Hewlett-Packard (HPQ)

Variable Pay

        HP's Total Rewards program is designed to provide significant incentives for executive officers in the form of variable pay. Achievement of annual performance objectives by executive officers and other designated employees is rewarded under the HP 2005 Pay-for-Results Plan (the "PfR Plan"). Achievement of longer-term performance objectives by certain high-level employees, including executive officers, is rewarded under the Long-Term Performance Cash Program (the "LTPC Program"). Each program links compensation directly to HP's performance and encourages employees to make significant contributions toward HP's results.

Pay-for-Results

        Short-term incentives are provided under the PfR Plan, which was approved by stockholders in 2006. The PfR Plan is designed to reward achievement of financial performance objectives during the fiscal year; it has two components, revenue and net profit, that are equally weighted. These components address both "top line" (revenue) and "bottom line" (net profit) corporate financial goals. Bonuses are paid only when performance goals are achieved; if threshold targets are not met, no amounts are paid under the PfR Plan. If targets are exceeded, payouts under the PfR Plan may be significant. Targets for fiscal 2006 performance were set by the Committee at its November 2005 meeting. For some executive officers, payouts were determined based solely upon business unit performance; for other executive officers, payouts were determined 50% on business unit performance and 50% on overall corporate performance. For corporate executive officers, payouts were determined 100% on overall corporate performance. For fiscal 2006, the targeted short-term bonus amount for executive officers generally ranged from 50% to 220% of base salary, and the maximum payout could not exceed 300% of the target amount. The Committee has structurally reduced the maximum payout from 300% to 250% of target for fiscal 2007.

LTPC Program

        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. A long-term incentive target amount is set for each participant in the LTPC Program. If periodic milestones relating to HP's cash flow from operations as a percentage of revenue are met, amounts are banked under the LTPC Program. At the end of the three-year performance period, a modifier approved at the beginning of the LTPC Program is applied to banked amounts held by then-current participants based on TSR relative to the TSR for the S&P 500 for the period. The TSR modifier is designed to limit payouts under the program if stockholders have not benefited during the period relative to overall S&P 500 performance. Conversely, where there has been a significant return to stockholders, LTCP Program participants may receive payouts at rates substantially above the market median at peer companies. In addition, the HR and Compensation Committee has the discretion to adjust awards in exceptional circumstances, including accelerating payouts or waiving forfeiture conditions.

53

        For the three-year performance period ending April 2006, the cash flow metric was achieved at target during the first 12 months; threshold performance was not achieved for the second 12-month period, resulting in no amounts being banked for that period; and targets were achieved for the final two six-month periods (May 2005 through October 2005 and November 2005 through April 2006). For the total three-year program period, TSR was approximately the 71^st percentile of the S&P 500. Accordingly, the banked amounts were adjusted by applying a modifier based on HP's TSR relative to the TSR for the S&P 500, and a cash award was paid out for the three-year period ending April 30, 2006. Payouts to LTPC Program participants, including the named executive officers, were approved by the Committee at its May 2006 meeting. The amounts of such payouts to named executive officers in fiscal 2006 are reported in column (h) of the Summary Compensation Table beginning on page 34.

        Mr. Hurd's employment agreement provided for mid-plan entry into the LTPC Program's three-year cycles that began May 1, 2003 and May 1, 2004 and deemed the targets for his first full year of participation (May 1, 2005 through April 30, 2006) to have been met.

Variable Pay

        Our variable pay programs focus on matching rewards with results. Executive officers and high-level, non-sales managers and individual contributors participate in the Pay-for-Results ("PfR") Program¹. Most other employees participate in the Company Performance Bonus Plan ("CPB Plan"). In addition, certain high-level employees participate in our Long-Term Performance Cash Program (the "LTPC Program"). The philosophy of each of our variable pay programs is simple: a basic reward for reaching minimum expectations, and an upside for reaching HP's aspirational goals. The variable pay programs link compensation directly to HP's performance and encourage employees to make significant contributions toward

¹

The Pay-for-Results Program is structured similarly for all participants, but is operated under two plans. In fiscal 2005, the HP Executive Pay-for-Results Plan (the "Executive PfR Plan") was used for executive officers and other high-level managers. We are seeking stockholder approval of the 2005 HP Pay-for-Results Plan for purposes of qualifying compensation paid to "covered officers" for tax deduction purposes, and therefore this plan is designed to meet the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). For a description of the HP 2005 Pay-for-Results Plan, see "Proposal No. 3 'Approval of the Hewlett-Packard Company 2005 Pay-for-Results Plan."' Other participants in the Pay-for-Results Program (generally high-level, non-sales managers and individual contributors) participate through a similar short-term bonus plan.

63

HP's results. For executives, a significant portion of cash compensation is "at risk" dependent upon those results, in accordance with HP's philosophy of providing pay for performance.

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.

LTPC Program

        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. Periodic milestones³ 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 the three-year performance period, a modifier approved at the beginning of the LTPC program will be applied to banked amounts held by then-current

²

United States Generally Accepted Accounting Principles.

³

Performance periods for the cash flow metric are generally one year, with six-month performance periods to permit alignment of the program with HP's fiscal year.

64

participants based on TSR relative to the TSR for the S&P 500 for the period. Because HP failed to achieve the threshold level of performance for the cash flow as a percentage of total revenue metric for the May 2004-April 2005 performance period, no amounts were banked for participants, consistent with HP's pay-for-results philosophy. For the May 2005-October 2005 performance period, amounts were banked above target due to HP's achievement of cash flow goals. For a further description of the LTPC Program, see "Long-term Incentive Plans—Awards in Last Fiscal Year" on page 43.

Other

        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 then-current executive officers, in December 2004 for HP's performance in the fourth quarter of fiscal 2004.