This Compensation Discussion and Analysis describes our executive compensation philosophy and programs, the compensation decisions the HRC Committee has made under the program, and the considerations in making those decisions in fiscal 2018.
Named Executive Officers
Our NEOs for fiscal 2018 are:
- Dion J. Weisler, President and CEO;
- Steven J. Fieler, Chief Financial Officer;
- Catherine A. Lesjak, former Chief Financial Officer and Interim Chief Operating Officer¹;
- Enrique J. Lores, President, Imaging, Printing and Solutions;
- Kim M. Rivera, President, Strategy and Business Management and Chief Legal Officer and General Counsel;
- Tracy S. Keogh, Chief Human Resources Officer;
- Ron V. Coughlin, former President, Personal Systems²; and
- Jon E. Flaxman, former Chief Operating Officer³.
- Ms. Lesjak served as Chief Financial Officer from the beginning of our fiscal year until June 30, 2018 when she was succeeded by Mr. Fieler. She served as Interim Chief Operating Officer from July 1, 2018 until January 1, 2019, when she was succeeded by Ms. Rivera who was appointed to the role of President, Strategy and Business Management.
- Mr. Coughlin resigned from this role effective June 13, 2018.
- Mr. Flaxman served as Chief Operating Officer until he passed away on March 28, 2018.
The HRC Committee continues to review and refine our compensation programs to support our evolving business strategy and attract high caliber executive talent. The HRC Committee’s assessment includes regular stockholder engagement and consideration of stockholder feedback. HP’s fiscal 2018 executive compensation structure remained the same as its fiscal 2017 program.
Below are brief highlights of key compensation decisions with respect to NEOs:
|Fiscal 2018 NEO Pay Action||HRC Committee Decision||HRC Committee Rationale|
|Adjusted base salaries||Salary changes for NEOs ranged from 0% to 7.7% based on market competitiveness and performance.||Reflect peer group market positioning, individual experience, performance, advancement potential, and internal equity.|
|Determined earned annual incentives for fiscal 2018 performance||
Annual incentives for fiscal 2018 were earned, ranging from 165.5% to 180.5% of target, with the CEO at 178% of target and the average payout of other NEOs at 170.2%.(1)
At the beginning of the year, the HRC Committee set target award opportunities at competitive levels versus peers and subject to rigorous threshold-to-maximum performance goals.
|Earned awards reflected performance against applicable enterprise-wide, business, and individual goals. The HRC and management ensured that U.S. tax reform’s effects during fiscal 2018 did not result in any windfalls on earned awards. 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 in fiscal 2018, achieving above-target results with respect to each financial goal. Further, NEOs successfully delivered against their MBOs as further detailed on pages 43-44.|
|Determined long-term incentive grants||Fiscal 2018 long-term incentives were granted using a mix of 60% PARSUs and 40% time-based RSUs. Grant values for all our NEOs were set at competitive levels versus peers with appropriate incumbent-specific variability for performance, experience, and internal equity.||PARSUs are based on relative TSR compared to the S&P 500 and Earnings Per Share (“EPS”) during the three year performance period. The intent was to align pay delivery with stockholder returns. RSUs vest based on continued service to encourage stockholder alignment and to support executive retention.|
- Excluding Mr. Coughlin, who did not receive a performance bonus in fiscal 2018 as he left the company prior to the end of the fiscal year.
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.
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 2019. 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 2018, 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; identifies peer group companies for competitive market comparisons; 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 and director 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 2018, and all five of these meetings included an executive session. FW Cook participated in all 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. The Board considered market competitiveness, business results, experience, and individual performance in evaluating fiscal 2018 NEO compensation and the overall 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 2018, 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 2018, 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 in comparison 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 levels and practices compare to market practices.
When determining the peer group, the following characteristics were considered:
- 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. For fiscal 2018, the HRC Committee removed EMC from the peer group due to its merger with Dell Inc. The peer group for fiscal 2018 consisted of the following companies:
Fiscal 2018 Peer Group
- Represents fiscal 2018 reported revenue, except fiscal 2017 reported revenue is provided for Amazon, Verizon, General Electric, IBM, PepsiCo, Intel, Honeywell, Texas Instruments and Xerox.
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 2018, 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 of critical talent). 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 is not formulaic and may differ from year to year or by individual NEO. 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 decision.
