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Compensation and Management Development Committee Report (The five non-employee directors that comprise this Committee have considerable experience in executive compensation issues and management development. None of the members of the Committee has ever been an officer or employee of Praxair or any of its subsidiaries. All of the members of the Committee are independent as defined by the Board of Directors Policy on Independence Standards (See Appendix 2 to this Proxy Statement). In discharging its responsibilities, the Committee employs the services of an independent compensation consultant. The consultant reports directly to the Committee regarding these matters.) This report addresses and discloses the Committee’s policies and decisions regarding 2002 compensation and long term incentives as they affected the Chief Executive Officer and the four other most highly paid executive officers of Praxair (the five individuals collectively called “the Senior Executives”). These policies and practices also generally affect the compensation of Praxair’s other officers and high level executives. Executive Compensation Policies and Practices The Committee uses the services of an outside compensation consultant to review the competitiveness of the company’s compensation programs. Praxair has selected a comparator group of companies from the consultant’s database that it considers as an appropriate group of companies against which to compare Praxair for compensation purposes. The comparator group comprises 20 companies from various industries that represent the competitive marketplace for Praxair executives. Since the size of the comparator companies measured by sales varies somewhat, the consultant adjusts its competitive analysis to account for that variable. For purposes of the shareholder return comparisons elsewhere in this proxy statement, Praxair uses an index focussed on the basic materials industry, based on its belief that an industry index is an appropriate peer group for investment comparisons. The companies chosen for the compensation comparator group are not necessarily those represented in the shareholder return comparisons. The Committee believes that Praxair’s competitors for executive talent are a broader group of companies and not limited only to the companies in the investment comparison. In determining the total compensation opportunity for each Senior Executive, the Committee takes into account the mix of base salary, variable compensation and long term incentives. It targets its compensation decisions to achieve a median total compensation opportunity for comparable jobs within the comparator group. However, since a large portion of the compensation opportunity is determined by performance-based variable compensation, total compensation may be above or below the median based on individual, business unit and/or total company performance. Salary Performance-Based Annual Variable Compensation At its January 2003 meeting, the Committee evaluated 2002 performance of the Corporation against its 2002 Annual Business Plan and considered the individual performance of each of the Senior Executives. Regarding the primary measures of performance, namely achievement of financial targets, the Committee concluded that the Corporation achieved improved performance in 2002 compared to 2001 and substantially achieved its annual plan in spite of an extremely challenging external environment in the U.S. and some of Praxair’s key international markets such as South America. The Committee also noted that the Corporation achieved record operating results in 2002 and was one of a very few of the basic materials companies (chemicals, paper, minerals, mining, steel) to show improved performance versus the prior year. For 2002, Praxair’s total shareholder return was +5.98%. In contrast, the S&P 500 Index declined 22.10%. In addition, most of the 2002 nonfinancial goals noted above either were accomplished or progress was well under way. The Committee also reviewed the performance of the Corporation in comparison to the performance measures established by the Committee in 2002 for the Senior Executives under the Praxair, Inc. Plan for Determining Performance-Based Awards Under Section 162(M), approved by the shareholders in 2001 to comply with Section 162(m) of the Internal Revenue Code. On the basis