39 Old Ridgebury Road

Danbury, Connecticut 06810-5113

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD APRIL 24, 2007

 

Dear Praxair Shareholder:

 

The Annual Meeting of Shareholders of Praxair, Inc. will be held at 9:30 a.m. on Tuesday, April 24, 2007 in the Grand Ballroom of the Sheraton Danbury, 18 Old Ridgebury Road, Danbury, Connecticut, for the following purposes:

 

 

Only holders of Common Stock of Praxair, Inc. of record at the close of business on March 1, 2007 will be entitled to notice of, and to vote at, the meeting or any adjournment or postponement thereof.

 

It is important that your shares be represented and voted at the meeting. You may vote your shares by means of a proxy form using one of the following methods:

 

 

The giving of such proxy does not affect your right to vote in person if you attend the meeting.

 

We encourage you to complete and submit your proxy electronically or by telephone (if those options are available to you) as a means of reducing the Company’s expenses related to the meeting.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

JAMES T. BREEDLOVE,

Senior Vice President, General Counsel and Secretary

 

March 15, 2007

 

 

WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE PROMPTLY COMPLETE AND SUBMIT A PROXY, EITHER BY INTERNET, BY TELEPHONE OR BY MAIL.

 

 

PROXY STATEMENT
TABLE OF CONTENTS

 

 

39 Old Ridgebury Road
Danbury, Connecticut 06810-5113

 

PROXY STATEMENT

 

Annual Meeting of Shareholders

 

Tuesday, April 24, 2007

 

 

This Proxy Statement is furnished to shareholders of Praxair, Inc. (“Praxair” or the “Company”) in connection with the solicitation of proxies for the Annual Meeting of Shareholders to be held at the Sheraton Danbury, 18 Old Ridgebury Road, Danbury, Connecticut on April 24, 2007, at 9:30 a.m. or any adjournment or postponement thereof (the “Annual Meeting”). This Proxy Statement and the enclosed form of proxy are first being sent to shareholders on or about March 15, 2007. The enclosed proxy is solicited on behalf of the Board of Directors of Praxair.

 

Four directors will be elected to serve for a one-year term until the 2008 annual meeting of shareholders, and until their successors are elected and qualify. The remaining seven directors’ terms expire in 2008, or 2009, as noted below. They were elected for three-year terms under Praxair’s previous “staggered” or “classified” board structure that is being phased-out through 2009. Beginning with this 2007 Annual Meeting, each director whose term expires at an annual meeting may be re-elected to a one-year term and until his or her successor is elected and qualifies.

 

The terms of the following four present directors, who were elected for three-year terms in 2004, expire this year and each of them has been nominated for re-election for a one-year term: José P. Alves, Ronald L. Kuehn, Jr., H. Mitchell Watson, Jr., and Robert L. Wood. In order to continue to draw on his advice and counsel for an additional year during the current period of transition in the Chairman and Chief Executive Officer positions, your Board has provided a one-time waiver of the Board’s director retirement policy in the case of Ronald L. Kuehn, Jr.

 

Your Board recommends that José P. Alves, Ronald L. Kuehn, Jr., H. Mitchell Watson, Jr., and Robert L. Wood, each be elected to serve for a one-year term until the 2008 annual meeting of shareholders, and until their successors are elected and qualify. Each nominee has agreed to be named in this Proxy Statement and to serve if elected. Biographical data on these nominees and the other members of the Board of Directors is presented beginning at page 19 of this Proxy Statement under the caption “The Board of Directors.”

 

If one or more of the nominees becomes unavailable for election or service as a director, the proxy holders will vote your shares for one or more substitutes designated by the Board of Directors, or the size of the Board of Directors will be reduced.

 

To be elected, a nominee must receive a plurality of the votes cast at the Annual Meeting in person or by proxy. See the vote counting rules on pages 3-4 of this Proxy Statement.

 

A shareholder has announced its intention to present a proposal recommending that director nominees be elected by the affirmative vote of a majority of votes cast. If this proposal were implemented in 2008, when new New York Stock Exchange (“NYSE”) broker voting rules will be in effect, substantially less than a majority of the shares outstanding could determine the outcome of a director election. Because of this and other reasons, your Board recommends that you defer approval of this proposal until practical experience is gained under the new NYSE rules and that you vote against this proposal. The proponent’s statement in favor of this proposal and your Board’s statement in opposition are located on pages 50 and 51, respectively, of this Proxy Statement under the caption “Shareholder Proposal-Director Election Process.”

 

In order for this proposal to be adopted by the shareholders, at least a majority of the votes cast at the Annual Meeting in person or by proxy by the shareholders entitled to vote on the matter must be voted in its favor. See the vote counting rules on pages 3-4 of this Proxy Statement.

 

A shareholder has announced his intention to present a proposal recommending that the Company’s shareholder-approved Stockholder Protection Rights Agreement (“Rights Plan”) be subject to an annual vote of the shareholders. The Rights Plan has already been approved by the shareholders and, by its terms, expires on May 1, 2009 unless shareholders approve its extension. For this and other reasons, your Board believes that this proposal is unnecessary and misguided and recommends that you vote against this proposal. The proponent’s statement in favor of this proposal and your Board’s statement in opposition are located on pages 53 and 54, respectively, of this Proxy Statement under the caption “Shareholder Proposal-Rights Plan Vote.”

 

In order for this proposal to be adopted by the shareholders, at least a majority of the votes cast at the Annual Meeting in person or by proxy by the shareholders entitled to vote on the matter must be voted in its favor. See the vote counting rules on pages 3-4 of this Proxy Statement.

 

By NYSE and Securities and Exchange Commission (“SEC”) rules, selection of the Company’s independent auditor is the direct responsibility of the Audit Committee. Your Board has determined, however, to seek shareholder ratification of that selection as a good practice to provide shareholders an avenue to express their views on this important matter. If shareholders fail to ratify the selection, the Audit Committee will seek to understand the reasons for such failure and will take those views into account in this and future appointments. Even if the current selection is ratified by shareholders, the Audit Committee reserves to itself the right to appoint a different independent auditor at any time during the year if the Audit Committee determines that such change would be in the best interests of the Company and its shareholders.

 

Information concerning the independent auditor may be found beginning at page 15 of this Proxy Statement under the caption “The Independent Auditor.”

 

Your Board recommends that you vote FOR this item 4, the proposal to ratify the Audit Committee’s selection of the independent auditor.

 

In order for this proposal to be adopted by the shareholders, at least a majority of the votes cast at the Annual Meeting in person or by proxy by the shareholders entitled to vote on the matter must be voted in its favor. See the vote counting rules on pages 3-4 of this Proxy Statement.

 

Praxair knows of no other business that will be considered for action at the Annual Meeting. If any other business calling for a vote of shareholders is properly presented at the meeting, the proxy holders will have the discretion to vote your shares in accordance with their best judgment.

 

Who are the Shareholders Entitled to Vote at this Meeting?

 

Common Stock shareholders of record at the close of business on March 1, 2007 will be entitled to vote at the Annual Meeting. As of that date, a total of 320,677,626 shares of Praxair’s Common Stock were outstanding and entitled to vote. Each share of Common Stock is entitled to one vote.

 

How do I Submit My Vote by Means of a Proxy?

 

Your vote is important. Because many shareholders cannot attend the Annual Meeting in person, it is necessary that a large number be represented by proxy. Most shareholders have a choice of voting over the Internet, by using a toll-free telephone number or by completing a proxy card and mailing it in the postage-paid envelope provided. Check your proxy card or the information forwarded by your bank, broker or other holder of record to see which options are available to you. Please be aware that, if you vote over the Internet, you may incur costs such as telecommunication and Internet access charges for which you will be responsible.

 

The Internet and telephone voting procedures are designed to authenticate shareholders and to allow shareholders to confirm that their instructions have been properly recorded.

 

How are the Proxies Voted?

 

All shares entitled to vote and represented by a properly completed proxy (either by Internet, telephone or mail) will be voted at the Annual Meeting as indicated on the proxy unless earlier revoked by you. If no instructions are indicated for a matter on an otherwise properly completed proxy from a shareholder of record, the shares represented by that proxy will be voted on that matter as recommended by the Board of Directors. See also the vote counting rules on pages 3-4 of this Proxy Statement. Execution of the proxy also confers discretionary authority on the proxy holders to vote your shares on other matters that may properly come before the Annual Meeting.

 

How Can I Revoke my Proxy?

 

You may revoke your proxy at any time before it is voted by filing with Praxair’s Secretary a written revocation, by timely delivery of a properly completed, later-dated proxy (including by Internet or telephone), or by voting in person at the Annual Meeting.

 

May I Still Vote at the Annual Meeting Even if I Have Submitted a Proxy?

 

The method by which you vote will in no way limit your right to vote at the Annual Meeting if you later decide to attend in person. If your shares are held in the name of a bank, broker or other holder of record, you must obtain a proxy, executed in your favor, from the holder of record, to be able to vote at the Annual Meeting.

 

What is the Necessary Quorum to Transact Business at the Annual Meeting?

 

The presence, in person or by proxy, of the holders of a majority of the shares entitled to vote shall constitute a quorum. The shares represented by withhold votes, abstentions and broker non-votes on filed proxies and ballots will be considered present for quorum purposes (for an explanation of “broker non-votes,” see the vote counting information below).

 

How are the Votes Counted for Each Item of Business?

 

If you are a shareholder of record and submit a proxy (whether by Internet, telephone or mail) without specifying a choice on any given matter to be considered at this Annual Meeting, the proxy holders will vote your shares according to the Board’s recommendation on that matter.

If you hold your shares in a brokerage account, then, under NYSE rules and Delaware corporation law:

 

 

If you hold your shares in the Praxair, Inc., Praxair Distribution, Inc., Praxair Healthcare Services, Inc., Praxair Puerto Rico, Inc., or the Dow Chemical Company Employees’ savings plan, and if the plan trustee receives no voting instructions from you, then, under the applicable plan trust agreement, the plan trustee must vote your shares in the same proportion on each matter as it votes the shares for it has received instructions.

 

You can save Praxair future postage and printing expense by consenting to receive future annual reports, meeting notices, and proxy statements on-line on the Internet. Most shareholders can elect to view future proxy statements and annual reports over the Internet instead of receiving paper copies in the mail. Those shareholders will be given the opportunity to consent to future Internet delivery when they vote their proxy. For some shareholders, this option is only available if you vote by Internet. If you are not given an opportunity to consent to Internet delivery when you vote your proxy, contact the bank, broker or other holder of record through which you hold your shares and inquire about the availability of such an option for you.

