HON » Topics » Funding Formulas

This excerpt taken from the HON DEF 14A filed Mar 13, 2008.

Funding Formulas

The corporate bonus pool is funded based on calculations regarding each of the established financial metrics. For EPS and FCF, the corporate bonus pool is funded as follows:

 

 

 

 

 

 

 

Performance Level vs. Target

 

ICP Funding Level

Below Threshold

 

<75%

 

0%

Threshold

 

75% of target

 

50%

Target

 

100% of target

 

100%

Maximum

 

133% of target

 

200%

Performance between threshold and target performance levels and between target and maximum performance levels is interpolated.

To ensure that relative, and not just absolute, performance has a direct impact on executive compensation levels (as it does on shareowner value), the EPS component of the annual incentive bonus pool is also subject to upward or downward adjustment, up to a maximum of 25% in either direction, based on Honeywell’s relative EPS growth performance versus a 33-company peer group reflecting the Conglomerates, Aerospace & Defense, Industrial Machinery, Specialty Chemicals, Diversified Chemical and Auto Parts & Equipment subgroups of the S&P 500 Index. We use this expanded thirty-three company peer group for this purpose (rather than just the Peer Group discussed above) due to its broader representation of each of the relevant industry groups in which the Company’s segments participate. For each percentile that Honeywell’s EPS growth exceeds or is below the median EPS growth of its peers, the EPS component of the Company’s annual incentive bonus pool is increased or decreased, as appropriate, by approximately 1%. We refer to this adjustment as the “peer EPS growth adjustment.”

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With respect to working capital turns, the corporate bonus pool is funded as follows:

 

 

 

Results vs. Target

 

Pool Funding

+0.2 points  

 

200% of target

+0.1 points  

 

150% of target

  At Target  

 

100% of target

 -0.1 points  

 

 75% of target

 -0.2 points  

 

 50% of target

>-0.2 points   

 

 0% of target

Each tenth of a point improvement in working capital turns frees up approximately $80-90 million of cash that can be used to fund operations and/or for acquisitions, dividends and share repurchases. Actual turns achieved between threshold and target levels and between target and maximum performance levels are not interpolated, but have discrete funding levels associated with them as set forth above.

Each SBG’s bonus pool is similarly funded based on the achievement of corresponding SBG financial objectives (substituting net income for EPS). Unusual, infrequently occurring and/or extraordinary items, which we refer to below as “extraordinary items,” are excluded in determining achievement of the established financial objectives.

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