The HRC Committee spends significant time determining the appropriate goals for our annual and long-term incentive plans, which make up the majority of NEO compensation. 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, industry performance, conditions or goals specific to a particular business segment, and strategic initiatives. 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 “2018 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’ interests. We regularly engage with our stockholders on a variety of issues, including their views on best practices in executive compensation. Some changes during the last few years 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 to encourage greater collaboration and teamwork among business leaders.
- Replaced Return on Invested Capital (“ROIC”) with EPS in our PARSU grants for stronger alignment with stockholder interests and because it is a more appropriate measure for HP after the separation of HPE.
- At the Company’s 2018 annual meeting, the Company’s executive compensation proposal received the support of over 92% of the votes cast. As part of its 2018 executive compensation discussions, the Compensation Committee reviewed the advisory vote result and considered it to be supportive of the Company’s compensation practices.
Determination of Fiscal 2018 Executive Compensation
Under our Total Rewards Program, executive compensation consists of: base salary, annual incentives, long-term incentives, benefits, and perquisites.
The HRC Committee regularly explores ways to improve our executive compensation program by considering stockholder feedback, our current business needs and strategy, and peer group practices. For 2018 the Committee decided to maintain a consistent compensation structure for executives since it supports the business strategy and aligns pay with stockholder interests.
2018 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 the majority of 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. In fiscal 2018, salaries comprise on average 11% of our NEOs’ overall compensation, which is consistent with the practice of our peers. To decide the CEO’s salary, the HRC Committee reviews analyses and recommendations provided by FW Cook.
For fiscal 2018, Mr. Weisler’s salary was increased from $1.3 million to $1.4 million, to better align with the market median. The HRC Committee did not change Ms. Lesjak’s base salary. Based on market competitiveness and performance, both Mr. Coughlin’s and Mr. Lores’ base salaries were increased from $725,000 to $750,000, Mr. Flaxman’s base salary was increased from $700,000 to $715,000, Ms. Rivera’s base salary was increased from $645,000 to $675,000 and Ms. Keogh’s base salary was increased from $600,000 to $630,000. Mr. Fieler’s base salary was increased from $480,000 to $690,000 in conjunction with his promotion to CFO on July 1, 2018.
2018 Annual Incentives
The fiscal 2018 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 is capped at 200% of target.
The target annual PfR incentive awards for fiscal 2018 were set at 200% of salary for the CEO and 125% of salary for the other NEOs.
The HRC and management ensured that U.S. tax reform’s effects during fiscal 2018 did not result in any windfalls on earned awards.
For fiscal 2018, 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 $15 million individual cap under the Stock Incentive Plan. Below this umbrella funding structure, actual payouts were determined based upon financial metrics and MBOs established and evaluated by the HRC Committee for Section 16 officers and by the independent members of the Board for the CEO.
Fiscal 2018 Annual Incentive Plan
|Key Design Elements||Revenue
($ in billions)
($ in billions)
|Free Cash Flow as a
% of Revenue(1)
|Global Functions Executives(3)||Corporate||Corporate||Corporate||Individual|
|Business Unit (“BU”) Executives(4)||Corporate/BU||Corporate/BU||Corporate||Individual|
|Corporate Performance Goals|
- 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. Maximum and threshold information are not disclosed on the basis of competitive harm. However, goals are set at levels we believe to be achievable in connection with strong performance.
- Interpolate for performance between discrete points. Each individual metric may fund up to 250% of target; however, the maximum annual PfR incentive for each executive is capped at 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.
- The Global Functions Executives include Mr. Weisler, Mr. Fieler, Ms. Lesjak, Mr. Flaxman, Ms. Rivera, and Ms. Keogh.
- The Business Unit Executives include Mr. Coughlin and Mr. Lores. Specific Business Unit goals are excluded on the basis of competitive harm. However, goals are set at levels we believe to be achievable in connection with strong performance.
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 2018 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 for fiscal 2018||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 for fiscal 2018|
|Corporate Net Earnings||Non-GAAP net earnings, as defined and reported in our fourth quarter fiscal 2018 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|
- 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.
