properly brought before the meeting, the accompanying proxy will be voted in accordance with the judgment of the proxy holders.
Quorum and Vote Required to Approve Each Item on the Proxy
A majority of the outstanding shares entitled to vote on a matter, represented in person or by proxy, constitutes a quorum for consideration of that matter at the meeting. The affirmative vote of a majority of the shares represented at the meeting and entitled to vote on a matter shall be the act of the shareholders with respect to that matter.
Effect of Broker Non-Votes and Abstentions
A proxy submitted by an institution such as a broker or bank that holds shares for the account of a beneficial owner may indicate that all or a portion of the shares represented by that proxy are not being voted with respect to a particular matter. This could occur, for example, when the broker or bank is not permitted to vote those shares in the absence of instructions from the beneficial owner of the stock. These "non-voted shares" will be considered shares not present and, therefore, not entitled to vote on that matter, although these shares may be considered present and entitled to vote for other purposes. Non-voted shares will not affect the determination of the outcome of the vote on any matter to be decided at the meeting. Shares represented by proxies which are present and entitled to vote on a matter but which have elected to abstain from voting on that matter will have the effect of votes against that matter.
Inspectors of Election
The inspectors of election and the tabulators of all proxies, ballots, and voting tabulations that identify shareholders are independent and are not Abbott employees.
Cost of Soliciting Proxies
Abbott will bear the cost of making solicitations from its shareholders and will reimburse banks and brokerage firms for out-of-pocket expenses incurred in connection with this solicitation. Proxies may be solicited by mail or in person by directors, officers, or employees of Abbott and its subsidiaries.
Abbott has retained Georgeson Inc. to aid in the solicitation of proxies, at an estimated cost of $17,500 plus reimbursement for reasonable out-of-pocket expenses.
Abbott Laboratories Stock Retirement Plan
Participants in the Abbott Laboratories Stock Retirement Plan will receive a voting instruction card for their shares held in the Abbott Laboratories Stock Retirement Trust. The Stock Retirement Trust is administered by both a trustee and an investment committee. The trustee of the Trust is Putnam Fiduciary Trust Company. The members of the investment committee are Robert E. Funck, Stephen R. Fussell, and William H. Preece, Jr., employees of Abbott. The voting power with respect to the shares is held by and shared between the investment committee and the participants. The investment committee must solicit voting instructions from the participants and follow the voting instructions it receives. The investment committee may use its own discretion with respect to those shares for which no voting instructions are received.
It is Abbott's policy that all proxies, ballots, and voting tabulations that reveal how a particular shareholder has voted be kept confidential and not be disclosed, except:
Information Concerning Security Ownership
Based on information contained in a Schedule 13G filed by Capital Research and Management Company, 333 S. Hope Street, Los Angeles, California 90071 with the Securities and Exchange Commission on February 12, 2007, as of December 29, 2006, Capital Research and Management Company was the beneficial owner of 97,467,700 Abbott common shares (approximately 6.3% of the outstanding common shares).
Information Concerning Nominees for Directors (Item 1 on Proxy Card)
Thirteen directors are to be elected to hold office until the next Annual Meeting or until their successors are elected. All of the nominees, except Messrs. Scott and Tilton, are currently serving as directors. Messrs. Scott and Tilton were recommended for election by the nominations and governance committee.
Nominees for Election as Directors
The Board of Directors and its Committees
The Board of Directors
The board of directors held 13 meetings in 2006. The average attendance of all directors at board and committee meetings in 2006 was 99 percent. Abbott encourages its board members to attend the annual shareholders meeting. Last year, all of Abbott's directors attended the annual shareholders meeting.
The board has determined that each of the following directors and director nominees is independent in accordance with the New York Stock Exchange listing standards: R. S. Austin, W. M. Daley, W. J. Farrell, H. L. Fuller, J. M. Greenberg, D. A. L. Owen, B. Powell Jr., W. A. Reynolds, R. S. Roberts, S. C. Scott III, W. D. Smithburg, and G. F. Tilton. In addition, the board also determined that J. R. Walter, who served on the board during the year, was independent under those standards. To determine independence, the board applied the categorical standards attached as Exhibit A to this proxy statement. The board also considered whether a director has any other material relationships with Abbott or its subsidiaries and concluded that none of these directors had a relationship that impaired the director's independence. This included consideration of the fact that some of the directors serve on boards of companies or entities to which Abbott sold products or made contributions or from which Abbott purchased products and services during the year. In making its determination, the board relied on both information provided by the directors and information developed internally by Abbott.
The chairman of the nominations and governance committee acts as lead director to facilitate communication with the board and presides over regularly conducted executive sessions of the independent directors or sessions where the chairman of the board is not present. It is the role of the lead director to review and approve matters, such as agenda items, schedule sufficiency, and, where appropriate, information provided to other board members. The lead director is chosen by and from the independent members of the board of directors, and serves as the liaison between the chairman and the independent directors; however, all directors are encouraged to, and in fact do, consult with the chairman on each of the above topics as well. The lead director, and each of the other directors, communicates regularly with the chairman and chief executive officer regarding appropriate agenda topics and other board related matters.
Committees of the Board of Directors
The board of directors has five committees established in Abbott's bylaws: the executive committee, audit committee, compensation committee, nominations and governance committee, and public policy committee. Each of the members of the audit committee, compensation committee, nominations and governance committee, and public policy committee is independent.
The executive committee, whose members are M. D. White, chairman, H. L. Fuller, J. M. Greenberg, W. A. Reynolds, and W. D. Smithburg, held three meetings in 2006. This committee may exercise all the authority of the board in the management of Abbott, except for matters expressly reserved by law for board action.
The audit committee, whose members are J. M. Greenberg, chairman, R. S. Austin, D. A. L. Owen, and W. D. Smithburg, held seven meetings in 2006. The committee is governed by a written charter. This committee assists the board of directors in fulfilling its oversight responsibility with respect to Abbott's accounting and financial reporting practices and the audit process, the quality and integrity of Abbott's financial statements, the independent auditors' qualifications, independence and performance, the performance of Abbott's internal audit function and internal auditors, and certain areas of legal and regulatory compliance. Each of the members of the audit committee is financially literate, as required of audit committee members by the New York Stock Exchange. The board of directors has determined that both J. M. Greenberg, the committee's chairman, and R. S. Austin are "audit committee financial experts." A copy of the report of the audit committee is on page 35.
The compensation committee, whose members are W. D. Smithburg, chairman, W. M. Daley, W. J. Farrell, H. L. Fuller, and B. Powell Jr., held three meetings in 2006. The committee is governed by a written charter. This committee assists the board of directors in carrying out the board's responsibilities relating to the compensation of Abbott's executive officers and directors. The compensation committee annually reviews the compensation paid to the members of the board and gives its recommendations to the full board regarding both the amount of director compensation that should be paid and the allocation of that compensation between equity-based awards and cash. In recommending director compensation, the compensation committee takes comparable director fees into account and reviews any arrangement that could be viewed as indirect director compensation. The processes and procedures used for the consideration and determination of executive compensation are described in the section of the proxy captioned, "Compensation Discussion and Analysis." This committee also reviews, approves, and administers the incentive compensation plans in which any executive officer of Abbott participates and all of Abbott's equity-based plans. It may delegate the responsibility to administer and make grants under these plans to management, except to the extent that such delegation would be inconsistent with applicable law or regulation or with the listing rules of the New York Stock Exchange. The compensation committee has engaged Hewitt Associates LLC, as its independent compensation consultant to provide counsel and advice on executive and non-employee director compensation matters and has instructed Hewitt to provide information and advice regarding the peer groups against which performance and pay should be examined, the financial metrics to be used to assess Abbott's relative performance, the competitive
long-term incentive practices in the market place, and compensation levels relative to market practice. A copy of the report of the compensation committee is on page 16.
