Introduction

This Compensation Discussion and Analysis describes our executive compensation philosophy and programs, the compensation decisions the HRC Committee has made under those programs, and the considerations in making those decisions in fiscal 2017.

Named Executive Officers

Our NEOs for fiscal 2017 are:

  • Dion J. Weisler, President and CEO;
  • Catherine A. Lesjak, Chief Financial Officer;
  • Ron V. Coughlin, President, Personal Systems;
  • Jon E. Flaxman, Chief Operating Officer; and
  • Enrique J. Lores, President, Imaging, Printing and Solutions.

Executive Summary

Fiscal 2017 was the second full fiscal year for HP as a standalone organization. It was created as the successor entity when Hewlett Packard Enterprise Company (“HPE”) was separated from Hewlett-Packard Company in November 2015. HP and HPE, each have ranked among the 100-largest U.S. companies in revenues since the separation.

Market Practice and Company Performance Are Reflected in Pay Decisions

The HRC Committee continues to review our compensation programs to maintain support of our evolving business strategy without potential material risk to the organization. The HRC Committee’s assessment includes regular stockholder engagement and consideration of stockholder feedback.

Below are brief highlights of key compensation decisions with respect to NEOs:

Fiscal 2017 NEO Pay Action HRC Committee Decision HRC Committee Rationale
Adjust base salaries Salary changes ranged from 0% for certain NEOs to 8.3% for the CEO, to better align with market median. Reflect peer group market positioning, individual experience, performance, advancement potential, and internal equity.
Determine earned annual bonuses for fiscal 2017 performance Annual bonuses for fiscal 2017 were earned, ranging from 134.5% to 135.1% of target, with the CEO at 135.1% of target and the average for other NEOs at 134.9%. At the beginning of the year, target award opportunities were set at competitive levels versus peers. The HRC Committee set threshold-to-maximum performance goals for determining earned awards at the beginning of fiscal 2017. Earned awards reflected performance against applicable enterprise-wide, business, and individual goals. Goals were set for the overall Company and businesses against internal budgets for revenues, net earnings/profits, and free cash flow as a percentage of revenue. Non-financial individual performance goals under the Management by Objectives program (“MBOs”) were set for individuals. The Company delivered strong results across revenue, net profit and free cash flow (FCF) in fiscal 2017, and as a result, Corporate revenue, net profit and FCF (% revenue) were above target. With the strong top line growth driven by Personal Systems, Corporate FCF (% of revenue) was considerably above target for the year. Despite these very strong combined results for the year, after careful review and consistent with its authority, the Committee exercised its discretion to limit the funding for FCF (% revenue) to 100% of target. With this change, annual bonus funding for the financial portion of the annual incentives (excluding the impact of MBO payouts) was lowered by roughly 26% to 28% for the Company’s NEOs. Further, NEOs successfully delivered against their MBOs as further detailed on page 37.
Make regular long-term incentive grants Fiscal 2017 long-term incentives were granted in an approximate mix of 60% PARSUs and 40% time-based RSUs. Grant values were set at competitive levels versus peers with appropriate incumbent-specific variability for performance, experience, and internal equity. Grants for Mr. Coughlin, Mr. Flaxman and Mr. Lores were increased versus fiscal 2016 grants to better align with market data. PARSUs are based on relative TSR compared to the S&P 500 and one-year Earnings Per Share (“EPS”). The intent was to align pay delivery with stockholder returns. RSUs vest based on continued service to create ownership and to support retention.

Oversight and Authority over Executive Compensation

Role of the HRC Committee and its Advisors

The HRC Committee oversees and provides strategic direction to management regarding all aspects of our pay program for senior executives. It makes recommendations regarding the CEO’s compensation to the independent members of the Board for approval, and it reviews and approves the compensation of the remaining Section 16 officers, including our NEOs. Each HRC Committee member is an independent non-employee director with significant experience in executive compensation matters.

Much of HP’s 2017 program structure was continued from the fiscal 2016, where there was 93.2% approval of the say on pay proposal for 2016. HP implemented two refinements in program structure for fiscal 2017. For PARSUs, the ROIC measure was replaced by EPS for improved stockholder alignment. Further, the HRC Committee increased the focus on enterprise-wide revenue and net income in order to increase collaboration and teamwork across HP’s various businesses.

The HRC Committee continually considers feedback from stockholders and the potential executive compensation implications of evolving business and strategic objectives. Based on these considerations, the HRC determined that it would be appropriate to maintain the same overall program structure for 2018. We believe that our current compensation structure incents and rewards achievement of specific goals, reinforces year-over-year results and provides an attractive pay-for-performance opportunity that encourages retention and leadership engagement.

During fiscal 2017, the HRC Committee continued to engage Frederic W. Cook and Co., Inc. (“FW Cook”) as its independent compensation consultant. FW Cook provides analyses and recommendations that inform the HRC Committee’s decisions; evaluates market pay data and competitive-position benchmarking; provides analyses and inputs on program structure, performance measures, and goals; provides updates on market trends and the regulatory environment as it relates to executive compensation; reviews various management proposals presented to the HRC Committee related to executive compensation; and works with the HRC Committee to validate and strengthen the pay-for-performance relationship and alignment with stockholder interests. FW Cook does not perform other services for HP, and will not do so without the prior consent of the HRC Committee chair. FW Cook meets with the HRC Committee chair and the HRC Committee outside the presence of management while in executive session.

The HRC Committee met five times in fiscal 2017, and all five of these meetings included an executive session. FW Cook participated in most of the meetings and, when requested by the HRC Committee chair, in the preparatory meetings and the executive sessions.

