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comparing฀the฀compensation฀of฀chief฀executive฀officers฀in฀a฀
group฀of฀comparator฀companies฀based฀on฀data฀provided฀by฀
the฀independent฀consultant.฀Following฀his฀announcement,฀the฀
Compensation฀Committee฀recommended฀and฀the฀Board฀of฀
Directors฀approved฀a฀restatement฀dated฀as฀of฀August฀1,฀2004฀
of฀Mr.฀Wiley’s฀employment฀agreement฀in฀order฀to฀provide฀for฀
an฀orderly฀transition฀of฀management.฀Pursuant฀to฀Mr.฀Wiley’s฀
restated฀employment฀agreement,฀upon฀his฀retirement฀on฀฀
October฀25,฀2004,฀Mr.฀Wiley฀received฀his฀base฀salary฀through฀
April฀30,฀2005.฀
In฀setting฀the฀base฀salary฀of฀Mr.฀Deaton฀for฀fiscal฀year฀
2004,฀the฀Compensation฀Committee฀reviewed฀the฀compensa-
tion฀of฀chief฀executive฀officers฀from฀a฀group฀of฀comparator฀
companies฀and฀with฀comparable฀levels฀of฀experience.฀Based฀on฀
this฀evaluation฀and฀analysis฀by฀outside฀advisors,฀the฀Compensa-
tion฀Committee฀established฀a฀base฀salary฀of฀$825,000฀for฀Mr.฀
Deaton.฀Mr.฀Deaton’s฀salary฀will฀be฀reviewed฀on฀an฀ongoing฀
basis฀using฀comparable฀data.฀In฀the฀future,฀the฀Compensation฀
Committee฀expects฀to฀also฀consider฀a฀review฀of฀Mr.฀Deaton’s฀
performance,฀including฀a฀review฀of฀the฀Company’s฀financial฀
performance฀during฀the฀previous฀fiscal฀year฀with฀respect฀to฀฀
revenue฀growth,฀expense฀control,฀net฀income฀and฀earnings฀
per฀share฀in฀setting฀Mr.฀Deaton’s฀salary.฀Members฀of฀the฀Board฀
of฀Directors฀that฀are฀not฀part฀of฀the฀Compensation฀Committee฀
will฀also฀be฀given฀the฀opportunity฀to฀review฀Mr.฀Deaton’s฀per-
formance฀each฀year฀and฀provide฀input฀to฀the฀Compensation฀
Committee฀with฀respect฀to฀both฀past฀performance฀and฀perfor-
mance฀goals฀and฀objectives฀for฀the฀upcoming฀year.
Annual฀Incentives
The฀1995฀Employee฀Annual฀Incentive฀Compensation฀Plan,฀
as฀amended,฀provides฀executives฀with฀the฀opportunity฀to฀earn฀
cash฀bonuses฀based฀on฀the฀achievement฀of฀specific฀Company-
wide,฀business฀unit฀and฀individual฀performance฀goals.฀
Each฀year,฀the฀Compensation฀Committee฀establishes฀฀
specific฀goals฀relating฀to฀each฀executive’s฀bonus฀opportunity.฀
Executives฀are฀assigned฀threshold,฀target฀and฀overachievement฀
bonus฀levels฀based฀on฀a฀percentage฀of฀their฀base฀salary.฀The฀
percentages฀have฀been฀established฀based฀on฀competitive฀prac-
tices฀of฀the฀comparator฀group.฀Executives฀earn฀bonuses฀based฀
on฀achievements฀of฀the฀extent฀to฀which฀pre-established฀goals฀
are฀achieved.฀Bonus฀awards฀may฀be฀adjusted฀to฀differentiate฀
performance฀among฀executives.฀However,฀no฀bonus฀is฀paid฀
unless฀predetermined฀threshold฀performance฀levels฀are฀
reached.฀If฀overachievement฀status฀is฀reached฀and฀surpassed,฀
bonus฀awards฀earned฀over฀this฀level฀are฀paid฀to฀the฀executive฀
over฀a฀two-year฀period.฀
Performance฀goals฀are฀approved฀each฀year฀by฀the฀Compen-
sation฀Committee฀and฀are฀based฀upon฀financial฀and/or฀strategic฀
objectives฀of฀the฀Company.฀During฀fiscal฀year฀2004,฀the฀corpo-
rate฀objective฀was฀based฀on฀(i)฀earnings฀per฀share฀and฀(ii)฀Baker฀
Value฀Added,฀a฀Company฀metric฀that฀measures฀our฀operating฀
profit฀after฀tax฀less฀the฀cost฀of฀capital฀employed฀as฀a฀measure฀
of฀the฀value฀we฀create฀for฀our฀stockholders.฀Baker฀Value฀Add-
ed฀integrates฀the฀profit฀and฀loss฀results฀and฀balance฀sheet฀
investments฀of฀the฀Company฀by฀assuring฀that฀the฀cost฀of฀any฀
capital฀used฀to฀earn฀those฀profits฀is฀fully฀taken฀into฀account.฀
Where฀executives฀have฀business฀unit฀responsibilities,฀a฀portion฀
of฀the฀goal฀may฀be฀based฀on฀financial฀performance฀measures฀
that฀support฀business฀unit฀performance.฀This฀portion฀varies฀
with฀the฀position฀of฀each฀individual฀and฀the฀particular฀objec-
tives฀of฀the฀Company.฀
Performance฀targets฀are฀established฀by฀the฀Compensation฀
Committee฀at฀levels฀that฀are฀achievable,฀but฀require฀above-
average฀performance฀from฀each฀executive.฀Target฀bonus฀
awards฀range฀from฀45%฀to฀100%฀of฀base฀salary.
