Baker Hughes 2009 Annual Report Download - page 29

2009 Proxy Statement 19
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
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 typically utilized, while outside the United States,
we generally utilize 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 generally 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 Exec-
utives 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. Performance units are certificates
of potential value that are payable in cash at the end of a spec-
ified performance period. Performance units only pay out if the
Company achieves certain financial targets (BVA targets in the
case of awards granted prior to 2009), typically after a three-
year performance period. Failure to achieve the entry level
threshold will render the performance unit awards valueless.
Performance units are designed to encourage long-range
planning and reward sustained stockholder value creation. The
objectives of the performance units are to (i) ensure a long-term
focus on capital employment; (ii) develop human resource
capability; (iii) enable long-term growth opportunities; (iv) moti-
vate accurate financial forecasting; and (v) reward long-term
goal achievement. While stock options, RSAs and RSUs tie
directly to our stock price, performance units reward contribu-
tions to our financial performance and mitigate the impact of
the volatility of the stock market on our long-term incentive
program. For performance unit awards granted in 2009, our
revenue growth, operating margin and return on net capital
employed as compared to a peer group consisting of six peer
companies are the financial metrics that will be used to deter-
mine payouts. The peer group consists of Schlumberger Limited,
Halliburton Company, National Oilwell Varco Incorporated,
Smith International Incorporated, Weatherford International
Ltd. and BJ Services Company. On August 30, 2009 we entered
into an agreement to acquire BJ Services Company. If this
acquisition agreement is consummated we will make appro-
priate adjustments to the performance unit awards granted
during 2009 to reflect the fact that BJ Services Company is no
longer in the peer group. For awards prior to 2009, BVA has
been the financial metric used to determine payouts, if any, for
performance units. As noted above, BVA measures operating
PAT less the cost of capital employed and is generally the same
BVA measure used in the Annual Incentive Plan. At this time
the Compensation Committee does not intend to use the
BVA metric for future performance unit awards.
The performance goals for the performance units granted
in 2009 are based upon a three-year performance period end-
ing on December 31, 2011 with three one-year measurement
intervals within that three-year period. As of each measure-
ment interval, the Company’s performance is measured against
the peer group and 25% of the award value is determined. In
addition, at the end of the three-year performance period the
Company’s three-year performance is measured against the
three-year performance of the peer group to determine the
final 25% of the award values. The payout, if any, will be paid
on March 13, 2012.
Performance units are generally awarded once each year in
January to Senior Executives at the same time as grants to the
general eligible employee population. The performance unit
program operates in overlapping three-year cycles with a pay-
out determined at the end of each cycle.
Performance units are generally forfeited if a Senior Execu-
tive voluntarily leaves the Company before the end of the per-
formance cycle. Performance units pay out on a pro rata basis
if a Senior Executive retires when the sum of his age and years
of service equals at least 65.
When granted, the target value for our performance units
is $100 each, though the actual value realized depends on how
well we perform against our peer group with respect to specified
performance metrics (BVA targets in the case of grants prior to
2009), which are established by the Compensation Committee
with assistance from Cogent Compensation Partners.
The following chart specifies the performance levels for the
applicable performance measure and the dollar value per unit at
various levels of performance. The payouts for results between
the threshold and expected value levels of performance and