Baker Hughes 2009 Annual Report Download - page 23

2009 Proxy Statement 13
Cogent assists the Compensation Committee by providing
comparative market data on compensation practices and pro-
grams (the “Survey Data”) based on an analysis of ten publicly
traded, energy-related companies that are competitors of ours
(the “Peer Group”) plus published compensation survey infor-
mation from the 2008 Mercer U.S. Executive Compensation
Benchmark Database and the 2008 Mercer U.S. Benchmark
Survey data. The Peer Group, which annually is reviewed with
the assistance of Cogent and approved by the Compensation
Committee, is used to benchmark executive compensation
levels against companies that have executive positions with
responsibilities similar in breadth and scope to ours and have
global businesses that compete with us for executive talent.
With such information, the Compensation Committee reviews
and analyzes compensation for each Senior Executive and
makes adjustments as appropriate. The following ten compa-
nies comprise the Peer Group: Anadarko Petroleum Corpora-
tion, Apache Corporation, BJ Services Company, Devon Energy
Corporation, Halliburton Company, National Oilwell Varco
Incorporated, Schlumberger Limited, Smith International Incor-
porated, Transocean Incorporated and Weatherford Interna-
tional Ltd. An analysis by Cogent based on recent financial
data shows that amongst our Peer Group we ranked eighth in
revenue as of December 31, 2008. The Survey Data and gen-
eral economic conditions and marketplace compensation
trends are evaluated with the assistance of Cogent.
Cogent advises the Compensation Committee in (1) deter-
mining base salaries for Senior Executives, (2) setting individual
performance goals and award levels for Senior Executives for
the Long-Term Incentive Plan performance cycle and (3) design-
ing and determining individual grant levels for the long-term
incentive awards for Senior Executives.
From time to time Cogent provides advice to the Gover-
nance Committee with respect to reviewing and structuring our
policy regarding fees paid to our directors as well as other equity
and non-equity compensation awarded to independent, non-
management directors, including designing and determining
individual grant levels for the 2009 long-term incentive awards.
Overview of Compensation Philosophy and Program
The purpose of our compensation program is to motivate
exceptional individual and organizational performance that is
in the long-term best interests of stockholders. The following
compensation objectives are considered in setting the compen-
sation programs for our Senior Executives:
• drive and reward performance that supports the Company’s
core values of integrity, teamwork, performance and learning;
• provide a significant percentage of total compensation that
is variable because it is at risk, based on predetermined per-
formance criteria;
• require significant stock holdings to align the interests
of Senior Executives with those of stockholders;
• design competitive total compensation and rewards
programs to enhance our ability to attract and retain
knowledgeable and experienced Senior Executives; and
• set compensation and incentive levels that reflect competi-
tive market practices.
To reward both short and long-term performance in the
compensation program and in furtherance of our compensa-
tion objectives noted above, our executive compensation
philosophy includes the following two general principles:
(i) Compensation levels should be competitive and
should be related to performance
The Compensation Committee reviews the Survey Data to
ensure that the compensation program is competitive with the
Peer Group. We believe that a competitive compensation pro-
gram is essential to our ability to attract and retain Senior
Executives. The Compensation Committee also believes that a
significant portion of a Senior Executive’s compensation should
be tied to performance. For this reason our incentive plans
have been based on the performance of the overall Company
and if applicable, the Executive’s product line or geographic
locale. The Compensation Committee also considers a Senior
Executive’s individual performance in determining salary
increases, annual incentives, and the granting of long-term
incentive awards. In assessing performance, the Compensation
Committee considers financial and non-financial performance
indicators. During periods when performance meets or exceeds
the established objectives, Senior Executives should be paid at,
or more than, expected levels, respectively. When performance
does not meet key objectives, incentive award payments, if
any, should be less than such levels.
(ii) Incentive compensation should represent a large
portion of a Senior Executive’s total compensation
and should balance short and long-term performance
The Company de-emphasizes fixed compensation paid to
Senior Executives in order to minimize costs when Company
performance is not optimum. A significant portion of the
Senior Executives’ compensation is incentive compensation,
which provides them with an incentive to increase Company
profitability and stockholder return. The largest portion of total
compensation is delivered in the form of variable compensa-
tion. Our variable compensation programs consist of our short-
term incentives, made up of the Baker Hughes Incorporated
Annual Incentive Compensation Plan, as amended (the
“Annual Incentive Plan”) and discretionary bonuses, and
long-term incentives, made up of stock options, restricted
stock awards (“RSAs”), restricted stock units (“RSUs”), and
performance units. Less than fifty percent of each Senior Execu-
tive’s compensation package is contingent solely upon continued
employment with the remainder at risk and contingent on
Senior Executives helping to drive the success of the Company.