Each฀of฀the฀named฀executive฀officers฀received฀an฀annual฀
bonus฀based฀on฀their฀contribution฀to฀the฀2004฀financial฀per-
formance.฀Pursuant฀to฀Mr.฀Deaton’s฀employment฀agreement฀
with฀the฀Company,฀Mr.฀Deaton’s฀bonus฀for฀2004฀is฀guaranteed฀
to฀be฀not฀less฀than฀$600,000.
Pursuant฀to฀Mr.฀Wiley’s฀restated฀employment฀agreement,฀
Mr.฀Wiley฀received฀during฀2004,฀as฀part฀of฀his฀lump฀sum฀pay-
ment฀following฀his฀retirement,฀payments฀relating฀to฀his฀bonus฀
for฀2004฀and฀2005฀of฀$1,014,300฀and฀$350,000,฀respectively.฀
Long-Term฀Incentives
Long-term฀incentives฀comprise฀the฀largest฀portion฀of฀an฀
executive’s฀total฀compensation฀package,฀supporting฀the฀Com-
pany’s฀commitment฀to฀provide฀a฀total฀compensation฀package฀
that฀favors฀at-risk฀pay.฀The฀Compensation฀Committee’s฀objec-
tive฀is฀to฀provide฀executives฀with฀long-term฀incentive฀award฀
opportunities฀that฀are฀consistent฀with฀grants฀made฀within฀the฀
comparator฀groups.
Long-term฀incentive฀award฀guidelines฀are฀determined฀
using฀competitive฀market฀references฀for฀each฀executive฀posi-
tion฀and฀the฀individual฀performance฀of฀each฀executive.
Long-term฀incentives฀are฀provided฀pursuant฀to฀the฀Com-
pany’s฀long-term฀incentive฀plans.฀Stock฀options฀are฀granted฀at฀
an฀option฀price฀equal฀to฀the฀fair฀market฀value฀of฀the฀Common฀
Stock฀on฀the฀date฀prior฀to฀the฀date฀of฀grant.฀Stock฀options฀
have฀value฀if฀the฀stock฀price฀appreciates฀after฀the฀date฀the฀
options฀are฀granted.฀
Each฀year฀the฀Compensation฀Committee฀determines฀the฀
total฀pool฀of฀stock฀options฀that฀will฀be฀made฀available฀to฀the฀
Company’s฀executives,฀as฀well฀as฀the฀size฀of฀individual฀grants฀
for฀each฀senior฀executive.฀The฀amounts฀vary฀each฀year฀and฀are฀
based฀upon฀what฀the฀Compensation฀Committee฀believes฀is฀
appropriate฀after฀consideration฀of฀the฀data฀provided฀by฀the฀
independent฀compensation฀consultant฀as฀well฀as฀the฀execu-
tive’s฀total฀compensation฀package.
Mr.฀Wiley฀was฀awarded฀a฀stock฀option฀grant฀of฀150,000฀
shares฀of฀Common฀Stock,฀effective฀January฀28,฀2004,฀and฀a฀
second฀stock฀option฀grant฀of฀150,000฀shares฀of฀Common฀
Stock,฀effective฀July฀28,฀2004,฀at฀an฀exercise฀price฀equal฀to฀the฀
fair฀market฀value฀of฀the฀stock฀on฀the฀day฀prior฀to฀the฀respec-
tive฀date฀of฀grant.฀The฀options฀vest฀and฀become฀exercisable฀
in฀increments฀of฀33฀1/3%฀each฀year฀from฀the฀date฀of฀grant.฀
These฀grants฀were฀made฀to฀furnish฀an฀incentive฀for฀Mr.฀Wiley฀
to฀create฀stockholder฀value฀through฀his฀remaining฀term.฀Upon฀
20฀฀฀฀Baker฀Hughes฀Incorporated