The nominations and governance committee, whose members are H. L. Fuller, chairman, W. J. Farrell, D. A. L. Owen, W. A. Reynolds, and R. S. Roberts, held six meetings in 2006. The committee is governed by a written charter. This committee assists the board of directors in identifying individuals qualified to become board members and recommends to the board the nominees for election as directors at the next annual meeting of shareholders, recommends to the board the persons to be elected as executive officers of Abbott, develops and recommends to the board the corporate governance guidelines applicable to Abbott, and serves in an advisory capacity to the board and the chairman of the board on matters of organization, management succession plans, major changes in the organizational structure of Abbott, and the conduct of board activities. The process used by this committee to identify a nominee to serve as a member of the board of directors depends on the qualities being sought. Board members should have backgrounds that when combined provide a portfolio of experience and knowledge that will serve Abbott's governance and strategic needs. A search firm assists the committee in identifying and evaluating potential board candidates. Board candidates will be considered on the basis of a range of criteria, including broad-based business knowledge and relationships, prominence and excellent reputations in their primary fields of endeavor, as well as a global business perspective and commitment to good corporate citizenship. Directors should have demonstrated experience and ability that is relevant to the board of directors' oversight role with respect to Abbott's business and affairs.
The public policy committee, whose members are W. A. Reynolds, chair, R. S. Austin, W. M. Daley, B. Powell Jr., and R. S. Roberts held one meeting in 2006. The committee is governed by a written charter. This committee assists the board of directors in fulfilling its oversight responsibility with respect to Abbott's public policy, certain areas of legal and regulatory compliance, and governmental affairs and healthcare compliance issues that affect Abbott by discharging the responsibilities set forth in its charter.
Communicating with the Board of Directors
You may communicate with the board of directors by writing a letter to the chairman of the board, to the chairman of the nominations and governance committee, who acts as the lead director at the meetings of the independent directors, or to the independent directors c/o Abbott Laboratories, 100 Abbott Park Road, D-364, AP6D, Abbott Park, Illinois 60064-6400 Attention: corporate secretary. The general counsel and corporate secretary regularly forwards to the addressee all letters other than mass mailings, advertisements, and other materials not relevant to Abbott's business. In addition, directors regularly receive a log of all correspondence received by the company that is addressed to a member of the board and may request any correspondence that is addressed to them.
Corporate Governance Materials
Abbott's corporate governance guidelines, outline of directorship qualifications, director independence standards, code of business conduct and the charters of Abbott's audit committee, compensation committee, nominations and governance committee, and public policy committee are all available in the corporate governance section of Abbott's investor relations Web Site (www.abbottinvestor.com) or by sending a request for a paper copy to: Abbott Laboratories, 100 Abbott Park Road, Dept. 383, AP6D2, Abbott Park, Illinois 60064-6400, attn. Investor Relations.
Abbott employees are not compensated for serving on the board or board committees. Abbott's non-employee directors are compensated for their service under the Abbott Laboratories Non-Employee Directors' Fee Plan and the Abbott Laboratories 1996 Incentive Stock Program.
The following table sets forth a summary of the non-employee directors' 2006 compensation.
Fees earned under the Abbott Laboratories Non-Employee Directors' Fee Plan are paid in cash to the director, paid in the form of non-qualified stock options (based on an independent appraisal of their fair market value), deferred (as a non-funded obligation of Abbott), or paid currently into an individual grantor trust established by the director. The distribution of deferred fees and amounts held in a director's grantor trust generally commences when the director reaches age 65, or upon retirement from the board of directors. The director may elect to have deferred fees and fees deposited in trust credited to either a guaranteed interest account at the prime rate plus 2.25 percentage points or to a stock equivalent account that earns the same return as if the fees were invested in Abbott stock. If necessary, Abbott contributes funds to a director's trust so that as of year end the stock equivalent account balance (net of taxes) is not less than seventy-five percent of the value of the related Abbott common stock at year end. Abbott pays the director for any tax owed on the income earned by the trust or any supplemental contribution to the trust by Abbott.
high and low market prices of an Abbott common share on the date of grant. In addition to the fees described in footnote 1, each non-employee director elected to the board of directors at the annual shareholder meeting also received stock equivalent units having a value of $90,000 (rounded down). In 2006, this was 2,127 units. Effective as of the 2007 annual meeting, each non-employee director elected at the annual shareholder meeting will receive stock equivalent units having a value of $96,000 (rounded down). The non-employee directors receive cash payments equal to the dividends paid on the Abbott shares covered by the units at the same rate as other shareholders. Upon termination, retirement from the board, death, or a change in control of Abbott, a non-employee director will receive one Abbott common share for each restricted share unit outstanding under the Incentive Stock Program. The amounts reported in this column also represent the grant date fair value of the award.
Security Ownership of Executive Officers and Directors
The table below reflects the number of common shares beneficially owned as of January 31, 2007, by each person who served as a director of Abbott during 2006, by each director nominee, by the chief executive officer, the chief financial officer, and the four other most highly paid executive officers (the "named officers"), and by all directors, director nominees, and executive officers of Abbott as a group. It also reflects the number of stock equivalent units and restricted stock units held by non-employee directors under the Abbott Laboratories Non-Employee Directors' Fee Plan.
Compensation Discussion and Analysis
The Compensation Committee has established a compensation philosophy to attract, retain and motivate executives and to align their financial rewards with shareholder returns. The following guiding principles apply:
All components of both performance and pay should be examined relative to two peer groups:
To achieve the Compensation Committee's objectives, Abbott's pay plans must serve three primary purposes. First, they must be competitive. Presently, competitive means targeting total compensation, in the aggregate (i.e., including base pay, short-term incentives, long-term incentives and benefits) in a manner that references the median of our primary health care comparison group as an initial benchmark, but varies based on individual and company performance for the period relative to those peer groups. Individual targets are equitably set on the same basis, compared to both peer groups and internal benchmarks. Secondly, pay should vary based on company and individual performance. Thirdly, they should align participant's interests with shareholders.
Specifically, base salaries are typically reviewed annually. Overall, company targets are set based on the company's business plan. Individual increases are granted based on performance (merit), and influenced by internal and external equity. The Compensation Committee focuses on those elements of pay that are driven by performance, rather than on fixed elements such as base pay.
Short-term (annual) incentive targets are determined annually. Specific performance goals supporting both the company's overall goals for the year and the contributions of each executive in his or her own area of responsibility are established. In this way, each executive's bonus is directly tied to company results, yet varies based on the individual's actual performance. Short-term incentives primarily support the setting and tracking of individual and team goals, and rewarding performance that facilitates their achievement. In the aggregate, short-term incentives should trail our peers when performance trails, match our peers when performance is at peer levels and exceed peers when performance does.
Long-term incentives are typically in the form of equity-based awards and are designed to increase executives' ownership in the company, creating direct alignment with the interests of shareholders. As with other pay elements, reference is made to the median of competitive benchmarks, but the actual awards vary based on Abbott's overall results compared to peers, the company's business plan, and individual performance. Long-term incentives serve two primary purposes. The first objective is the retention of our senior leaders, a key asset of the company. Secondly, long term incentives help to continuously align shareholder and executive interests. Accordingly, while reference is made to the competitive medians, long-term incentive awards should trail competitors when performance trails, match competitors when performance matches, and exceed competitors when performance exceeds their performance. To achieve this outcome, Abbott currently grants both non-qualified stock options and full value shares subject to vesting restrictions. The full value shares are typically granted in two forms: performance based restricted stock with a return on equity vesting threshold and traditional time-vested shares, which provide for cliff vesting to provide retention incentives for the recipient.