of the overall performance during 2002 in relation to both financial and non-financial plans, the Committee awarded 2002 performance-based annual variable compensation for the Senior Executives somewhat above the target payout. Mr. Reilley’s variable compensation was established at $1,150,000 based on the foregoing considerations. Long Term Incentives The Committee made annual stock option grants to 101 executive officers, officers, and other key employees (excluding the Senior Executives) at its December 2001 meeting. These options were granted at the closing market price on the date of grant, will vest in December 2002, 2003 and 2004, and have a ten year term. These grants constituted the long term incentive component of pay for 2002. Policy with Respect to Deductibility of Compensation Expense Conclusion The Compensation and Management Development Committee |
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| Long Term Compensation |
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Awards | Payouts | |||||||
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| Name and Principal Position | Year | Salary ($) | Bonus1 ($) | Other Annual Compensation2 ($) | Restricted Stock Award(s) ($) | Securities Underlying Options (#) | LTIP Payouts ($) | All Other Compensation3 ($) | |
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| Dennis H. Reilley Chairman, President and Chief Executive Officer4 |
2002 | 912,500 | 1,150,000 | – | 0 | 220,000 | 0 | 34,219 | |
| 2001 | 856,250 | 750,000 | 169,779 | 0 | 165,000 | 0 | 32,173 | ||
| 2000 | 657,971 | 660,000 | 181,671 | 985,9385 | 400,000 | 0 | 24,835 | ||
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| Paul J. Bilek Executive Vice President |
2002 | 480,500 | 415,200 | 9,226 | 0 | 55,000 | 0 | 16,245 | |
| 2001 | 467,250 | 326,400 | 7,253 | 0 | 55,000 | 0 | 24,955 | ||
| 2000 | 437,500 | 355,000 | 7,888 | 0 | 0 | 0 | 23,659 | ||
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| Stephen F. Angel Executive Vice President8 |
2002 | 415,000 | 361,000 | 51,162 | 0 | 55,000 | 0 | 4,687 | |
| 2001 | 276,190 | 276,000 | 39,612 | 926,000 5 | 225,000 | 0 | 4,232 | ||
| 2000 | – | – | – | – | – | – | – | ||
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| Thomas W. von Krannichfeldt Executive Vice President |
2002 | 451,250 | 262,600 | 20,422 | 0 | 32,500 | 0 | 16,922 | |
| 2001 | 442,000 | 173,900 | 62,313 | 0 | 35,000 | 0 | 28,793 | ||
| 2000 | 430,000 | 200,000 | 130,786 | 0 | 0 | 0 | 15,987 | ||
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| James S. Sawyer Vice President and Chief Financial Officer |
2002 | 373,250 | 298,400 | 6,630 | 0 | 46,800 | 0 | 13,997 | |
| 2001 | 361,250 | 216,900 | 4,820 | 0 | 35,000 | 0 | 16,799 | ||
| 2000 | 306,250 | 205,000 | 4,556 | 0 | 10,000 | 0 | 14,156 | ||
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| Notes: | 1) Reported in this column are annual awards that Praxair characterizes as Performance Based Annual Variable Compensation. Twenty percent of the variable compensation paid for the three listed years was paid in the form of Praxair Common Stock or, at the officer’s option, at least 20% was deferred into “deferred stock” units.
2) Represents the value of the discount from the market value of Praxair’s Common Stock that is, in effect, received by individuals who have deferred variable compensation or base salary earned in the listed years into discounted “deferred stock” units under Praxair’s deferred compensation plan for management. Compensation that is placed in this option must be so deferred for a minimum of 5 years. This column also includes the value of personal benefits received in 2000 and 2001 by Mr. Reilley and Mr. von Krannichfeldt. Major components of these personal benefits are as follows: |
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| Mr. Reilley | Mr. von Krannichfeldt |
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| 2000 | 2001 | 2000 | 2001 | ||||||
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| Relocation expenses | $44,839 | $28,500 | $63,563 | $25,769 | |||||
| Reimbursement of taxes | $48,516 | $37,636 | $54,556 | $19,383 | |||||
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| 3) Amounts reported in this column for 2002 represent the Praxair Savings Plan Company Match (including both qualified and unqualified match amounts) received by the executive in that year.
