ADT 2006 Annual Report Download - page 51

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 Senior Officers, which may be achieved over a period of time, vary by position and range from
two to six times base salary. Senior Officers have either met their target ownership levels or are making
good progress towards obtaining these levels, depending on their length of service with the Company.
‘‘Earned equity awards’’ include vested and unvested restricted stock and units, 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. During 2006, the Committee reviewed the Stock Ownership and Retention
Guidelines (‘‘the Guidelines’’) and determined that ownership levels, although significantly higher for
certain positions than those of peer companies, should be retained. Acting jointly with the Nominating
and Governance Committee, during 2006 the Committee approved inclusion of unvested restricted
shares in determining compliance with the Guidelines.
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 to be 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
plans so that annual bonuses, stock options and performance share awards should be fully deductible.
DSUs are paid following an executive’s termination of employment when the deduction limits of
Internal Revenue Code Section 162(m) do not apply (including the anticipated conversion of
performance based stock units to time-based awards upon the Proposed Separation of the Company).
Separation of the Company
The focus of the Committee expanded after Board approval of the Proposed Separation of the
Company to include review of human resource strategies and progress related to the separation.
During 2006 the Committee approved a retention program to be put into place for selected
employees who were critical to successful completion of the Proposed Separation or maintenance of
essential corporate stewardship functions, and who were significant retention risks. Target retention
awards ranged from 25% of base pay to 200% of base pay. None of the Named Executive Officers
other than Juergen Gromer (whose retention award was not under the Separation related retention
program) received a retention award. Payment of retention bonuses is contingent on successful
completion of the Proposed Separation.
The Committee has regularly reviewed information concerning the progress in each of the key
human resources work areas related to the Proposed Separation, including proposed organization
structure and reporting relationship, staffing levels, compensation costs, projected stock plan dilution
and overhang for the new companies and unvested equity value for new company management
post-separation. To help the Committee track separation progress, the Committee has regularly
reviewed a ‘‘Separation Scorecard’’, reflecting detailed goals and separation related progress in the
areas of staffing, compensation, total compensation costs and, equity conversion. To assure that costs
associated with executive compensation are reasonable and appropriate, the Committee has reviewed
each compensation action for new hires and individuals promoted into new public company roles, who
will either become officers or will have base salaries of $350,000 or more.
Officer Compensation
The Summary Compensation table on page [25] reports the bonus amounts for Messrs. Breen,
Coughlin and Lytton, reflecting payments based on the performance of the Company’s 2006 EPS and
2007 Proxy Statement 39