Baker Hughes 2009 Annual Report Download - page 26

16 Baker Hughes Incorporated
In determining base salaries, the Compensation Commit-
tee also considers the Company’s continuing achievement of
its short and long-term goals to:
• achieve specific EPS 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:
• their current compensation significantly deviates from the
Survey Data;
• recognizing outstanding individual performance; or
• recognizing an increase in responsibility.
In 2009 the Compensation Committee approved base sal-
ary increases for Messrs. Ragauss, Craighead and O’Donnell.
The decision to increase each such salary was based on the
review of Survey Data from the Peer Group at the 50th per-
centile and the Senior Executive’s increased level of responsibil-
ity. In approving the 2009 salary increases, the Compensation
Committee reviewed the Survey Data which indicated that the
Senior Executive group averaged 94% of the market median
(excluding Mr. Barr who was not included in the review) as
well as the performance of the Company and each of Messrs.
Ragauss, Craighead and O’Donnell before approving the base
salary increases. The new salaries were effective in May 2009.
Mr. Barr retired from our employment on April 30, 2009. The
individual performance factors considered by the Compensa-
tion Committee in awarding a salary increase to Mr. Ragauss
were performance factors relating to compliance and stan-
dardization in the finance function. The Compensation Com-
mittee awarded salary increases to Messrs. Craighead and
O’Donnell in connection with their promotions to positions of
significantly increased responsibility during 2009. During 2009
Mr. Craighead was promoted to the position of Senior Vice
President and Chief Operating Officer. Effective May 4, 2009,
we reorganized our global operations by geography. Western
Hemisphere Operations report to Mr. O’Donnell, a Company
Vice President, who was named President Baker Hughes West-
ern Hemisphere Operations.
Annual Incentive Plan
The Annual Incentive Plan provides Senior Executives with
the opportunity to earn cash bonuses based on the achieve-
ment of specific Company-wide, business unit, division or
function and individual performance goals. The Compensation
Committee designs the annual incentive component of our
compensation program to align Senior Executive pay with our
annual (short-term) performance. Incentive bonuses are gener-
ally paid in cash in March of each year for the prior fiscal year’s
performance. The payouts for Senior Executives under the
Annual Incentive Plan in conjunction with discretionary
bonuses are targeted to pay out at the median (50th percen-
tile) of the Survey Data in years when we reach expected
financial performance levels. If we reach, but do not exceed,
the financial performance targets for any given year, the incen-
tive payout should position the Senior Executives’ total cash
compensation near the median of the Survey Data. However,
the Annual Incentive Plan is designed so that in years that
financial performance significantly exceeds our financial per-
formance targets, the payouts of the short-term incentive pro-
gram could exceed the 50th percentile of the Survey Data, and
vice versa in years when performance falls meaningfully short
of expected results. The incentive target percentage represents
the Senior Executive’s annual bonus opportunity if the annual
performance goals of the Annual Incentive Plan are achieved.
The Annual Incentive Plan incorporates a set of financial
metrics for each Senior Executive. The sole financial metric
used in the Annual Incentive Plan for the 2009 performance
period was the financial metric of EPS. The Compensation
Committee reviews and may change the metrics of the Annual
Incentive Plan. As of the date of this Proxy Statement, the
metrics have not changed.
The amount to be paid to each Senior Executive under the
Annual Incentive Plan (the “Incentive Amount”) is determined
by the applicable financial metrics, which are combined into
an overall value (the “Financial Result”). The Compensation
Committee approves three performance levels 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 tar-
get 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 level, the Incentive Amount equals
100% of target incentive compensation. Over achievement
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. If the Compa-
ny’s Financial Result exceeds the over achievement level, the
Incentive Amount will exceed 200% of the Senior Executive’s
target incentive compensation level. Financial performance
between any of the performance levels results in a payout that
is determined by interpolation between the two performance
level percentages according to the actual Financial Result
achieved. The individual bonus opportunities for achievement
of bonus objectives above the over achievement level are
determined by extrapolation.
Performance targets for all metrics are established at levels
that are considered achievable but challenge the Company
and the individual Senior Executives to perform at a high level.
Targets are set such that only exceptional performance will
result in payouts above the target incentive and poor perfor-
mance will result in no incentive payment. We set the target
performance goals at a level for which there is a reasonable
chance of achievement based upon forecasted performance of
our operating units. Scenarios were developed based upon a