Baker Hughes 2007 Annual Report Download - page 59

2007 Proxy Statement 41
PROPOSAL NO. 3
APPROVAL OF THE PERFORMANCE CRITERIA FOR THE
2002 DIRECTOR & OFFICER LONG-TERM INCENTIVE PLAN
Background
The Company’s stockholders are being asked to approve
the material terms of the performance criteria that may apply
to performance-based compensation granted under the 2002
D&O Plan. This approval is necessary to generally preserve the
Company’s federal income tax deduction for performance-
based compensation paid to certain executive officers under
Section 162(m) of the Code.
In 2002 the Board of Directors adopted, and the stock-
holders approved, the 2002 D&O Plan, which provides for,
among other compensation, performance-based compensation
for corporate officers, directors and key employees of the
Company based upon the achievement of performance goals
for the year.
The 2002 D&O Plan provides corporate officers, directors
and key employees who have substantial responsibility for the
growth and profitability of the Company and/or its affiliates
with performance incentives that are designed to align the
interests of the corporate officers, directors and key employees
with those of the Company’s stockholders.
The 2002 D&O Plan is administered by the Compensation
Committee, which is composed of independent non-manage-
ment directors. The Compensation Committee has exclusive
authority to (i) select the participants each year, (ii) establish
award opportunities for each participant, (iii) establish the per-
formance goals for each participant and (iv) determine the
extent to which the performance goals have been attained.
The 2002 D&O Plan provides for awards of performance units,
performance shares and cash-based awards that are generally
intended to qualify as performance-based compensation under
Section 162(m) of the Code.
Performance units and cash-based awards granted under
the 2002 D&O Plan may be paid in the form of cash or shares
of our Common Stock in the discretion of the Compensation
Committee. Performance shares granted under the 2002 D&O
Plan are paid in the form of shares of our Common Stock.
The performance period for a performance unit award,
performance share award or cash-based award granted under
the 2002 D&O Plan is such period of time as the Compensa-
tion Committee establishes. The performance periods for such
awards granted under the 2002 D&O Plan in the past have
typically been consecutive three-year periods.
Under the terms of the 2002 D&O Plan the maximum
aggregate grant with respect to any awards of performance
shares made in any one fiscal year of the Company to any one
employee shall be equal to the value of 1,000,000 shares
determined as of the date of grant. The maximum aggregate
amount awarded or credited with respect to cash-based awards
or performance units for any one employee in any one fiscal
year of the Company may not exceed in value $10,000,000,
determined as of the date of grant.
Section 162(m) of the Code
Section 162(m) of the Code imposes an annual deduction
limit of $1,000,000 on the amount of compensation paid to
covered employees (as defined in Section 162(m) of the Code).
The deduction limit does not apply to performance-based
compensation that satisfies the requirements of Section
162(m) of the Code. The requirements of Section 162(m) of
the Code for performance-based compensation include stock-
holder approval of the material terms of the performance
goals under which the compensation is paid. The material
terms include (i) the employees eligible to receive compensa-
tion upon attainment of a goal; (ii) the business criteria on
which the goals may be based and (iii) the maximum amount
payable to an employee upon attainment of a goal.
The provisions of the 2002 D&O Plan grant the Compen-
sation Committee the flexibility to establish performance tar-
gets that may differ among awards and therefore, it is
necessary to periodically obtain re-approval by the Company’s
stockholders of the material terms of the 2002 D&O Plan per-
formance goals. Department of Treasury Regulation section
1.162-27(e)(4)(vi) provides that if a company’s compensation
committee has the authority to change the targets under a
performance goal, the material terms of the performance goal
must be disclosed to, and reapproved by, stockholders on a
periodic basis. The stockholder approval of the material terms
of the performance goal remains effective until the first stock-
holders meeting that occurs in the fifth year following the year
in which stockholders previously approved the performance
goal. For awards granted after that deadline, new stockholder
approval would be required.
It is necessary to obtain stockholder re-approval of the per-
formance goals before amounts are paid under performance
units, performance shares and cash-based awards that are
granted in the future if such future awards are to qualify as
performance-based compensation that is exempt from the
Section 162(m) deduction limitation.
Performance Criteria
The following summary of the material features of the
performance criteria for awards under the 2002 D&O Plan is
qualified by reference to the copy of the 2002 D&O Plan,
which is attached as Annex E to this Proxy Statement.
Performance unit awards, cash-based awards and perfor-
mance share awards may be granted under the 2002 D&O
Plan to officers and key employees of the Company.
Under the 2002 D&O Plan, performance unit awards,
cash-based awards and performance share awards are subject
to the satisfaction of one or more performance goals during
the applicable performance period. Performance goals for
awards will be determined by the Compensation Committee
and will be designed to support the Company’s business strat-
egy and align participants’ interests with stockholder interests.
Performance goals for performance unit awards, performance
share awards or cash-based awards to Section 162(m) covered
employees are based on the criteria contained in the 2002
D&O Plan, including one or more of the following business cri-
teria: Baker Value Added; net earnings; earnings per share; net
income (before or after taxes); stock price (including growth