 

If you consent, your account will be so noted and, when Praxair’s 2007 Annual Report, meeting notice, and the proxy statement for the 2008 annual meeting of shareholders become available, you will be notified on how to access them on the Internet. Any prior consent you have given will remain in effect until specifically revoked by you in the manner specified by the bank or broker that manages your account. If you do elect to receive your Praxair materials via the Internet, you can still request paper copies by contacting the Investor Relations Department at Praxair, Inc., 39 Old Ridgebury Road, M-2, Danbury, CT 06810-5113.

 

Recent changes to SEC and NYSE rules will allow Praxair, beginning in 2008, to provide shareholders the proxy statement and annual report by posting them on an Internet site without the above-described consent from you. However, Praxair would notify shareholders by mail of this Internet availability, and you would still be able to request a paper copy. At this time, Praxair has not decided whether, or to what extent, it may suspend mail deliveries of the proxy statement and annual report for 2008 as permitted under the new rules.

 

If you share an address with another shareholder, you may receive only one set of proxy materials (including this Proxy Statement and the annual report to shareholders) unless you have provided contrary instructions. If you wish to receive a separate set of proxy materials now or in the future, you may contact us at the address cited above.

 

Similarly, if you share an address with another shareholder and have received multiple copies of our proxy materials, you may contact us at the above address to request delivery of a single copy of these materials.

 

 

The only person known by Praxair to be a beneficial owner of more than five percent of Praxair’s Common Stock is the following:

 

 

 

The table below sets forth the beneficial ownership of Praxair’s common stock as of March 1, 2007 by each Director and certain Executive Officers. No Director or Executive Officer of Praxair beneficially owned more than 1% of Praxair’s common stock, and Directors and Executive Officers of Praxair as a group (20 persons) beneficially owned approximately 1.4% of the outstanding shares as of that date.

 

(1) Amounts reported as Common Stock include 20,928 unvested restricted shares for which Mr. Reilley has sole voting power. As Mr. Reilley will retire from the Company effective April 30, 2007, he will forfeit these restricted shares. Reported shares also include 32,529 unvested restricted shares for which Mr. Angel has sole voting power and 10,000 of which will vest on April 23, 2007, with the remaining shares vesting on April 23, 2011.

(2) Deferred Stock represents stock price-based units into which deferred compensation has been invested pursuant to the deferred compensation plans for management and for non-employee directors. Holders have no voting rights with respect to Deferred Stock. The value of Deferred Stock units varies with the price of Praxair’s common stock and, at the end of the deferral period, the units are payable in stock.

(3) Stock Options represent shares that may be acquired upon exercise of options exercisable within 60 days of March 1, 2007.

Business Integrity and Ethics. One of your Board’s first acts upon Praxair’s launch as a public company was to adopt policies and standards regarding Compliance with Laws and Business Integrity and Ethics. The current version of the Board’s policy in these areas is posted at Praxair’s website, www.praxair.com and is available in print to any shareholder who requests it. This Code of Ethics applies to Praxair’s directors and to all employees, including Praxair’s Chief Executive Officer, Chief Financial Officer, and Controller.

Director Independence. Your Board has adopted independence standards for service on Praxair’s Board of Directors which are set forth in Appendix 2 to this Proxy Statement and are posted at Praxair’s public website, www.praxair.com. Your Board has applied these standards to all of the incumbent non-management directors and has determined that all of them are independent. Your Board is not otherwise aware of any relationship with the Company or its management that could potentially impair a director’s exercise of independent judgment. See also related information which is presented in this Proxy Statement under the caption “Certain Relationships and Transactions.”

Board Leadership. In September 2005, the independent directors elected Raymond W. LeBoeuf as Executive Session Presiding Director. Mr. LeBoeuf presides over private meetings of the non-management directors and performs other duties, including conducting a performance review of the Chief Executive Officer.

Mandatory Director Retirement. Your Board’s policy is that no director who has attained the age of 72 may serve on the Praxair Board. As noted above, your Board has provided a one-time waiver of this policy in the case of Ronald L. Kuehn so that, if re-elected, Mr. Kuehn will serve for an additional one-year term. Your Board also has a policy against service on the Board by an officer of the Company after his/her retirement, resignation or removal as an officer.

Limits to Service on Other Boards. Your Board’s policy is that no non-management director may serve on more than five additional public company boards and no member of the Audit Committee may serve on more than two additional public company audit committees. Also, the Chief Executive Officer may not serve on more than two other public company boards.

Director Nomination Process. For a description of your Board’s policy regarding nominees for election as directors, see “The Governance & Nominating Committee” on page 17 of this Proxy Statement.

Communications with the Board. Your Board believes that the most efficient means for shareholders and other interested parties to raise issues and questions and to get a response is to direct such communications to the Company through its Investor Relations Department or other methods as described in the Contact Us section of the Company’s public website, www.praxair.com.

If, notwithstanding these methods, a shareholder or other interested party wishes to direct a communication specifically to the Company’s Board of Directors, then the following means are available. To ensure that the communication is properly directed in a timely manner, it should be clearly identified as intended for the Board:

 

 

The above addresses are supervised by the Company’s Security Department which will promptly forward to the Corporate Secretary’s Office any communication intended for the Board.

 

The Corporate Secretary’s Office will collect and organize all such communications, deleting any that are sales or other solicitations and any which contain offensive material. A summary of communications received will be periodically provided to the Executive Session Presiding Director who will make the final determination regarding the disposition of any such communication.

 

Your Board believes that the Company should speak with one voice and has empowered management to speak on the Company’s behalf subject to the Board’s oversight and guidance on specific issues. Therefore, in most circumstances, the Board will not respond directly to inquiries received in this manner but may take into consideration ideas, concerns and positions that are presented in a concise, clear, supported and constructive manner.

Director Attendance at the Annual Shareholders’ Meeting. Absent extenuating circumstances, each member of the Board is expected to attend the Annual Meeting of Shareholders. All of the then incumbent directors attended the 2006 annual meeting.

Policy Statement on Rights Agreements. Your Board will adopt or materially amend a Stockholder Protection Rights Agreement only if, in the exercise of its fiduciary responsibilities under Delaware law, and acting by a majority of its independent directors, it determines that such action is in the best interests of Praxair’s shareholders. If the Board adopts or materially amends a Stockholder Protection Rights Agreement, it will submit such action to a non-binding shareholder vote as a separate ballot item at the first annual meeting of shareholders occurring at least six months after such action.

Director Stock Ownership Guidelines. Your Board’s policy is that non-management directors must acquire and hold during their service as a Praxair Board member shares of the Company’s stock equal in value to at least 5 times the base cash retainer for non-management directors. Directors have five years from their initial election to meet this guideline (or, for incumbent directors as of October 2002, until October 2007). As shown in the stock ownership table presented at page 5 of this Proxy Statement under the caption “Share Ownership,” all non-management directors have met this guideline or are within the transition period; and most substantially exceed the guideline. In addition, any new non-management director elected after October 2002 must, no later than the date of his/her election, acquire, using his/her own personal resources, shares of the Company’s stock equal in value to the base cash retainer then in effect.

Executive Stock Ownership Guidelines. Your Board believes that it is important for Executive Officers to acquire a substantial ownership position in Praxair. In this way, their interests will be more closely aligned with those of shareholders. Significant stock ownership focuses the executives’ attention on managing Praxair as equity owners.

 

Accordingly, stock ownership guidelines have been established for the Company’s officers as follows. Twenty-three executives are currently covered under this stock ownership policy. Individuals are expected to meet the applicable guideline no more than five years after first becoming subject to it.

 

 

As of the date of this Proxy Statement, all covered individuals have met or exceeded their guidelines, where permitted by law, or are within their compliance periods. Stock ownership of the five most highly compensated Executive Officers in 2006 can be found in the table presented at page 5 of this Proxy Statement under the caption “Share Ownership.”

Succession Planning and Personnel Development. Under the leadership of the Compensation & Management Development Committee, it is your Board’s practice to annually conduct a formal Succession Planning and Personnel Development session in which evaluations of senior executives are reviewed with respect to their potential for promotion into senior leadership positions, including that of the CEO. In addition, a wide variety of senior executives are purposely exposed to your Board by way of Board and Committee presentations and directors have unrestricted access to management for management assessment and development as well as for information gathering.

CEO Performance Evaluation. Your Board has in place a process whereby the Executive Session Presiding Director conducts a performance review at least annually of the Chief Executive Officer taking into account the views of all of the other independent directors. This is in addition to the evaluation inherent in the Compensation & Management Development Committee’s determination of performance-based variable compensation each year.

Strategy Review and Oversight.  It is your Board’s practice to conduct a full-day session at least annually to review the strategies of the Company overall and of its key business components; and to provide advice and counsel to management regarding the strategic issues facing the Company. Throughout the year, management reports to your Board on the status of significant strategic initiatives and issues.

Board Effectiveness Assessment. As set forth in the Corporate Governance Guidelines, and under the leadership of the Governance & Nominating Committee, your Board assesses its effectiveness at least annually. Typically, this assessment includes evaluating its effectiveness in the areas of Performance of Core Responsibilities, Decision-making Support, the Quality of Deliberations, and Director Performance, as well as consideration of additional Board practices and policies recommended as best practices by recognized governance authorities. In addition, directors are given measures of individual director effectiveness for purposes of self-assessment, reflection and self-improvement.

Auditor Independence. Your Board recognizes the importance of ensuring the independence of the Company’s independent auditor. See page 15 of this Proxy Statement under the caption “The Independent Auditor” for a summary of some of the policies designed to monitor and support such independence.

Director Compensation.  The compensation paid to non-management directors in 2006, and a description of the Company’s director compensation program, are presented at pages 48 to 49 of this Proxy Statement under the caption “Director Compensation.” The principles used by the Board in determining director compensation are set forth in the Board’s Corporate Governance Guidelines included in Appendix 1 to this Proxy Statement.

 

Relevant Polices. The Company’s Compliance with Laws and Business Integrity and Ethics Policy (“Ethics Policy,”) prohibits employees, officers and Board members from having a personal, financial or family interest that could in any way prevent the individual from acting in the best interests of the Company (a “conflict of interest”) and provides that any conflict of interest waiver relating to Board members or executive officers may only be made after review and approval by the Board upon the recommendation of its Governance & Nominating Committee.

 

In addition, the Board’s Corporate Governance Guidelines (attached as Appendix 1 to this Proxy Statement) require that any “related transaction” by an executive officer or director be pre-approved by a committee of independent and disinterested directors. For this purpose, a “related transaction” means any transaction or relationship that is reportable under the SEC’s Regulation S-K, Item 404 or that, in the case of a non-management director, would violate the Board’s independence standards.