Role of Management and the CEO in Setting Executive Compensation

The Board works with an outside consultant and management in evaluating and defining pay programs. They considered market competitiveness, business results, experience, and individual performance in evaluating fiscal 2017 NEO compensation and the compensation structure. The Chief Human Resources Officer and other members of our executive compensation team, together with members of our finance and legal organizations, work with the CEO to design and develop the compensation program, to recommend changes to existing program provisions applicable to NEOs and other senior executives, as well as financial and other targets to be achieved under those programs, prepare analyses of financial data, peer comparisons and other briefing materials to assist the HRC Committee in making its decisions, and implement the decisions of the HRC Committee. During fiscal 2017, management continued to engage Meridian Compensation Partners, LLC (“Meridian”) as its compensation consultant. The HRC Committee took into consideration that Meridian provided executive compensation-related services to management when it evaluated any information and analyses provided by Meridian, all of which were also independently reviewed by FW Cook, as applicable, on the HRC Committee’s behalf.

During fiscal 2017, Mr. Weisler provided input to the HRC Committee regarding performance metrics and the setting of appropriate performance targets for his direct reports. Mr. Weisler also recommended MBOs for the NEOs (other than himself) and the other senior executives who report directly to him. Mr. Weisler is subject to the same financial performance goals as the executives who lead global functions, and Mr. Weisler’s MBOs and compensation are established by the HRC Committee and recommended to the independent members of the Board for approval.

Use of Comparative Compensation Data and Compensation Philosophy

The HRC Committee reviews the compensation of our Section 16 officers and compared it to that of executives in similar positions at our peer group companies. Our peer group includes companies we compete with for executive talent due to our geographical proximity and technology industry overlap. The HRC Committee takes size differentiations into consideration when reviewing the results of market data analysis. The HRC Committee uses this information to evaluate how our pay practices compare to market practices.

When determining the peer group, Meridian and HP considered the following characteristics:

  • Companies that are U.S.-based, listed on a major U.S. exchange, and with executives primarily living in the United States
  • Companies in the information technology industry sector, as well as non-technology peers in industrial, consumer discretionary, consumer staples, and telecommunications services
  • Technology companies with 1/5x to 5x HP’s revenue and non-technology companies with 1/2x to 3x HP’s revenue
  • Companies with non-U.S. revenue greater than or equal to 40% of total revenue
  • Companies with market capitalizations that are within a reasonable range of HP’s market capitalization
  • Companies with comparable organizational complexity (i.e., at least two operating segments and products and services components)
  • Companies with R&D greater than or equal to 2.5% of total revenue
  • Companies with primarily B2B, or business-to-business, focus

We believe the resulting peer group provides HP and the HRC Committee with a valid comparison and benchmark for the Company’s executive compensation program and governance practices. This year, the HRC Committee added HPE due to its similarity in size and IT industry classification and removed Apple and Alphabet due to their market caps relative to HP.

The peer group for fiscal 2017 consisted of the following companies:

Company Name   Revenue ($ in billions)*
Amazon.com, Inc. 136.0
Verizon Communications Inc. 126.0
General Electric Company 123.7
Microsoft Corporation 90.0
International Business Machines Corporation 79.9
The Procter & Gamble Company 65.1
PepsiCo, Inc. 62.8
Intel Corporation 59.4
HP Inc. 52.1
Cisco Systems, Inc. 48.0
Honeywell International, Inc. 39.3
Oracle Corporation 37.7
Nike, Inc. 34.4
Hewlett Packard Enterprise Company 28.9
EMC Corporation 24.7
Qualcomm Incorporated 22.3
Western Digital Corporation 19.1
Texas Instruments Inc. 13.4
Xerox Corporation 10.8
Seagate Technology PLC 10.8
  • Represents fiscal 2017 reported revenue, except fiscal 2016 reported revenue is provided for Amazon, General Electric, Honeywell, IBM, Intel, PepsiCo, Texas Instruments, Verizon and Xerox and fiscal 2015 reported revenue is provided for EMC.

Process for Setting and Awarding Executive Compensation

A broad range of facts and circumstances is considered in setting our overall executive compensation levels. In fiscal 2017, the HRC Committee continued to set target compensation levels within a competitive range of the market median, although in some cases lower or higher based on each executive’s situation (e.g., attraction and retention purposes). The Board maintains a total CEO target compensation package that approximates the median of our competitive market and is consistent with our pay positioning strategy and pay-for-performance philosophy.

The primary factors considered when determining pay opportunities for our NEOs are market competitiveness, internal equity, and individual performance. The weight given to each factor may differ from year to year, is not formulaic, and may differ among individual NEOs in any given year. For example, when we recruit externally, market competitiveness, experience, and the candidate-specific circumstances may weigh more heavily in the compensation decision process. In contrast, when determining year-over-year compensation changes for current NEOs, internal equity and individual performance may factor more heavily in the analysis.

Because such a large percentage of NEO pay is performancebased, the HRC Committee spends significant time determining the appropriate goals for our annual and long-term incentive plans. In general, management makes an initial recommendation of the goals, which is then assessed by the HRC Committee’s independent compensation consultant, and discussed and approved by the HRC Committee. Major factors considered in setting financial goals for each fiscal year are business results from the most recently completed fiscal year, budgets and strategic plans, macroeconomic factors, guidance and analyst expectations, competitive performance results and goals, conditions or goals specific to a particular business segment, and strategic initiatives. To permit eligible compensation in fiscal 2017 to qualify as “performancebased” under Section 162(m) of the Code, the HRC Committee set the overall funding target under the “umbrella” structure created for the annual PfR incentives, and set performance goals for annual PfR incentives and equity awards within the first 90 days of the fiscal year. MBOs are set based on major shared and individual strategic, operating, and tactical initiatives.

Following the close of the fiscal year, the HRC Committee reviews actual financial results and MBO performance against the goals that it had set for the applicable plans for that year, with payouts under the plans determined based on performance against the established goals. The HRC Committee meets in executive session to review the MBO performance of the CEO and to determine a recommendation for his annual PfR incentive award to be approved by the independent members of the Board. See “2017 Annual Incentives” below for a further description of our results and corresponding incentive payouts.

Listening to our Stockholders on Compensation

HP believes in aligning our compensation with our stockholders in order to deliver better value to all our stakeholders. In order to help accomplish this, we engage with our stockholders on a variety of issues on an ongoing basis, including discussing their views on best practices in executive compensation. Some recent changes to our executive compensation program, shown here, have reflected those conversations with stockholders.

