Hewlett-Packard (HPQ)

Short-term Bonus/Variable Pay

        Our short-term bonus/variable pay programs focus on matching rewards with results through

43

financial and customer metrics, as described below. Executive officers are eligible to participate in the Executive Pay-for-Results Plan (the "Executive PfR Plan"). We have three principal variable pay plans (excluding sales incentive plans):

•

Executive PfR Plan (which in fiscal 2004 applied to the named executive officers and other executives)



•

Pay-for-Results Short-Term Bonus Plan (for high-level, non-sales managers and individual contributors)



•

Company Performance Bonus (which applies to all eligible employees except those participating in another variable pay plan)

        The philosophy of our variable pay program is simple: a basic reward for reaching minimum expectations, and an upside for reaching HP's aspirational goals. The variable pay plans link HP's semi-annual performance directly to compensation and encourage employees to make significant contributions toward top-line revenue and bottom-line net profit. The performance metrics for the Executive PfR Plan participants during fiscal 2004 were weighted as follows: 40% based on revenue, 40% based on net profit and 20% based on total customer experience. 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 specific level of reward. Once the funding for each metric was determined based on the results for the semi-annual performance period during fiscal 2004, the revenue and TCE amounts were subject to a net profit modifier, which was designed to reduce or increase such amounts depending upon the extent to which net profit goals were met.

44

        Under the Executive PfR Plan in fiscal 2004, a portion of the executive's targeted cash compensation was placed "at risk" dependent upon HP results. The targeted short-term bonus amount for the named executive officers ranged from 125% to 300% of base salary. Depending upon the achievement of pre-determined performance metrics, we award executives between 0% and 300% of the targeted short-term bonus under this plan. The variable pay plans pay out semi-annually when, and if, performance goals are achieved. Based upon performance measured against pre-established goals, HP paid bonuses for the first semi-annual period covering the first and second quarters of fiscal 2004. No payments were made under this plan for the second semi-annual period of fiscal 2004.

        The Committee also periodically considers bonuses outside of the variable pay plans, based on both individual and corporate performance. The Committee paid a bonus outside of the variable pay plans to all employees, including each of the named executive officers, for HP's performance in the fourth quarter of fiscal 2004.