 

Reporting and Review Procedures. To implement the foregoing policies, the Governance & Nominating Committee has adopted a written procedure for the Handling of Potential Conflicts of Interests which specifies a process for the referral of potential conflicts of interests to the Board and standards for the Board’s evaluation of those matters. This policy applies to any transaction or relationship involving an executive officer, a member of the Board of Directors, a nominee for election as a director of the Company, or a family member of any of the foregoing which (1) could violate the Company’s Ethics Policy provisions regarding conflicts of interest, (2) would be reportable under the SEC’s disclosure rules, or (3), in the case of a non-management director, would violate the Board’s independence standards.

 

In summary, under this procedure, potential conflicts of interest are reported to the Corporate Secretary for preliminary analysis to determine whether referral to the Governance & Nominating Committee is appropriate. Potential conflicts of interest can be self-identified by the director or executive officer or may arise from internal audits, integrity hotline or other referrals or through periodic due diligence conducted by the Corporate Secretary’s office. The Governance & Nominating Committee then examines the facts and circumstances of each matter referred to it and makes a final determination as to (1) whether the transaction or relationship would (or does) constitute a violation of the conflicts of interest provisions of the Company’s Ethics Policy, and (2) whether the transaction or relationship should be approved or ratified and the conditions, if any, of such approval or ratification. In determining whether a transaction or relationship constitutes a violation of the conflicts of interest provisions of the Company’s Ethics Policy, the Governance & Nominating Committee considers, among other factors, the materiality of the transaction or relationship to the individual’s personal interests, whether the individual’s personal interest is materially adverse to or competitive to the interests of the Company, and whether the transaction or relationship materially interferes with the proper performance of the individual’s duties or loyalty to the Company. In determining whether to approve or ratify a transaction or relationship, the Governance & Nominating Committee considers, among other factors, whether the matter would constitute a violation of the conflicts of interest provisions of the Company’s Ethics Policy, whether the matter would violate the NYSE listing standards, the expected practical impact of the transaction or relationship on the individual’s independence of judgment or ability to act in the best interests of the Company, the availability, practicality and effectiveness of mitigating controls or safeguards such as recusal, restricted access to information, reassignment etc., and the best interests of the Company and its shareholders generally.

 

Application of Policies & Procedures. The employment of Mr. Ratcliffe’s son-in-law in a non-executive position as disclosed below under “Certain Relationships and Transactions” does not violate the Company’s Ethics Policy or the Board’s independence standards. In addition, his hiring predated the Board’s 2004 adoption of the self-imposed requirement that certain relationships reportable under SEC rules be pre-approved by a committee of independent and disinterested directors.

 

When determining whether any director or nominee is independent, your Board considers all facts and circumstances and any relationships that a director or nominee may have with the Company, directly or indirectly. To assist your Board in making independence determinations, it also applies the independence standards set forth in Appendix 2 to this Proxy Statement. In determining that each non-management director is independent, your Board considered the following circumstances and relationships of those directors who had any direct or indirect relationship with the Company, other than serving as a director:

 

 

Based solely upon a review of SEC Forms 3, 4 and 5 furnished to the Company and written representations from the Company’s executive officers and directors, the Company believes that those persons complied with all Section 16(a) filing requirements during 2006 with respect to transactions in the Company’s stock.

 

The Board currently has four standing committees as described in the table below and each is comprised of only independent directors. The Charters for each of these committees may be found in the Governance section of Praxair’s public website, www.praxair.com and are available in print to any shareholder who requests them.

 

 

A principal role of the Audit Committee is to assist the Board of Directors in its oversight of the Company’s financial reporting process. The Board of Directors, in its business judgment, has determined that all members of the Audit Committee are “independent,” as required by applicable listing standards of the NYSE and by your Board’s independence standards set forth in Appendix 2 of this Proxy Statement.

 

As set forth in the Audit Committee’s Charter, the management of the Company is responsible for: (1) the preparation, presentation and integrity of the Company’s financial statements; (2) the Company’s accounting and financial reporting principles; and (3) internal controls and procedures designed to ensure compliance with applicable laws, regulations, and standards, including internal control over financial reporting. The independent auditor is responsible for auditing the Company’s financial statements and expressing an opinion as to their conformity with generally accepted accounting principles.

 

In the performance of its oversight function, the Audit Committee has considered and discussed the audited financial statements with management and the independent auditor. The Audit Committee has also discussed with the independent auditor the matters required to be discussed by the Statement on Auditing Standards No. 61, Communication with Audit Committees, as currently in effect.

 

The Audit Committee has discussed with the independent auditor its independence from the Company and its management. The Audit Committee has received the written disclosures and the letter from the independent auditor required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, as currently in effect. The Audit Committee has also received written confirmations from management with respect to non-audit services provided to the Company by the independent auditor in calendar year 2006 and those planned for 2007. The Audit Committee has considered whether the provision of such non-audit services is compatible with maintaining PricewaterhouseCoopers’ independence.

 

In its oversight role for these matters, the Audit Committee relies on the information and representations made by management and the independent auditor. Accordingly, the Audit Committee’s oversight does not provide an independent basis to certify that the audit of the Company’s financial statements has been carried out in accordance with generally accepted auditing standards, that the financial statements are presented in accordance with generally accepted accounting principles or that the Company’s independent auditor is, in fact, “independent.”

 

Based upon the reports and discussions described in this report, and subject to the limitations on the role and responsibilities of the Audit Committee referred to above and in the Charter, the Audit Committee recommended to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 to be filed with the SEC.

 

The Audit Committee

 

H. Mitchell Watson, Jr., Chairman
Ronald L. Kuehn, Jr.
Raymond W. LeBoeuf
Robert L. Wood

 

PricewaterhouseCoopers LLP served as Praxair’s independent auditor for the year ended December 31, 2006 and has been selected by your Board’s Audit Committee to serve in such capacity for the year ending December 31, 2007. Representatives of PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting to be available to respond to appropriate questions and to make a statement if they desire.

 

The Audit Committee’s policy is that the audit engagement partner should rotate off the Company’s account no less frequently than every five years. During Praxair’s 141/2 years as a public company, it has had four audit engagement partners. The current engagement partner has been in place for about 4 years.

 

With respect to audit firm rotation, the Audit Committee believes that it is inappropriate to establish a fixed limit on the tenure of the independent auditor. Continuity and the resulting in-depth knowledge of the Company strengthens the audit. Moreover, the mandatory partner rotation policy expressed above, normal turnover of audit personnel, the Audit Committee’s policy regarding the hiring of auditor personnel as described below, and the Audit Committee’s practices restricting non-audit engagements of the independent auditor as described below, all mitigate against any loss of objectivity that theoretically could arise from a long-term relationship. As provided in the Audit Committee’s Charter and as further described below, the Audit Committee continuously evaluates the independence and effectiveness of the independent auditor and its personnel, and the cost and quality of its audit services. The Audit Committee will periodically consider alternatives to ensure that the Audit Committee and the Company’s shareholders are receiving the best audit services available.

 

As noted in the Audit Committee Charter and in the Audit Committee Report presented above, the independent auditor reports directly to the Audit Committee and the Audit Committee is charged with evaluating its independence.

 

To help ensure independence of the independent auditor, the Audit Committee has established a policy whereby all non-audit engagements of the independent auditor must be approved in advance by the Audit Committee or its Chairman, has set forth limitations codifying its bias against such engagements, and has adopted a guideline that, absent special circumstances, the aggregate cost of non-audit engagements in a year should not exceed the audit fees for that year. As noted below in the report on independent auditor fees, such non-audit engagements were approximately 5.2% of audit fees in 2006. 100% of the Audit-Related Fees, Tax Fees and All Other Fees disclosed below were pre-approved by the Audit Committee.

 

In addition, the Audit Committee has established a policy whereby no former employee of the independent auditor may be elected or appointed an officer of the Company earlier than two years after termination of the engagement or employment.

 

Audit Fees. PricewaterhouseCoopers LLP billed Praxair, Inc. and its affiliates an aggregate amount of $5,795,000 and $5,186,000 for professional services rendered in 2006 and 2005, respectively, for the audit of Praxair’s annual financial statements, the reviews of the financial statements included in Praxair’s reports on Form 10-Q, attestation of management’s assessment of the Company’s internal controls as required by § 404 of the Sarbanes-Oxley Act of 2002, and services that are normally provided

by the independent auditor in connection with statutory and regulatory filings or engagements for those fiscal years.

 

Audit-Related Fees. PricewaterhouseCoopers LLP billed Praxair, Inc. and its affiliates an aggregate amount of $46,000 and $77,000 for assurance and related services rendered in 2006 and 2005, respectively, that are reasonably related to the performance of the audit or review of Praxair’s financial statements other than the fees disclosed in the foregoing paragraph. These fees related primarily to due diligence services and certifications required by customers and others.

 

Tax Fees. PricewaterhouseCoopers LLP billed Praxair, Inc. and its affiliates an aggregate amount of $84,000 and $91,000 for professional services rendered in 2006 and 2005, respectively, for tax compliance and tax preparation, including preparation of original and amended tax returns, and claims for refunds.

 

All Other Fees. PricewaterhouseCoopers LLP billed Praxair, Inc. and its affiliates an aggregate amount of $169,000 and $123,000 for products and services rendered in 2006 and 2005, respectively, other than those reported in the foregoing paragraphs. These services related primarily to consulting and advice in regard to local country issues for non-U.S. subsidiaries.

 

Executive Compensation

 

Praxair’s Compensation & Management Development Committee of the Board (the “Compensation Committee”) consists of four non-management directors appointed by your Board who meet the independence requirements of the NYSE and your Board’s standards for director independence as set forth at Appendix 2 of this Proxy Statement. Among other duties, the Compensation Committee is responsible for considering and determining executive compensation. Consideration and determination of directors’ compensation is the responsibility of the Governance & Nominating Committee of the Board.

 

Committee Charter and Responsibilities: As set forth in the Compensation Committee’s charter, with respect to the compensation of the executive officers reported in this Proxy Statement, the Compensation Committee has the authority to:

 

 

Delegation and CEO Involvement: The Compensation Committee may not delegate any of the foregoing authority to any other persons. With respect to the allocation of compensation and awards to employees other than the executive officers, the Compensation Committee may, and has, delegated authority to the CEO, subject to guidelines established by the Compensation Committee. The CEO does not determine the compensation of any of the executive officers but he does offer for the Compensation Committee’s consideration his views on relevant matters as described in more detail in this Proxy Statement in the section captioned “Compensation Discussion and Analysis.”

 

Committee Consultant: The Compensation Committee engages an independent, third-party compensation consultant to assist it in such analysis as is necessary to inform and support the Compensation Committee’s decisions on executive compensation. For its consideration of 2006 executive compensation, the Compensation Committee engaged Towers Perrin LLP. The purpose of the engagement was to provide to the Compensation Committee data, analysis and independent advice with regard to executive compensation. The scope of the consultant’s work is described in this Proxy Statement in the section

captioned “Compensation Discussion and Analysis.” The engagement also included certain analyses and data requested by management from time to time. The consultant was directed to keep the Compensation Committee informed of the work that it performs for management and to not compromise its independence with respect to advice its renders to the Compensation Committee.