  • Increased focus on enterprise-wide corporate revenue and corporate net earnings/profit in our annual PfR incentive plan in order to encourage greater collaboration and teamwork among business leaders
  • Replaced Return on Invested Capital (“ROIC”) with EPS in PARSUs for stronger alignment with stockholder interests and because it is a more appropriate measure for HP after the separation of HPE

Determination of Fiscal 2017 Executive Compensation

Under our Total Rewards Program, executive compensation consists of: base salary, annual incentives, long-term incentives, benefits, and perquisites.

Fiscal 2017 Compensation Highlights

The HRC Committee regularly explores ways to improve our executive compensation program. In making changes for fiscal 2017, the HRC Committee considered stockholder feedback, our current business needs and strategy, and peer group practices. The objectives were to support the business strategy, to continue to align pay with stockholder interests, and to maintain best-in-class governance standards. While many elements of the fiscal 2017 executive compensation program remained consistent with prior years, some changes were made that reflect strategy and market considerations, and take into account stockholder feedback.

What We Changed Rationale
Annual incentives: created specific financial targets from 0% - 250% payout for revenue metric To simplify program design, align with market practice, and support stockholder feedback
Annual incentives: included HP enterprise-wide revenue and net earnings metrics for business group leaders To encourage greater collaboration and teamwork among business leaders
Long-term incentives: replaced ROIC metric with EPS for PARSUs To promote more-relevant drivers of long-term stockholder value given the company’s post-separation capital structure and balance sheet, as well as our focus on bottom-line profitability in the business transformation strategy. EPS is also a common measure for performance-based long-term incentives among our peer companies

2017 Base Salary

Our executives receive a small percentage of their overall compensation in the form of base salary, which is consistent with our philosophy of tying pay to performance. The NEOs are paid an amount in the form of base salary sufficient to attract qualified executive talent and maintain a stable management team. The HRC Committee aims to have executive base salaries set at or near the market median for comparable positions and comprise 8% to 13% of the NEOs’ overall compensation, which is consistent with the practice of our peer group companies. The HRC Committee typically establishes executive base salaries at the beginning of the fiscal year. To decide the CEO’s salary, the HRC Committee reviews analyses and recommendations provided by FW Cook, the Committee’s independent compensation consultant.

For fiscal 2017, Mr. Weisler’s salary was increased from $1.2 million to $1.3 million, to better align with the market median. The HRC Committee did not change Ms. Lesjak’s or Mr. Flaxman’s base salaries. Both Mr. Coughlin’s and Mr. Lores’s base salaries were increased from $700,000 to $725,000, which brought their total direct compensation closer to the peer group median.

2017 Annual Incentives

The fiscal 2017 annual PfR incentive plan consisted of the following three core financial metrics: revenue, net earnings/profit, and corporate free cash flow as a percentage of revenue. A fourth metric, MBOs, was used to further drive individual performance and achievement of key strategic goals. Each metric was weighted at 25% of the target award value. Each individual metric may fund up to 250% of target; however, the maximum annual PfR incentive for each executive will be capped at 200% of target.

The target annual PfR incentive awards for fiscal 2017 were set at 200% of salary for the CEO and 125% of salary for the other NEOs.

For fiscal 2017 and purposes of Section 162(m) deductibility under the Code, the HRC Committee again established an “umbrella” formula governing the maximum bonus and then exercised negative discretion in setting actual bonuses. Under the umbrella formula, each Section 16 officer was allocated a pro rata share of 0.75% of net earnings based on his or her target annual PfR incentive award, subject to a maximum bonus of 200% of the NEO’s target bonus, and the maximum $15 million cap under the Stock Incentive Plan. Below this umbrella funding structure, actual payouts were determined based upon financial metrics and MBOs established and evaluated by the HRC Committee for Section 16 officers and by the independent members of the Board for the CEO. After the end of the fiscal year, the actual funding for the umbrella pool was certified, and it exceeded the maximum potential bonus for the combined covered officers.

Fiscal 2017 Annual Incentive Plan
  Corporate Goals    
Key Design Elements Revenue
($ in billions)
Net
Earnings/Profit
($ in billions)
Free Cash Flow as a
% of Revenue(1)
(%) 
MBOs % Payout
Metric(2)
(%)
 Weight 25% 25% 25% 25%   
 Linkage          
Global Functions Executives(3)  Corporate  Corporate  Corporate  Individual  
Business Unit (“BU”) Executives(4) Corporate/BU Corporate/BU Corporate Individual  
Corporate Performance Goals          
Maximum  — Various 250
Target $46.0 $2.9 5.3% Various 100
Threshold Various 0
  1. Maximum funding for corporate free cash flow as a percentage of revenue is capped at 150% of target if corporate net earnings/profit achievement was below target and is capped at 100% of target if corporate net earnings/profit achievement was below threshold. If corporate net earnings/profit achievement was above target, the maximum funding level is 250% for this metric.
  2. Interpolate for performance between discrete points. Maximum payout is equal to 200% of target. As a general administrative discretionary guideline, the HRC Committee may decide that financial funding for Global Functions Executives, including the CEO, cannot exceed the highest funding for a Business Unit Executive.
  3. The Global Functions Executives include Mr. Weisler, Ms. Lesjak, and Mr. Flaxman.
  4. The Business Unit Executives include Mr. Coughlin and Mr. Lores.

The specific metrics, their linkage to corporate results, and the weighting that was placed on each were chosen because the HRC Committee believed that:

  • performance against these metrics, in combination, enhances value for stockholders, capturing both the top and bottom line, as well as cash and capital efficiency;
  • a balanced weighting of metrics limits the likelihood of rewarding executives for excessive risk-taking;
  • different measures avoid paying for the same performance twice; and
  • MBOs enhance focus on business objectives, such as operational objectives, strategic initiatives, succession planning, and people development, which are important to the long-term success of the Company.

