This excerpt taken from the HPQ DEF 14A filed Jan 23, 2006.
HP's Compensation and Benefits Programs
The Committee considers HP's compensation and benefits programs holistically in making decisions for HP generally and for individual executives. HP refers to its package of compensation and benefits as "Total Rewards," which include: (1) base pay; (2) variable pay; (3) rewards and recognition programs (small, on-the-spot bonus awards for individual contributions); (4) equity; and (5) benefits. The components of Total Rewards are depicted in the diagram below.
We believe that appropriately balancing the Total Rewards package and ensuring the viability of each component of the package is necessary in order to provide market-competitive compensation and benefits, and to ensure the health of HP, which benefits employees and stockholders alike. In addition, we believe that employees should share in the value they help create and that their rewards should be proportional to their performance. At the same time, because HP has approximately 150,000 employees, the costs of HP's Total Rewards programs are a significant determinant of HP's competitiveness. Accordingly, the Committee is focused on ensuring that the balance of the various components of HP's Total Rewards is optimized to motivate employees to improve HP's results on a cost-effective basis.
In rebalancing the components of Total Rewards, the Committee also considers changes in the external environment. In the first quarter of fiscal 2006, HP began expensing equity awards in accordance with FAS 123R, which will result in significantly higher expenses in the equity component of Total Rewards. In addition, HP, like many of its peers, has been impacted by rising healthcare costs. As a result, HP has made difficult decisions to reduce salary expenses (through headcount reductions) and benefits (through changes in its retirement programs). By taking these actions, HP hopes to see increases in other components of Total Rewards that are more closely tied to performance, such as the variable pay awarded to employees, and in HP's stock price, which benefits employees as well as stockholders.
The Committee also recognizes the need to balance the components of Total Rewards appropriately depending on employee position and ability to impact HP's results. Accordingly, HP's Total Rewards programs are structured so that more than two-thirds of senior managers' targeted Total Rewards are "at risk" (in the form of option grants, long-term performance cash and variable pay) dependent upon HP's results. By contrast, the broad-based employee population's compensation is designed to provide more income stability, and less than one-tenth of most non-sales employees' Total Rewards are "at risk."