 

Committee Process for Executive Compensation: With regard to executive compensation, the Compensation Committee generally follows the following schedule and process in its annual cycle of meetings:

 

 

 — Review trends in executive compensation and the competitiveness of the Company’s executive compensation program as presented by the Compensation Committee’s consultant.

 

 

 — Determine the performance-based variable compensation plan for the following plan year including establishment of financial and non-financial goals and payout formulas based on levels of performance against those goals.

 

 — Determine for each executive officer the following elements of his/her direct compensation for the following year: (1) salary adjustment (typically effective on April 1), (2) target performance-based variable compensation (percent of salary) and (3) value and form of long term incentive award.

 

 

 — Determine performance based variable compensation earned for the previous plan year based on evaluation of Company and CEO performance against the goals previously established by the Compensation Committee.

 

 — Determine terms and conditions of long term incentive awards including calculation of the number of equity units to be awarded based on the dollar value to be delivered as established in December.

 

 

 — Review perquisites and personal benefits available to executive officers.

 

 — Review executive officer stock transactions and compliance with stock ownership guidelines.

 

 — Review proposed proxy statement disclosures with respect to executive compensation.

 

Director Nominations

 

The Governance & Nominating Committee is comprised of five non-management directors who meet the independence requirements of the NYSE and your Board’s standard’s for director independence set forth in Appendix 2 to this Proxy Statement. Among other duties, the Governance & Nominating Committee has responsibility for the director nomination process.

 

The Governance & Nominating Committee will consider candidate nominees for election as director who are recommended by shareholders. Recommendations should be sent to the Secretary of Praxair and should include the candidate’s name and qualifications and a statement from the candidate that he or she consents to being named in the proxy statement and will serve as a director if elected. In order for any candidate to be considered by the Governance & Nominating Committee and, if nominated, to be included in the proxy statement, such recommendation must be received by the Secretary on or before the date specified on page 56 of this Proxy Statement under the caption “Shareholder Proposals for the 2008 Annual Meeting.”

 

The Governance & Nominating Committee believes that the minimum qualifications that must be met by any director nominee include a strong record of integrity and ethical conduct, a record of accomplishment, lack of conflicts that might interfere with the nominee’s exercise of independent judgment on matters affecting the Company or its shareholders, and a willingness and ability to represent all shareholders of the Company.

 

The qualities and skills necessary in a director nominee are governed by the specific needs of the Board at the time the Governance & Nominating Committee determines to add a director to the Board. The specific requirements of the Board will be determined by the Governance Committee and will be based on, among other things, the Company’s then existing strategies and business, market, geographic and regulatory environments, and the mix of perspectives, experience and competencies then represented by the other Board members; and will take into account the Chief Executive Officer’s views as to areas in which management desires additional advice and counsel.

 

When the need to recruit a director arises, the Governance & Nominating Committee will consult the other directors, the Chief Executive Officer and, on occasion, fee-paid third party recruiting firms to identify potential candidates. The candidate evaluation process may include inquiries as to the candidate’s reputation and background, examination of the candidate’s experiences and skills in relation to the Board’s requirements at the time, consideration of the candidate’s independence as measured by the Board’s independence standards, and other considerations that the Governance & Nominating Committee deems appropriate at the time. Prior to formal consideration by the Governance & Nominating Committee, any candidate who passes such screening would be interviewed by the Governance & Nominating Committee (or the Governance & Nominating Committee Chairman) and by the Chief Executive Officer.

 

No new directors have been appointed or nominated since the last annual meeting of shareholders.

 

The following pages present information about the persons who comprise Praxair’s Board of Directors, including the four nominees for election. During 2006, the Board held nine meetings.

 

During his current term to-date, each nominee for reelection attended Board meetings and meetings of committees of which he is a member as follows: Mr. Alves, 100%; Mr. Kuehn, 100%; Mr. Watson 96%; and Mr. Wood 90%. During this same period, the continuing directors collectively attended approximately 99% of such meetings.

 

 

The following Executive Officers have been elected by the Board of Directors and serve at the pleasure of the Board. It is expected that the Board will elect officers annually following each annual meeting of shareholders.

 

Stephen F. Angel, 51, See description under “The Board of Directors.”

 

James T. Breedlove, 59, is Senior Vice President, General Counsel and Secretary of Praxair, Inc. and served as Vice President, General Counsel and Secretary from 2004 to 2006. Prior to joining Praxair in 2004, Mr. Breedlove was Senior Vice President and General Counsel at GE Equipment Services from 2002, and from 1992 to 2002, he served as a Senior Vice President of a division of General Electric Capital Corp.

 

Domingos H. G. Bulus, 45, is President of White Martins Gases Industriais Ltda. (“White Martins”), Praxair’s Brazilian subsidiary, and is a Vice President of Praxair, Inc. He served as President of Praxair Asia from 2001 to 2003. Mr. Bulus also served as Executive Director of the Andean Treaty region for White Martins from 1996 to 2001. He assumed his current position in 2003.

 

Patrick M. Clark, 45, is a Vice President of Praxair, Inc. and its Controller. Prior to joining Praxair in those capacities, Mr. Clark was, since 1997, Vice President, Finance and Chief Financial Officer of Enodis North America, a subsidiary of Enodis Plc., a global manufacturer of food equipment. He assumed his current positions in 2002.

 

James J. Fuchs, 54, is a Senior Vice President of Praxair, Inc., and served as a Vice President from 2001 to 2006. Since 2001, he also has been President of North American Industrial Gases, and President of Praxair Canada. In 2006, Mr. Fuchs also assumed responsibility for Praxair’s Mexican operations. Prior to these assignments, Mr. Fuchs served Praxair Asia as a Vice President from 1996 and then as its President from 1998.

 

Randy S. Kramer, 54, is a Vice President of Praxair, Inc. and, since 2004, President, Praxair Europe. In 1999, he was elected a Vice President of Praxair responsible for carbon dioxide products and services, and then for U.S. food and beverage marketing and sales. Mr. Kramer led Praxair’s procurement organization in 2000 and, in 2001, he was appointed as Praxair’s Vice President of Sales.

 

Ricardo S. Malfitano, 48, is an Executive Vice President of Praxair, Inc., overseeing Praxair’s South America and Asia regions, the Electronics business, the North American packaged gases business, Praxair Distribution, and global supply systems, global procurement and engineering. Mr. Malfitano served as a Senior Vice President of Praxair from 2003 to 2006 and was President of White Martins, Praxair’s Brazilian subsidiary, and President, Praxair South America from 2001 to 2003. He served as President, North American Industrial Gases and President, Praxair Canada from 1998 to 2001. Mr. Malfitano also served as Chief Operating Officer of White Martins from 1997 to 1998. He assumed his current position in 2006.

 

Dennis H. Reilley, 54. See description under “The Board of Directors.”

 

James S. Sawyer, 50, is an Executive Vice President and the Chief Financial Officer of Praxair, Inc. From 2003 to 2006, he served as a Senior Vice President and the Chief Financial Officer. Mr. Sawyer became Assistant Treasurer in 1992 upon Praxair’s launch as a public company, and served as Vice President and Treasurer from 1994 to 2000. He was designated the Chief Financial Officer in 2000.

 

Robert S. Vruggink, 49 is a Senior Vice President of Praxair, Inc. He served as President of Praxair Surface Technologies from 2003 to 2006. Mr. Vruggink joined Praxair in 2001 as area director for industrial gases in the U.S. southern region. Prior to joining Praxair, he had served in a wide variety of engineering and management assignments for Conoco and DuPont. He assumed his current position in 2006.

 

Wayne J. Yakich, 49, is a Vice President of Praxair, Inc. and President, Praxair Distribution, Inc. Mr. Yakich was formerly Vice President, Business Operations for Praxair Distribution. He assumed his current positions in 2000.

 

 

The Compensation & Management Development Committee reviewed and discussed with management the “Compensation Discussion and Analysis” below and recommended to the Board that it be included in this Proxy Statement. The Compensation Committee has represented to management that, to the extent that the “Compensation Discussion and Analysis” purports to disclose the Compensation Committee’s deliberations and thinking in making executive compensation decisions and policy, it is accurate and materially complete.

 

The Compensation & Management Development Committee

 

Ronald L. Kuehn, Jr., Chairman
Claire W. Gargalli
Raymond W. LeBoeuf
Wayne T. Smith

 

This compensation discussion and analysis (“CD&A”) is intended to provide context for the decisions underlying the compensation reported in the executive compensation tables included in this Proxy Statement for the Company’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and the three other executive officers who had the highest “total compensation” for 2006, as set forth in the “Summary Compensation Table” below (these five executive officers are collectively referred to as the “Named Executive Officers” or the “NEOs”). The Compensation Committee of the Company’s Board of Directors is responsible for policies and decisions regarding the compensation and benefits for NEOs. Certain facts described in this CD&A reflect Compensation Committee deliberations about which management does not have personal knowledge, although the Compensation Committee has advised management that the information in this CD&A is accurate and materially complete.

 

Objectives of Praxair’s Executive Compensation Program

 

The objectives of Praxair’s executive compensation program are to:

 

 

 — short term business performance, and

 

 — longer term shareholder value creation; and

 

 

The Compensation Committee achieves these objectives through the following means:

 

Attraction and retention of executive talent

 

The Compensation Committee endeavors to provide competitive compensation to Praxair’s executives. To help ensure that Praxair’s executive compensation is in-line with the market, the Compensation Committee benchmarks each element of Praxair’s compensation program against comparator companies representing, among others, the market for executive talent most applicable to the Company. The Compensation Committee designs the executive compensation program to be performance-based in order to drive performance and also to assure that strong performance is well rewarded, thus attracting

and retaining high-performing, results-oriented executives. Long term incentives are designed, in part, to provide retention incentive as well as to reward the creation of long term shareholder value. In the event of a change-in-control of the Company, severance arrangements are intended to ensure continuity by incenting executives to focus on performing their duties rather than seeking immediate employment elsewhere.

 

Linkage to short term business performance and to longer term shareholder value creation

 

The Compensation Committee seeks to motivate executives to work conscientiously to achieve both short term and long term goals and, thereby, create shareholder value. A significant proportion of each NEO’s total compensation opportunity is performance-based variable compensation which rewards executives for annual business performance against pre-determined financial and non-financial goals. These rewards are balanced with long term incentives to both drive short term growth in shareholder value and to reward long term decision-making which results in sustainable growth in shareholder value.

