ADT 2005 Annual Report Download - page 57

We are committed to hiring and retaining the best executive talent and paying competitively, when such
pay is merited by performance, and to retaining, developing and motivating talented executives.
Each year, the Committee reviews the Company’s executive compensation programs to assure
alignment between the interests of executives and shareholders and the external competitiveness of the
programs and total compensation levels. The Company determines what, if any, changes are
appropriate in the compensation programs of the Company.
Elements of Compensation
To assure the appropriate mix of risk and reward and focus on both short and long term Company
performance, we have established three basic components to Tyco’s executive compensation program:
Base Salary Base salary is generally designed to be competitive with comparable positions in peer
group companies; however, each executive’s actual salary varies based on the complexity and unique
challenges of his or her position, individual skills, experience, background and performance. Base
salaries are reviewed and established at 12 to 24 month intervals, depending on competitive salary
positioning.
Annual Incentive Bonus Annual incentive bonus targets are set within ranges determined by
Career Band. These ranges are designed to reflect competitive conditions and are intended to motivate
executives by providing significant bonus opportunities based on the achievement of measurable goals.
Each executive has a target bonus percentage expressed as a percentage of base salary. Bonus targets
for Section 16 Officers generally range from 65% to 100% of base salary. The annual incentive
program includes minimum performance thresholds required to earn any incentive compensation, as
well as maximum payouts geared towards rewarding extraordinary business performance; thus, actual
awards can range from 0% to 200% of target, depending on performance against pre-established
objectively determinable goals. In addition, calculated awards may be adjusted up or down by up to
25% based on behaviors as measured against the Tyco values and on individual performance. Annual
incentive awards, other than for Section 16 Officers, are made pursuant to the terms of the Tyco
International Annual Incentive Plan. Annual incentive awards for Section 16 Officers are determined
under the 2004 Stock and Incentive Plan based on performance criteria reviewed by the Committee
and approved by the Board, with the actual amount of their awards determined by exercise of negative
discretion of the Committee to align their awards with the Annual Incentive Plan. Each year, the
Committee reviews and assesses proposed performance goals, and approves the design of the annual
incentive bonus program. Following determination of year-end results, the Committee assesses
proposed bonus pools against Company performance, determines appropriate adjustments, if any, and
approves bonus pools and individual bonus awards for senior executives. It reviews, approves and
recommends Board approval of Section 16 Officer bonuses.
Long Term Incentive Compensation Tyco’s long term incentive program is designed to ensure that
executives have a continuing stake in the long term success of the Company and to thereby encourage
executives to enhance the value of the Company’s stock. The long term incentive program is also
designed to create individual retention incentives.
Tyco’s long-term, equity based compensation program consists of a mix of stock options and
restricted stock (or restricted units in certain countries). Grants are generally made annually. Stock
options generally permit an executive to purchase a share of Tyco stock at the exercise price, which is
the fair market value, defined as the average of the high and low share price on the date of grant.
Thus, options have value only if the Company’s stock appreciates in value after the options are granted.
Repricing of stock options is not permitted under the Tyco International, Ltd. 2004 Stock and Incentive
Plan, under which all new options are granted. Options vest ratably over a multi-year period (typically
three years) and have a ten year term to exercise while in active employment, while restricted stock
2006 Proxy Statement 39