This excerpt taken from the HPQ DEF 14A filed Feb 11, 2005.
Long-term Incentive Programs
HP's long-term incentive programs are designed to encourage creation of long-term value for our stockholders, employee retention and equity ownership. The programs consist of stock option grants, a long-term performance cash program (the "LTPC Program"), an employee stock purchase program and restricted stock awards. For fiscal 2004, our executive officers received a mix of options and long-term cash, determined as follows. First, a target number of options for each executive officer was determined. Fifty percent of those options were then granted to the named executive officer, and the remaining value (as determined in accordance with a modified Black-Scholes valuation model) was used as the target LTPC payout amount under the LTPC program for such executive. HP utilized the LTPC Program during fiscal 2004 in part to address dilution levels.
Fiscal 2004 stock option grants to executive officers and other employees were made under HP's 1995 Incentive Stock Plan and 2000 Stock Plan. Each grant allows the executive officer to acquire shares of HP's common stock, subject to the completion of a four-year vesting period (25% vesting each year). These shares may be acquired at a fixed price per share (the fair market value on the grant date) and have an eight-year term.
The LTPC Program, which the Committee approved in May 2003, is designed to drive value creation and operational results through its use of balance sheet and total stockholder return ("TSR") performance measures. Each participant in the LTPC Program receives a targeted long-term incentive amount. Annual milestones relating to HP's cash flow from operations as a percentage of revenue must be met to receive a banked amount under the LTPC Program. At the end of a three-year performance period, a modifier approved at the beginning of the LTPC program will be applied to banked amounts held by then current participants as described above based on TSR relative to the TSR for the S&P 500 for the period. For a further description of the LTPC Program, see "Long-term Incentive PlansAwards in Last Fiscal Year" on page 34.
From time to time, we also engage in restricted stock grants to reward performance and encourage retention. In December 2003, we authorized the grant of restricted stock (or deferred cash in certain jurisdictions outside of the United States) to executive officers and other key employees who participated in the Executive PfR Plan and the Pay-for-Results Short-term Bonus Plan. The restricted stock granted to executive officers vested in one year, subject to continued employment.