- Fiscal 2018 non-GAAP net earnings of $3.5 billion excludes after-tax costs of $2 billion related to the amortization of intangible assets, restructuring charges, and acquisition-related charges. Management uses non-GAAP net earnings to evaluate and forecast our performance before gains, losses, or other charges that are considered by management to be outside of our core business segment operating results. We believe that presenting non-GAAP net earnings provides investors with greater visibility with respect to the information used by management in its financial and operational decision making. We further believe that providing this additional non-GAAP information helps investors understand our operating performance and evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance. This additional non-GAAP information is not intended to be considered in isolation or as a substitute for GAAP diluted net earnings.
Following fiscal 2018, the HRC Committee reviewed performance against the financial metrics and certified the results as follows:
Fiscal 2018 Annual PfR Incentive Performance Against Financial Metrics(1,2)
($ in billions)
($ in billions)
|Percentage of Target
Annual Incentive Funded
|Corporate Net Earnings||25.0||%||$||3.2||$||3.5||37.5||%|
|Corporate Free Cash Flow (% of revenue)||25.0||%||5.85||%||7.1||%||62.5||%|
- Mr. Weisler, Mr. Fieler, Ms. Lesjak, Ms. Rivera, Ms. Keogh and Mr. Flaxman received annual PfR incentive payments based on corporate financial metrics. Mr. Lores received an annual PfR incentive payment based on corporate and business financial metrics. Mr. Coughlin’s annual PfR Incentive goals were based on corporate and business financial metrics. However, Mr. Coughlin didn’t receive an annual PfR incentive payment since he left the company on June 13, 2018, prior to the end of the fiscal year.
- 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.
- The financial metrics were equally weighted to account for 75% of the target annual PfR incentive.
Mr. Weisler. At the end of the fiscal year, the independent members of the Board evaluated Mr. Weisler’s performance against all of his MBOs, which included, but were not limited to: set strategic direction for the company based on optimizing shareholder value, maintain supplies stabilization, fully integrate Samsung printing business, grow profitable share in Personal Systems, accelerate adoption of multi-jet fusion to extend leadership in 3D printed plastics and announce technology for metals, engage with all major constituents including financial analysts, media, key governmental figures, partners and customers to execute the HP strategy, and ensure HP has a robust evaluation and talent program. After conducting a thorough review of Mr. Weisler’s performance, the independent members of the Board determined that his MBO performance had been achieved above target. Mr. Weisler’s accomplishments included:
- Added $2.2B in market cap over the fiscal year 2018 and out-paced the S&P 500 by 7 points for the year.
- Beat external expectations on all key metrics: revenue, non-GAAP EPS and free cash flow, despite several critical challenges through the year.
- In Print, maintained supplies stabilization growing +7% versus prior year. Integrated Samsung Printing business. Gained share in A3 printer market and grew the Managed Print Services business double-digits. In Graphics, entered corrugated post-print market.
- In Personal Systems business, delivered profitable share growth in the core business while expanding Device as a Service offering. Further, supported the successful transition of Mr. Cho as new leader of the business.
- In 3D print business, achieved #1 position for thermoplastic solutions above $100k. Introduced HP Metal Jet to take metal 3D printing from specialized to mass production. Mr. Weisler has also supported the successful transition of Mr. Schell as leader of the 3D business.
- Mr. Weisler worked to maintain market access and competitive pricing in the face of 301 tariffs and non-tariff barriers.
- Mr. Weisler continued his emphasis on talent and assignment planning which helped the successful transition of leaders into executive leadership positions.
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 2018 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.
Mr. Fieler. Mr. Fieler was eligible for and participated in two different bonus programs during fiscal 2018 on a pro-rata basis. Prior to his promotion to CFO, from November 1 to June 30, he participated in the annual PfR incentive plan for the non-Executive Leadership Team (“ELT”). In conjunction with his promotion to CFO on July 1, Mr. Fieler began participating in the annual PfR incentive plan for the ELT. His MBOs as CFO were approved by the HRC Committee at their June meeting.
The HRC Committee determined that Mr. Fieler’s MBOs performance had been achieved at target. Mr. Fieler made a very strong transition into his new role as CFO. He brought strong operational perspective and excellent experience in areas such as cash flow. Mr. Fieler is a thoughtful, strategic and engaged leader and was critical in delivering against financial expectations.