Post-retirement and certain other benefits are also necessary to attract and retain key executives. In the aggregate, while the practices of individual companies vary widely, these plans also reference competitive medians which are adjusted to reflect the actual performance of the individual and the company.
HOW OUR PHILOSOPHY GUIDES SPECIFIC DECISIONS
Each named officer establishes specific written goals for each performance period, typically a calendar year. These goals establish specific targets which are tied with the financial, strategic and operational goals of the company and may include, among others, goals relating to earnings, sales, earnings per share, and similar financial measures. The Chief Operating Officer and Chief Executive Officer review the goals of each executive for alignment and calibration with the overall objectives of the company. The Chief Executive Officer's goals are established with input from and are reviewed by the independent Board members. The Chief Executive Officer evaluates the performance and recommends the total compensation award for each named officer, other than himself. The Chief Executive Officer's performance, as against these established goals, is reviewed by the Compensation Committee and, based upon that evaluation, the Committee determines the compensation of the Chief Executive Officer, with the exception of the Chief Executive Officer's base compensation, which is approved by the
independent directors of the full board, following the recommendation of the Committee. The Committee also reviews the performance of the company's other executive officers, taking into consideration the Chief Executive Officer's recommendation, and determines their compensation based on that review.
Using compensation survey data from the peer groups, a range for total compensation and each of its elementsbase salary, annual incentive, long-term incentives and non-cash compensationis annually established by the Committee for each named officer. The Committee considered a number of alternative financial metrics to assess Abbott's relative performance. Based upon the advice of its independent compensation consultant, and its own review, the Committee determined that total shareholder return, earnings per share, return on equity, and return on net assets were appropriate performance measures. The Committee also evaluates the success of the management team as a whole and each officer's goals in the development and execution of strategic plans, the development of talent, successful progress of Abbott's diversity initiative, and the exercise of leadership within the industry and in the communities that Abbott serves.
Specific pay decisions for the named officers are described below and reflected in the Summary Compensation Table on page 17 of this proxy statement.
An overall merit budget of 3.5% was established for executive staff in 2006. This target equals the target for most of Abbott's U. S. employee population. Most executives received a 3.5% merit increase, but due to individual performance, peer comparisons both outside and inside the company, promotions, career growth and potential, individual increases varied.
Performance-Based Annual Cash Incentives
All named officers participate in the 1998 Abbott Laboratories Performance Incentive Plan (PIP). The PIP is designed to comply with the requirements of Section 162(m) of the Internal Revenue Code of 1986 for performance-based compensation.
Each year, maximum award allocations awards for PIP participants as a percentage of consolidated net earnings are set. For 2006, the maximum award for the Chief Executive Officer was .0015 of adjusted consolidated net earnings for the fiscal year; for the Chief Operating Officer .0010 of adjusted consolidated net earnings; and for all other PIP participants .00075 of adjusted consolidated net earnings. Actual awards paid to PIP participants varied based on both corporate and individual results. Historically, and in 2006, the Committee has used its discretion to deliver PIP award amounts well below the maximums. For 2006, the company met or exceeded all of its predetermined financial goals, which included consolidated net earnings, profitability, sales and earnings per share. Abbott delivered annual shareholder returns in the top quartile of the health care peer group. The longer term measure of five-year total shareholder returns exceeded the average of the companies in Abbott's health care peer group, positioned between the 50th and 75th percentiles. Accordingly, after examining the one-year and five-year performance measures, the Compensation Committee determined that, in the aggregate, actual awards should be targeted between the 50th and 75th percentile of peers. Individual award amounts varied based upon each individual's relative performance against pre-determined goals.
Long-Term IncentivesEquity Awards
Based on its analysis of the competitive long-term incentive practice in the market place, the goals of the company's long-term incentive program, the recommendation of its independent compensation consultant, current outstanding awards held by named officers and the Committee's assessment that the management team's operating performance exceeded that of Abbott's comparators as described above, the Committee determined that the annual long-term incentive award in 2006 should be targeted midway between the median and seventy-fifth percentile of the market place. Applying these standards, the Committee determined the value for each named officer and made the awards reported in the Summary Compensation Table as shown on page 17 of this proxy statement. Further, the Committee determined in 2006, based on changing market practice, input from its independent compensation consultant and to align with recommendations of institutional shareholders, the long-term incentive award for named officers should be in the form of 50% stock options and 50% performance-vested shares.
Abbott's policy with respect to its annual equity award for all employees, including the Chief Executive Officer, executive officers and all other officers of the company, is to grant this award and set the grant price at the same time each year, at the Compensation Committee's regularly scheduled February meeting. These meeting dates are generally the third Friday of February and are scheduled two years in advance. In 2006, the annual grant was dated and the grant price set on February 17th. The historical practice for setting the grant price is the average of the highest and lowest trading price of a common share on the date of the grant (rounded up to the next even penny). The grant price for the 2006 annual grant was set at $44.16. The high, low and closing price of an Abbott common share on February 17th was $44.50, $43.80 and $44.34, respectively.
In establishing criteria for performance vesting shares, the Committee considered the recommendation of its independent compensation consultant, and the fact that the secondary comparison of "High-Performance Companies" is currently defined by five-year average return on equity of 18% or greater. Accordingly, performance-based stock awards granted in 2006 will be earned (vested) over a period of up to five years, with not more than one-third of the award vesting in any one year, dependent upon the company achieving an annual return on equity threshold of 18% from continuing operations adjusted for specified items per the quarterly earnings releases (which is currently above the median of Abbott's Standard Industrial Classification peer group). If the thresholds are met in three of the five years, 100% of the performance shares will vest. If the thresholds are not met in any of the five years, 100% of the performance shares will be forfeited.
Post Termination and Other Benefits
Each of the benefits described below were chosen to support the company's objective of providing a total competitive pay program. Individual benefits do not directly affect decisions regarding other benefits or pay components, except to the extent that all benefits and pay components must, in aggregate, be competitive, as previously discussed.
The named officers participate in two Abbott-sponsored defined benefit plans: the Abbott Laboratories Annuity Retirement Plan ("ARP") and the Abbott Laboratories Supplemental Pension Plan ("SERP"). These plans are described in greater detail in the section of the proxy statement captioned "Pension Benefits".
Since officers' SERP benefits cannot be secured in a manner similar to qualified plans, which are held in trust, officers receive an annual cash payment equal to the increase in present value of their SERP benefit. Officers have the option of depositing these annual payments to an individually established grantor trust, net of tax withholdings. Deposited amounts may be credited with the difference between the officer's actual annual trust earnings and the rate used to calculate trust funding (currently eight percent). Since amounts contributed to the trust have already been taxed, Abbott remits the tax owed on the income earned by the trust or any company adjustment paid to the trust, thus preserving the parity of the benefit to those payable under the ARP. The manner in which the grantor trust will be distributed to an officer upon retirement from the company generally follows the manner elected by the officer under the ARP. Should an officer (or his spouse depending upon the pension distribution method elected by the officer under the ARP) live beyond the actuarial life expectancy age used to determine the SERP benefit and therefore exhaust the trust balance, the SERP benefit will be paid to the officer by Abbott.