The following chart sets forth the definition of and rationale for each of the financial performance metrics that was used for the Fiscal 2017 Annual Incentive Plan:

Financial Performance Metrics(1) Definition Rationale for Metric
Corporate Revenue Net revenue as reported in our Annual Report on Form 10-K/A for fiscal 2017 Reflects top line financial performance, which is a strong indicator of our long-term ability to drive stockholder value
Business Revenue Segment net revenue as reported in our Annual Report on Form 10-K/A for fiscal 2017
Corporate Net Earnings Non-GAAP net earnings, as defined and reported in our fourth quarter fiscal 2017 earnings press release, excluding bonus net of income tax(2) Reflects bottom line financial performance, which is directly tied to stockholder value on a short-term basis
Business Net Profit (“BNP”) Business net profit, excluding bonus net of income tax
Corporate Free Cash Flow Cash flow from operations less net capital expenditures (gross purchases less retirements) divided by net revenue (expressed as a percentage of revenue) Reflects efficiency of cash management practices, including working capital and capital expenditures
  1. While we report our financial results in accordance with generally accepted accounting principles (“GAAP”), our financial performance targets and results under our incentive plans are sometimes based on non-GAAP financial measures. The financial results, whether GAAP or non-GAAP, may be further adjusted as permitted by those plans and approved by the HRC Committee. We review GAAP to non-GAAP adjustments and any other adjustments with the HRC Committee to ensure performance takes into account the way the goals were set and executive accountability for performance. These metrics and the related performance targets are relevant only to our executive compensation program and should not be used or applied in other contexts.
  2. Fiscal 2017 non-GAAP net earnings of $2.8 billion excludes after-tax costs of $0.4 billion related to the amortization of intangible assets, restructuring charges, and acquisition-related charges. Management uses non-GAAP net earnings to evaluate and forecast our performance before gains, losses, or other charges that are considered by management to be outside of our core business segment operating results. We believe that presenting non-GAAP net earnings provides investors with greater visibility with respect to the information used by management in its financial and operational decision making. We further believe that providing this additional non-GAAP information helps investors understand our operating performance and evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance. This additional non-GAAP information is not intended to be considered in isolation or as a substitute for GAAP diluted net earnings.

Following fiscal 2017, the HRC Committee reviewed performance against the financial metrics and certified the results as follows:

Fiscal 2017 Annual PfR Incentive Performance Against Financial Metrics(1)

Metric

 

Weight(2)

Target
($ in billions)

Result
($ in billions)

Percentage of Target
Annual Incentive Funded(3)

Corporate Revenue

 

25.0%

$46.0

$52.1

54.2%

Corporate Net Earnings

 

25.0%

$2.9

$3.0

30.9%

Corporate Free Cash Flow (% of revenue)

 

25.0%

5.3%

6.4%

25.0%

Total

 

75.0%

 

Adjusted Total

 

75.0%

110.1%

  1. Mr. Weisler, Ms. Lesjak, and Mr. Flaxman received annual PfR incentive payments based on corporate financial metrics. Mr. Coughlin and Mr. Lores received annual PfR incentive payments based on corporate and business financial metrics. As a general administrative discretionary guideline, the HRC Committee may decide that financial funding for Global Functions Executives, including the CEO, cannot exceed the highest funding for a Business Unit Executive.
  2. The financial metrics were equally weighted to account for 75% of the target annual PfR incentive.
  3. The Company delivered strong results across revenue, net profit and free cash flow (FCF) in fiscal 2017, and as a result, Corporate revenue, net profit and FCF (% revenue) were above target. With the strong top line growth driven by Personal Systems, Corporate FCF (% of revenue) was considerably above target for the year. Despite these very strong combined results for the year, after careful review and consistent with its authority, the Committee exercised its discretion to limit the funding for FCF (% revenue) to 100% of target. With this change, annual bonus funding for the financial portion of the annual incentives (excluding the impact of MBO payouts) was lowered by roughly 26% to 28% for the Company’s NEOs.

Mr. Weisler. With respect to performance against the MBOs, the independent members of the Board evaluated the CEO’s performance at fiscal year-end. The evaluation included an analysis of Mr. Weisler’s performance against all of his MBOs, which included, but were not limited to: support a successful launch and entrance into the A3 and 3D markets, support and monitor the progress of the Print Renaissance plan, continue to grow share in strategic areas where HP chooses to play, invest across all three pillars (core, growth and future), execute a plan to consistently engage with channel partners, customers and ecosystems, and ensure we have a people strategy that reflects current and future business needs. After conducting a thorough review of Mr. Weisler’s performance, the independent members of the Board determined that his MBO performance had been achieved at target. Mr. Weisler’s accomplishments included:

  • Returned the company to growth with accelerated revenue performance each quarter
  • Overcame substantial cost headwinds and delivered operating profit growth year-over-year
  • Delivered non-GAAP EPS at the high-end of the outlook range provided at the start of the year
  • Exceeded free cash flow estimates, returning capital to stockholders while investing in our future to create a sustainable business over time
  • Stabilized supplies revenue a quarter earlier than expected
  • Continued to surprise the market with innovation, enabling profitable share gains in both Personal Systems and Print segments
  • Turned the 3D Printing initiative into a business with global reach, repeat customer orders and an expanding partner ecosystem
  • Successfully closed the acquisition of Samsung’s printer business on November 1, 2017

As CEO, Mr. Weisler evaluated the performance of each of the other Section 16 officers and presented the results of those evaluations to the HRC Committee at its November 2017 meeting. The evaluations included an analysis of the officers’ performance against all of their MBOs. The HRC Committee reviewed the CEO’s assessment of the degree of attainment of the MBOs of the other Section 16 officers and set their MBO scores. The results of these evaluations for the other NEOs are summarized below.

