Baker Hughes 2009 Annual Report Download - page 24

14 Baker Hughes Incorporated
While both short and long-term incentives drive the final
compensation levels for Senior Executives, the Committee
encourages a balance between short and long-term business
goals by employing both types of compensation programs.
Our incentive plans are established to emphasize long-term
decision making. Because the value of our long-term incentive
opportunity is meaningfully higher than the short-term incen-
tive opportunity, we believe our Executives are properly moti-
vated to manage the business for the long-term. The following
pie charts demonstrate the current allocation of total direct
compensation between base salary, target short term incen-
tives and target long-term incentives for the PEO and the
average of the other NEOs (other than Mr. David H. Barr):
Financial Metrics Used in Compensation Programs
Several financial metrics are commonly referenced in defin-
ing Company performance for Senior Executives’ compensa-
tion. These metrics and their use in short-term incentives and
long-term incentive programs are described below. The impact
of certain items that are extraordinary, unusual in nature, infre-
quent in occurrence, related to the acquisition or disposal of a
business, or related to a change in accounting principle (“cer-
tain identified items”) may be excluded from the calculation of
these metrics in order to ensure that the metrics consistently
reflect Company performance and stockholder return. The
existence of certain identified items is determined in accor-
dance with standards established by accounting regulators
applicable accounting rules, or consistent with Company poli-
cies and practices for measuring the achievement of perfor-
mance goals on the date the Compensation Committee
establishes the performance goal.
Earnings Per Share
To ensure that compensation is tied to the return on
investment earned by stockholders, we use Earnings per Share
(“EPS”) as a metric for Senior Executives in the Annual Incen-
tive Plan. EPS is generally defined as our net income divided by
the weighted average number of shares outstanding during
that period. Certain identified items (as defined above under
the heading “Financial Metrics Used in Compensation Pro-
grams”) are generally excluded from the EPS calculation for
purposes of determining Annual Incentive Compensation pay-
outs. The exclusion of certain identified items from the EPS
calculation causes EPS to be a non-GAAP measure for pur-
poses of determining Annual Incentive Compensation payouts.
Profit After Tax
A related metric used in the annual incentive calculations
is profit after tax (“PAT”). PAT means revenues minus cost of
sales (the cost of products sold and the cost of providing ser-
vices, including personnel costs, repair and maintenance costs,
freight/custom, depreciation and other costs directly relating to
the service provided) minus operating expenses (costs incurred
in non-manufacturing areas to provide products and services
to customers (e.g., finance and administrative support), minus
income taxes. The use of this metric allows us to reward
Senior Executives for meeting targets related to actual operat-
ing profit earned each year. PAT is a non-GAAP measure
because the impact of certain identified items is excluded. We
believe that PAT is useful because it is a consistent measure of
the underlying results of our business. Furthermore, manage-
ment uses PAT internally as a measure of the performance of
our operations.
Baker Value Added
Baker Value Added (BVA) is a non-GAAP measure that
supplements traditional accounting measures to evaluate the
return on capital invested in the business. BVA is calculated as
our financial return in a given period less our capital charge
for that period. Our financial return is defined as (i) profit
before tax (as defined below) plus interest expense, multiplied
by (ii) 1 minus the applicable tax rate. Our capital charge is
defined as (i) the weighted average cost of capital determined
for the Company for the period multiplied by (ii) the average
capital employed. Profit before tax is calculated as total reve-
nues (including interest and dividend income) minus total costs
and expenses (including interest expense). BVA has been used
in the past for both short-term and long-term incentive com-
pensation for awards granted prior to 2009. At present, the
Compensation Committee does not intend to use this metric
for future awards.
PEO
Base Salary, 10%
ICP, 13%
LTI, 77%
NEOs
Base Salary, 19%
ICP, 15%
LTI, 66%