Officers of the company, like all U.S. employees, are eligible to defer a portion of annual base salary, on a pre-tax basis, to the company's qualified 401(k) plan, up to the IRS contribution limits. Officers are also eligible to defer up to 18% of their base salary, less contributions to the 401(k) plan, to a non-qualified plan. 100% of annual incentive awards earned under the company's PIP Plan are also eligible for deferral to a non-qualified plan. Officers may defer these amounts to unfunded book accounts or choose to have the amounts paid in cash on a current basis and deposited into individually established grantor trusts, net of tax withholdings. These amounts are credited annually with earnings equivalent to the average prime rate over the previous thirteen months plus 2.25 percent. Since amounts contributed to the trusts have already been taxed, Abbott remits the tax owed on the income earned by the trusts or any company adjustment paid to the trusts. Officers elect the manner in which the assets held in their grantor trusts will be distributed to them upon retirement or other separation from the company.
Change in Control (CIC) Arrangements
On February 16, 2007 Messrs. White, Gonzalez and Freyman informed the Compensation Committee that they would voluntarily terminate their individual CIC agreements with the Company, effective February 28, 2007.
Abbott's other executive officers have individual CIC agreements. The purpose of these agreements is to aid in retention and recruitment, encourage continued attention and dedication to assigned duties during periods involving a possible change in control of the company and to protect the earned benefits of the officer against adverse changes resulting from a change in control. The level of payments provided under the agreements is established to be consistent with market practice as confirmed by data provided the Committee by its independent compensation consultant. These arrangements are described in greater detail in the section of the proxy captioned "Potential Payments Upon Termination or Change-in-Control".
Named officers are eligible for up to $10,000 of annual costs associated with estate planning advice, tax preparation and general financial planning fees. If an officer chooses to utilize this benefit, fees for services received up to the annual allocation are paid by the company and are treated as imputed income to the officer who then is responsible for payment of all taxes due on the fees paid by the company.
Named officers are eligible for use of a company-leased vehicle, with a lease term of 50 months. Seventy five (75%) percent of the cost of the vehicle is imputed to the officer as income.
Non-business related flights on corporate aircraft are covered by time-sharing lease agreements, pursuant to which certain costs associated with those flights are reimbursed in accordance with Federal Aviation Administration regulations. Messrs. Gonzalez, Freyman, and White have such agreements and reimbursed the Company for non-business flights in accordance with those agreements.
In addition to Abbott's standard disability benefits, the named officers are eligible for a monthly long-term disability benefit, which is described in greater detail in the section of the proxy captioned, "Potential Payments Upon Termination or Change-in-Control."
SHARE OWNERSHIP GUIDELINES
To further promote sustained shareholder return and to ensure the company's executives remain focused on both short and long-term objectives, the company has established share ownership guidelines. Each officer has five years from the date appointed/elected to his/her position to achieve the ownership level associated with the position. The share ownership requirements are 175,000 shares for
the Chief Executive Officer; 100,000 shares for the Chief Operating Officer; 50,000 shares for Executive Vice Presidents and Senior Vice Presidents and 25,000 shares for all other officers. All named officers meet or substantially exceed the guidelines.
As provided in Abbott's Stock Incentive Program, no award may be assigned, alienated, sold or transferred otherwise than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order or as permitted by the Committee for estate planning purposes, and no award and no right under any award, may be pledged, alienated, attached or otherwise encumbered. All members of senior management, including the company's executive officers, and certain other employees are required to clear any transaction involving company stock with the General Counsel prior to entering into such transaction.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER'S COMPENSATION
The company's performance for 2006 as described above and as reflected in the company's financial statements included strong growth in sales, earnings and shareholder returns that placed Abbott in the top quartile of the health care peer group. Accordingly, in evaluating Mr. White's overall performance, the Committee determined that Mr. White exceeded his strategic and financial goals for 2006. Therefore, in February 2007, the Committee awarded Mr. White a PIP bonus of $4,050,000 for his performance in 2006, intended to recognize his leadership in guiding the Company to top-quartile performance.
Other 2006 compensation approved for Mr. White by the Committee and Independent Directors of the Board, as appropriate, in February 2006 (the Committee's Charter requires the CEO's base salary be approved by the Independent Directors of the Board) included a base salary increase of 3.5%, the average of the company's U.S. merit increase budget, to $1,671,100, a 438,000 share stock option grant and a 139,000 share performance vesting restricted stock award.
The PIP and Incentive Stock Program, which are described above, are intended to comply with Internal Revenue Code Section 162(m) to ensure deductibility.
The Committee reserves the flexibility to take actions that may be based on considerations in addition to tax deductibility. The Committee believes that shareholder interests are best served by not restricting the Committee's discretion and flexibility in crafting compensation programs, even if such programs may result in certain non-deductible compensation expenses. Accordingly, the Committee may from time to time approve components of compensation for certain officers that are not deductible.
While the Committee does not anticipate there would ever be circumstances where a restatement of earnings upon which any incentive plan award decisions were based would occur, the Committee, in evaluating such circumstances, has discretion to take all actions necessary to protect the interests of shareholders up to and including actions to recover such incentive awards. Such circumstances have never occurred.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board is primarily responsible for reviewing, approving and overseeing Abbott's compensation plans and practices, and works with management and the committee's independent consultant to establish Abbott's executive compensation philosophy and programs. The Committee has reviewed and discussed the Compensation Discussion and Analysis with management and has recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.
W. D. Smithburg, Chairman, W. M. Daley, W. J. Farrell, H. L. Fuller, and B. Powell Jr.
Summary Compensation Table
The following table summarizes compensation awarded to, earned by, or paid to the named officers in 2006. The section of the proxy statement captioned "Compensation Discussion and AnalysisCompensation Components" describes in greater detail the information reported in this table.
Abbott Laboratories Annuity Retirement Plan. M. D. White: $25,025; R. A. Gonzalez: $30,651; T. C. Freyman: $29,849; W. G. Dempsey: $48,486; H. Liepmann: $31,824; and J. M. Leiden: $3,245.
Abbott Laboratories Supplemental Pension Plan. M. D. White: $972,873; R. A. Gonzalez: $763,682; T. C. Freyman: $702,566; W. G. Dempsey: $492,654; H. Liepmann: $642,705; and J. M. Leiden: $46,641.
Non-Qualified Defined Contribution Plan Earnings. The totals in this column include reportable interest credited under
Abbott's non-qualified defined contribution plans as follows: M. D. White: $310,954; R. A. Gonzalez: $118,176; T. C. Freyman: $12,967; W. G. Dempsey: $169,402; H. Liepmann: $86,266; and J. M. Leiden: $191,906.
Earnings, Fees and Tax Payments for Non-Qualified Defined Benefit and Non-Qualified Defined Contribution Plans (net of reportable interest included in footnote 4):
M. D. White: $675,843; R. A. Gonzalez: $349,822; T. C. Freyman: $217,119; W. G. Dempsey: $261,738; H. Liepmann: $485,077; and J. M. Leiden: $194,695.
Each of the named officers' awards under The 1998 Abbott Laboratories Performance Incentive Plan are paid in cash to the officer on a current basis and may be deposited into a grantor trust established by the officer, net of maximum tax withholdings. None of the named officers currently receives awards under the 1986 Abbott Laboratories Management Incentive Plan, but grantor trusts were established by the officers under that plan, as well.
Employer Contributions to Defined Contribution Plans.
M. D. White: $83,099; R. A. Gonzalez: $48,697; T. C. Freyman: $40,644; W. G. Dempsey: $31,529; H. Liepmann: $31,298; and J. M. Leiden: $10,620.
These amounts include employer contributions both to Abbott's tax-qualified defined contribution plan and to the Abbott Laboratories 401(k) Supplemental Plan. The Abbott Laboratories 401(k) Supplemental Plan permits Abbott's officers to contribute amounts in excess of the limit set by the Internal Revenue Code for employee contributions to 401(k) plans up to the excess of (i) 18% of their base salary over (ii) the amount contributed to Abbott's tax-qualified 401(k) plan. Abbott matches participant contributions at the rate of 250% of the first 2% of compensation contributed to the Plan. The named officers have these amounts paid to them in cash on a current basis and deposited into a grantor trust established by the officer, net of maximum tax withholdings.