 

Encouragement of executive ownership of Company stock

 

Stock ownership guidelines are in place for NEOs (see disclosure on details of these guidelines and their enforcement in the Corporate Governance and Board Practices section of this Proxy Statement under the caption “Executive Stock Ownership Guidelines”). Equity-based instruments are a significant component of the Company’s executive compensation program. Also, the Company’s Compensation Deferral Program, 401(k) savings plan and Dividend Reinvestment and Stock Purchase Plan each provide all plan participants, including NEOs, with many avenues to acquire and hold Praxair stock or stock-equivalent units.

 

Key Factors Supporting Compensation Decisions for Executive Officers

 

The Compensation Committee considered many factors in making NEO compensation decisions reported in this Proxy Statement. Some of those key factors are summarized below. This section is intended to supplement the discussion and analysis concerning individual elements of NEOs’ compensation included elsewhere in this CD&A.

 

As described more fully elsewhere in this CD&A, a large component of annual performance-based variable compensation for 2006 was based on formula-calculated earnings for the performance achieved against selected financial measures. Except for this, individual compensation decisions in 2006 required considerable judgment and the balancing of many objective and subjective considerations such as those listed in this section. The Compensation Committee did not find it practical, nor did it attempt, to assign relative weights to various factors or subject them to pre-defined, rigid formulas; and the importance and relevance of specific factors varied among individual executives.

 

Individual Factors

 

In making its compensation decisions for NEOs in 2006, the Compensation Committee considered a number of quantitative and qualitative factors relating to the individual including, as applicable:

 

 

 

Compensation Consultant Data, Analysis and Advice

 

To assist it in meeting its objectives, the Compensation Committee engaged Towers Perrin LLP, an independent, third-party consultant, to provide data, analysis and independent advice. For 2006, the scope of the consultant’s work included preparation, and presentation to the Compensation Committee, of a report on executive compensation trends, a competitive compensation analysis covering the Company’s officers, various other materials related, for example, to the performance-based variable compensation program and stock options valuation, and other special projects requested by the Compensation Committee or management. The engagement also included certain analyses and data requested by management from time to time. In advance of applicable Compensation Committee meetings, the CEO and other management personnel reviewed the consultant’s data and analysis to be presented at the meeting and the CEO solicited the consultant’s views on his proposed recommendations for executive officer compensation (other than his own) based on that data. In its deliberations, including in private sessions with the consultant, the Compensation Committee requested the consultant’s opinion of the CEO’s recommendations.

 

Recommendations of the Chief Executive Officer

 

The CEO did not determine the compensation of any of the executive officers in 2006 but he did offer his views on relevant matters for the Compensation Committee’s consideration including:

 

 

The Compensation Committee duly considered the CEO’s recommendations in each of these areas.

 

Benchmarking

 

Benchmark data was used by the Compensation Committee to help determine the appropriate amount of each element of each NEO’s total compensation for 2006.

 

Selection of Benchmark Companies. Benchmark companies were selected by the Compensation Committee with the assistance of its consultant. From a broader base of companies in selected industries (the Key Industry Group, consisting, for 2006, of 297 companies) for which the consultant maintains detailed compensation data, the Compensation Committee selected a smaller group as the Key Company Group. The Compensation Committee used the Key Company Group to determine competitive pay levels for NEO positions. The companies in this group were selected to represent the Company’s competitors, key customer segments and the markets for executive talent most applicable to the Company. The group was targeted at 25-30 members so as to provide meaningful but manageable data comparisons. For 2006, the 28 companies identified below were selected on the advice of the

Compensation Committee’s consultant. From the Key Company Group were selected 10 companies to comprise the Compensation Committee’s Practices Tracking Group for use in benchmarking compensation and benefit-related practices such as forms of equity awards, stock ownership guidelines, perquisites and personal benefits, retirement and other termination arrangements, based on proxy statement disclosures. The Practices Tracking Group comprised key competitors as well as other companies that the consultant and the Compensation Committee deemed appropriate for this purpose.

 

The companies in the Key Company Group were: 

 

 

Application of Benchmark Data. For each of the three elements of direct compensation (salary, long term incentive awards and target performance-based variable compensation), the Compensation Committee examined the mid-range of benchmark company data for each NEO’s position, such data adjusted by the consultant for scope of company operation. Although the Compensation Committee uses this mid-range as a guide for determining compensation levels, actual values set for any individual NEO may, from time to time deviate from mid-range (a) due to the Individual Factors described above, (b) because of year-to-year swings in market median data, and (c) so as to maintain the desired internal equity among executive positions. Unless otherwise disclosed in the below sections on individual elements of direct compensation, the value of compensation paid or targeted for each NEO in 2006 was within the mid-range as determined by the benchmarking process. The Compensation Committee also consulted market data from the broader Key Industry Group as a secondary check to ensure that mid-range data from the Key Company Group in any year is generally representative and not impacted by any unusual or short-term factors.

 

Evaluation of Aggregate Compensation

 

Total Compensation and Benefits. In late 2005, as a cross check against its separate determinations of the amounts of individual direct compensation elements for the CEO, the Compensation Committee considered the value of the CEO’s aggregate compensation package in which all components of his compensation and benefits were viewed together using a “tally sheet” format. Based on this review, the Compensation Committee determined that the total compensation granted to the CEO is both fair and reasonable. Completion of a similar analysis for most NEOs was completed in late 2006, for use in 2007 compensation decisions. At that time, the Compensation Committee determined that the total compensation granted to all NEOs is both fair and reasonable.

 

Termination Benefits. In late 2005, the Compensation Committee also reviewed an analysis of the total benefits to be received by the CEO under various termination events, including regular retirement, voluntary resignation, and termination by the Company, including following a change-in-control of the Company. Based on this review, the Compensation Committee determined that the aggregate of termination and severance provisions and their outcomes applicable to the CEO is both fair and reasonable. Completion of a similar analysis for most NEOs was completed in late 2006, for use in 2007 compensation decisions. At that time, the Compensation Committee determined that the termination benefits granted to all NEOs is both fair and reasonable.

 

Tax and Accounting Considerations

 

Deductibility of Compensation Expense. The Compensation Committee was cognizant of the compensation deduction limitations under Internal Revenue Code Section 162(m) and, accordingly, structured its performance-based variable compensation program for the 2006 plan year consistent with the shareholder-approved “Praxair, Inc. Plan For Determining Awards under Section 162(m)” (the “162(m) Plan”). The Company believes that compensation paid under this program is “performance-based” and, thereby, fully deductible under IRS rules. In addition, 2006 option grants and the plans under which they were determined and awarded were designed so as to make their related compensation expense fully deductible. The amount of the CEO’s base salary that exceeds $1 million is not deductible under IRS rules but such non-deductibility was not a consideration in determining the amount of such base salary.

 

Accounting Treatments. Accounting treatments were reviewed but did not impact the selection and design of equity and equity-related compensation for 2006, although all such grants were made in a manner as to not require variable accounting treatment.

 

Analysis of the Use of Long Term Incentives

 

The Compensation Committee reviewed 2006 stock transactions by executive officers and their year-end holdings so as to:

 

 

Based on this review, the Compensation Committee determined that the long term incentives previously granted to NEOs continue to be used appropriately and for their intended purpose.

 

Audit of Program Administration

 

To assist in determining the performance-based variable compensation payable for the 2006 plan year, the Compensation Committee engaged the Company’s internal audit department to verify that the rules of the program established by the Compensation Committee were properly applied and the Company’s performance against the pre-established financial measures was properly determined. The report of the internal auditors confirmed to the Compensation Committee that the program was properly administered.

 

Elements of Direct Compensation for Executive Officers

 

The Company uses a combination of cash salary, annual performance-based variable compensation (currently paid in the form of cash) and grants of long term incentives (in the form of stock options for 2006) as the three elements of total direct compensation for NEOs. The ratio of each component to total direct compensation takes into consideration the benchmark market data specific to each position, Individual Factors as described above and the mix of cash and equity components the Compensation Committee deems necessary to balance retention with shareholder value creation. The proportion of total compensation that is dependent on the Company’s business or stock performance (or is “at risk”) varies by position and increases with higher responsibility. The methods by which the amounts of 2006 compensation for NEOs were determined are described in the following sections for each element of direct compensation.

 

Salary

 

The salaries reported in the “Summary Compensation Table” reflect actual cash paid for the 2006 calendar year which includes the effect of adjustments to base salaries made as of March 1, 2006 (for Mr. Angel), April 1, 2006 (for the other NEOs) and November 1, 2006 (for Messrs. Sawyer, Malfitano and Fuchs). The March and April adjustments ranged from 3% to 5%, except for Messrs. Angel and

Malfitano whose salary adjustments were 8-13% due to their promotions early in the year to President & Chief Operating Officer and Executive Vice President, respectively. The salary adjustments for Messrs. Sawyer, Malfitano and Fuchs as of November 1, 2006 ranged from 8%-10% of their salaries then in effect. These adjustments were based upon Mr. Sawyer’s promotion to Executive Vice President, Mr. Malfitano’s assumption of greater Company operating responsibilities, and Mr. Fuchs’ promotion to Senior Vice President. The salary level for each NEO was established by the Compensation Committee considering both the benchmark data for equivalent positions in the Key Company Group and the Individual Factors as described above.

 

Annual Performance-Based Variable Compensation

 

The performance-based variable compensation reported for each NEO (in the column of the “Summary Compensation Table” captioned “Non-Equity Incentive Plan Compensation”) represents that earned for 2006 performance. The following describes the methodologies used by the Compensation Committee to determine the final annual performance-based variable compensation earned by each NEO, subject to the limitations of the 162(m) Plan:

 

Target Performance-Based Variable Compensation Level. The target performance-based variable compensation level for 2006 for each NEO (meaning the amount of variable compensation, expressed as a percent of salary, that would be earned for 100% achievement of the financial performance mid-point goals) was established by the Compensation Committee in December 2005 considering both the benchmark data for equivalent positions in the Key Company Group and the Individual Factors as described above.

 

Establishment of Financial Measures. Prior to the start of the 2006 plan year, the Compensation Committee selected three financial measures that it determined were appropriate to drive desired business behavior for Praxair and would correlate positively with total shareholder return. These financial measures were the Company’s corporate consolidated results with respect to (1) net income, (2) sales revenue and (3) cash flow (defined as net income plus depreciation plus changes in operating working capital) with each measure weighted equally. Each measure is an accounting item reported in accordance with GAAP in the Company’s public financial statements except that the Compensation Committee permitted adjustments to reported results based on differences between operating plan assumptions and actual results with respect to currency exchange rates and product price changes caused only by changes in certain raw material costs. Similar financial measures were established for each of 10 business units (the measures tailored and adjusted to each business’ circumstance such as using working capital as a percent of sales rather than cash flow). Corporate consolidated financial results and the business unit financial results were both included in the formula by which performance-based variable compensation earned for financial performance was determined.