Ms. Lesjak. The HRC Committee determined that Ms. Lesjak’s MBOs performance had been achieved at target. Ms. Lesjak is a highly experienced leader who was critical in consistently delivering against financial expectations. She drove efficiencies across the organization by implementing a new Finance model and leading re-engineering, robotics, and Artificial Intelligence transformation projects. Ms. Lesjak is a highly valuable member of the Executive Leadership Team and an important role model to our HP community.

Mr. Coughlin. The HRC Committee determined that Mr. Coughlin’s MBOs performance had been achieved at target. Mr. Coughlin delivered a strong performance by growing Personal Systems revenue by more than 10% and meeting profit targets. Mr. Coughlin not only gained commercial share but also attained the number one position in consumer as well. He continued delivering great products with the Spectre and Elitebook refreshes and positioned us as the most secure laptops. Mr. Coughlin also drove strategic relationships with key partners that have helped position us for success.

Mr. Flaxman. The HRC Committee determined that Mr. Flaxman’s MBOs performance had been achieved at target. Mr. Flaxman managed a complex portfolio of critical business areas while delivering on key critical projects such as Enterprise Resource Planning (ERP) and the consolidation of our robotics capabilities. Under his leadership, we are transforming the IT and operations infrastructure of the company reducing costs and improving processes. Mr. Flaxman did a remarkable job supporting the many natural disasters HP encountered this year from the hurricanes in Houston and Puerto Rico to the earthquake in Mexico City. This support was critical for business continuity as well as for employees and their families.

Mr. Lores. The HRC Committee determined that Mr. Lores’s MBOs performance had been achieved above target. Mr. Lores did a fantastic job in fiscal year 2017 in turning around Printing, achieving supplies stabilization, closing the acquisition of Samsung’s printer business, and launching HP’s A3 product line. He grew Printing revenues, while reducing costs and increasing operating profit. Mr. Lores set the business up for long-term success with a multi-year road map that will drive future profitable growth.

Based on the findings of these performance evaluations, the HRC Committee (and, in the case of the CEO, the independent members of the Board) evaluated performance against the non-financial metrics for the NEOs as follows:

Fiscal 2017 Annual PfR Incentive Performance Against Non-Financial Metrics (MBOs)

Named Executive Officer

     

Weight
(%)

 

Percentage of Target Annual Incentive
Funded 
(%)

Dion J. Weisler

     

25.0

 

25.0

Catherine A. Lesjak

     

25.0

 

25.0

Ron V. Coughlin

     

25.0

 

25.0

Jon E. Flaxman

     

25.0

 

25.0

Enrique J. Lores

     

25.0

 

35.0

Based on the level of performance described above on both the financial and non-financial metrics for fiscal 2017, the payouts to the NEOs under the annual PfR incentive were as follows:

Fiscal 2017 Annual PfR Incentive Payout
   

Percentage of Target
Annual Incentive Funded

 

Total Annual
Incentive Payout

Named Executive Officer

 

Financial
Metrics
(%)

 

Non-Financial
Metrics
(%)

 

As % of
Target Annual
Incentive
(%)

Payout
($)

Dion J. Weisler

 

110.1

 

25.0

 

135.1

$3,511,560

Catherine A. Lesjak

 

110.1

 

25.0

 

135.1

$1,435,012

Ron V. Coughlin

 

110.1

 

25.0

 

135.1

$1,224,612

Jon E. Flaxman

 

110.1

 

25.0

 

135.1

$1,181,775

Enrique J. Lores

 

99.5

 

35.0

 

134.5

$1,219,035

Long-term Incentive Compensation

The HRC Committee established a total long-term incentive target value for each NEO in early fiscal 2017 that was 60% weighted in the form of PARSUs and 40% weighted in the form of time-based RSUs. The high proportion of performance-based awards reflects our pay-for-performance philosophy. The time-based awards encourage retention and are linked to stockholder value and ownership, which are important goals of our executive compensation program.

2017 PARSUs

The fiscal 2017-2019 PARSUs have a two-and three-year vesting period, subject to one-, two-, and three-year performance periods that began at the start of fiscal 2017 and continue through the end of fiscal 2017, 2018 and 2019. Under this program, 50% of the PARSUs (including dividend equivalent units) are eligible for vesting based on EPS and 50% are eligible for vesting based on relative TSR performance. These PARSUs vest as follows: 16.6% of the units are eligible for vesting based on EPS performance of year one with continued service over two years, 16.6% of the units are eligible for vesting based on EPS performance of year two with continued service over three years, 16.6% of the units are eligible for vesting based on EPS performance of year three with continued service over three years, 25% of the units are eligible for vesting based on TSR performance over two years with continued service over two years, 25% of the units are eligible for vesting based on TSR performance over three years with continued service over three years. This structure is depicted in the chart below:

2017 PARSUs

Key Design Elements

EPS vs. Internal Goals

Relative TSR vs. S&P 500

Payout
Weight 

16.6%

16.6%

16.6%

25%

25%

 % of Target(3)
Performance Periods(1) 

Year 1

Year 2

Year 3

2 Years

3 Years

Vesting Periods(2) 

Year 2 Year 3 Year 3 Year 2 Year 3

Performance Levels: 

           
Max
> Target
Target
Threshold
< Threshold
  Target to be disclosed
after the end of the three-year
performance period
> 90th percentile
70th percentile
50th percentile
25th percentile
< 25th percentile
200%
150%
100%
50%
0%
  1. Performance measurement occurs at the end of the one-, two-, and three-year periods,
  2. Vesting occurs at the end of the two- and three-year periods, subject to continued service.
  3. Interpolate for performance between discrete points.

Year 1 (fiscal 2017) EPS goals were set after consideration of historical performance, internal budgets, external expectations, and peer group performance.

EPS was chosen because it is a critical driver of long-term stockholder value and because of our focus on bottom-line profitability in the business transformation strategy. Relative TSR was chosen as a performance measure because it is a direct measure of stockholder value.

