Baker Hughes 2007 Annual Report Download - page 30

12 Baker Hughes Incorporated
Base Salaries
The Compensation Committee targets the median base
salary level (50th percentile) of the Survey Data for the base sal-
aries of our Senior Executives. The Committee has strategically
decided to target the 50th percentile based on historical perfor-
mance of the oilfield services industry. Because the industry is
dependent on the supply and demand of oil and the invest-
ment levels of customers, 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 Company performance.
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 demonstrat-
ing 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
salaries, if any, are driven primarily by individual performance
and comparative data from the Survey Data.
In determining base salaries, the Compensation Committee
also considers the Company’s continuing achievement of its
short and long-term goals to:
•฀ achieve฀specific฀EPS฀and฀BVA฀goals;
•฀ communicate฀strategy฀and฀financial฀results฀effectively;
•฀ increase฀emphasis฀on฀employee฀health฀and฀safety;฀and
•฀ develop฀human฀resource฀capability฀and฀reduce฀attrition.
The Compensation Committee bases its compensation
decisions on the Company’s performance related to the goals
listed above. The Compensation Committee does not rely
solely on predetermined formulas or a limited set of criteria
when it evaluates the performance of the Senior Executives.
The Compensation Committee usually adjusts base salaries
for Senior Executives when:
•฀ the฀current฀compensation฀demonstrates฀a฀significant
deviation from the Survey Data;
•฀ recognizing฀outstanding฀individual฀performance;฀or
•฀ recognizing฀an฀increase฀in฀responsibility.
If in this review of individual performance and market
salary data, the Compensation Committee finds that the
Senior Executive is paid competitively at the 50th percentile
of the market, and has exhibited exceptional performance
during the period under review, the Compensation Committee
may award the Senior Executive a merit lump sum instead of
a salary increase. The purpose of the merit lump sum is to
reward individual performance in the annual review, without
increasing the base salary beyond the competitive 50th per-
centile of market. This allows the Senior Executive to be
rewarded for exceptional performance, without the Company
incurring the additional costs associated with a base salary
increase, including the related compensation tied to base
salary, and without increasing salaries over median levels.
In 2007 the Compensation Committee approved base
salary increases for each of the Senior Executives. The decision
to increase each salary was based on the review of Survey
Data from the Peer Group at the 50th percentile and individual
performance. In approving the 2007 salary increases, the
Compensation Committee reviewed the Survey Data as well as
reviewing the performance of the Company and each Senior
Executive before approving the base salary increases. The new
salaries were effective in March 2007 at the same time all
other merit increases were granted to employees of the Com-
pany. The Compensation Committee decided not to award any
merit lump sum in lieu of salary increases during 2007.