Ms. Lesjak. Ms. Lesjak served in two important capacities at HP this year, serving as CFO from November 1 to June 30 and as interim Chief Operating Officer after July 1. The HRC Committee determined that Ms. Lesjak’s MBOs performance in both capacities had been achieved above target. She drove efficiencies in the Finance organization and was critical in the successful transition of Mr. Fieler as CFO. Further, Ms. Lesjak was vital in stabilizing the COO organization after Mr. Flaxman’s passing, leading a complex portfolio of critical business areas while reenergizing the organization.
Mr. Lores. The HRC Committee determined that Mr. Lores’s MBOs performance had been achieved above target. Mr. Lores did a great job in delivering profitable growth in supplies, Graphics Solutions Business, Managed Print Services and Instant Ink. He significantly over-performed on Print transformation goals to substantially improve Print’s cost position. Mr. Lores also did an excellent job leading Samsung integration and delivering on the first-year plan.
Ms. Rivera. The HRC Committee determined that Ms. Rivera’s MBO performance had been achieved above target. Ms. Rivera worked closely with the businesses on critical matters such as supplies counterfeiting, IP protections and Samsung deal close and integration. She did an excellent job on tariffs, revamping government relations and internal programs such as Integrity@HP. Ms. Rivera is a well-respected leader who not only gives solid legal advice but also is a strong partner in business and technology matters.
Ms. Keogh. The HRC Committee determined that Ms. Keogh’s MBO performance had been achieved above target. Ms. Keogh’s strong focus on executive talent development and succession planning set a strong foundation to support the leadership changes in 2018. Ms. Keogh did a remarkable job in creating company culture, increasing employee engagement across the organization, reducing employee attrition and completing a successful year in outstanding talent acquisition.
Mr. Coughlin. Resigned from HP on June 13, 2018 and was not eligible to receive the bonus payout for fiscal 2018.
Mr. Flaxman. The HRC Committee determined that Mr. Flaxman’s MBOs performance had been achieved at target. Mr. Flaxman managed critical business areas while delivering on key critical projects such as Enterprise Resource Planning (ERP) and the consolidation of our robotics capabilities.
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 2018 Annual PfR Incentive Performance Against Non-Financial Metrics (MBOs)
|Named Executive Officer||Weight
|Percentage of Target
|Dion J. Weisler||25.0||37.5|
|Steven J. Fieler||25.0||25.0|
|Catherine A. Lesjak||25.0||30.0|
|Enrique J. Lores||25.0||40.0|
|Kim M. Rivera||25.0||30.0|
|Tracy S. Keogh||25.0||40.0|
|Ron V. Coughlin||25.0||n/a|
|Jon E. Flaxman||25.0||25.0|
Based on the level of performance described above on both the financial and non-financial metrics for fiscal 2018, the payouts to the NEOs under the annual PfR incentive were as follows:
Fiscal 2018 Annual PfR Incentive Payout
|Percentage of Target
Annual Incentive Funded
|Named Executive Officer||Financial
|As % of Target
|Dion J. Weisler||140.5||%||37.5||%||178.0||%||$||4,984,348|
|Steven J. Fieler(1)||140.5||%||25.0||%||165.5||%||$||793,632|
|Catherine A. Lesjak||140.5||%||30.0||%||170.5||%||$||1,811,695|
|Enrique J. Lores||128.5||%||40.0||%||168.5||%||$||1,579,331|
|Kim M. Rivera||140.5||%||30.0||%||170.5||%||$||1,438,699|
|Tracy S. Keogh||140.5||%||40.0||%||180.5||%||$||1,421,536|
|Ron V. Coughlin||0.0||%||0.0||%||0.0||%||$||—|
|Jon E. Flaxman(2)||140.5||%||25.0||%||165.5||%||$||857,821|
- Mr. Fieler’s annual PfR incentive target was 60% before his promotion to CFO. On July 1, 2018, Mr. Fieler’s annual PfR incentive target was increased to 125%. Total Annual Incentive Payout reflects the combined total value of his annual PFR incentive for both roles.
- Mr. Flaxman’s incentive payout is based upon the base salary received for the year (prior to his death) and is paid to his beneficiaries.
Long-term Incentive Compensation
The HRC Committee established a total long-term incentive target value for each NEO in early fiscal 2018 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 support retention and are linked to stockholder value and ownership, which are important goals of our executive compensation program.