EPS and Relative TSR will be weighted equally in determining earned PARSUs. The first segment (42% of total target units) will vest after the end of fiscal 2018, subject to Year 1 EPS performance and Relative TSR performance for the first two years. The second segment (58% of total target units) will vest after the end of fiscal 2019, subject to Year 2 EPS performance, Year 3 EPS performance, and Relative TSR performance for the three years.

For more information on grants of PARSUs to the NEOs during fiscal 2017, see “Executive Compensation—Grants of Plan-Based Awards in Fiscal 2017.”

2017 RSUs

2017 RSUs and related dividend equivalent units vest ratably on an annual basis over three years from the grant date. Three-year vesting is common in our industry and supports executive retention and alignment with stockholder feedback.

For more information on grants of RSUs to the NEOs during fiscal 2017, see “Executive Compensation—Grants of Plan-Based Awards in Fiscal 2017.”

2016 PARSUs

The fiscal 2016-2018 PARSUs have a two- and three-year performance period that began at the start of fiscal 2016 and continue through the end of fiscal 2017 and 2018, respectively. Under this program, 50% of the PARSUs (including dividend equivalent units) are eligible for vesting based on performance over two years with continued service through such time, and 50% are eligible for vesting based on performance over three years with continued service through such time. The two- and three-year awards are equally weighted between ROIC and relative TSR. This structure is depicted in the chart below: 

Key Design Elements 

HP ROIC vs. Internal Goals

HP Relative TSR vs. S&P 500

Payout
Weight 

25%

25%

25%

25%

 % of Target(2)
Performance/Vesting Periods(1) 

2 years

3 years

2 years

3 years

Performance Levels: 

         
Max
> Target
Target
Threshold
< Threshold
  Target to be disclosed
at end of the
performance periods
> 90th percentile
70th percentile
50th percentile
25th percentile
< 25th percentile
200%
150%
100%
50%
0%
  1. Performance measurement and vesting occur at the end of the two- and three-year periods, subject to continued service.
  2. Interpolate for performance between discrete points.

The actual performance achievement for the two-year period (i.e., fiscal 2016–2017) as a percentage of target for the HP PARSUs as of October 31, 2017 is summarized in the table below:

Actual Performance – Segment 1

Segment

ROIC vs. Internal Goals

 

Relative TSR vs. S&P 500(1)

 

Percent of Target
Vested

Fiscal 2016 Result – Fiscal 2017 Result

 

Payout

 

Fiscal 2016-2017
Results

 

Payout

Segment 1 (50%)

106.1%

 

97.0%

 

38.4%

 

89th percentile

 

197.0%

 

117.7%

 

Target: 114%

 

Target: 120%

               
  1. Through October 2017, HP’s actual TSR performance was at the 89th percentile of the S&P 500 which corresponds to a payout of 197.0% of target.

2015 PARSUs

Mr. Weisler and Ms. Lesjak, who continued with the Company after the separation, received PARSUs in fiscal 2016 that replaced grants they had received at HP during fiscal 2015, prior to the separation (FY15 PARSUs). The HRC Committee determined that it would be appropriate and desirable to cancel the FY15 PARSUs and replace them with PARSUs denominated in shares of HP stock. Originally, the FY15 PARSUs had a two- and a three-year performance period, such that one-half the FY15 PARSUs was eligible for vesting based on performance over two years with continued service and one-half was eligible for vesting based on performance over three years with continued service. The FY15 PARSUs were equally weighted between ROIC and relative TSR. The chart below shows the structure of the FY15 PARSUs when initially granted.

2015 – 2017 HP PARSUs (Pre-separation)

Key Design Elements

  HP ROIC vs. Internal Goals

HP Relative TSR vs. S&P 500

Payout
Weight 

25%

25%

25%

25%

 % of Target(2)
Performance/Vesting Periods(1)

2 years

3 years

2 years

3 years

Performance Levels:

           
Max
> Target
Target
Threshold
< Threshold
  Target disclosed
below
> 90th percentile
70th percentile
50th percentile
25th percentile
< 25th percentile
200%
150%
100%
50%
0%
  1. Performance measurement and vesting occur at the end of the two- and three-year periods, subject to continued service.
  2. Interpolate for performance between discrete points.

The replacement grant was made in early fiscal 2016. The replacement ratio was set so the intrinsic value of the HP target replacement PARSUs (“HP PARSUs”) equaled the intrinsic value of the cancelled target number of FY15 PARSUs immediately prior to the separation. HP PARSUs maintain the original service-vesting requirements. HP PARSUs use the same performance metrics as the replaced FY15 PARSUs and the performance goals were established by the HRC Committee after the separation. The chart below shows the structure of the HP PARSUs after the separation.

HP PARSUs (Post-separation)

Key Design Elements

HP ROIC vs. Internal Goals

HP Relative TSR vs. S&P 500

Payout

Weight

25%

25%

25%

25%

% of Target(3)

Adjusted Performance Periods(1)

1 year

2 years

1 year

2 years

Vesting Periods(2)

2 years

3 years

2 years

3 years

Performance Levels:

       

Max
> Target
Target
Threshold
< Threshold

 

Target disclosed
below

> 90th percentile
70th percentile
50th percentile
25th percentile
<25th percentile

200%
150%
100%
50%
0%

  1. Performance measurement occurs at the end of the one-and two-year periods, measured from the date of the separation.
  2. Vesting occurs at the end of the two- and three-year periods, measured from the original grant date.
  3. Interpolate for performance between discrete points.

The actual performance achievement for the two-year period post-separation as a percentage of target for the HP PARSUs as of October 31, 2017 is summarized in the table below:

Fiscal 2015 PARSUs (Actual Performance - Segment 2)

Segment

ROIC vs. Internal Goals

 

Relative TSR vs. S&P 500(1)

 

Percent of Target
Vested

Fiscal 2016 Result Fiscal 2017 Result

 

Payout

Fiscal 2016-2017
Results

 

Payout

Segment 2 (50%)

106.1%

 

97.0%

 

38.4%

 

89th percentile

 

197.0%

 

117.7%

 

Target: 114%

 

Target: 120%

               
  1. Through October 2017, HP’s actual TSR performance was at the 89th percentile of the S&P 500 which corresponds to a payout of 197.0% of target.