All Other Compensation.
M. D. White: $96,291; R. A. Gonzalez: $74,472; T. C. Freyman: $15,518; W. G. Dempsey: $25,884; H. Liepmann: $107,688; and J. M. Leiden: $38,740.
Non-business related flights on corporate aircraft are covered by time-sharing lease agreements, pursuant to which certain costs associated with those flights are reimbursed in accordance with Federal Aviation Administration regulations. Messrs. Gonzalez, Freyman, and White have such agreements and reimbursed the Company for non-business flights in accordance with those agreements.
Included in All Other Compensation are the following amounts, which reflect Abbott's incremental cost less reimbursements for non-business related flights: M. D. White, $90,154; R. A. Gonzalez, $43,546; T. C. Freyman, $8,148; and, J. M. Leiden $11,235. The company determines the incremental cost for these flights based on the direct cost to Abbott, including fuel costs, parking, handling and landing fees, catering, travel fees, and other miscellaneous direct costs.
Also included in All Other Compensation is the cost of providing a corporate automobile less amount reimbursed by the executive: M. D. White, $6,137; R. A. Gonzalez, $23,426; T. C. Freyman, $7,370; W. G. Dempsey, $15,884; H. Liepmann, $22,561; and, J. M. Leiden, $17,505.
For Messrs. Gonzalez, Dempsey, Liepmann, and Dr. Leiden, costs associated with financial planning are included: R. A. Gonzalez, $7,500; W. G. Dempsey, $10,000; H. Liepmann, $10,000; and, J. M. Leiden, $10,000.
For Mr. Liepmann, incremental tax payments of $75,127 resulting from his multi-year assignment outside the United States are included.
The named officers are also eligible to participate in an executive disability benefit described on page 15.
Grants of Plan-Based Awards
held by the named officer, a replacement option is granted for the number of shares used to make that payment. Abbott uses the closing price of an Abbott common share on the business day before the exercise to determine the number of shares required to exercise the related option and the exercise price of the replacement option. The replacement option is exercisable in full six months after the date of grant, and has a term expiring on the expiration date of the original option. Other terms and conditions of the replacement option award are the same in all material respects to those applicable to the original grant.
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the outstanding equity awards held by the named officers at year-end.
Footnotes to Equity Awards table:
Option Exercises and Stock Vested
The following table summarizes for each named officer the number of shares the officer acquired on the exercise of stock options and the number of shares the officer acquired on the vesting of stock awards in 2006:
The named officers participate in two Abbott-sponsored defined benefit pension plans: the Abbott Laboratories Annuity Retirement Plan, a tax-qualified pension plan; and the Abbott Laboratories Supplemental Pension Plan, a nonqualified supplemental pension plan. Abbott has adopted the Supplemental Pension Plan to provide the portion of the Annuity Retirement Plan benefit that cannot be paid from the Annuity Retirement Plan due to the pay and benefit amount limitations set by the Internal Revenue Code. The Supplemental Pension Plan also includes a benefit feature Abbott uses to attract officers who are at the mid-point of their career. This feature provides an additional benefit that is most valuable to officers who are mid-career hires and is less valuable to officers who have spent most of their career at Abbott. Except as provided in Abbott's change in control agreements, Abbott does not have a policy granting extra years of credited service under the plans.
Abbott calculates the present values shown on the table using: (i) a 5.95% discount rate, the same discount rate it uses for FAS 87 calculations for financial reporting purposes; and (ii) each plan's normal retirement age (age 62 for the Abbott Laboratories Annuity Retirement Plan and age 60 for officers under the Abbott Laboratories Supplemental Pension Plan). The present values shown in the table reflect postretirement mortality, based on the FAS 87 assumption (the RP2000 Combined Healthy table), but do not include a factor for preretirement termination, mortality, or disability.
The compensation considered in determining the pensions payable to the named officers is the compensation shown in the "Salary" and "Non-Equity Incentive Plan Compensation" columns of the Summary Compensation Table on page 17.
Annuity Retirement Plan
The Annuity Retirement Plan covers most employees in the United States, age 21 or older and provides participants with a life annuity benefit at normal retirement equal to A plus the greater of B or C below.
The benefit for service prior to 2004 (B or C above) is reduced for the cost of preretirement surviving spouse benefit protection. The reduction is calculated using formulas based on age and employment status during the period in which coverage was in effect.
Final average earnings are the average of the 60 highest-paid consecutive calendar months of compensation out of the last 120 months worked. The Annuity Retirement Plan covers earnings up to the limit imposed by Internal Revenue Code section 401(a)(17) and provides for a maximum of 35 years of benefit service.
Participants become fully vested in their pension benefit upon the completion of five years of service. The benefit is payable on an unreduced basis at age 65. Employees hired after 2003 who terminate prior to age 55 with at least 10 years of service may choose to commence their benefits on an actuarially reduced basis as early as age 55. Employees hired prior to 2004 who terminate prior to age 50 with at least 10 years of service may choose to commence their benefits on an actuarially reduced basis as early as age 50. Employees hired prior to 2004 who terminate prior to age 50 with less than 10 years of service may choose to commence their benefits on an actuarially reduced basis as early as age 55.
The Annuity Retirement Plan offers several optional forms of payment, including certain and life annuities, joint and survivor annuities, and level income annuities. The benefit paid under any of these options is actuarially equivalent to the life annuity benefit produced by the formula described above.
Employees who retire from Abbott prior to their normal retirement age may receive subsidized early retirement benefits. Employees hired after 2003 are eligible for early retirement at age 55 with 10 years of service. Employees hired prior to 2004 are eligible for early retirement at age 50 with 10 years of service or age 55 if the employee's age plus years of benefit service total 70 or more. Each of the named officers is eligible for early retirement benefits under the plan.
The subsidized early retirement reductions applied to the benefit payable for service after 2003 (A above) depend upon the participant's age at retirement. If the participant retires after reaching age 55, the benefit is reduced 5 percent per year for each year that payments are made before age 62. If the participant retires after reaching age 50 but prior to reaching age 55, the benefit is actuarially reduced from age 65.
The early retirement reductions applied to the benefit payable for service prior to 2004 (B and C above) depend upon age and service at retirement:
Supplemental Pension Plan
With the following exceptions, the provisions of the Supplemental Pension Plan are the same as those of the Annuity Retirement Plan:
Benefits payable under the Supplemental Pension Plan are offset by the benefits payable from the Annuity Retirement Plan. Abbott pays the officer's Supplemental Pension Plan benefits to the extent assets held in the officer's trust are insufficient.
Potential Payments Upon Termination or Change-in Control
Potential Payments Upon Termination Generally
Abbott does not have employment agreements with the named officers.
The following summarizes the payments that the named officers would have received if their employment had terminated on December 31, 2006. If the officer's employment had terminated due to death or disability, the officer's unvested stock options and restricted shares would have vested on December 31, 2006 with values as set forth below in the section captioned, "Potential Payments Upon Change in Control." If the termination of employment was due to disability, then the named officers also would have received, in addition to Abbott's standard disability benefits, a monthly long-term disability benefit in the amount of $180,146 for M. D. White, $85,100 for R. A. Gonzalez, $68,850 for T. C. Freyman, $55,850 for W. G. Dempsey, and $50,642 for H. Liepmann. This long-term disability benefit would continue for up to 18 months following termination of employment. It ends if the officer retires, recovers, dies or ceases to meet eligibility criteria. Finally, the following one-time deposits would have been made under the Abbott Laboratories Supplemental Pension Plan for each named officer, respectively, M. D. White, $2,338,195, R. A. Gonzalez, $1,690,119, T. C. Freyman, $1,961,484, W. G. Dempsey $1,210,662, and H. Liepmann $819,653. As each of the named officers who was employed by Abbott on December 31, 2006 is eligible to retire, each of these officers would be eligible to begin to receive the pension benefits described on pages 28 to 30.
