Baker Hughes 2009 Annual Report Download - page 25

2009 Proxy Statement 15
Review of Senior Executive Performance
The Compensation Committee reviews, on an annual
basis, each compensation element for each of the Senior Exec-
utives. In every case, the Compensation Committee takes into
account the Executive’s scope of responsibilities and experience
and balances these against competitive salary levels. The mem-
bers of the Compensation Committee have the opportunity to
meet with the Senior Executives at various times during the
year, which allows the Compensation Committee to form its
own assessment of each Senior Executive’s performance.
In addition, each year, the PEO presents to the Compensa-
tion Committee his evaluation of each of the other Senior
Executives, which includes a review of contribution and perfor-
mance over the past year, strengths, weaknesses, development
plans and succession potential. Following this presentation and
a review of the Survey Data, the Compensation Committee
makes its own assessments and approves compensation for
each Senior Executive.
In this way all compensation elements are reviewed and
approved by the Compensation Committee. The PEO, as the
direct manager of the NEOs, provides input on their individual
performance and recommends specific compensation changes
for his direct reports; however, the Committee retains ultimate
approval for any compensation changes. The PEO makes no
recommendations to the Compensation Committee regarding
his own compensation. The Committee does take into consid-
eration the NEOs’ total compensation, including base salary
annual incentives and long-term incentives, both cash and
equity, when considering market based adjustments to the
NEOs’ compensation. Additionally, the Committee reviews
compensation metrics and targets for all of the Senior Execu-
tives and is responsible for approving any adjustments to those
metrics and targets.
Effect of Recent Economic Volatility on Executive Pay
The recent economic volatility has had a significant effect
on world energy markets and has impacted our executive
compensation program. In light of this, we reviewed the
appropriateness of our compensation programs in an effort to
maintain their effectiveness. We made changes to the struc-
ture of our approach to annual incentives which provides for
an element of non-financial performance measures, reinforcing
balance sheet management and strategic reorganization
efforts. We also changed performance measures under the
annual incentive plan and the performance unit program,
moving away from the BVA metric in order to best manage
the business during this period. While we still value the impor-
tance of focusing on profitable returns on capital, we deter-
mined that using revenue growth, operating margin and
return on net capital employed in the performance unit
awards was most appropriate at this time. We considered
these measures timely to our strategy and responsive to the
market conditions. We also began measuring performance
solely against our peer group to be consistent with the man-
ner investors value our performance relative to the market.
We considered the changes in stock price and its effect on
our long-term incentive grants. The impact of a lower share
price generally results in more options and restricted shares
being granted to plan participants. We reviewed the resulting
number of shares required to meet our long-term incentive
target values and determined that number was within a rea-
sonable range and therefore made no changes to our histori-
cal target award values in 2009.
Components of the Executive Compensation Program
The total compensation and benefits program for Senior
Executives consists of the following:
• base salaries;
• short-term incentive compensation;
• long-term incentive compensation;
• retirement, health and welfare benefits; and
• perquisites and perquisite allowance payments.
The Compensation Committee targets different compensa-
tion levels for each element of compensation for the PEO and
each other NEO based upon his level of responsibility to the
Company (as discussed in more detail below).
Base Salaries
The Compensation Committee targets the median base
salary level (50th percentile) of the Survey Data for the base
salaries of our Senior Executives. The Committee has strategi-
cally decided to target the 50th percentile based on historical
performance of the oilfield services industry. Because of the
volatility of the industry, Baker Hughes strategically chooses to
set base salaries at a competitive level, but not the highest in
the market. Base salaries make up a large portion of fixed
compensation costs, and our stockholders are served best by
minimizing those fixed costs when business activity is low. To
employ talented and capable Senior Executives we pay the
market median for base salaries. We do not believe we need
to pay above the market median, since we provide greater
opportunity for earnings through compensation programs
which are at risk and dependent on the performance of the
Executives and the Company.
When considering adjustment of a Senior Executive’s base
salary, the Compensation Committee reviews Survey Data and
evaluates the Senior Executive’s level of responsibility and
experience as well as Company performance. The Compensa-
tion Committee also considers the Senior Executive’s success in
achieving business results, promoting our core values and keys
to success, improving health and safety and demonstrating
leadership. We believe the Company’s keys to success are (i)
people contributing at their full potential, (ii) delivering
unmatched value to our customers, (iii) being cost efficient in
everything we do and (iv) employing our resources effectively.
Benchmarking and aligning base salaries are especially crit-
ical to a competitive compensation program. Other elements
of our compensation are affected by changes in base salary.
Annual incentives are targeted and paid out as a percentage
of base salary, and the target levels of long-term incentives are
also set as a percentage of base salary. Increases to base sala-
ries, if any, are driven primarily by individual performance and
comparative data from the Survey Data.