Fiscal 2018 Compensation Program

The HRC Committee regularly identifies and evaluates ways to improve our executive compensation program. We believe that our current compensation structure incents and rewards achievement of specific goals, reinforces year-over-year results, offers a stable and consistent message to both stockholders and participants, and provides an attractive pay-or-performance opportunity to encourage retention and leadership engagement. As such, our fiscal 2018 incentive plan is consistent with our fiscal 2017 plan discussed in this CD&A.

In fiscal 2018, the HRC Committee plans to continue to carefully review our talent needs and compensation programs in order to:

  • support the current and long-term business strategy;
  • continue to align pay with stockholder interests; and
  • maintain good governance standards.

Benefits

We do not provide our executives, including the NEOs, with special or supplemental U.S. defined benefit pension or health benefits. Our NEOs receive health and welfare benefits (including retiree medical benefits, if eligibility conditions are met) under the same programs and subject to the same eligibility requirements that apply to our employees generally.

Benefits under all U.S. pension plans were frozen effective December 31, 2007. Benefits under the Electronic Data Systems (“EDS”) Pension Plan ceased upon HP’s acquisition of EDS in 2008. As a result, no NEO or any other HP employee accrued a benefit under any HP U.S. defined benefit pension plan during fiscal 2017. The amounts reported as an increase in pension benefits are for those NEOs who previously accrued a benefit in a defined benefit pension plan prior to the cessation of accruals and reflect changes in actuarial values only, not additional benefit accruals.

The NEOs, along with other executives who earn base pay or an annual incentive in excess of certain limits of the U.S. tax code or greater than $150,000, are eligible to participate in the Executive Deferred Compensation Plan (the “EDCP”). This plan is maintained to permit executives to defer some of their compensation in order to also defer taxation on such amounts. This is a standard benefit plan also offered by most of our peer group companies. The EDCP permits deferral of base pay in excess of the amount taken into account under the qualified HP 401(k) Plan (the 401(k) deferral limit for calendar 2017 was $18,000) and up to 95% of the annual incentive payable under the Stock Incentive and Variable Performance Bonus (“VPB”) Plans. In addition, we make a 4% matching contribution to the plan on base pay contributions in excess of IRS limits up to a maximum of two times that limit (maximum of $10,800 in calendar 2017). This is the same percentage of matching contributions those executives are eligible to receive under the 401(k) Plan. In effect, the EDCP permits these executives and all eligible employees to receive a 401(k)-type matching contribution on a portion of base-pay deferrals in excess of IRS limits. Amounts deferred or matched under the EDCP are credited with hypothetical investment earnings based on investment options selected by the participant from among nearly all of the proprietary funds available to employees under the 401(k) Plan. No amounts earn above-market returns. Benefits payable under the EDCP are unfunded and unsecured.

Executives are also eligible to have a yearly HP-paid medical exam as part of the HP U.S. executive physical program. This includes a comprehensive exam, thorough health assessment and personalized health advice. This benefit is also offered by our peer group companies.

Consistent with its practice of not providing any special or supplemental executive defined benefit programs, including arrangements that would otherwise provide special benefits to the family of a deceased executive, in 2011 the HRC Committee adopted a policy that, unless approved by our stockholders pursuant to an advisory vote, we will not enter into a new plan, program or agreement or modify an existing plan, program or agreement with a Section 16 officer that provides for payments, grants or awards following the death of the officer in the form of unearned salary or unearned annual incentives, accelerated vesting or the continuation in force of unvested equity grants, perquisites, and other payments or awards made in lieu of compensation, except to the extent that such payments, grants or awards are provided or made available to our employees generally.

Perquisites

Consistent with the practices of peer group companies, we provide a small number of perquisites to our senior executives, including the NEOs, as discussed below.

We provide our NEOs with financial counseling services to assist them in obtaining professional financial advice, which is a common benefit among our peer group companies, for convenience and to increase the understanding and effectiveness of our executive compensation program.

Due to our global presence, we maintain one corporate aircraft. In the event an NEO is accompanied by a guest or family member on the aircraft for personal reasons, as approved by the CEO, the NEO is taxed on the value of this usage according to the relevant Code rules. There is no tax gross-up paid on the income attributable to this value. Among our NEOs, Mr. Weisler is the only executive that used the corporate aircraft for personal use during fiscal 2017.

Our Audit Committee periodically conducts global risk management reviews, which include reviewing home security services of NEOs. Services considered necessary by the Audit Committee may be paid for by HP, due to the range of security issues that may be encountered by key executives of any large, multinational corporation.

Severance and Long-term Incentive Change in Control Plan for Executive Officers

Our Section 16 officers (including all of the NEOs) are covered by the Severance and Long-term Incentive Change in Control Plan for Executive Officers (“SPEO”), which is intended to protect us and our stockholders, and provide a level of transition assistance in the event of an involuntary termination of employment. Under the SPEO, participants who incur an involuntary termination (i.e., a termination not for cause), and who execute a full and effective release of claims following such termination, are eligible to receive severance benefits in an amount determined as a multiple of base pay, plus the average of the actual annual incentives paid for the preceding three years. In the case of the NEOs other than the CEO, the multiplier is 1.5. In the case of the CEO, the multiplier is 2.0. In all cases, this benefit will not exceed 2.99 times the sum of the executive’s base pay plus target annual incentive as in effect immediately prior to the termination of employment.

Although the majority of compensation for our executives is performance-based and largely contingent upon achievement of financial goals, the HRC Committee continues to believe that the SPEO is appropriate for the attraction and retention of executive talent. In addition, we find it more equitable to offer severance benefits based on a standard formula for the Section 16 officers because severance often serves as a bridge when employment is involuntarily terminated, and should therefore not be affected by other, longer-term accumulations. As a result, and consistent with the practice of our peer group companies, other compensation decisions are not generally based on the existence of this severance protection.