Potential Payments Upon Change in Control
On February 16, 2007 Messrs. White, Gonzalez and Freyman informed the Compensation Committee that they would voluntarily terminate their individual CIC agreements with the Company, effective February 28, 2007. Abbott has change in control arrangements with the rest of its management team, in the form of change in control agreements for Abbott officers and a change in control plan for other key management personnel. The agreements with Messrs. Dempsey and Liepmann are described below.
The agreements with Messrs. Dempsey and Liepmann continue in effect until December 31, 2009, and at the end of each year will automatically be extended through the third year thereafter unless Abbott notifies the officer that the agreement will not be extended. The agreements also automatically extend for two years following any change in control (as defined in the agreements) that occurs while they are in effect. The agreements provide that if the officer is terminated other than for cause or permanent disability or if the officer elects to terminate employment for good reason (as defined in the agreements) during a potential change in control (as defined in the agreements) or within two years following a change in control of Abbott (including termination by the officer for any reason during the thirty-day window period which begins six months after the date of a change in control), the officer is entitled to receive a lump sum payment equal to three times the officer's annual salary and bonus (assuming for this purpose that all target performance goals have been achieved or, if higher, based on the average bonus for the last three years), plus any unpaid bonus owing for any completed performance period and the pro rata bonus for any current bonus period (based on the highest of the bonus assuming achievement of target performance, the average bonus for the past three years, or in the case of the unpaid bonus for any completed performance period, the actual bonus earned). Bonus payments include payments made under the Performance Incentive Plan. The officer will also receive up to three years of additional employee benefits (including welfare benefits, outplacement services and tax and financial counseling for three years and the value of three more years of pension accruals), and payment of any excise taxes imposed under section 4999 of the Internal Revenue Code and other related taxes for which the officer is responsible as a result of receiving payments and benefits in connection with a change in control. The agreements also limit the conduct for which awards under Abbott's incentive stock programs can be terminated and generally permit options to remain exercisable for the remainder of their term. Independent compensation consultants confirm that the level of payments provided under the agreements is consistent with current market practice.
If a change in control had occurred on December 31, 2006, immediately followed by one of the covered circumstances described above, Messrs. Dempsey and Liepmann would have been entitled to receive the following payments and benefits under the change in control agreements:
Under the Abbott Laboratories 1996 Incentive Stock Program, upon a change in control, all outstanding stock options, restricted stock and restricted stock units vest, including performance-based restricted shares which are deemed earned in full. If a change in control had occurred on December 31, 2006:
The value of stock options shown is based on the excess of the closing price of a share of Abbott common stock on December 31, 2006 over the exercise price of such options, multiplied by the number of unvested stock options held by the named officer. The value of restricted shares shown is determined by multiplying the number of restricted shares that would vest as of December 31, 2006 and the closing price of a share of Abbott common stock on December 31, 2006.
Approval Process for Related Person Transactions
It is Abbott's policy that the nominations and governance committee review, approve or ratify any transaction in which Abbott participates and in which any related person has a direct or indirect material interest if such transaction involves or is expected to involve payments of $120,000 or more in the aggregate per fiscal year. Related person transactions requiring review by the nominations and governance committee pursuant to this policy are identified in:
In determining whether to approve or ratify a related person transaction, the nominations and governance committee will consider the following items, among others:
This process is included in the nominations and governance committee's written charter, which is available on the corporate governance section of Abbott's investor relations Web Site (www.abbottinvestor.com). Abbott did not have any related person transactions in 2006 requiring nominations and governance committee approval under this policy.
Ratification of Deloitte & Touche LLP as Auditors (Item 2 on Proxy Card)
Abbott's bylaws provide that the audit committee shall appoint annually a firm of independent registered public accountants to serve as auditors. In October 2006, the audit committee appointed Deloitte & Touche LLP to act as auditors for 2007. Deloitte & Touche LLP has served as Abbott's auditors since 2002.
Although the audit committee has sole authority to appoint auditors, it would like to know the opinion of the shareholders regarding its appointment of Deloitte & Touche LLP as auditors for 2007. For this reason, shareholders are being asked to ratify this appointment. If the shareholders do not ratify the appointment of Deloitte & Touche LLP as auditors for 2007, the audit committee will take that fact into consideration, but may, nevertheless, continue to retain Deloitte & Touche LLP.
The board of directors recommends a vote FOR ratification of the appointment of Deloitte & Touche LLP as auditors for 2007.
Representatives of Deloitte & Touche LLP are expected to be present at the Annual Meeting and will be given the opportunity to make a statement if they desire to do so. They will also be available to respond to appropriate questions.
Audit Fees and Non-Audit Fees
The following table presents fees for professional audit services by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates ("the Deloitte Entities") for the audit of Abbott's annual financial statements for the years ended December 31, 2006 and December 31, 2005, and fees billed for other services rendered by the Deloitte Entities during these periods.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Independent Auditor
The audit committee has established policies and procedures to pre-approve all audit and permissible non-audit services performed by the Deloitte Entities.
Prior to engagement of the independent registered public accounting firm for the next year's audit, management will submit a schedule of all proposed services expected to be rendered during that year for each of four categories of services to the audit committee for approval.
Prior to engagement, the audit committee pre-approves these services by category of service. The fees are budgeted and the audit committee requires the independent registered public accounting firm and management to report actual fees versus the budget periodically by category of service. During the year, circumstances may arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, the audit committee requires specific pre-approval before engaging the independent registered public accounting firm.
The audit committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report any pre-approval decisions to the audit committee at its next scheduled meeting.
Report of the Audit Committee
Management is responsible for Abbott's internal controls and the financial reporting process. The independent registered public accounting firm is responsible for performing an audit of the consolidated financial statements and expressing an opinion on the conformity of those financial statements with accounting principles generally accepted in the United States of America, as well as expressing an opinion on (i) management's assessment of the effectiveness of internal control over financial reporting and (ii) the effectiveness of internal control over financial reporting. The audit committee reviews these processes on behalf of the board of directors. In this context, the committee has reviewed and discussed the audited financial statements contained in the 2006 Annual Report on Form 10-K with Abbott's management and its independent registered public accounting firm.
The committee has discussed with the independent registered public accounting firm the matters required to be discussed by the Statement on Auditing Standards No. 61 (Communication with Audit Committees), as amended.
The committee has received the written disclosures and the letter from the independent registered public accounting firm required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), as amended, and has discussed with the independent registered public accounting firm their independence. The committee has also considered whether the provision of the services described on page 34 under the caption "Audit Fees and Non-Audit Fees" is compatible with maintaining the independence of the independent registered public accounting firm.
Based on the review and discussions referred to above, the committee recommended to the Board of Directors that the audited financial statements be included in Abbott's Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission.
J. M. Greenberg, chairman, R. S. Austin, D. A. L. Owen, and W. D. Smithburg
Section 16(a) Beneficial Ownership Reporting Compliance
Abbott believes that during 2006 its officers and directors complied with all filing requirements under Section 16(a) of the Securities Exchange Act of 1934.
Two shareholder proposals have been received. Abbott is advised that the proposals will be presented for action at the Annual Meeting. The proposed resolutions and the statements made in support thereof are presented below.
