Baker Hughes 2007 Annual Report Download - page 60

42 Baker Hughes Incorporated
measures and total shareholder return); return measures
(including return on net capital employed, return on assets,
return on equity or sales return); earnings before or after
interest, taxes, depreciation and/or amortization; dividend
payments to the Company; gross revenues; gross margins;
expense targets; cash flow return on investments, which
equals net cash flows divided by owner’s equity; internal rate
of return or increase in net present value; working capital
targets relating to inventory or accounts receivable; planning
accuracy (as measured by comparing planned results to actual
results); comparisons to various stock market indices; compari-
sons to the performance of other companies; net sales
growth; net operating profit; cash flow (including operating
cash flow and free cash flow); and operating margin.
“Baker Value Added” or “BVA” means, with respect
to a performance period, the amount calculated under the
following formula:
[[(a) + (b) + (c)] x (1 – (d)] – (e)
where (a) is the Profit Before Tax of Baker Hughes for the per-
formance period, (b) is the interest expense of Baker Hughes
for the performance period, (c) is the non-compete amortiza-
tion expense of Baker Hughes for the performance period,
(d) is the applicable Tax Rate for the performance period and
(e) is the Capital Charge determined for Baker Hughes for the
performance period. For this purpose, “Average Adjusted Net
Capital Employed” means the sum of the Monthly Adjusted
Net Capital Employed during the performance period divided
by 12; “Capital Charge” means Average Adjusted Net Capital
Employed multiplied by the Cost of Capital; “Baker Hughes”
means the Company and all of its affiliates in which the Com-
pany directly or indirectly has a capital investment, or one or
more business units of the Company and its affiliates, as speci-
fied in the written award opportunities; “Cost of Capital”
means the weighted average after-tax cost of debt and cost of
equity for Baker Hughes for the performance period; “Monthly
Adjusted Net Capital Employed” means the capital employed
by Baker Hughes during a month of the performance period
plus accumulated goodwill amortization plus accumulated non-
compete amortization plus the value of significant operating
leases; “Profit Before Tax” means the total revenues of Baker
Hughes for the performance period minus the cost of revenues
and operating expenses of Baker Hughes for the performance
period minus interest expense plus interest and dividend
income of Baker Hughes for the performance period; and
“Tax Rate” means the effective tax rate for Baker Hughes
determined in a manner consistent with Baker Hughes tax
policies and practices.
Achievement of the goals may be measured:
•฀ individually,฀alternatively฀or฀in฀any฀combination;
•฀ with฀respect฀to฀the฀Company,฀one฀or฀more฀business฀units,฀or฀
any combination of the foregoing;
•฀ on฀an฀absolute฀basis,฀or฀relative฀to฀a฀target,฀to฀a฀designated฀
comparison group, to results in other periods, or to other
external measures; and
•฀ including฀or฀excluding฀items฀determined฀to฀be฀extraordinary,฀
unusual in nature, infrequent in occurrence, related to the
acquisition or disposal of a business, or related to a change in
accounting principle, in each case based on Opinion No. 30
of the Accounting Principles Board (APB Opinion No. 30), or
other applicable accounting rules, or consistent with the
Company’s policies and practices for measuring the achieve-
ment of performance goals on the date the Committee
establishes the goals.
The Compensation Committee may, in its discretion,
decrease the amount payable under any award. The Compen-
sation Committee may, in its discretion, increase the amount
payable under an award to a participant who is not a covered
employee (as defined in Section 162(m) of the Code). The
Compensation Committee may not increase the amount pay-
able under an award to a participant who is a covered
employee (as defined in Section 162(m) of the Code).
Future Awards
It is anticipated that the Compensation Committee will
make future grants of performance unit awards, performance
share awards or cash-based awards that will align the interests
of the Company’s officers and key employees with the interests
of the Company’s stockholders and will incentivize the Compa-
ny’s officers and key employees to achieve specific financial per-
formance goals. No compensation under performance unit
awards, cash-based awards or performance share awards
granted to employees who are covered employees within the
meaning of Section 162(m) of the Code will be paid under the
2002 D&O Plan for the performance period commencing in
2008 or subsequent performance periods unless the Company’s
stockholders approve this Proposal No. 3.
Additional Information
For further information regarding compensation to Senior
Executives and the 2002 D&O Plan see the “Compensation
Discussion and Analysis.”
Recommendation
The Board of Directors recommends a vote “FOR”
approval of the material terms of the performance crite-
ria for performance awards under the 2002 D&O Plan.
ANNUAL REPORT
The 2007 Annual Report on Form 10-K of the Company
(the “Annual Report”), which includes audited financial state-
ments for the fiscal year ended December 31, 2007, accompa-
nies this Proxy Statement only if you have requested that a
copy of this Proxy Statement be mailed to you. The Annual
Report also is available electronically by following the instruc-
tions in the E-Proxy Notice, as described in the “Proxy State-
ment – Information About the Notice of Internet Availability of
Proxy Materials” section of this Proxy Statement. However, the
Annual Report is not part of the proxy soliciting information.