In addition to the cash benefit, SPEO participants are eligible to receive (1) a pro-rata annual incentive for the year of termination based on actual performance results, at the discretion of the HRC Committee, (2) pro-rata vesting of unvested equity awards (and for performance-based equity awards, only if any applicable performance conditions have been satisfied), and (3) payment of a lump-sum health-benefit stipend of an amount equal to 18 months’ COBRA premiums for continued group medical coverage for the executive and his or her eligible dependents, to the extent those premiums exceed 18 times the monthly premiums for active employees in the same plan with the same level of coverage as of the date of termination.

Benefits in the Event of a Change in Control

Effective November 1, 2015, the HRC Committee approved the change of control terms in the SPEO. In addition to the benefits provided for involuntary terminations, the SPEO provides for full vesting of outstanding stock options, RSUs, Performance Contingent Stock Options (“PCSOs”), and PARSUs upon involuntary termination not for Cause or voluntary termination for Good Reason (as defined in the plan) within 24 months after a change in control (“double trigger”), and in situations where equity awards are not assumed by the surviving corporation (a “modified double trigger”). The SPEO further provides that under a double trigger, PARSUs will vest based on target performance, whereas under a modified double trigger, PARSUs will vest based upon the greater of the number of PARSUs that would vest based on actual performance and the number of PARSUs that would vest pro-rata based upon target performance.

The HRC Committee approved the change of control provisions in the SPEO as it determined that providing for double trigger and modified double trigger equity acceleration is consistent with market practice, will provide clarity to prospective and current executives, and will help attract and retain talent.

Other Compensation-Related Matters

Succession Planning

Among the HRC Committee’s responsibilities described in its charter is to oversee succession planning and leadership development. The Board plans for succession of the CEO and annually reviews senior management selection and succession planning that is undertaken by the HRC Committee. As part of this process, the independent directors annually review the HRC Committee’s recommended candidates for senior management positions to see that qualified candidates are available for all positions and that development plans are being utilized to strengthen the skills and qualifications of the candidates. The criteria used when assessing the qualifications of potential CEO successors include, among others, strategic vision and leadership, operational excellence, financial management, executive officer leadership development, ability to motivate employees, and an ability to develop an effective working relationship with the Board. We also host a Board Buddy program through which each executive officer is aligned to a board member as a mentor to aid the executive’s development while giving board members a deeper understanding of the day-to-day operations of the company.

In fiscal 2017, an executive talent review was conducted along with succession plans for each of the executive leaders. Successors were identified to reflect necessary skill sets, performance, potential, and diversity. Development plans for successors were also established to ensure readiness and will be managed throughout the year. In addition to the annual succession planning process, the HRC Committee participates in an in-depth performance discussion of each executive officer at the time of the annual compensation review. Further, there is a People Update at each HRC Committee meeting, which includes a review of key people processes and developments for that quarter.

In addition, the executive team participated in a robust development process that included individual assessments, interviews with executive coaches, and an individualized development plan that can be leveraged throughout the year. Development themes for the entire executive team will be addressed during quarterly face-to-face meetings for full team development.

Stock Ownership Guidelines

Our stock ownership guidelines are designed to align executives’ interests more closely with those of our stockholders and mitigate compensation-related risk. The current guidelines provide that, within five years of assuming a designated position, the CEO should attain an investment position in our stock equal to seven times his base salary and all other Section 16 officers reporting directly to the CEO should attain an investment position equal to five times their base salaries. Shares counted toward these guidelines include any shares held by the executive directly or through a broker, shares held through the 401(k) Plan, shares held as restricted stock, shares underlying time-vested RSUs, and shares underlying vested but unexercised stock options (50% of the in-the-money value of such options is used for this calculation). Ms. Lesjak is the only NEO who has served in a role covered by our stock ownership guidelines for over five years and her ownership exceeds the current guideline. In addition, our other NEOs held the required investment position in our stock as of the end of fiscal 2017.

The HRC Committee has adopted a policy prohibiting our executive officers from engaging in any form of hedging transaction (derivatives, equity swaps, forwards, etc.) including, among other things, short sales and transactions involving publicly traded options. In addition, with limited exceptions, our executive officers are prohibited from holding our securities in margin accounts and from pledging our securities as collateral for loans. We believe that these policies further align our executives’ interests with those of our stockholders.

Accounting and Tax Effects

The impact of accounting treatment is considered in developing and implementing our compensation programs, including the accounting treatment as it applies to amounts awarded or paid to our executives.

The impact of federal tax laws on our compensation programs is also considered, including the deductibility of compensation paid to the NEOs, as limited by Section 162(m) of the Code. Our compensation program for fiscal 2017 was designed with the intention that compensation paid in various forms may be eligible to qualify for deductibility under Section 162(m), but there may be exceptions for administrative or other reasons that have a business justification.

Policy on Recovery of Annual Incentive in Event of Financial Restatement

In fiscal 2006, the Board adopted a “clawback” policy that permits the Board to recover certain annual incentives from senior executives whose fraud or misconduct resulted in a significant restatement of financial results. The policy allows for the recovery of annual incentives paid at or above target from those senior executives whose fraud or misconduct resulted in the restatement where the annual incentives would have been lower absent the fraud or misconduct, to the extent permitted by applicable law. Additionally, our incentive plan document allows for the recoupment of performance-based annual incentives and long-term incentives consistent with applicable law and the clawback policy. Also, in fiscal 2014, we added a provision to our grant agreements to clarify that equity awards are subject to the clawback policy.

HR and Compensation Committee Report on Executive Compensation

The HRC Committee of the Board of HP has reviewed and discussed with management this Compensation Discussion and Analysis. Based on this review and discussion, it has recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement and in the Annual Report on Form 10-K/A of HP filed for the fiscal year ended October 31, 2017.

HR and Compensation Committee of the Board of Directors

Stephanie A. Burns, Chair
Aida Alvarez
Shumeet Banerji
Charles “Chip” V. Bergh
Stacey Mobley