 

Establishment of Financial Goals and Payout Formulae. Mid-point goals were established for each financial measure which corresponded to a 100% payout of the target performance-based variable compensation. In addition, values were established for each financial measure representing minimum and maximum rewarded performance levels corresponding to a potential payout percentage ranging from 0% to 200% of target. The Compensation Committee designed the relationship between pay and performance so as to ensure that performance which significantly exceeded the mid-point goals would be rewarded with well-above market benchmark payout levels. Similarly, performance that did not meet the goals would reduce the performance-based variable compensation payout to as low as zero in the case of failure to meet the pre-established minimum performance. In setting the mid-point goals for 100% target payout, the Compensation Committee strived to establish challenging but achievable goals. The factors considered by the Compensation Committee in assessing the challenge inherent in the goals included:

 

 

 

Although the Compensation Committee performed no explicit probability assessment, its intent was to establish the 100% target payout level at about a 50% probability of achievement, the minimum payout level at relatively high probability (approximating 85%) and the maximum payout at a relatively low probability (approximating 15%).

 

Non-Financial Goals. The Compensation Committee also established non-financial goals with respect to (1) strategic positioning, (2) performance relative to peers, (3) safety, (4) people development, (5) Six Sigma, and (6) audit/compliance. The Compensation Committee retained the discretion to adjust the performance-based variable compensation payout as determined by the performance against financial measures based on its assessment of the Company’s performance of these non-financial goals plus consideration of unforeseeable external factors beyond management’s control that may have helped or hindered management’s achievement of the financial goals.

 

Payout Based on Performance Against Goals. For 2006 performance, taking into consideration the Company’s performance against both the financial goals and non-financial goals, the Compensation Committee determined that each NEO earned a performance-based variable compensation payout above target. This was based on the Company exceeding the financial goals for revenue growth, net income and cash flow previously established as performance-based variable compensation measures for 2006 performance. In addition, the Compensation Committee judged that performance against pre-established non-financial goals was above standard and, consequently, should be a positive factor in determining performance-based variable compensation.

 

Application of Individual Performance Factors. The Compensation Committee retained the discretion to adjust a NEO’s performance-based payout (calculated as described above) based on an individual performance factor (“IPF”), determined, in part, by some of the Individual Factors as described above. The calculated payout to a particular NEO as determined by the above-described evaluation of performance against the financial and non-financial goals was adjusted by an IPF determined by the Compensation Committee (subject to a maximum payout limit set by the 162(m) Plan) taking into account the CEO’s annual performance appraisal of the NEO. The Compensation Committee also determined the IPF to be applied to the CEO.

 

Determining Maximum Permissible Payout Under 162(m). For NEOs, the procedures set forth in the 162(m) Plan were used to establish an upper limit on performance-based variable compensation to be earned for 2006. For 2006, the Compensation Committee approved a schedule identifying the maximum performance-based variable compensation payment to be paid to each NEO for each potential level of 2006 Net Income performance. The Compensation Committee then exercised its downward discretion available under the 162(m) Plan to adjust the actual payment to a level it deemed appropriate for each NEO according to the methodology described above.

 

Recapture Policy. The Compensation Committee has no established policy for the recapture of annual performance-based variable compensation payouts in the event of a later restatement of the results on which the payouts were based. If such an event occurs, the Compensation Committee expects to establish such recapture requirements as it determines are legal, equitable and practical under the circumstances existing at that time.

 

Performance Goals for 2007 Variable Compensation. In designing the performance-based variable compensation program for 2007, the Compensation Committee adjusted the financial measures to be used by substituting working capital for cash flow as was used for 2006 as described above. This change was made to simplify the process by aligning the corporate measure with the measure used for most of the business units as described above.

 

Long Term Incentive Awards

 

The long term incentive grants reported for each NEO in the “Grants of Plan-Based Awards” table represent those stock option grants made in February 2006. No grants were made to any NEO in 2006 other than this annual grant.

 

Determining the Value to be Delivered. The dollar value to be delivered in 2006 to each NEO in the form of long term incentives was established by the Compensation Committee in December 2005 considering both the benchmark data for equivalent positions in the Key Company Group and the Individual Factors as described above. For 2006, the Compensation Committee granted Mr. Reilley long term incentives approximately 30% above the market median (as estimated by the benchmark data described above) to provide additional retention incentive and based on the Compensation Committee’s evaluation of his exceptional performance, primarily acknowledging the Company’s sustained financial performance for 2005 and prior years and the market’s recognition of his achievements. In determining the value to be delivered in 2006 to NEOs in the form of long term incentive awards, the Compensation Committee did not deem relevant the number or value of incentives then held by NEOs or the amount of previous gains received by NEOs from exercises of options.

 

Determining the Amount of Award. The number of options granted to each NEO was determined by the Compensation Committee in January 2006 based on the consultant’s estimated valuation of the Company’s options using a binomial valuation model and applying that per-option value to the dollar value to be delivered to each NEO as previously determined.

 

Determining the Form of Award. The Compensation Committee reviewed alternative forms of long term equity incentives taking into account, among other factors, market trends and practices, the potential shareholder dilution effect of equity grants, and the intended purposes of such incentives. The Compensation Committee determined that stock options were the most appropriate vehicle for the 2006 grants. The Compensation Committee judged at that time that stock options presented an appropriate balance of risk and reward in that the executive earns no compensation from stock options without an increase in the Company’s stock price and, yet, the potential for increased value acts as a retention incentive. The Compensation Committee also noted that, because of the Company’s record of excellent shareholder return performance, the Company’s executives place high value in this particular long term incentive vehicle. Finally, the Compensation Committee considered that the vesting terms as well as the opportunity provided by stock options for substantial leveraged value from sustainable growth in shareholder wealth over their ten-year term encourage long term decision-making.

 

Determining the Grant Date. The Compensation Committee’s practice has been to approve at its regular meeting in late January the total number of stock options to be allocated among all eligible employees and to specifically approve the stock options to be granted to NEOs and all other executive officers. The Compensation Committee sets the actual grant date of these options as the date of the Board’s regular meeting in late February. The option exercise price is fixed at 100% of the closing price of the Company’s common stock on the NYSE on that February meeting date. Separate grants may occur on other dates throughout each year as part of hiring new employees or to reflect promotions.

 

Consistent with this practice, on January 24, 2006, the Compensation Committee established February 28, 2006 as the grant date for NEOs’ and other eligible employees’ options, coinciding with the Board’s next scheduled meeting date. This grant date was established so that:

 

 

Form of Long Term Incentives for 2007 Grant. In designing the long term incentive program for 2007 applicable to NEOs, the Compensation Committee determined to move to a mix of 75% of the dollar

value in stock options plus 25% in performance share units to be paid out in stock based on two-year performance metrics. The Compensation Committee decided that this mix retains the benefits of stock options as described above but complements the executives’ focus on external stock price and longer-term shareholder wealth creation with an appropriate balance of attention to internal performance metrics that are expected to drive growth and medium-term decision-making.

 

Benefit Plans Available to Executive Officers

 

The Company’s practice is to make available to NEOs essentially the same benefit plans generally available to other employees in the U.S. Neither the financial resources of the NEO, nor the amount or form of present or past direct compensation paid to the NEO was deemed by the Compensation Committee as relevant to any NEO’s continuing eligibility to participate in these plans in 2006. Benefits for NEOs under these plans are available and calculated on the same basis as for the other plan participants. Adjustments are made so as to continue the benefits to all participants, including NEOs, to the extent that they would otherwise be limited by income or other restrictions imposed by the federal tax laws. From time to time, the Compensation Committee may approve certain other adjustments to be applied to an NEO when it is in the best interests of the Company such as to facilitate the recruitment of an executive. Any such adjustments that are in place for any NEO are disclosed in the tables in this Proxy Statement or their accompanying footnotes or narratives. In addition to the benefit plans listed below, employees, including NEOs, are eligible to participate in other Company plans such as the 401(k) Savings Plan, medical (both active employee and retiree), dental, relocation and vacation.

 

Retirement Plans

 

The benefits payable to NEOs under the Company’s retirement plans are described in the “Pension Benefits” table and its accompanying footnotes and narrative. As described more fully therein, the Compensation Committee, with the advice of its consultant, has in the past approved certain service year credits for Messrs. Reilley and Angel, as were deemed necessary to compensate these the executives for benefits lost upon departure from their previous employers or to provide additional retention incentive. Also described in the footnotes are certain equitable adjustments for Messrs. Malfitano and Fuchs related to their service in Brazil and Canada, respectively, which adjustments are generally available to all similarly situated employees.

 

Tax-Qualified Pension Plan. The Company maintains a tax-qualified defined benefit pension plan for most U.S. employees, including the NEOs.

 

Supplemental Retirement Income Plan. The Company maintains an unfunded Supplemental Retirement Income Plan (“Supplemental Plan”) for the primary purpose of providing benefits that would otherwise be paid to U.S. employees under the tax-qualified pension plan but for the application of certain federal tax law limitations. Because of their income levels, each NEO is eligible to participate in the Supplemental Plan. The incremental benefits paid under the Supplemental Plan are calculated in the same manner as the underlying tax-qualified pension plan and result in no greater benefit than if federal tax law limitations were not in place.

 

Compensation Deferral Program

 

Any U.S. employee eligible to participate in the annual performance-based variable compensation plan, including each NEO, is eligible to participate in the Company’s Compensation Deferral Program. Contributions, earnings, withdrawals and year-end balances for 2006 for each NEO under the Compensation Deferral Program are reported in the “Non-Qualified Deferred Compensation” table.

 

The primary benefit to participants in this plan is that taxes on any compensation deferred into the plan, and on any earnings within the plan on those deferrals, are also deferred until the account is actually paid out to the individual. Contributions to the plan are voluntary and represent compensation already earned by the participant. The Company also makes contributions that would have been made to the 401(k) Savings Plan

but for the application of certain federal tax law limits under that plan. No preferential earnings opportunities are available under the plan to participants, including NEOs. An NEO’s account balance in the plan at any point in time reflects the value of the Company contributions noted above and his deferred compensation as if he had invested it, at the time it was earned, in Praxair stock or a fixed income security, as the NEO chose at the time of deferral. Therefore, these balances are irrelevant to any present or future compensation decisions for the NEO or the amount of any severance payment that should be paid to NEOs.

