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2002฀Employee฀Long-Term฀Incentive฀Plan
The฀Baker฀Hughes฀Incorporated฀2002฀Employee฀Long-Term฀
Incentive฀Plan฀(the฀“2002฀Employee฀LTIP”)฀was฀adopted฀effec-
tive฀as฀of฀March฀6,฀2002.฀The฀2002฀Employee฀LTIP฀permits฀the฀
grant฀of฀awards฀as฀nonqualified฀stock฀options,฀stock฀apprecia-
tion฀rights,฀restricted฀stock,฀restricted฀stock฀units,฀performance฀
shares,฀performance฀units,฀stock฀awards฀and฀cash-based฀
awards฀to฀our฀corporate฀officers฀and฀key฀employees.฀The฀num-
ber฀of฀shares฀authorized฀for฀issuance฀under฀the฀2002฀Employee฀
LTIP฀is฀9.5฀million,฀with฀no฀more฀than฀3.0฀million฀available฀for฀
grant฀as฀awards฀other฀than฀options฀(the฀number฀of฀shares฀is฀
subject฀to฀adjustment฀for฀changes฀in฀our฀Common฀Stock).
The฀2002฀Employee฀LTIP฀is฀the฀companion฀plan฀to฀the฀
Baker฀Hughes฀Incorporated฀2002฀Director฀&฀Officer฀Long-
Term฀Incentive฀Plan,฀which฀was฀approved฀by฀our฀stockholders฀
in฀2002.฀The฀rationale฀for฀the฀two฀companion฀plans฀was฀to฀
discontinue฀the฀use฀of฀the฀remaining฀older฀option฀plans฀and฀
to฀have฀only฀two฀plans฀from฀which฀we฀would฀issue฀compen-
sation฀awards.
Options.฀The฀exercise฀price฀of฀the฀options฀will฀not฀be฀less฀
than฀the฀fair฀market฀value฀of฀the฀shares฀of฀our฀Common฀Stock฀
on฀the฀date฀of฀grant,฀and฀options฀terms฀may฀be฀up฀to฀ten฀
years.฀The฀maximum฀number฀of฀shares฀of฀our฀Common฀Stock฀
that฀may฀be฀subject฀to฀options฀granted฀under฀the฀2002฀
Employee฀LTIP฀to฀any฀one฀employee฀during฀any฀one฀fiscal฀year฀
will฀not฀exceed฀3.0฀million,฀subject฀to฀adjustment฀under฀the฀
antidilution฀provisions฀of฀the฀2002฀Employee฀LTIP.฀Under฀the฀
terms฀and฀conditions฀of฀the฀stock฀option฀awards฀for฀options฀
issued฀under฀the฀2002฀Employee฀LTIP,฀options฀generally฀vest฀
and฀become฀exercisable฀in฀installments฀over฀the฀optionee’s฀
period฀of฀service,฀and฀the฀options฀vest฀on฀an฀accelerated฀
basis฀in฀the฀event฀of฀a฀change฀in฀control฀or฀certain฀termina-
tions฀of฀employment.฀As฀of฀December฀31,฀2004,฀options฀cov-
ering฀approximately฀3.1฀million฀shares฀of฀our฀Common฀Stock฀
were฀outstanding฀under฀the฀2002฀Employee฀LTIP,฀options฀cov-
ering฀0.5฀million฀shares฀were฀exercised฀during฀fiscal฀year฀2004฀
and฀approximately฀5.8฀million฀shares฀remained฀available฀for฀
future฀options.
Performance฀Shares฀and฀Units;฀Cash-Based฀Awards.฀Perfor-
mance฀shares฀may฀be฀granted฀to฀employees฀in฀the฀amounts฀
and฀upon฀the฀terms฀determined฀by฀the฀Compensation฀Com-
mittee฀of฀our฀Board฀of฀Directors,฀but฀must฀be฀limited฀to฀no฀
more฀than฀1.0฀million฀shares฀to฀any฀one฀employee฀in฀any฀one฀
fiscal฀year.฀Performance฀shares฀will฀have฀an฀initial฀value฀equal฀
to฀the฀fair฀market฀value฀of฀our฀Common฀Stock฀at฀the฀date฀of฀
the฀award.฀Performance฀units฀and฀cash-based฀awards฀may฀be฀
granted฀to฀employees฀in฀amounts฀and฀upon฀the฀terms฀deter-
mined฀by฀the฀Compensation฀Committee,฀but฀must฀be฀limited฀
to฀no฀more฀than฀$10.0฀million฀for฀any฀one฀employee฀in฀any฀
one฀fiscal฀year.฀The฀performance฀measures฀that฀may฀be฀used฀
to฀determine฀the฀extent฀of฀the฀actual฀performance฀payout฀or฀
vesting฀include,฀but฀are฀not฀limited฀to,฀net฀earnings;฀earnings฀
per฀share;฀return฀measures;฀cash฀flow฀return฀on฀investments฀
(net฀cash฀flows฀divided฀by฀owner’s฀equity);฀earnings฀before฀or฀
after฀taxes,฀interest,฀depreciation฀and/or฀amortization;฀share฀
price฀(including฀growth฀measures฀and฀total฀shareholder฀return)฀
and฀Baker฀Value฀Added฀(our฀metric฀that฀measures฀operating฀
profit฀after฀tax฀less฀the฀cost฀of฀capital฀employed).
