This excerpt taken from the HPQ DEF 14A filed Jan 29, 2008.
Long Term Performance Cash Program
The portion of an NEO's long-term incentive compensation to be delivered in cash is payable under the HP Long-Term Performance Cash Program. The LTPC Program, established in 2003, was designed to focus senior executives on certain long-term performance criteria. The LTPC Program provides rewards for meeting or exceeding performance targets over a three-year period. Payout under the LTPC Program is contingent upon achieving both (a) annual goals for cash flow from operations as a percentage of revenue, and (b) Total Shareholder Return ("TSR") relative to the S&P 500 over the three-year period.
The TSR modifier is designed to ensure that there are no or limited payouts under the program if stockholders have not benefited during the period relative to overall S&P 500 performance. Conversely,
where there has been significant return to stockholders and the cash flow performance goals have been met or exceeded, LTPC participants may receive payouts substantially above the market median of peer companies.
Under the LTPC Program, cash flow milestones are set at the beginning of each performance period, and performance is reviewed at the end of that period. If HP achieves a threshold level of performance for the cash flow metric, a percentage is applied to each participant's targeted cash amount for the period, and this amount is credited on the participant's behalf. The percentage to be applied to each participant's targeted cash amount ranges from zero to 150%, based upon the extent to which performance goals are achieved. If HP does not achieve a threshold level of cash flow performance for the period, the amount credited is zero. Interest at the applicable federal rate is applied to any credited amounts.
At the end of the three-year program period, the total credited amounts, if any, are adjusted by applying a modifier based on HP's TSR (including reinvestment of dividends) relative to the S&P 500 for the three-year period. To achieve a modifier above 100% for the three-year program periods ending during and after fiscal 2006, HP's TSR must exceed the median for the S&P 500, and to achieve the maximum payout, HP's TSR must approximate the 75th percentile for S&P 500 companies. The maximum modifier was 200% for the performance periods ending April 30, 2007 and April 30, 2008, and the maximum modifier will be 150% for the performance periods that end October 31, 2008 and October 31, 2009.
Because LTPC grants were made in each year and are subject to a three-year performance cycle, multiple program cycles are outstanding simultaneously. Payouts in any one particular year may not be consistent with performance achieved during the most recent fiscal year because payment is due to performance over the three-year period.
For the three-year performance period ending April 2007, the cash flow metric was not achieved during the first 12-month period, was achieved above target for the May 2005 through October 2005 and November 2005 through October 2006 periods, and was achieved slightly below target for the November 2006 through April 2007 period. HP's performance against the S&P 500 over the entire three-year performance period May 1, 2004 through April 30, 2007 was at the 83rd percentile. The combination of these factors resulted in the payouts during fiscal 2007 reported in the Fiscal 2007 Summary Compensation Table and described in more detail in footnote (4) to that table.
The annual cash-flow targets recommended by management and set by the Committee under the LTPC Program were based on the financial performance achieved in the prior year. Payout at threshold for the most recent period required achievement above the levels achieved in the prior period. That targets are set aggressively and require achievement of significant financial performance is demonstrated by the fact that targets have not been met in several of the periods since the LTPC Program was first established in 2003.
No new three-year awards were made under the LTPC Program after fiscal 2007, as future long-term incentive awards will be granted primarily under the new long-term incentive program described below. However, existing LTPC awards will continue to vest over the remaining three-year performance periods for grants awarded for the May 1, 2005 through April 30, 2008, November 1, 2005 through October 31, 2008, and November 1, 2006 through October 31, 2009 periods.