Kodak 2006 Annual Report Download - page 191

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Long-Term Variable Equity Incentive Compensation
The purposes behind our long-term equity incentive compensation program are to align executive compensation with shareholder interests, create
signifi cant incentives for executive retention, encourage long-term performance by our executive offi cers and promote stock ownership. In 2006, the
Committee granted our Named Executive Offi cers long-term variable equity incentive compensation consisting of stock options and performance stock
units, known as Leadership Stock. The Committee also granted our Named Executive Offi cers performance stock units under the 2006 Executive Per-
formance Share Plan. In addition to these equity award programs, the Company granted individual equity awards to certain Named Executive Offi cers
in connection with signifi cant promotions, retention, new hires and outstanding individual achievements that promoted Kodak’s strategic business
plan.
Our long-term variable equity incentive programs balance a focus on stock price appreciation and the achievement of strategic business goals. Stock
options are designed to compensate our most senior executives for stock appreciation and provide a strong link to shareholder value creation. We
believe options are an effective incentive compensation vehicle for those who are most responsible for infl uencing shareholder value. Leadership Stock
is designed to encourage executives to achieve key metrics (e.g., digital earnings from operations) that promote the Company’s digital transformation.
When determining the aggregate annual long-term variable equity awards to each of our Named Executive Offi cers, the Committee establishes the
aggregate value of stock option awards at the same time that it determines the aggregate value of Leadership Stock targets that are to be granted in
the next year. The Committee generally makes annual option grants in December of each year at its regularly scheduled meeting. Leadership Stock
allocations are also determined at this time for the next performance cycle. The timing of our option awards was selected because it enables the
Committee to consider current year performance and expectations for the succeeding year. The Company recently conducted a review of its past stock
option granting practices and did not identify any practices that raised concerns. In order to formalize its procedures relating to grants of stock options
and other equity awards, the Board of Directors adopted a policy that sets forth procedures for the setting of grant dates, which is discussed on page
41 of this Proxy Statement.
The Committee has no set policy for determining the mix of the form of long-term variable equity incentives granted to our Named Executive Of-
fi cers. At its regular meeting in December 2006, the Committee determined to grant one-half of the value of our Named Executive Offi cers’ long-term
variable equity incentives in the form of non-qualifi ed stock options and one-half of the value in the form of a target allocation under the Leadership
Stock Program for the 2007 performance cycle. Generally, the Committee does not consider prior awards in granting annual long-term variable equity
incentive awards.
Long-Term Incentive Gap Closure
In response to the Committee’s fi ndings upon its annual review of our Named Executive Offi cers’ compensation in 2006, the Committee increased
the size of the award of annual stock option grants and Leadership Stock for the 2007 performance cycle to our Named Executive Offi cers relative to
prior years. The Committee determined that this increase was warranted because market data indicated that our executives’ long-term variable equity
incentive compensation opportunity was less than the median opportunity for executives in similar positions with similar responsibilities as identifi ed
based on the average of two national surveys using companies with gross revenues similar to Kodak.
The Committee assessed the aggregate cost of this increase and determined that the costs and long-term incentive budget as a result of the gap clo-
sure were reasonable. In making this determination, the Committee reviewed the long-term equity incentive practices of the following 15 peer group
companies based on review with its consultant:
• Agilent Technologies • H.J. Heinz Company • Motorola Inc.
• Caterpillar, Inc. • Hewlett-Packard Company • Sun Microsystems, Inc.
• The Clorox Company • Honeywell International Inc. • Texas Instrument Incorporated
• E.I. du Pont de Nemours and Company • Lexmark International Inc. • Xerox Corporation
• Emerson Electric Co. • Lucent Technologies • 3M Company
The peer group was selected based on the following criteria: 1) market capitalization; 2) revenue; 3) consumer/commercial/high-tech mix; 4) mix of
high growth and steady companies; 5) industry similarity; and 6) data availability. In comparing Kodak’s programs to the peer group, the Committee
reviewed the value of the Leadership Stock awards granted in January 2006, the 2005 stock option grants and the annualized value of other non-an-
nual equity grants (such as new hire or retention awards) as a percentage of Kodak’s market capitalization. This analysis indicated that the Company’s
current practices fell below the median range of our peer group. The Committee determined that increasing the 2006 stock option grants and 2007
Leadership Stock awards granted to our Named Executive Offi cers to bring their total direct compensation to the level the Committee considers
competitive would be reasonable.