Hewlett-Packard (HPQ)

Analysis of HP's Process for Setting Executive Compensation

        A broad range of facts and circumstances is considered in setting executive compensation. Among the factors considered for HP's executives generally, and for the NEOs in particular, are business results, market competitiveness, internal equity, past practice, experience and individual performance. The weight given each factor may differ from year to year and may differ among individual NEOs in any given year. For example, when HP recruits externally, market competitiveness and experience as well as the circumstances unique to a particular candidate may weigh more heavily in the compensation analysis. In contrast, when determining year-over-year compensation for current NEOs, business results, peer company metrics, and internal equity generally factor more heavily in the analysis.

        Because such a large percentage of NEO pay is performance-based, the Committee spends significant time determining the financial targets for HP's short- and long-term incentive pay plans. In general, management makes the initial recommendation for the financial targets, and these recommendations are reviewed and discussed by the Committee and its independent advisors. The major factor used in setting targets for the current fiscal year are business results from the most recently-completed fiscal year; other factors taken into account may include the general business

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climate and global market conditions, as well as conditions or goals specific to a particular business segment. Targets are set by the Committee during HP's first fiscal quarter, typically at either its November or January meetings.

        Following close of the fiscal year, the Committee reviews actual financial results against the targets approved by the Committee under HP's incentive compensation plans for that year, and payouts under the plans are generally determined based on performance against the targets as set. The total incentive compensation payments approved by the Committee may be more or less than the amounts determined solely by performance against targets due to a range of other factors, such as the quality of earnings, the number and size of strategic acquisitions, and the economic conditions in which the performance was delivered. Based on the financial results and recommendations presented by management, the Committee reviews the individual performance of the NEOs (other than the CEO) as reported by the CEO and determines their incentive compensation for that fiscal year.

        In fiscal 2009, HP achieved solid financial results in a very challenging global economic environment. This performance was driven by the significant transformation HP has undergone in recent years, which resulted in a broader portfolio of products and services and a significantly improved cost structure. These changes not only contributed to HP's solid 2009 performance, but also positioned the company well for the future. For fiscal 2009, HP delivered revenue of $114.6 billion and GAAP diluted earnings per share of $3.14. Total shareholder return during fiscal 2009 was 25% compared to 10% for the S&P 500 during that period.

        In evaluating the performance of the CEO and recommending his compensation to the independent members of the Board, the Committee takes into account corporate financial performance, as well as performance on a range of non-financial factors, including accomplishment of strategic goals, workforce development and diversity, succession planning, and his working relationship with the Board. Overall, the Committee and the Board believe that, under the CEO's leadership in fiscal 2009, HP achieved solid financial results in a difficult economic environment and that he also continued to demonstrate significant achievement on a broad range of non-financial goals, including the integration of acquired companies, talent management and succession planning.

        In setting incentive compensation for NEOs, the Committee generally does not consider the effect of past changes in stock price, or expected payouts or earnings under other plans. In addition, incentive compensation decisions are made without regard to length of service or prior awards. For example, NEOs with longer service at HP or who are eligible for retirement do not receive greater or lesser awards, or larger or smaller target amounts, in a given year than do NEOs with shorter service.