QUINTON CARDIOLOGY SYSTEMS INC - Proxy Statement (definitive) (DEF 14A) REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF

Our executive compensation program is administered by the compensation committee, which is comprised of three non-employee directors.

Executive compensation consists of three major components that are reviewed annually by the compensation committee: base salary, bonuses and stock options.

Base Salary. The committee sets the base salary of the Chief Executive Officer at an amount it believes is competitive with the salaries paid to executives of other companies in the industry. The committee relies on surveys and on knowledge of local pay practices as reported in financial periodicals or otherwise accessible to the committee. Additionally, the committee reviews the Chief Executive Officer’s performance and the company’s financial and stock price performance generally. Executive base salaries are targeted at mid-range for comparable positions in the industry, comparable scope of responsibility and comparable levels of experience.

Bonus. The 2003 Management Incentive Plan allows for cash distribution to all management employees, including executive officers. Goals of this plan include rewarding participants annually based on overall company performance and sharing in the company’s financial success. The amount of cash distribution under the plan is entirely discretionary and subject to achievement of certain profitability goals. Any 2003 Management Incentive Plan cash distribution is subject to approval by the compensation committee of the board of directors. In addition, the compensation committee approved a one-time integration bonus to Mr. Lustig in order to compensate Mr. Lustig for efforts relating to the integration of the operations of Burdick, Inc. into our existing operations. The compensation committee also approves annual sales bonus plans for our key sales personnel, including Mr. Lustig, that is based on target sales levels of specified products for each participant. Bonus payments are presented in the Summary Compensation Table under the heading “Bonus.”

Stock Option Grants. The objectives of substantial long-term incentives are to enhance long-term profitability and shareholder value. The compensation committee determines the number and terms of options granted to the company’s Chief Executive Officer, other executive officers and all other employees. Grant amounts are based on individual circumstances, in consideration of each executive’s experience, scope of responsibility and individual performance, both demonstrated and expected.

Chief Executive Officer Compensation. In 2003, Dr. Ruediger Naumann-Etienne served as our Chief Executive Officer through August 31, 2003, at which time Mr. John Hinson was appointed as our Chief Executive Officer. In 2003, Dr. Ruediger Naumann-Etienne received a base salary of $160,000 for his services during the period in which he served as Chief Executive Officer with no cash bonus under the 2003 Management Incentive Plan and was granted options to purchase 40,000 shares of common stock. Dr. Naumann-Etienne received $52,308 in salary for his service as Chairman for the period from September 1,

2003 through December 31, 2003. For the period in which he served as Chief Executive Officer during 2003, Mr. Hinson received a base salary of $83,333. Mr. Hinson also received a base salary of $155,359 for his service as President and Chief Officer during the period preceding his appointment as Chief Executive Officer. Mr. Hinson received a cash bonus of $81,693 under the 2003 Management Incentive Plan for his service to the Company in 2003. In addition, he granted options to purchase 50,000 shares of common stock during 2003. The compensation committee determined the salary, bonus and quantity of the stock option grant issued to each of Dr. Naumann-Etienne and Mr. Hinson based on his respective experience, scope of responsibility, and expected and demonstrated individual performance. In 2003, Dr. Naumann-Etienne received $3,000 in 401(k) savings and retirement matching contributions along with $1,508 in life insurance premiums paid by the company for Dr. Naumann-Etienne’s benefit. In 2003, Mr. Hinson received $3,000 in 401(k) savings and retirement matching contributions along with $356 in life insurance premiums paid by the company for Mr. Hinson’s benefit.

Tax Deductibility Considerations. Section 162(m) of the Internal Revenue Code limits the tax deductibility by a corporation of compensation in excess of $1 million paid to the Chief Executive Officer and any other of its four most highly compensated executive officers. However, compensation that qualifies as “performance-based” is excluded from the $1 million limit. The committee does not presently expect total cash compensation payable for salaries to exceed the $1 million limit for any individual executive. Our stock option plans are designed to qualify as performance-based compensation that is fully deductible by the company for income tax purposes.

Conclusion. The committee believes that our compensation policies have been successful in attracting and retaining qualified employees and in linking compensation directly to corporate performance relative to our goals. The committee will continue to monitor the compensation levels potentially payable under our other compensation programs, but intends to retain the flexibility necessary to provide total compensation in line with competitive practice, our compensation philosophy and the company’s best interests.

The following graph shows the cumulative total shareholder return of an investment of $100 in cash on May 7, 2002 (the date on which our common stock was first traded on the Nasdaq National Market) for (i) our common stock, (ii) the Nasdaq Stock Market (U.S.) Index, and (iii) the S&P Health Care Equipment Index. The cumulative total return on our common stock and each index assumes the value of each investment was $100 on May 7, 2002 and that all dividends were reinvested. All values are calculated as of December 31, 2002 and December 31, 2003.

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