This excerpt taken from the HPQ DEF 14A filed Jan 29, 2008.
Long-Term Incentive Pay for Fiscal 2008
As announced on September 23, 2007, the Committee approved a new long-term incentive compensation program for HP executives, including the NEOs, beginning in fiscal 2008. This program will replace the combination of cash awards under the LTPC Program, stock options and restricted stock previously awarded to eligible employees as part of the annual performance review cycle. Under the new program, restricted stock units, called "Performance-based Restricted Units" ("PRUs"), will be awarded to eligible employees. This change in the way that long-term incentives are delivered to eligible employees represents a further step being taken to drive a high-performance culture. It is also consistent with the direction being taken by some of the peer companies.
The new PRU Program will be an improvement over the prior programs in several ways, including that it represents a single, integrated program for the delivery of long-term incentives. In addition, the new program has the potential:
The structure of the new PRU Program will be similar to the LTPC Program, including the three-year performance period and the performance metrics of (a) annual targets based on cash flow from operations as a percentage of revenue, and (b) an overall "modifier" based on TSR relative to the S&P 500 over the three-year performance period. HP believes that the metric of "cash flow from operations as a percentage of revenue" continues to be a key metric that drives improved financial performance within the company, because a company's ability to manage its cash flow is a key driver of creating stockholder value. It is also a complementary metric to the revenue and net profit metrics used under our annual incentive pay plan.
As under the LTPC Program, the TSR modifier is intended to ensure that there are no or limited payouts under the program if stockholders have not benefited, relative to overall S&P 500 performance,
over the three-year performance period. Where the annual cash flow metrics have been met and where there have been significant relative returns to stockholders over the three-year performance period, the structure of the PRU Program may provide substantial rewards to participants with respect to that performance period.
Under the Program, the number of shares released at the end of the performance period may range from zero to two times the target number, and award values will reflect changes in stock price (both increases and decreases) because awards will be denominated in stock units payable in shares.
In approving the new PRU Program, the Committee considered a wide range of factors, including possible award values based on achievement at different performance and stock price levels, the accounting treatment of the program and the fact that the costs of the PRU Program will vary more directly with payouts than under the current programs, the more favorable impact on annual share usage and dilution, as well as the potential for deductibility under Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended (the "Code"). In addition, the program moves away from the payment of cash, which had been a key factor in adoption of the LTPC Program, because dilution and overhang are at more manageable levels than when the LTPC Program was adopted in 2003.
While grants under the new PRU Program are intended to form the primary basis on which long-term incentives are delivered to the NEOs, grants of stock options, stock appreciation rights, and restricted or unrestricted stock may continue to be awarded by the Committee as it deems necessary or appropriate to provide special reward or retention incentives in individual cases. The Board is considering such a special incentive for the CEO during the first half of fiscal 2008 to address some objectives that it believes are important to HP's stockholders in light of the CEO's demonstrated leadership skills and success since assuming his role with HP. These objectives are long-term employment retention, encouraging the recruitment and development of talented individuals capable of progressing to the CEO position, strong incentive to maintain total stockholder return in the top quartile of other major companies, and the ability to accumulate a substantial ownership position in HP stock over the CEO's career with HP.