ADT 2005 Annual Report Download - page 58

(and restricted stock units) typically cliff vest 100% after three years. Unvested options and shares of
restricted shares (or restricted units) are forfeited if an executive voluntarily leaves the Company other
than due to retirement or disability.
During 2005, the Committee undertook an in depth review of the linkage between long term
incentive programs and shareholder value. It worked with independent consultants in evaluating
appropriate measures that correlate with shareholder value and the plan design modifications that
might enhance the long term incentive program’s reliance on such measures. Consequently, the
Committee has approved a three-year Performance Share Program to take effect in fiscal 2006 that will
base a portion of high level executive long-term incentive awards on Company-wide return on invested
capital and organic revenue growth.
The Committee believes its equity-based incentive compensation program aligns executive and
shareholder interests because (i) the use of a multi-year vesting schedule for equity awards encourages
executive retention and emphasizes long-term growth, and (ii) the payment of a significant portion of
executives’ compensation in Tyco equity provides management with a powerful incentive to increase
shareholder value over the long term. Stock option and restricted stock awards are generally reflective
of position and individual contribution, taking into account equity-based compensation levels for
executives in comparable positions at other large diversified companies. The Committee determines
appropriate individual long-term incentive awards in the exercise of its discretion in view of the above
criteria and applicable policies.
Stock Ownership Guidelines In 2003, the Board established stock retention and ownership
guidelines for all Section 16 Officers. These guidelines generally require Section 16 Officers to retain at
least 75% of ‘‘earned equity awards’’ until their required ownership levels have been attained, and,
thereafter, to retain 25% of subsequently earned equity awards for a minimum period of three years
after such awards are earned. The ownership level for the Chairman and CEO is ten times base salary.
Required ownership levels for other Section 16 Officers, which may be achieved over a period of time,
vary by position, and range from two to six times base salary. ‘‘Earned equity awards’’ include vested
restricted stock and shares obtained upon option exercise; both are net of shares withheld or sold to
cover the cost of exercise and required minimum tax withholding.
Tax Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code imposes a limit of $1 million on the amount of
compensation that may be deducted by Tyco with respect to the Chief Executive Officer and any of the
other four most highly compensated officers; however, this limitation does not apply to compensation
that qualifies as ‘‘performance-based’’ under federal tax law. It is the Committee’s policy to have
compensation payable to our executive officers qualify as performance-based and deductible for federal
income tax purposes unless there are valid compensatory reasons for paying non-deductible amounts,
such as the recruitment and retention of key employees. We have endeavored to structure our incentive
plans so that annual bonuses, stock options and performance share awards should be fully deductible.
Deferred stock units (DSUs) are paid following an executive’s termination of employment when the
deduction limits of Internal Revenue Code Section 162(m) do not apply. Examples of potentially
non-deductible compensation would include non-deferred base salary in excess of $1 million, sign on/
relocation bonuses, and time-based restricted stock awards.
Compensation for Fiscal Year 2005
We approved a fiscal 2005 annual incentive compensation program for executives of Tyco and its
subsidiaries that is substantially similar to the fiscal 2004 program. The 2005 annual incentive program
reflects the Company’s compensation philosophy, is linked to our values and goals, and closely ties
annual incentive opportunities to business performance, measured by earnings and free cash flow,
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