Baker Hughes 2007 Annual Report Download - page 32

14 Baker Hughes Incorporated
The amount to be paid to each Senior Executive under the
Annual Incentive Plan (the “Incentive Amount”) is determined
by the financial metrics of BVA and EPS, which are combined
into an overall value (the “Financial Result”). The Compensa-
tion Committee approves three different thresholds with
respect to the Financial Result, entry level, expected value and
over achievement. Entry level is the minimum level of Financial
Result for which the Compensation Committee approves any
annual incentive payout. If the Company’s Financial Result is
less than the entry level threshold, then there is no payout
for the Incentive Amount in that fiscal year. If we achieve
the entry threshold, the Incentive Amount equals 25% of the
target incentive compensation, which is a percentage of the
Senior Executive’s base salary. Expected value is the target level
of financial performance. If the Company’s Financial Result
reaches the expected value threshold, the Incentive Amount
equals 100% of target incentive compensation. Over achieve-
ment represents a level of financial performance that exceeds
the expected value threshold. If the Company’s Financial Result
reaches the over achievement threshold, the Incentive Amount
equals 200% of target incentive compensation. Financial per-
formance between any of the thresholds results in a payout
that is prorated between the two threshold percentages
according to the actual Financial Result achieved.
If the Company’s Financial Result exceeds the over achieve-
ment threshold, the Incentive Amount will exceed 200% of
the Senior Executive’s target incentive compensation threshold.
Effective for performance periods commencing prior to Janu-
ary 1, 2008, any Incentive Amount over 200% of target incen-
tive compensation is not paid out with the annual incentive,
but is held or “banked” until following years. Half of the
banked amount, plus interest at market rates on the banked
amount, is paid one year after the incentive is earned. The
remaining half of the amount plus interest at market rates is
paid out two years from the date earned. This ensures that
exceptional incentive payouts are only realized by Senior Exec-
utives if they remain employed by us. An example of the bank-
ing calculation is shown in the following table(1):
Target Incentive Compensation $ 100,000
Incentive Earned $ 220,000
Paid in March Following Fiscal Plan Year $ 200,000
Banked for Following Year $ 10,500
Banked for 2nd Year After Original Payout $ 11,025
(1) Values are for illustrative purposes and assume a 5% market interest rate on
the banked amount.
For the health and safety metric, we have pre-established
goals for an acceptable Total Recordable Incident Rate (“TRIR”).
If we attain our goal for TRIR, the health and safety metric is
paid out in full equaling 5% of incentive opportunity. If the
TRIR goal is not achieved, the Senior Executive does not
receive that portion of the incentive.
The second non-financial metric in the Annual Incentive
Plan is individual performance. This metric pays out if the Senior
Executive achieves pre-determined performance goals. The direct
supervisor of each Senior Executive sets specific individual goals
at the beginning of each year. If these goals are achieved by the
end of the plan year, the Senior Executive may earn the target
value for the individual performance metric.If these goals are
not achieved, the individual performance metric is not paid out.
For illustration, if an NEO with an incentive compensation
target of 50% of salary and a base salary of $400,000
achieved the following financial and non-financial results,
the payout would be as follows:
Target Incentive: $400,000 x 50% = $200,000
Weight Result Payout
Financial Results (BVA and EPS) 80% 150% $ 240,000
Health and Safety (TRIR) 5% 100% $ 10,000
Individual Performance 15% 100% $ 30,000
Total Incentive Earned: $ 280,000
The payout for each metric is the target incentive of
$200,000 multiplied by the weight of each metric and the
percentage results, for example $200,000 x 80% x 150% =
$240,000.
Long-Term Incentive Compensation
The long-term incentive program allows Senior Executives
to increase their compensation over a number of years as
stockholder value is increased as a result of a higher stock
price or sustained improvements in financial performance over
multiple years. Long-term incentives comprise the largest por-
tion of a Senior Executive’s compensation package and are
consistent with our at-risk pay philosophy. Currently, long-term
incentives generally are allocated to Senior Executives in the
following percentages: 40% Performance Units, 35% Stock
Options and 25% Restricted Stock. The Compensation Com-
mittee has approved targeting the 75th percentile of the Sur-
vey Data with respect to long-term incentive awards because
the majority of long-term incentives are at risk and therefore
justify a higher target percentage in relation to the Survey Data.
In 2002, the Compensation Committee and our Board of
Directors approved the 2002 D&O Plan for performance-related
awards for Senior Executives. Our stockholders approved the
2002 D&O Plan in April 2002. An objective of the 2002 D&O
Plan was to align the interests of Senior Executives with stock-
holders and to provide a more balanced long-term incentive
program. Beginning in 2005, the Compensation Committee
approved equity awards in shares of restricted stock (or in most
cases restricted stock units in non-United States jurisdictions)
in addition to the previously offered fixed-price stock options.
Capitalized terms used in this section discussing long-term
incentive compensation and not otherwise defined herein shall
have the meaning assigned to such term in the 2002 D&O Plan.
The Compensation Committee approves the total stock
options, restricted stock, performance units and cash-based
awards that will be made available to Senior Executives as well
as the size of individual grants for each Senior Executive. The
amounts granted to Senior Executives vary each year and are
based on the Senior Executive’s performance, the Survey Data,
as well as the Senior Executive’s total compensation package.
Previous awards and grants, whether vested or unvested, have
no impact on the current year’s awards and grants.