The board of directors recommends that you vote AGAINST the proposals.
Shareholder Proposal on Advisory Vote (Item 3 on Proxy Card)
The Unitarian Universalist Association of Congregations, 25 Beacon Street, Boston, MA 02108, owner of 500 Abbott common shares, has informed Abbott that it intends to present the following proposal at the meeting.
Resolved, that shareholders of Abbott Laboratories urge the board of directors to adopt a policy that Company shareholders be given the opportunity at each annual meeting of shareholders to vote on an advisory resolution, to be proposed by Abbott Laboratories' management, to ratify the compensation of the named executive officers ("NEOs") set forth in the proxy statement's Summary Compensation Table (the "SCT") and the accompanying narrative disclosure of material factors provided to understand the SCT (but not the Compensation Discussion and Analysis). The proposal submitted to shareholders should make clear that the vote is non-binding and would not affect any compensation paid or awarded to any NEO.
Proponent's Statement in Support of Shareholder Proposal
Investors are increasingly concerned about mushrooming executive compensation which sometimes appears to be insufficiently aligned with the creation of shareholder value. Media and government focus on back dating of stock options has increased investor concern. This proposed reform can help rebuild investor confidence.
The SEC has created a new rule, with record support from investors, requiring companies to disclose additional information about compensation and perquisites for top executives. The rule goes into effect this year. In establishing the rule the SEC has made it clear that it is the role of market forces, not the SEC, to provide checks and balances on compensation practices.
We believe that existing U.S. corporate governance arrangements, including SEC rules and stock exchange listing standards, do not provide shareholders with enough mechanisms for providing input to boards on senior executive compensation. In contrast to U.S. practices, in the United Kingdom, public companies allow shareholders to cast an advisory vote on the "directors' remuneration report," which discloses executive compensation. Such a vote isn't binding, but gives shareholders a clear voice that could help shape senior executive compensation.
Currently U.S. stock exchange listing standards require shareholder approval of equity-based compensation plans; those plans, however, set general parameters and accord the compensation committee substantial discretion in making awards and establishing performance thresholds for a particular year. Shareholders do not have any mechanism for providing ongoing feedback on the application of those general standards to individual pay packages. (See Lucian Bebchuk & Jesse Fried, Pay Without Performance 49 (2004))
Similarly, performance criteria submitted for shareholder approval to allow a company to deduct compensation in excess of $1 million are broad and do not constrain compensation committees in setting performance targets for particular senior executives. Withholding votes from compensation committee members who are standing for reelection is a blunt and insufficient instrument for registering dissatisfaction with the way in which the committee has administered compensation plans and policies in the previous year.
Accordingly, we urge Abbott Laboratories' board to allow shareholders to express their opinion about senior executive compensation at Abbott Laboratories by establishing an annual referendum process. The results of such a vote would, we think, provide the board and management with useful information about whether shareholders view the company's senior executive compensation, as reported each year, are in shareholders' best interests.
Board of Directors' Statement in Opposition to the Shareholder Proposal on Advisory Vote
The proponents' proposal to provide shareholders with an advisory vote on compensation determinations offers no incremental benefit to shareholders and undermines the fundamental principle of corporate governance.
The Company is governed for the benefit of shareholders by an independent Board of Directors. The Board of Directors is responsible for all aspects of governance of the Company, including compensation determinations for executives as well as all employees of the Company. Abbott is recognized world wide as being an excellent employer and all employees of the Company are appropriately compensated for their efforts.
Executive compensation determinations, in particular, are made by an independent committee of the Board, after consideration of the strategic and financial objectives of the Company, the performance of the individuals and the relevant performance and comparative market data. Shareholder interests are best represented through this process.
The Compensation Committee has determined that an executive compensation program designed around various elements of compensation, including base salaries, incentive bonuses, and various performance-based equity awards, best meets its dual objectives of retaining highly talented executives and aligning compensation with shareholder returns. The Committee makes extensive use of competitive data on both peer companies and other high performing companies in determining the amount of annual and long-term compensation.
Additionally, the Committee also considers an executive's performance against specific quantitative and qualitative objectives,
which are established on an annual basis and are directly related to the delivery of the financial growth of the Company and creation of shareholder value. The Committee also retains highly knowledgeable and qualified consultants to provide expert advice on appropriate compensation variables and levels.
The advisory vote called for by the shareholder proponents will not enhance the Company's governance practices, improve accountability or communication with shareholders. The Company has established procedures to provide shareholders a means to communicate directly with Board and Committee members on any issue, including executive compensation. Additionally, the Company also has sufficient accountability mechanisms through, among others, its majority voting requirements to ensure that shareholders opinions are heard.
The responsibility for determining the appropriate executive compensation levels and programs properly resides with an independent Board of Directors and Compensation Committee. Based upon the foregoing, the advisory vote proposed by the shareholder proponent is not in the best interest of shareholders.
The board of directors recommends that you vote AGAINST the proposal.
Shareholder Proposal on the Roles of Chair and CEO (Item 4 on Proxy Card)
Catholic Healthcare West, 185 Berry Street, Suite 300, San Francisco, California 94107-1739, and 16 other proponents have informed Abbott that they intend to present the following proposal at the meeting. Abbott will provide the proponents' names and addresses to any shareholder who requests that information and, if provided by a proponent to Abbott, the number of Abbott common shares held by that proponent.
Resolved: The shareholders of Abbott Laboratories (the "Company") request the Board of Directors establish a policy of, whenever possible, separating the roles of Chairman and Chief Executive Officer, so that an independent director who has not served as an executive officer of the Company serves as Chair of the Board of Directors.
This proposal shall not apply to the extent that complying would necessarily breach any contractual obligations in effect at the time of the 2007 shareholder meeting.
Proponent's Statement in Support of Shareholder Proposal
We believe in the principle of the separation of the roles of Chairman and Chief Executive Officer. This is a basic element of sound corporate governance practice.
We believe an independent Board Chair separated from the CEO is the preferable form of corporate governance. The primary purpose of the Board of Directors is to protect shareholder's interests by providing independent oversight of management and the CEO. The Board gives strategic direction and guidance to our Company.
The Board will likely accomplish both roles more effectively by separating the roles of Chair and CEO. An independent Chair will enhance investor confidence in our Company and strengthen the integrity of the Board of Directors.
A number of respected institutions recommend such separation. CalPER's Corporate Core Principles and Guidelines state: "the independence of a majority of the Board is not enough" and that "the leadership of the board must embrace independence, and it must ultimately change the way in which directors interact with management."
An independent board structure will also help the board address complex policy issues facing our company, foremost among them the crisis in access to pharmaceutical products.
Millions of Americans and others around the world have limited or no access to our company's life-saving medicines. We believe an independent Chair and vigorous Board will bring greater focus to this ethical imperative, and be better able to forge solutions to address this crisis.
The current business model of the pharmaceutical sector is undergoing significant challenges. The industry has generated substantial revenue from American purchasers, who pay higher prices for medicines than those in other developed countries. Pressure on drug pricing and dependence on this business model may impact our company's long-term value. We believe independent Board leadership will better position our company to respond to these enduring challenges.
A similar resolution voted on in 2006 was supported by 31.19% of shareholders.
In order to ensure that our Board can provide the proper strategic direction for our Company with independence and accountability, we urge a vote FOR this resolution.
Board of Directors' Statement in Opposition to the Shareholder Proposal on the Roles of Chair and CEO (Item 4 on Proxy Card)
It is in the best interest of the Company's shareholders to allow the Board sufficient flexibility to determine who should serve as Chairman of the Board of Directors. This determination is made by an independent Board based upon the circumstances and individuals available at any particular point in time.
