Hewlett-Packard (HPQ)

Pay-for-Results/Company Performance Bonus

        The performance metrics for the PfR Program participants during fiscal 2005 were measured on a semi-annual basis and were weighted as follows: 40% based on revenue, 40% based on non-GAAP² net profit and 20% based on total customer experience. For executive officers and most other United States participants, these metrics were set at the HP level. For regional PfR Program participants, metrics were based on both HP and regional goals. The variable pay plans measure company performance for each metric at three levels of performance (threshold, target and aspiration), each of which is tied to a successively higher level of reward. In the event that threshold non-GAAP net profit measures were not met, there would be no payout under the short-term bonus programs, regardless of whether other metrics fund. In addition, there were no payouts under the PfR Program unless there were payouts under the CPB Plan, so that executives would not receive payouts unless the general employee population was also rewarded. The Committee could adjust bonuses from the amount that would have otherwise been paid under the variable pay programs, but under no circumstances could the Committee adjust bonuses upward for executive officers. Once the funding for each metric was determined, managers were permitted to use discretion in the distribution of a portion of the funded amount.

        The targeted short-term bonus amount for the named executive officers in fiscal 2005 ranged from 100% to 300% of base salary. Bonuses were paid when, and only if, performance goals were achieved. Based upon performance measured against pre-established goals, HP did not pay bonuses for the semi-annual period covering the first and second quarters of fiscal 2005 (except as required pursuant to an employment contract) because non-GAAP net profit for the period was below threshold levels. In contrast, HP's results were very strong for the second half of 2005, with an increase in non-GAAP net profit of 46% and 22% for the third and fourth quarters of fiscal 2005, respectively, compared to the prior-year periods. Even after adjusting for currency effects, HP also experienced year-over-year revenue improvement in the same periods. Accordingly, HP paid bonuses above target levels under the PfR Program and CPB Plan to all eligible participants, including the executive officers. The exact amounts of such payouts to named executive officers for the second semi-annual period of fiscal 2005 are set forth in footnote 1 to the Summary Compensation Table beginning on page 37.

        In line with the programs of many of HP's technology peers and in order to promote a longer-term focus by management and employees, for fiscal 2006, the Committee determined to set goals for the PfR Program and CPB Plan on an annual rather than semi-annual basis. Metrics will be based on revenue and non-GAAP net profit, with improvements over prior year revenue and non-GAAP net profit required in order for any funding to take place under those metrics.