Restricted฀Stock฀and฀Restricted฀Stock฀Units.฀With฀respect฀
to฀awards฀of฀restricted฀stock฀and฀restricted฀stock฀units,฀the฀
Compensation฀Committee฀will฀determine฀the฀conditions฀or฀
restrictions฀on฀the฀awards,฀including฀whether฀the฀holders฀of฀
the฀restricted฀stock฀or฀restricted฀stock฀units฀will฀exercise฀full฀
voting฀rights฀or฀receive฀dividends฀and฀other฀distributions฀dur-
ing฀the฀restriction฀period.฀At฀the฀time฀the฀award฀is฀made,฀the฀
Compensation฀Committee฀will฀determine฀the฀right฀to฀receive฀
unvested฀restricted฀stock฀or฀restricted฀units฀after฀termination฀
of฀service.฀Awards฀of฀restricted฀stock฀are฀limited฀to฀1.0฀million฀
shares฀in฀any฀one฀year฀to฀any฀one฀individual.
Stock฀Appreciation฀Rights.฀Stock฀appreciation฀rights฀may฀
be฀granted฀under฀the฀2002฀Employee฀LTIP฀on฀the฀terms฀and฀
conditions฀determined฀by฀the฀Compensation฀Committee.฀The฀
grant฀price฀of฀a฀freestanding฀stock฀appreciation฀right฀will฀not฀
be฀less฀than฀the฀fair฀market฀value฀of฀our฀Common฀Stock฀on฀
the฀date฀of฀grant.฀The฀maximum฀number฀of฀shares฀of฀our฀
Common฀Stock฀that฀may฀be฀utilized฀for฀purposes฀of฀determin-
ing฀an฀employee’s฀compensation฀under฀stock฀appreciation฀rights฀
granted฀under฀the฀2002฀Employee฀LTIP฀during฀any฀one฀fiscal฀
year฀will฀not฀exceed฀3.0฀million฀shares,฀subject฀to฀adjustment฀
under฀the฀antidilution฀provisions฀of฀the฀2002฀Employee฀LTIP.
Administration;฀Amendment฀and฀Termination.฀The฀Com-
pensation฀Committee฀shall฀administer฀the฀2002฀Employee฀LTIP,฀
and฀in฀the฀absence฀of฀the฀Compensation฀Committee,฀the฀
Board฀will฀administer฀the฀Plan.฀The฀Compensation฀Committee฀
will฀have฀full฀and฀exclusive฀power฀to฀interpret฀the฀provisions฀
of฀the฀2002฀Employee฀LTIP฀as฀the฀Committee฀may฀deem฀nec-
essary฀or฀proper,฀with฀the฀powers฀exercised฀in฀the฀best฀inter-
ests฀of฀the฀Company฀and฀in฀keeping฀with฀the฀objectives฀of฀
the฀Plan.฀The฀Board฀may฀alter,฀amend,฀modify,฀suspend฀or฀ter-
minate฀the฀2002฀Employee฀LTIP,฀except฀that฀no฀amendment,฀
modification,฀suspension฀or฀termination฀that฀would฀adversely฀
affect฀in฀any฀material฀way฀the฀rights฀of฀a฀participant฀under฀
any฀award฀previously฀granted฀under฀the฀Plan฀may฀be฀made฀
without฀the฀written฀consent฀of฀the฀participant฀or฀to฀the฀extent฀
stockholder฀approval฀is฀otherwise฀required฀by฀applicable฀
legal฀requirements.
Director฀Compensation฀Deferral฀Plan
The฀Baker฀Hughes฀Incorporated฀Director฀Compensation฀
Deferral฀Plan,฀as฀amended฀and฀restated฀effective฀July฀24,฀2002฀
(the฀“Deferral฀Plan”),฀is฀intended฀to฀provide฀a฀means฀for฀฀
members฀of฀our฀Board฀of฀Directors฀to฀defer฀compensation฀฀
otherwise฀payable฀and฀provide฀flexibility฀with฀respect฀to฀our฀
compensation฀policies.฀Under฀the฀provisions฀of฀the฀Deferral฀
Plan,฀directors฀may฀elect฀to฀defer฀income฀with฀respect฀to฀each฀
calendar฀year.฀The฀compensation฀deferrals฀may฀be฀stock฀
option-related฀deferrals฀or฀cash-based฀deferrals.฀The฀stock฀
option-related฀deferrals฀may฀be฀either฀market-priced฀stock฀
options฀or฀discounted฀stock฀options.฀The฀number฀of฀shares฀to฀
be฀issued฀for฀the฀market-priced฀stock฀option฀deferral฀is฀calcu-
lated฀on฀a฀quarterly฀basis฀by฀multiplying฀the฀deferred฀compen-
sation฀by฀4.4฀and฀then฀dividing฀by฀the฀fair฀market฀value฀of฀our฀
2004฀Form฀10-K฀฀฀฀฀67