The fiscal 2018-2020 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 2018 and continue through the end of fiscal 2018, 2019 and 2020. 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:
|Key Design Elements||EPS vs. Internal Goals||Relative TSR vs. S&P 500||Payout|
|Performance Periods(1)||Year 1||Year 2||Year 3||2 Years||3 Years||% of Target||(3)|
|Vesting Periods(2)||Year 2||Year 3||Year 3||Year 2||Year 3|
|Max||Target to be disclosed after
the end of the three-year
|> 90th percentile||200||%|
|> Target||70th percentile||150||%|
|< Threshold||< 25th percentile||0||%|
- Performance measurement occurs at the end of the one-, two-, and three-year periods.
- Vesting occurs at the end of the two- and three-year periods, subject to continued service.
- Interpolate for performance between discrete points.
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. Year 1 (fiscal 2018) EPS goals were set after consideration of historical performance, internal budgets, external expectations, and peer group performance.
Relative TSR was chosen as a performance measure because it is a direct measure of stockholder value and rewards for outperformance relative to the broader market.
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 2019, 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 2020, 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 2018, see “Executive Compensation—Grants of Plan-Based Awards in Fiscal 2018.”
2018 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 value.
Fiscal 2018 Long-term Incentive Compensation at Target
The following table shows combined total grant values for grants attributable to fiscal 2018. It is important to note that these values are target opportunities to earn future value-based compensation and are not actual earned amounts, which will be determined after three years based on continued employment and performance against the EPS and relative TSR goals.
|Named Executive Officer||PARSUs||RSUs||Total Fiscal 2018
Long-term Incentive Grant
|Dion J. Weisler||$||8,100,000||$||5,400,000||$||13,500,000|
|Steven J. Fieler||$||1,200,000||$||1,550,000||$||2,750,000|
|Catherine A. Lesjak||$||3,240,000||$||2,160,000||$||5,400,000|
|Enrique J. Lores||$||3,000,000||$||2,000,000||$||5,000,000|
|Kim M. Rivera||$||1,980,000||$||1,320,000||$||3,300,000|
|Tracy S. Keogh||$||1,971,000||$||1,314,000||$||3,285,000|
|Ron V. Coughlin||$||3,210,000||$||2,140,000||$||5,350,000|
|Jon E. Flaxman||$||2,595,000||$||1,730,000||$||4,325,000|
Values in the Summary Compensation Table are different than the target values described in the table above. In the Summary Compensation Table, consistent with accounting standards, amounts reflect the grant date fair value for the full TSR component (two and three-year performance period), and the EPS component for Year 1 (2018), for which goals were approved in January 2018. Grant date fair values for the EPS component for Year 2 and Year 3 are not included in the grant date fair value reported in the Summary Compensation Table since EPS goals for those years are approved in their respective fiscal year. However, the Summary Compensation Table for fiscal 2018 also includes a portion of the fiscal 2017 PARSUs for which the Year 2 EPS goal was approved in fiscal 2018 – EPS component Year 2 (2018).
For more information on grants to the NEOs during fiscal 2018, see “Executive Compensation—Grants of Plan-Based Awards in Fiscal 2018.”
The fiscal 2017-2019 PARSUs have a two-and three-year vesting period, subject to one-, two-, and three-year performance periods that began at the start of fiscal 2017 and continue through the end of fiscal 2017, 2018 and 2019. Under this program, 50% of the PARSUs (including dividend equivalent units) are eligible for vesting based on EPS and 50% are eligible for vesting based on relative TSR performance. 2017 PARSUs have the same vesting structure as 2018 PARSUs (chart described above). The actual performance achievement for the one- and two-year periods (i.e., fiscal 2017 and fiscal 2017–2018) as a percentage of target for the PARSUs as of October 31, 2018 is summarized in the table below:
Actual Performance – Segment 1
|EPS vs. Internal Goals||Relative TSR vs. S&P 500(1)|
|Segment||Fiscal 2017 Result||Payout||Fiscal 2017-2018 Results||Payout|
|Segment 1 (42%)||$||1.65||141.7||%||86th percentile||191||%|
- Through October 2018, HP’s actual TSR performance was at the 86th percentile of the S&P 500 which corresponds to a payout of 191% of target.
The fiscal 2016-2018 PARSUs have a two- and three-year performance period that began at the start of fiscal 2016 and continued 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|
|Max||Target disclosed below||> 90th percentile||200||%|
|> Target||70th percentile||150||%|
|< Threshold||< 25th percentile||0||%|
- Performance measurement and vesting occur at the end of the two- and three-year periods, subject to continued service.