4) Mr. Reilley joined Praxair, Inc. on March 6, 2000. 5) Mr. Reilley was granted 25,000 shares of restricted stock on February 22, 2000. The dollar amount reported in 2000 is calculated according to SEC rules and equals the number of shares granted times the closing market price of Praxair, Inc.’s Common Stock on the date of grant. As of December 31, 2002, Mr. Reilley held a total of 25,000 shares of restricted stock. All of these shares are currently unvested and have a “value” of $1,444,250 on that date. This “value” is calculated according to SEC rules by assuming that all such shares are vested at 2002 year-end and by using the closing market price of Praxair, Inc.’s Common Stock as of December 31, 2002 ($57.770 per share). These shares actually vest in stages beginning in 2006. Mr. Angel was granted 20,000 shares of restricted stock on April 23, 2001. As of December 31, 2002, Mr. Angel held 20,000 shares of unvested restricted stock having a “value” of $1,155,400 on that date. These shares actually vest in stages beginning in 2003. Dividends are paid on Mr. Reilley’s and Mr. Angel’s restricted stock. 6) Mr. Angel joined Praxair on April 23, 2001. |
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Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term1 | ||||||||
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| Name | Number of Securities Underlying Options Granted (#) | Percent of Total Options Granted to Employees in Fiscal Year (%) | Exercise Price ($) | Expiration Date | If Stock at $89.361/sh 5% ($) |
If Stock at $142.293/sh 10% ($) |
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| Dennis H. Reilley | 220,000 | 16.9% (8.9%2) | $54.86 | 1/02/2012 | $7,590,255 | $19,235,196 | |||
| Paul J. Bilek | 55,000 | 4.2% (2.2%2) | 54.86 | 1/02/2012 | 1,897,564 | 4,808,799 | |||
| Stephen F. Angel | 55,000 | 4.2% (2.2%2) | 54.86 | 1/02/2012 | 1,897,564 | 4,808,799 | |||
| Thomas W. von Krannichfeldt | 32,500 | 2.5% (1.3%2) | 54.86 | 1/02/2012 | 1,121,288 | 2,841,563 | |||
| James S. Sawyer | 46,800 | 3.6% (1.9%2) | 54.86 | 1/02/2012 | 1,614,654 | 4,091,851 | |||
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| Note: | 1) Potential realizable value is the pre-tax gain that an option holder would realize at the time of the option expiration date if (a) he or she would exercise all of the options on their expiration date, and (b) Praxair’s stock price grew between the date of grant and the exercise date at the annual rate assumed in the column. This pre-tax gain is calculated by multiplying the number of options by the difference between the assumed stock price on the option expiration date and the option exercise price. The hypothetical values reflected in this table represent assumed rates of appreciation only; which rates are set by SEC rules. Actual gains, if any, on stock option exercises and common stock holdings are dependent on, among other factors, the future performance of the common stock and overall stock market conditions. There can be no assurance th | ||||||||
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| Name | Shares Acquired on Exercise (#) | Value Realized ($) | Number of Securities Underlying Unexercised Options at FY-End (#) | Value1 of Unexercised In-the-Money Options at FY-End ($) | |||||
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| Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||
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| Dennis H. Reilley | 0 | $0 | 583,333 | 201,667 | $9,058,899 | $1,183,051 | |||
| Paul J. Bilek | 40,000 | 1,475,550 | 181,999 | 55,001 | 2,613,297 | 557,523 | |||
| Stephen F. Angel | 0 | 0 | 93,333 | 186,667 | 920,349 | 1,840,701 | |||
| Thomas W. von Krannichfeldt | 33,000 | 404,314 | 74,166 | 33,334 | 875,653 | 223,472 | |||
| James S. Sawyer | 29,000 | 975,397 | 83,433 | 42,867 | 1,110,552 | 251,213 | |||
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| Note: | 1) Before Taxes. The reported dollar value is based on the difference between the exercise price of the outstanding option and the market price of Praxair’s Common Stock at the close of trading on December 31, 2002. The market price on this date was $57.770 per share. | ||||||||
| Defined Benefit or Actuarial Plans
Table 4 illustrates the estimated annual benefits payable from Praxair’s Retirement Program at retirement at age 65 based on the assumptions shown. Calculation of benefits is uniform for all participants in the Retirement Program, including the named executives. |
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| Average Annual Remuneration Used for Calculating Retirement Benefits |
for the Years of Company Service Credit Indicated |
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| 15 Yrs | 20 Yrs | 25 Yrs | 30 Yrs | 35 Yrs | 40 Yrs | 45 Yrs | |||