At this point in time, the Board has determined that the chief executive officer, who has primary responsibility for managing the Company day-to-day, is in the best position to chair the Board and to ensure that key business issues and other important matters are brought to the Board's attention.
Abbott's governance profile ensures that the appropriate level of oversight and independence is applied to all Board decisions. First, all but two of Abbott's twelve directors are independent, and the members of each of the key committees, Audit, Compensation, Nominations and Governance and Public Policy, are independent. Second, a Lead Director has been designated by and from the independent Board members. According to a recent publication by Institutional Shareholder Services ("ISS"), there is a clear preference for appointing a lead director in the U.S., rather than a non-executive chair. In a 2006 survey of S&P companies, approximately 57% of companies had a lead or presiding director, up from 52% in the prior year. Only 12% of all chairmen were classified as independent, up just 1% from the prior year.
The Lead Director appointed by the Board facilitates communications with the Board and presides over regularly conducted executive sessions and sessions where the chairman is not present. The Lead Director reviews and approves matters, such as agenda items, schedule sufficiency, and, where appropriate, information provided to other Board members. Any director, however, may suggest agenda items and may raise matters at
meetings. Third, the Board and each of its Committees have complete access to management and the authority to retain independent advisors, as they deem appropriate. Fourth, the independent directors review the performance of the CEO annually.
The Company also has established independence standards, governance guidelines and a published procedure for shareholders and other third parties to communicate with Board members. This information is posted and available on the Company Web site, www.abbott.com.
In light of the strong oversight mechanisms already in place, there is no reason to alter the current governance profile of the Company.
Contrary to the proponent's assertion, there is no connection between the policy issues relating to access to medicines and the Company's governance structure. The Company is committed to expanding access to medicines through a variety of measures, which include both Company-sponsored and industry-sponsored programs to deliver needed medicines to patients. The Board is aware of and supports the Company's many efforts in addressing the need for access to medicines. The assertion that a governance change would better address the access issue is unfounded.
The current structure, in which the Board retains the flexibility to allocate the responsibilities of the offices of chairman and chief executive officer to one individual, supports the Board's exercise of its oversight responsibilities and is in the best interests of the Company and its shareholders.
The board of directors recommends that you vote AGAINST the proposal.
Date for Receipt of Shareholder Proposals for the 2008 Annual Meeting Proxy Statement
Shareholder proposals for presentation at the 2008 Annual Meeting must be received by Abbott no later than November 20, 2007 and must otherwise comply with the applicable requirements of the Securities and Exchange Commission to be considered for inclusion in the proxy statement and proxy for the 2008 meeting.
Procedure for Recommendation and Nomination of Directors and Transaction of Business at Annual Meeting
A shareholder may recommend persons as potential nominees for director by submitting the names of such persons in writing to the chairman of the nominations and governance committee or the secretary of Abbott. Recommendations should be accompanied by a statement of qualifications and confirmation of the person's willingness to serve. A nominee who is recommended by a shareholder following these procedures will receive the same consideration as other comparably qualified nominees.
A shareholder entitled to vote for the election of directors at an Annual Meeting and who is a shareholder of record on:
may directly nominate persons for director by providing proper timely written notice to the secretary of Abbott.
That notice must include the name, age, business address, residence address and principal occupation or employment of the nominee, the class and number of shares of Abbott owned by the nominee and any other information relating to the nominee that is required to be disclosed in solicitations for proxies pursuant to the
Securities Exchange Act. In addition, the notice must include the name and record address of the nominating shareholder and the class and number of shares of Abbott owned by the nominating shareholder.
A shareholder of record on the record date for an Annual Meeting of Shareholders, the date the shareholder provides timely notice to Abbott and on the date of the Annual Meeting of Shareholders may properly bring business before the Annual Meeting by providing timely written notice to the secretary of Abbott. For each matter the shareholder proposes to bring before the Annual Meeting, the notice must include a brief description of the business to be discussed, the reasons for conducting such business at the Annual Meeting, the name and record address of the shareholder proposing such business, the class and number of shares of Abbott owned by the shareholder and any material interest of the shareholder in such business.
To be timely, written notice either to directly nominate persons for director or to bring business properly before the Annual Meeting must be received at Abbott's principal executive offices not less than ninety days and not more than one hundred twenty days prior to the anniversary date of the preceding Annual Meeting. If the Annual Meeting is called for a date that is not within twenty five days before or after such anniversary date, notice by the shareholder must be received not later than the close of business on the tenth day following the day on which such notice of the date of the Annual Meeting was mailed or made public in a press release or in a filing with the Securities and Exchange Commission, whichever occurs first.
It is important that proxies be returned promptly. Shareholders are urged, regardless of the number of shares owned, to vote their shares. Most of Abbott's shareholders may vote their shares by telephone or the Internet. Shareholders who wish to vote by mail should sign and return their proxy card in the enclosed business reply envelope. Shareholders who vote by telephone or the Internet do not need to return their proxy card.
The Annual Meeting will be held at Abbott's headquarters, 100 Abbott Park Road, located at the intersection of Route 137 and Waukegan Road, Lake County, Illinois. Admission to the meeting will be by admission card only. A shareholder planning to attend the meeting should promptly complete and return the reservation form. Reservation forms must be received before April 20, 2007. An admission card admits only one person.
DIRECTOR INDEPENDENCE STANDARD
No director qualifies as "independent" unless the Board affirmatively determines that the director has no material relationship with Abbott or its subsidiaries (either directly or as a partner, shareholder or officer of an organization that has a relationship with Abbott or any of its subsidiaries). In making this determination, the Board shall consider all relevant facts and circumstances, including the following standards:
Notice of Annual Meeting
YOUR VOTE IS IMPORTANT!
Reservation Form for Annual Meeting
I am a shareholder of Abbott Laboratories and plan to attend the Annual
Please send me an admission card for each of the following persons.
If you plan to attend the meeting, please complete and return the Reservation Form directly to Abbott Laboratories, Annual Meeting Ticket Requests,
D-0383 AP6D, 100 Abbott Park Road, Abbott Park, Illinois 60064-6048. Due to space limitations, Reservation Forms must be received before April 20, 2007. An admission
card, along with a form of photo identification, admits one person. A shareholder may request two admission cards.
Using a black ink pen, mark your votes with an X as shown in
IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFERATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.
Telephone and Internet Voting InstructionsYou can vote by telephone OR Internet! Available 24 hours a day,
7 days a week!
Authorized SignaturesSign HereThis section must be completed for your instructions to be executed.
IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFERATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking previous proxies, acknowledges receipt of the Notice and Proxy Statement dated March 19, 2007, in connection with the Annual Meeting of Shareholders of Abbott Laboratories to be held at 9:00 a.m. on April 27, 2007, at the corporation's headquarters, and hereby appoints MILES D. WHITE and LAURA J. SCHUMACHER, or either of them, proxy for the undersigned, with power of substitution, to represent and vote all shares of the undersigned upon all matters properly coming before the Annual Meeting or any adjournments thereof.
If the undersigned is a participant in the Abbott Laboratories Stock Retirement Plan, then this card also instructs the plan's co-trustees to vote as specified at the 2007 Annual Meeting of Shareholders, and any adjournments thereof, all shares of Abbott Laboratories held in the undersigned's plan account upon the matters indicated and in their discretion upon such other matters as may properly come before the meeting.
INSTRUCTIONS: This proxy when properly executed will be voted in the manner directed herein by the undersigned shareholder. If no direction is made, this proxy will be voted FOR Items 1 and 2 and AGAINST Items 3 and 4 and in accordance with the judgment of the proxy holders on any other matters that are properly brought before the meeting.
(ImportantPlease sign and date on other side.)