ADT 2006 Annual Report Download - page 48

a pre-existing employment agreement). The Corporate aircraft policy applies strict rules, limitations and
approval protocols for use of corporate aircraft. Based on its evaluation of materials presented, the
Committee concluded that such plans and arrangements, most of which were adopted after 2002,
remain appropriate and competitive.
During 2006, in accordance with the Committee’s charter, an internal audit was conducted of
compensation practices, including appropriate documentation of compensation actions, compliance with
the Company’s Delegation of Authority and other compensation related control processes. The audit,
performed by the internal audit function, which reports directly to the Audit Committee, provides an
additional measure of control over compensation matters outside of the Company’s management
structure. The audit confirmed that compensation practices were in line with all external requirements
and internal guidelines and demonstrated significant process improvements over the past three years.
The Committee reviewed control process improvements implemented in response to audit
recommendations. This internal audit was in addition to the audit and opinion of our independent
auditor of our compliance with Sarbanes-Oxley control requirements.
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, annual incentive bonus and long term equity based compensation. The weighting of
variable, performance based compensation relative to fixed compensation increases for more senior
level executives to link their compensation opportunity with business performance.
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. Benchmark
data for corporate executive salaries are also taken into consideration in determining periodic merit
increase levels. Base salaries are reviewed at least annually with the Committee and adjusted at 12 to
24 month intervals, depending on competitive salary positioning. During the fiscal year, the Committee
reviewed all Senior Officer salaries.
Annual Incentive Bonus Annual incentive awards reflect a combination of three key elements:
individual target bonus percentages, level of attainment of business performance targets, and individual
results and behaviors. Individual annual incentive bonus targets are set within ranges determined by
‘‘Career Band’’—a system that differentiates reward eligibility and levels based on scope and complexity
of an employee’s role. These ranges are designed to reflect competitive conditions and to assure that a
significant portion of executives’ annual cash compensation is performance based.
Each executive has a target bonus percentage expressed as a percentage of base salary, but actual
bonus opportunity ranges from 0% to 200% of target depending on performance against
pre-established, objectively determined goals. Bonus targets for Senior Officers range from 65% to
100% of base salary. At the beginning of each fiscal year, the Board reviews and approves an Annual
Operating Plan for the Company as a whole and for each business segment. The Committee then
reviews and assesses performance goals and approves the proposed design of the annual incentive
bonus program and of specific annual incentive goals for each performance measure under the plan.
These goals include minimum performance thresholds that must be met to earn any incentive
compensation, as well as performance levels required to achieve maximum payouts. Maximum payout
levels are intended to be available only for achievement of business performance significantly exceeding
target levels.
In fiscal year 2006, annual incentive bonus opportunities for executives in the corporate
headquarters were based on the overall performance of Tyco, using Company earnings per share
(‘‘EPS’’) and total Company free cash flow (‘‘FCF’’) as the performance measures. Annual incentive
bonus opportunity for segment presidents was based upon the Committee’s assessment of the respective
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