Baker Hughes 2010 Annual Report Download - page 50

38 B a k e r H u g h e s I n c o r p o r a t e d
subsequently approved at the 2001 and 2006 stockholders
meetings in order to continue the qualification of the Annual
Incentive Compensation Plan under Section 162(m) of the Code.
The Annual Incentive Compensation Plan provides officers
of the Company with performance incentives that are designed
to align the interests of the officers with those of the Company’s
stockholders. The Board of Directors believes that the Com-
pany must offer a competitive equity incentive program if it is
to continue to successfully attract and retain the best possible
candidates for positions of responsibility within the Company.
The Annual Incentive Compensation Plan is administered
by the Compensation Committee. The Compensation Commit-
tee has exclusive authority to (i) select the participants each
year, (ii) establish award opportunities for each participant,
(iii) establish the performance goals for each participant, and
(iv) determine the extent to which the performance goals
have been attained.
Section 162(m) of the Code
Section 162(m) of the Code imposes a $1,000,000 annual
limitation on the deduction for compensation paid to each of
the principal executive officer and our next three highest-paid
officers other than the principal financial officer. The deduction
limitation does not apply to performance-based compensation
that satisfies certain requirements of Section 162(m) of the
Code. One such requirement is that the material terms of
the performance goals must be approved by the stockholders
before the performance-based compensation is paid. The
material terms include the following: (1) the eligibility of
employees to receive compensation upon attainment of the
goal, (2) the business criteria on which the goals may be
based, and (3) the maximum amount payable to an employee
upon attainment of a goal. The stockholder approval of the
performance criteria under the Annual Incentive Compensa-
tion Plan serves the purpose of facilitating the tax deductibility
of awards under the Annual Incentive Compensation Plan.
Performance Criteria
The following summary of the material features of the
performance criteria for awards under the Annual Incentive
Compensation Plan is qualified by reference to the copy of
the Annual Incentive Compensation Plan which is attached
as Annex C to this Proxy Statement.
Performance bonuses may be granted under the Annual
Incentive Compensation Plan to officers and key employees
of the Company and its affiliates who are in a position to
significantly contribute to the growth and profitability of the
Company and/or its affiliates.
Under the Annual Incentive Compensation Plan, perfor-
mance bonuses are subject to the satisfaction of one or more
performance goals during the applicable calendar year per-
formance period. Performance goals for awards will be deter-
mined by the Compensation Committee and will be designed
to support the Company’s business strategy and align partici-
pants’ interests with stockholder interests. Performance goals
will be based on one or more of the following business criteria:
Profit After Tax (as defined in the Annual Incentive Compensation
Plan), Baker Value Added (as defined in the Annual Incentive
Compensation Plan), earnings per share, total shareholder
return, cash return on capitalization, increased revenue, reve-
nue ratios, net income, stock price, market share, return on
equity, return on assets, return on capital, return on capital
compared to cost of capital, return on capital employed,
return on invested capital, shareholder value, net cash flow,
operating income, earnings before interest and taxes, cash
flow, cash flow from operations, cost reductions, and cost
ratios. Profit After Tax means revenues minus cost of sales
(the cost of products sold and the cost of providing services,
including personnel costs, repair and maintenance costs,
freight/custom, depreciation and other costs (e.g., commission
and royalty 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.) In the case
of a participant other than a covered employee (within the
meaning of Section 162(m) of the Code), up to 25 percent
of his expected value bonus opportunity under the Annual
Incentive Compensation Plan may be based on nonfinancial,
subjective performance goals.
Achievement of the goals may be based on one or more
business criteria that apply to the participant, one or more
business units or the Company as a whole. They may also be
based on performance relative to a peer group, to results in
other periods, or to other external measures. Items that are
utilized in measuring the achievement of performance goals
may be included or excluded if they are determined to be
extraordinary, unusual in nature, infrequent in occurrence,
related to the acquisition or disposal of a business, or related
to a change in accounting principle, in each case based on
Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 225-20, Income Statement,
Extraordinary and Unusual Items, and FASB ASC 830-10,
Foreign Currency Matters, Overall, or other applicable account-
ing rules, or consistent with the Company’s policies and
practices for measuring the achievement of performance
goals on the date the Committee establishes the goals.
The Compensation Committee may, in its discretion,
decrease the amount payable under any award. The Compen-
sation Committee may, in its discretion, increase the amount
payable under an award to a participant who is not a covered
employee (as defined in Section 162(m) of the Code), but is
not permitted to increase the amount payable under an award
to a participant who is a covered employee. Under the Annual
Incentive Compensation Plan, the maximum annual perfor-
mance bonus that may be granted under the Annual Incentive
Compensation Plan is $4,000,000.
No compensation will be paid under the Annual Incentive
Compensation Plan to Section 162(m) covered employees in
respect of performance periods commencing after 2010 unless
the Company’s stockholders reapprove the performance crite-
ria for awards under the Annual Incentive Compensation Plan.
The affirmative vote of the majority of shares present in
person or represented by proxy at the meeting and entitled to
vote on the matter is required for the approval of this proposal.