 

Perquisites and Personal Benefits

 

The Company’s policy is to not extend perquisites or personal benefits to employees other than for limited and specifically defined business purposes. The incremental costs to the Company in 2006 of those benefits provided to NEOs that the SEC deems to be “perquisites and personal benefits” are reported in the “Summary Compensation Table” (included in the amounts reported in the column captioned “All Other Compensation” and further detailed in an accompanying supplemental table). The Compensation Committee exercises oversight over the perquisites and personal benefits that are made available to NEOs. Accordingly, the Compensation Committee reviewed all 2006 Company expenses, regardless of amount, including expenses related to security arrangements, that could be construed as a perquisite or personal benefit for each NEO. The purposes of this review included ensuring that:

 

 

In addition, the Company’s internal audit department performed its annual audit of executive officer expense reports for compliance with Company policies, and the independent auditors reviewed that work. Based on these reviews, the Compensation Committee determined that the perquisites and personal benefits available to NEOs in 2006, and their costs to the Company, were reasonable and properly disclosed to shareholders.

 

Severance and Change-in-Control Arrangements for Executive Officers

 

 

Severance Plan

 

All U.S. exempt employees, including NEOs, participate in the Company’s severance plan. This plan pays to a terminated employee a severance payment calculated based on the employee’s time in service and salary rate at the time of termination. This benefit applies only to terminations by the Company other than for cause.

 

Change-in-Control Arrangements

 

The Company has entered into identical severance compensation agreements with certain senior executives, including NEOs. These agreements provide for certain payments to be made to the executive in the event of both (1) a change-in-control of the Company (as defined in the agreements), and (2) the termination of his/her employment within two years thereafter by the Company without cause or by the executive for good reason (a so-called “dual trigger”). The purpose of these agreements is to encourage retention of the executive for continuity of management, and to keep the executive focused on acting in the best interests of the Company, in the event of an actual or threatened change-in-control. The Compensation Committee has determined that such arrangements are well within the mainstream of corporate practice and provide a legitimate and reasonable benefit to the Company and to its shareholders.

 

The tables below present compensation information for NEOs. The seven tables provide 2006 compensation information, followed by a narrative discussion of compensation that NEOs could receive when their employment with the Company terminates under various circumstances or upon a change-in-control of the Company. The tables include footnotes and other narrative explanations important for your understanding of the compensation information in each table.

 

The first table below, the Summary Compensation Table, summarizes key components of NEO compensation for 2006. The six tables following the Summary Compensation Table provide more detailed information about the various types of NEO compensation, some of which are included in the Summary Compensation Table.

 

 

(1) These are the amounts that the Company recognized as compensation expense in its financial statements for 2006 as determined under Statement of Financial Accounting Standards 123R (“FAS 123R”). The Stock Awards amounts are the expense for outstanding restricted stock grants to Messrs. Reilley and Angel granted prior to 2006. The Option Awards amounts are the expense for options granted in 2006 and in certain prior years. In accordance with FAS 123R, the Company recognizes compensation expense for stock options granted to employees who are eligible for full retirement over the period from the grant date to the date of such retirement eligibility. The Option Awards amount for Mr. Reilley includes such acceleration of compensation expense because Mr. Reilley was eligible for full retirement under the Company’s Pension Program as of April 2006. The assumptions used in computing the Option Awards amounts are included in Note 16 to the Company’s 2006 financial statements in the 2006 Annual Report to Shareholders and Form 10-K. For Stock Awards, the Company determines the value of a restricted stock grant (the number of shares granted times the fair market value of the Company’s stock on the date of grant) and then recognizes this as expense ratably over the vesting term.

 

The Stock Awards and Option Awards column amounts were not actually paid to any NEO in 2006. The value of any restricted stock that vested in 2006 is reported in the “Option Exercises and Stock Vested” table below. In addition, a stock option has value only if the Company’s stock price increases above the option exercise price (an “in-the-money” option). If a NEO exercises an in-the-money option, he would then realize an actual gain. Any gain actually realized for options exercised in 2006 is reported in the “Option Exercises and Stock Vested” table below.

 

(2) In 2006, the Company achieved certain financial and non-financial goals that the Compensation Committee set in December 2005 under the Company’s Variable Compensation Plan. Therefore, the Compensation Committee awarded each NEO performance-based variable compensation payments in February 2007. These amounts are reported as “Non-equity Incentive Plan Compensation.” See the detailed description of the Variable Compensation Plan in the preceding CD&A under the sub-heading “Annual Performance-Based Variable Compensation.” Certain NEOs elected to defer a portion of this payment under the Company’s Compensation Deferral Program described after the “Nonqualified Deferred Compensation” table below. Any amounts deferred are included in the amounts reported above.

(3) Amounts in this column are the 2006 increase in actuarial present value of retirement benefits payable under the Company’s Pension Program. These amounts were not actually paid to any NEO in 2006. See the detailed description of the Pension Program and how these amounts are calculated following the “Pension Benefits” table below. The total pension present value accrued for each NEO through 2006 under the Company’s Pension Program is also disclosed in that table.

 

No amounts accumulated under the Company’s Compensation Deferral Program earn above market or “preferential” interest or other earnings; therefore, no earnings are included in this column.

 

(4) Amounts shown in this column are detailed in the “All Other Compensation” table below.

 

(5) The amount reported in the “Total” column is the sum of all of the columns. It includes the Stock Awards, Option Awards and Change in Pension Value amounts, which were not actually paid to any NEO in 2006. The Stock Awards, Option Awards and Change in Pension Value amounts actually paid or provided in the future may be more or less than the reported amounts. The amount of compensation actually paid or provided to each NEO for 2006 (being Salary, Non-equity Incentive Plan Compensation and All Other Compensation) was: Mr. Reilley: $4,348,000 (28% of Total Compensation reported); Mr. Angel: $2,087,016 (45% of Total Compensation reported); Mr. Sawyer: $1,232,097 (41% of Total Compensation reported); Mr. Malfitano: $1,309,152 (51% of Total Compensation reported); and Mr. Fuchs: $962,972 (41% of Total Compensation reported).

 

(6) During 2006, Mr. Reilley served as Chairman & Chief Executive Officer, and Mr. Angel served as President & Chief Operating Officer. Mr. Angel was elected Chief Executive Officer effective January 1, 2007, and will become Chairman effective May 1, 2007, upon Mr. Reilley’s retirement from the Company on April 30, 2007.

 

This table provides more detail regarding the amounts disclosed in the “All Other Compensation” column in the Summary Compensation Table.

 

 

 

(1) Includes the Company’s incremental costs of providing financial planning services to Messrs. Reilley, Angel, Malfitano and Fuchs. For reasons of security and time management, the Board requires the Chief Executive Officer to use the Company’s corporate aircraft for personal use as well as business travel. During 2006, the aggregate unreimbursed incremental cost to the Company for Mr. Reilley’s personal use of corporate aircraft was $152,532. The aircraft is available for the Company’s use through a time-share arrangement. The Company pays a fixed time-share charge for the right to use the aircraft, and a per-trip charge. The Company calculates the incremental aircraft costs for Mr. Reilley’s personal use as the full amount of those per-trip charges attributable to his personal use. The fixed time-share charge is not included as an incremental cost, as the Company must pay this amount even if Mr. Reilley did not use the aircraft for personal travel.

 

The Company maintains certain country club memberships for business entertainment purposes which memberships, by club rules, are in an executive’s name. By Company policy, reimbursement of club costs is authorized only when membership and use of the club facilities are judged to be important to the conduct of the Company’s business. As no NEO made personal use of these club memberships during 2006, no amounts are reported in the table.

 

In addition, the Company pays for or provides executive officer travel, lodging and related expenses incurred in connection with attending Company business related events, including Board meetings (including the expenses related to the attendance of spouses if they are specifically invited for appropriate business purposes), and may provide use of Company chartered aircraft if available. No amounts are reported in the table for these business expenses.

 

(2) Under Federal tax rules, the Company imputes income to each NEO for the value of the perquisites listed in the first column. The amounts listed in this column are payments that were made to NEOs as reimbursement for the taxes on imputed income.

 

(3) The amounts in this column are Company matching contributions to the Company’s 401(k) Savings Plan and Company contributions to the Compensation Deferral Program. See the description of the Compensation Deferral Program under the “Nonqualifed Deferred Compensation” table below.

 

The following table provides more detailed information regarding the Non-Equity Incentive Plan Compensation and the Option Awards reported in the Summary Compensation Table above.

 

									Estimated Possible Payouts Under Non-Equity Incentive Plan Awards(2)									Estimated Possible Payouts Under Equity Incentive Plan Awards
																														All Other
																											All Other Stock			Option			Exercise or
						Compen-																					Awards:			Awards:			Base			Grant Date
						sation																					Number of			Number of			Price of			Fair Value of
						Committee																					Shares of			Securities			Option			Stock and
						Approval												Threshold									Stock or			Underlying			Awards			Option
Name			Grant Date			Date(1)			Threshold($)			Target($)			Maximum($)			($)			Target($)			Maximum($)			Units(#)			Options(#)(3)			($/Sh)			Awards(4)
Dennis H.			2/28/2006			1/24/2006			—			—			—			—			—			—			—			475,000			$53.98			$5,149,000
Reilley									$0			$1,251,250			$3,412,500			—			—			—			—			—			—			—
Stephen F.			2/28/2006			1/24/2006						—			—			—			—			—			—			130,600			$53.98			$1,415,704
Angel									$0			$568,125			$1,893,750			—			—			—			—			—			—			—
James S.			2/28/2006			1/24/2006			—			—			—			—			—			—			—			107,500			$53.98			$1,165,300
Sawyer									$0			$360,938			$1,443,750			—			—			—			—			—			—			—
Ricardo S.			2/28/2006			1/24/2006			—			—			—			—			—			—			—			92,500			$53.98			$1,002,700
Malfitano									$0			$373,750			$1,494,999			—			—			—			—			—			—
James J.			2/28/2006			1/24/2006			—			—			—						—			—			—			62,600			$53.98			$678,584
Fuchs									$0			$256,804			$1,185,249			—			—			—			—			—			—			—

 

(1) On January 24, 2006, the Compensation Committee approved the total number of stock options to be allocated among all eligible employees and specifically approved the stock options to be granted to NEOs and all other executive officers. The Compensation Committee set February 28, 2006 as the actual grant date of these options, at an option exercise price of 100% of the closing price of the Company’s common stock on the NYSE on that date. For a more detailed description of the Compensation Committee’s option grant practices, see the CD&A under the sub caption “Long Term Incentive Awards-Determining the Grant Date.”