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| $250,000 | $56,250 | $75,000 | $93,750 | $112,500 | $131,250 | $150,000 | $168,750 | ||
| $500,000 | $112,500 | $150,000 | $187,500 | $225,000 | $262,500 | $300,000 | $337,500 | ||
| $750,000 | $168,750 | $225,000 | $281,250 | $337,500 | $393,750 | $450,000 | $506,250 | ||
| $1,000,000 | $225,000 | $300,000 | $375,000 | $450,000 | $525,000 | $600,000 | $675,000 | ||
| $1,250,000 | $281,250 | $375,000 | $468,750 | $562,500 | $656,250 | $750,000 | $843,750 | ||
| $1,500,000 | $337,500 | $450,000 | $562,500 | $675,000 | $787,500 | $900,000 | $1,012,500 | ||
| $1,750,000 | $393,750 | $525,000 | $656,250 | $787,500 | $918,750 | $1,050,000 | $1,181,250 | ||
| $2,000,000 | $450,000 | $600,000 | $750,000 | $900,000 | $1,050,000 | $1,200,000 | $1,350,000 | ||
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| Notes: | • Amounts shown are computed based upon straight life annuity amounts and are subject to an offset for Social Security benefits. Annual retirement benefits for program participants are based on salary and bonus (variable compensation) payments as set forth in Table 1. For purposes of determining the average annual remuneration used for calculating retirement benefits, the three highest annual rates of salary and the three highest variable compensation payments received by the retiree during the previous ten years are averaged. No other forms of remuneration are included. This table reflects the combination of qualified and non-qualified pension benefits.
• Credited years of service as of March 1, 2003 are as follows: Dennis H. Reilley, 28 years; Paul J. Bilek, 34 years; Stephen F. Angel, 2 years; Thomas W. von Krannichfeldt, 27 years; James S. Sawyer, 17 years. • Credited years of service for Dennis H. Reilley represent combined service with Praxair, Inc. and DuPont. Mr. Reilley joined Praxair, Inc. on March 6, 2000 and at that time received credit for 25.75 years of service with DuPont. • Credited years of service reported for Thomas W. von Krannichfeldt represent combined service with Praxair, Inc. and Praxair Surface Technologies (Europe) S.A. • Mr. Reilley and Mr. von Krannichfeldt are each eligible for retirement benefits under the Praxair, Inc. Retirement Plan. Upon their retirements, each will receive retirement benefits under this Plan based on his combined Praxair and former employer service, less an offset for benefits received under the former employer’s retirement plan. |
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| Employment Contracts and Termination of Employment and Change-in-Control Arrangements Praxair has entered into identical Severance Compensation Agreements (the “Agreements”) with Dennis H. Reilley, Paul J. Bilek, Stephen F. Angel, Thomas W. von Krannichfeldt, James S. Sawyer, and certain other employees. The Agreements are designed to retain the executives and provide continuity of management in the event of any actual or threatened change in control of Praxair. The Agreements specify circumstances which shall constitute a “Change in Control” for these purposes. These circumstances include, among others and subject to the qualifications set forth in the Agreements: (1) any consolidation or merger in which Praxair is not the continuing or surviving corporation; (2) the sale, lease, exchange or transfer of all or substantially all of the assets of the Corporation; (3) acquisition by a person or group of more than 20% of Praxair’s outstanding shares; and (4) a change in the majority composition of the Board not approved by two-thirds of the directors in office prior to the change. The Agreements provide that if the executive’s employment is terminated under specified conditions after such a change in control, then the executive will be entitled to receive: (a) accrued salary, incentive compensation and benefits; (b) enhanced life, disability, accident, health insurance and pension benefits; (c) a lump sum payment equal to three times the sum of the executive’s salary, bonus and annualized long term incentive grants (stock options); (d) reimbursement for certain of the executive’s tax liabilities; and (e) outplacement and financial counseling benefits. Payments will be made by Praxair or through a grantor trust adopted by Praxair. The Agreements renew automatically for one year terms, unless Praxair or the executive gives notice of termination of the Agreement. Notwithstanding any such notice of termination, if a change in control occurs during the original or extended term of an Agreement, then the Agreement is automatically renewed for a period of 24 months beyond the term then in effect. The Agreement terminates if the executive’s employment with Praxair is terminated by the executive or Praxair prior to a change in control. |
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