ADT 2006 Annual Report Download - page 50

conviction that use of a multi-year vesting schedule for equity awards encourages executive retention
and emphasizes long-term growth, and that 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.
Individual stock option and restricted stock and unit awards reflect position and individual
contribution, taking into account equity-based compensation levels for executives in comparable
positions at other large diversified companies. The Committee determines long-term incentive award
ranges and approves appropriate individual Senior Executive awards within these ranges in the exercise
of its discretion, considering these criteria. The Committee reviews Senior Officer recommendations
and submits its grant recommendations to the Board for approval. Equity awards made as part of the
regular annual grant are made as of the date set by the Committee, after which individual award
documents are distributed to grantees. Annual grant dates have not differed for Senior Officers relative
to other executives. The Committee’s policy is to grant options at fair market value and re-pricing of
stock options is not permitted under the 2004 SIP.
The Company’s consistent practice in recent years has been to authorize a pool of shares available
for annual equity grants. Starting in fiscal year 2006, annual grant dates were changed from March to
November, to facilitate establishment of long term performance goals, if applicable, early in the fiscal
year. In fiscal year 2006, the Committee determined the number of shares authorized for annual grant
based on a number of factors, including: (i) target grant ranges recommended by the outside
compensation consultant to the Committee, (ii) the 6 month average share price; (iii) the mix of
options and full value shares; and (iv) the anticipated equity related expense, total annual share usage
or ‘‘run-rate’’, which the Committee has kept below 1% of shares outstanding for the past 3 years, and
overhang levels. Following the annual grant planning and nomination process, final recommendations
within the total authorized share limits are presented to the Committee for review and approval.
For fiscal year 2006, the Committee approved a grant of Performance Stock Units under a new
Performance Share Program for designated senior level executives, in lieu of a portion of time vested
stock options, and time vested restricted equity grants. The number of Performance Stock Units to be
paid out in shares of Tyco common stock at the end of the performance cycle of October 1, 2005 to
September 30, 2008 is based on the achievement of approved performance goals. Twenty percent of
named executive officer Performance Stock Unit awards contain the performance feature for fiscal year
2006. Performance Stock Unit goals are based on the Company achieving certain return on invested
capital and organic revenue growth goals. The Committee assigned a 25% weighting to the organic
revenue growth goal and a 75% weighting to the return on invested capital goal. Payments under the
Performance Share Program could vary from 0% to 200% of the target awards based on the level of
achievement of the financial goals. Goals for this program were carefully set using a number of internal
and external benchmarks and we considered these goals to be challenging to achieve.
After announcement of the Proposed Separation, the Committee approved an amendment to the
Performance Unit awards, contingent on the successful completion of the Separation. The amendment
provides that one-third of the awards will be based on the attainment of performance goals through the
end of Fiscal Year 2006 (but will continue to vest on the third anniversary of the grant date per the
original grant terms), and that the remaining two-thirds of the awards will vest at target on the third
anniversary of the grant date, without regard to the attainment of the performance goals. The
Committee determined attainment of 3-year Tyco-wide performance goals was no longer practicable as
a result of the Proposed Separation.
Stock Ownership Guidelines
In 2003, the Board established stock retention and ownership guidelines for all Senior Officers.
These guidelines generally require Senior 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
38 2007 Proxy Statement