 

(2) The actual amount of performance-based variable compensation paid in February 2007 for 2006 performance is shown in the “Summary Compensation Table” under the “Non-Equity Incentive Plan Compensation” column. The amounts shown in this column are the range of potential 2006 payments that could have been made under the Company’s Variable Compensation Plan and the 162(m) Plan. As no minimum amount was payable, no “Threshold” amounts are reported. Target amounts are expressed as a percent of each NEO’s salary, assuming achieving 100% of Company financial goals. The Maximum amounts are the maximum payments that could be made under the 162(m) Plan (generally, up to three times salary paid for the prior year). For more information, see the explanation in the CD&A under the sub-heading “Annual Performance-Based Variable Compensation.”

 

(3) This column shows the number of shares underlying stock option grants made in February 2006 under the 2002 Praxair, Inc. Long Term Incentive Plan. See the explanation below this table and in the CD&A for more information about the stock option grants.

 

(4) The amounts in this column are the full grant date values of the option grants made in February 2006 calculated in accordance with FAS 123R. These amounts were neither paid to any NEO nor recognized by the Company as compensation expense in 2006 under FAS 123R. The recognized compensation expense amounts are shown in the “Option Awards” column in the “Summary Compensation Table.” Those 2006 compensation expense amounts include expense for certain options granted prior to 2006. See footnote (1) to the “Summary Compensation Table.”

Additional Information Regarding Plan-Based Awards

 

Option Grant Terms

 

The 2006 option grants reported in the table above were made under the 2002 Praxair, Inc. Long Term Incentive Plan (the “Stock Plan”). Options granted to NEOs are made on the same terms as options granted to all other eligible employees. The material terms of these grants include:

 

 

 

The Stock Plan defines “change-in-control” to mean, generally, (1) any consolidation or merger in which the Company is not the continuing or surviving corporation; (2) the liquidation of the Company or the sale of all or substantially all of the assets of the Company; (3) an acquisition by a person or group of more than 20% of the Company’s outstanding shares; or (4) a change in the majority composition of the Board not approved by two-thirds of the directors in office before the change.

 

The table below shows each NEO’s outstanding option grants and unvested restricted stock, if any, at the end of 2006. For each outstanding option grant, the table shows the option shares that have vested (or that are “Exercisable”) and those not yet vested (or that are “Unexercisable”).

 

 

(1) Each option vests, or became fully vested, in three consecutive, equal annual installments beginning on the first anniversary of the grant date.

 

(2) The shares shown in this column are shares of restricted stock granted to Messrs. Reilley and Angel. See the description below this table for more information about the terms of these grants. Mr. Reilley’s grant of 25,000 shares (adjusted to 50,000 shares to reflect a later 2-for-1 stock split) was made on February 22, 2000 in connection with his joining the Company. The first 1/3 of the total grant vested on February 22, 2006, and another 1/3 vested on February 22, 2007. As Mr. Reilley is retiring from the Company effective April 30, 2007, he will forfeit the final 1/3 of the grant that would have vested on February 22, 2008. Mr. Angel’s grant of 20,000 shares (adjusted to 40,000 shares to reflect a later 2-for-1 stock split) was made on April 23, 2001, in connection with his joining the Company. The first 25% of the total grant vested on April 23, 2003. Another 25% will vest on April 23, 2007, and the final 50% will vest on April 23, 2011, assuming continued employment on those dates.

 

(3) The market value reported in this column is the number of shares of unvested restricted stock times the closing price of the Company’s common stock on the NYSE of $59.33 per share on December 29, 2006.

 

Additional Information Regarding Outstanding Equity Awards

 

Restricted Stock Grants

 

Footnote 2 to the above table describes the general vesting schedule of Messrs. Reilley’s and Angel’s restricted stock grants. The other material terms of those grants are:

 

 

Regardless of the vesting schedule described above, all shares will vest immediately if: (i) the Company terminates Messrs. Reilley’s or Angel’s employment other than for cause; (ii) either becomes disabled; (iii) either dies; or (iv) if a “change-in-control” of the Company occurs. Under the restricted stock grants, a “change-in-control” is generally as defined in the Stock Plan (see “Additional Information Regarding Plan-Based Awards — Option Grant Terms”) but also includes: (1) a transaction in which the Company’s common stock is converted into cash or some other security, except for a merger in which the Company’s stockholders own the same proportion of stock in the surviving corporation, (2) the Company is required to make a Form 8-K filing with the SEC to report a change-in-control, and (3) a person or group owning 20% or more of the Company’s outstanding shares begins to solicit proxies.

 

 

This table provides information about any options that were exercised, or any restricted stock that vested during 2006.

 

 

(1) The option exercise value realized equals the (i) NYSE market price of the Company’s common stock at the time of the option exercise minus the option exercise price, multiplied by (ii) the option shares exercised. These amounts are before taxes.

 

(2) During 2006, 1/3 of Mr. Reilley’s restricted stock grant vested (see the discussion of this grant under the “Outstanding Equity Awards At Fiscal Year-End” table above). The restricted stock value realized reported above equals the (i) NYSE closing price of the Company’s common stock on the vesting date, multiplied by (ii) the number of restricted shares that vested.

 

The table below shows certain retirement benefit information under the Company’s Pension Program described after the table.

 

 

(1) See the narrative below for a description of the Present Value of Accumulated Benefit. The values for each plan listed above are additive.

 

(2) Credited years of service for Mr. Reilley under the Supplemental Retirement Income Plan (“SRIP”) include his combined service with the Company (6.75 years) and his prior employer, DuPont (25.75 years). Mr. Reilley joined the Company from DuPont on March 6, 2000 and at that time received credit for 25.75 years of service with DuPont. When he retires from the Company, he will receive benefits based on his combined service with the Company and DuPont, less an offset of his DuPont retirement benefits. The values shown above include the effect of this offset. At the end of 2006, the present value of the accumulated benefit for Mr. Reilley’s 6.75 years of actual years of service with the Company under the SRIP was $2.1 million.

 

(3) The Praxair Pension Plan credited years of service for Mr. Angel represent his actual years of service with the Company. Effective January 1, 2011, assuming continuous employment, Mr. Angel will receive an additional credit under the SRIP for 10.00 years of service that he had with his prior employer, General Electric Company. He also will receive credit under the SRIP for an additional 11.64 years of General Electric service on January 1, 2016 if he remains continuously employed with the Company until that date. Under financial accounting rules (SFAS 87), the Company is recognizing as an accrued pension liability the additional years of credited service that Mr. Angel may receive under the SRIP over the course of his anticipated years of service. Therefore, the service and value amounts shown in the table reflect this ratable accrual. When he retires from the Company, he will receive retirement benefits under the Company’s Pension Program based on his service with the Company and any additional General Electric service that the Company recognizes at his retirement date (as described in the preceding sentences), less an offset for benefits he receives under the General Electric retirement plans. The values shown above include the effect of this offset. At the end of 2006, the present value of the accumulated benefit for Mr. Angel’s 6 years of actual years of service with the Company under the SRIP was $700,000.

 

(4) Credited years of service reported for Mr. Malfitano combine his service with Praxair and White Martins, the Company’s Brazilian subsidiary. Years of service reflect certain equitable adjustments for Mr. Malfitano related to his service for White Martins, which adjustments were generally available to all similarly situated employees. When he retires from the Company, he will receive Pension Program retirement benefits based on his combined Praxair and White Martins service, less an offset for the benefits he receives under the White Martins retirement plans. The values shown above include the effect of this offset. The White Matins retirement plans are not defined benefit plans and therefore, are not separately included in the table above.

 

(5) Credited years of service reported for Mr. Fuchs combine his service with Praxair and Praxair Canada, Inc. Years of services reflect certain equitable adjustments for Mr. Fuchs related to his service in Canada, which adjustments were generally available to all similarly situated employees. When he retires from the Company, he will receive Pension Program retirement benefits based on his combined U.S. and Canadian service, less an offset for the benefits he receives under the Canadian retirement plans. The values shown above include the effect of this offset.

Additional Information Regarding Pension Benefits

 

Present Value of Accumulated Benefit

 

The table above includes a “Present Value of Accumulated Benefit.” This is the value in today’s dollars of the total expected future retirement benefits that each NEO may receive under the Pension Program (described below). These are accrued amounts as of the end of 2006; none of these amounts have been paid. For any given year, there will be a change in the accumulated benefit. For example, from one year to the next, the accumulated benefit may increase because a NEO has worked for an additional year and received credit for that or his Pension Program compensation has increased. The change in accumulated benefit from 2005 to 2006 is disclosed in the “Summary Compensation Table” above in the “Change in Pension Value” column.

 

The Company recognizes these amounts as a future pension liability on its financial statements. The Company calculates these amounts using complex actuarial valuations and assumptions. These assumptions are described in Footnote 17 to the Company’s 2006 financial statements and in Management’s Discussion and Analysis under the caption “Critical Accounting Policies-Pension Benefits” in the 2006 Annual Report to Shareholders and Form 10-K. However, as required by SEC rules, the table above assumes that each NEO will retire at the earliest retirement age that would provide full benefits. This is the earliest of reaching age 65, or reaching age 62 with at least 10 years of service to the Company, or accumulating 85 “points” (points being the sum of age plus years of service). The value in today’s dollars of the total retirement benefits that each NEO eventually receives may be more or less than the amount shown in the above table.

 

General Terms of the Praxair Pension Program.

 

The Company has a retirement pension program for all of its eligible U.S. employees (the “Pension Program”). The Company has an obligation to pay pension benefits according to formulas described below under “Benefits Calculations.” The Pension Program does not include the Company’s 401(k) Savings Plan, which is a “defined contribution plan.” The 401(k) Savings Plan is funded by employee and Company contributions but the Company does not promise any given retirement benefit. Instead, any retirement payments will depend on employee and Company contributions and investment earnings on those contributions. As it applies to NEOs and certain other employees, the Pension Program has the following two parts:

 

 

Each NEO participates in the Pension Program Traditional Design (a defined benefit design providing benefits based on final average pay and years of service), which was available to eligible employees hired on or before April 30, 2002. Employees hired on or after May 1, 2002 participate in the Account-Based Design (a “cash balance” pension design).

 

Benefits Calculations

 

The Company calculates Traditional Design benefits as follows:

 

 

 

 

 

 

Crediting Extra Pension Benefits

 

The Company may credit to an employee more years of service under the Pension Program than the employee may actually work for the Company. The Company will consider this as part of negotiations to hire or to retain a highly valued executive or certain other employees. As part of hiring Mr. Reilley in 2000, the Company provided to Mr. Reilley additional years of service under the Pension Program Traditional Design. In 2001, the Company agreed to provide Mr. Angel with additional service years under the Pension Program Traditional Design in order to provide Mr. Angel with a long-term incentive for staying with the Company. Please see the notes to the table above for additional information.

 

This table shows information regarding compensation amounts that (i) the NEOs decided not to receive in cash but elected to defer to a later date under the Company’s Compensation Deferral Program, and (ii) Company contributions related to the Compensation Deferral Program.