Baker Hughes 2007 Annual Report Download - page 33

2007 Proxy Statement 15
For the performance period ending on December 31,
2007, the Compensation Committee approved cash-based
awards under the 2002 D&O Plan for certain NEOs to reward
exceptional organizational and individual achievements that
resulted in (i) settlements with the Department of Justice and
the Securities and Exchange Commission together with the
development and implementation of strategic initiatives to
improve compliance with the Company’s Business Code of
Conduct, (ii) advancement of the Company’s international
growth in the Eastern Hemisphere and (iii) creation of man-
agement systems to enhance and maintain our high perfor-
mance culture.
Stock Options
An important objective of the long-term incentives is to
strengthen the relationship between the long-term value of
our stock price and the potential financial gain for employees.
Stock options provide Senior Executives with the opportunity
to purchase our Common Stock at a price fixed on the grant
date regardless of future market price. Stock options generally
vest and become exercisable one-third annually after the origi-
nal award date.
The exercise prices of the stock options granted to the
PEO and the NEOs during fiscal year 2007 are shown in the
Grants of Plan-Based Awards Table on page 24. Additional
information on these grants, including the number of shares
subject to each grant, also is shown in the Grants of Plan-
Based Awards Table.
Options generally are granted semi-annually, at the same
time as grants to the general eligible employee population,
in January and July prior to the release of our earnings. Option
grants are made at Compensation Committee meetings sched-
uled in advance to meet appropriate deadlines for compensa-
tion-related decisions. Our practice is that the exercise price for
each stock option is the market value on the date of grant. Pur-
suant to the 2002 D&O Plan, the Option Price shall not be less
than the Fair Market Value of the shares on the date of grant.
In certain instances, stock options may vest on an acceler-
ated schedule. Retirement may trigger accelerated vesting if a
Senior Executive’s age plus years of service with us is greater
than or equal to 65 years. In this instance, all unvested options
will vest as of the retirement date, and the Senior Executive
will have three or five years to exercise the options depending
on the terms outlined in the stock option award agreement.
However, the exercise window may not exceed the original
option term.
Additionally, death or disability while employed with the
Company will cause all stock options to automatically vest and
become exercisable per the terms outlined in the stock option
award agreement.
Restricted Stock Awards and Restricted Stock Units
Restricted stock awards (“RSAs”) are intended to aid in
retaining key employees, including the Senior Executives,
through vesting periods. RSAs provide the opportunity for
capital accumulation and more predictable long-term incentive
value. In the United States, RSAs are awarded, while outside
the United States, we generally utilize restricted stock units
(“RSUs”) as a performance incentive.
RSAs generally are awarded to Senior Executives once a
year in January, at the same time as awards to the general
eligible employee population. RSAs are shares of our Common
Stock that are awarded with the restriction that the Senior
Executive remain with us until the date of vesting. RSAs gener-
ally vest one-third annually after the original award date. The
purpose of granting RSAs is to encourage ownership of our
Common Stock by, and retention of, our Senior Executives.
Senior Executives are allowed to vote RSAs as a stockholder
based on the number of shares held under restriction. The
Senior Executives are also awarded dividends on the RSAs
held by them.
Any unvested RSAs generally are forfeited if the Senior
Executive terminates employment with the Company or if
the Senior Executive fails to meet the continuing employment
restriction outlined in the RSA agreement. In the event of
death or disability, any unvested RSAs are immediately vested.
RSUs are similar to RSAs, but with a few key differences.
An RSU is a commitment by us to issue a share of our Com-
mon Stock for each RSU at the time the restrictions in the
award agreement lapse. RSUs are provided to Executives who
are not on the United States payroll because of the different
tax treatment in many other countries. RSU awards are eligible
for dividend equivalent payments each time we pay dividends.
Any unvested RSUs are generally forfeited upon termina-
tion of employment with the Company if the restrictions out-
lined in the awards are not met. Any vested shares are fully
owned. Additionally, in the event of death or disability, all
shares of RSUs are immediately vested.
Performance Units
Performance units represent a significant portion of our
long-term incentive program. Forty percent of the long-term
incentive value awarded is through performance units, which
are certificates of potential value that are payable in cash at
the end of a specified performance period. Performance units
only pay out if the Company achieves certain BVA targets,
typically after a three-year performance period. Failure to
achieve the entry level threshold will render the performance
unit awards valueless. Performance units are intended to
replace performance awards made under the Company’s
Performance Plan for 2004-2006 and 2005-2007. Awards
were granted under the Performance Plan for 2004-2006 on
December 29, 2006; however, no awards were earned and
thus no payouts made under the 2005-2007 Performance
Plan because total stockholder return goals were not achieved.
Both Performance Plans expired at December 29, 2006 and
December 31, 2007, respectively.
Performance units are designed to encourage long-range
planning and reward sustained stockholder value creation.
The objectives of the performance units are to (i) insure a
long-term focus on capital employment; (ii) develop human
resource capability; (iii) enable long-term growth opportunities;
(iv) motivate accurate financial forecasting; and (v) reward
long-term goal achievement. While stock options and
restricted stock and units tie directly to our stock price, perfor-
mance units reward contributions to our financial performance
and are not subject to the volatility of the stock market. BVA