- 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, was summarized in our proxy statement for fiscal 2017. The actual performance achievement for the three-year period (i.e., fiscal 2016–2018) as a percentage of target for the HP PARSUs as of October 31, 2018 is summarized in the table below:
Actual Performance – Segment 2
|ROIC vs. Internal Goals||Relative TSR vs. S&P 500(1)|
|Segment 2 (50%)||106.1||%||108.1||%||80.4||%||85.2||%||87th percentile||193.0||%||139.1||%|
|Target: 114||%||Target: 120||%||Target: 79||%|
- Through October 2018, HP’s actual TSR performance was at the 87th percentile of the S&P 500 which corresponds to a payout of 193% of target.
- For the final payout calculation of the fiscal 2017 portion of Segment 2 of the fiscal 2016 PARSU award, the Committee approved using the adjusted ROIC results of 108.1%, which excludes share repurchases funded by cash in that fiscal year.
- Due to the impact of extraordinary items (in particular U.S. tax reform), fiscal 2018 ROIC result was adjusted from ~88% to 80.4%.
Fiscal 2019 Compensation Program
The HRC Committee regularly identifies and evaluates ways to improve our executive compensation program. We believe that our current compensation structure effectively aligns real pay delivery with critical financial and strategic non-financial goals, reinforces year-over-year improvement and growth, offers a stable and consistent message to both stockholders and participants, and provides an attractive pay-for-performance opportunity to encourage retention and leadership engagement. As such, our fiscal 2019 incentive plan is consistent with our fiscal 2018 plan discussed in this CD&A.
In fiscal 2019, 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 best-in-class governance standards.
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 2018. The amounts reported as an increase in pension benefits in the Summary Compensation Table 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 Code or greater than $150,000, are eligible to participate in the 2005 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 2018 was $18,500) and up to 95% of the annual incentive payable under the Stock Incentive Plan, the PfR Plan and other eligible plans. In addition, we make a 4% matching contribution to the EDCP on base pay contributions in excess of IRS limits up to a maximum of two times that limit (maximum of $11,000 in calendar 2018). 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.
We provide a small number of perquisites to our senior executives, including the NEOs. For a list of all perquisites provided to our NEOs for fiscal 2018, please refer to the All Other Compensation Table on page 53.
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 2018.
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 the 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.
Benefits in the Event of a Change in Control
The SPEO also includes change in control terms for our NEOs. 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
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 2018, 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 and Prohibition on Hedging
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). Mr. Weisler, Ms. Lesjak and Ms. Keogh are the only NEOs who have served in roles covered by our stock ownership guidelines for over five years and their respective ownerships exceed the current guidelines. Our other NEOs are on pace to meet the stock ownership guidelines within the allotted time frame.
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. For fiscal year 2018 and prior fiscal years, Section 162(m) included an exception from the deductibility limitation for qualified “performance-based compensation.” This exception, however, has been repealed for tax years beginning in fiscal 2019 under the Tax Cuts and Jobs Act. As such, compensation paid to certain of our executive officers in excess of $1.0 million will not be deductible unless it qualifies for certain transition relief applicable for compensation paid pursuant to a written binding contract that was in effect as of November 2, 2017. In addition, the Tax Cuts and Jobs Act increased the scope of individuals subject to the deduction limitation. Thus, compensation originally intended to satisfy the requirements for exemption from Section 162(m) may not be fully deductible. Although our compensation program may take into consideration the Section 162(m) rules as a factor, these considerations will not necessarily limit compensation to amounts deductible under Section 162(m).
Policy for Recoupment of Performance-Based Incentives
In fiscal 2006, the Board adopted a “clawback” policy that provides Board discretion to recover certain annual incentives from senior executives whose fraud or misconduct resulted in a significant restatement of financial results. The policy specifically 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. Award agreements also provide Board discretion to cause forfeiture of certain outstanding cash and equity awards for fraud or misconduct that results in reputational harm to HP even when such fraud or misconduct does not result in a significant restatement of financial results.
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 of HP filed for the fiscal year ended October 31, 2018.
HR and Compensation Committee of the Board of Directors
Stephanie A. Burns, Chair
Charles “Chip” V. Bergh