Quest Diagnostics 2004 Annual Report Download - page 21

2003 Compensation Actions: Other Executive Officers
In 2003, each executive officer received adjustments to his or her base salary in accordance
with the philosophy described above. The salary increases for each executive officer (other than
Mr. Freeman) ranged from 3.5% to 28.2%. Prior to these increases, the salaries for these
individuals had not been adjusted since 2001.
Additionally, each executive officer received an award of stock options during 2003. The
options granted to each executive officer (other than Mr. Freeman) represented a combination
of (1) regular annual option awards and (2) replacement options as described in the Option
Grant Table on page 13. This replacement option was issued in order to fully ensure that the
Company would be entitled to available tax deductions upon the exercise of the option. The
executive officers realized no benefits, financial or otherwise, as a result of the replacement of
the option. Each replacement option has the same exercise price (which was above the market
price at the time of issuance), the same vesting terms and the same expiration date as the
option that it replaced.
Variable Compensation
The stockholders of the Company approved the Company’s Senior Management Incentive
Plan (the “Incentive Plan’’) at the 2003 annual meeting of stockholders. Each year the
Compensation Committee selects the executive officers and officers who participate in the
Incentive Plan for that year, subject to a maximum number of ten participants for any year. For
2003, the Compensation Committee selected the Company’s six executive officers as participants.
Under the Incentive Plan, each participant may be paid a bonus of up to 1% of the
Company’s Earnings (as defined in the Incentive Plan) in the fiscal year, reduced at the
discretion of the Compensation Committee by such amount, if any, as the Compensation
Committee deems appropriate. For 2003, the maximum bonus payable under the Incentive Plan
to each participant was $7,377,980. However, consistent with the compensation philosophy
described above, the Compensation Committee reduced the bonus payable to each named
executive officer to the amount indicated in the Summary Compensation Table under the
caption “Bonus’’ (ranging from $174,687 to $1,243,901).
The award for Mr. Freeman was based on Company-wide performance against a combination
of financial and quantitative, operations-based goals.
Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended, precludes a public
corporation from taking a tax deduction for annual compensation in excess of $1 million paid
to its chief executive officer and the next four most highly paid executive officers, unless certain
specific and detailed criteria are satisfied.
The Committee considers the anticipated tax treatment to Quest Diagnostics and to the
executive officers in its review and establishment of compensation programs and payments. The
deductibility of compensation payments can depend upon numerous factors, including the
nature of the payment and the time when income is recognized under various awards. Certain
compensation paid or awarded in prior years may not be fully deductible. Interpretations of and
changes in applicable tax laws and regulations as well as other factors beyond the control of the
Committee also can affect deductibility of compensation. Quest Diagnostics’ general policy is to
preserve the tax deductibility of compensation paid to its executive officers, including annual
incentive awards paid under the Incentive Plan and grants of stock options and shares of
incentive stock under the terms of the Employee Equity Participation Program. The Committee
will continue to monitor developments and assess alternatives for preserving the deductibility of
compensation payments and benefits to the extent reasonably practicable, consistent with its
Quest Diagnostics Incorporated ?2004 Proxy Statement ?19