10-K: Baker Hughes Company Outlines Performance Share Unit Award Agreement

Baker Hughes Company details the terms of its Performance Share Unit Award Agreement, outlining conditions for earning shares based on company performance and service.

Summary

• Baker Hughes Company has granted Performance Share Units (PSUs) to a participant, entitling them to receive one share of Class A common stock per PSU if certain conditions are met.
• The number of PSUs that can be earned may vary between 0% and 150% of the target PSUs, depending on the achievement of performance conditions and the participant's service.
• Dividend equivalents will be paid on earned PSUs, equal to the per share quarterly dividend payments made to stockholders during the period from the grant date until the restrictions lapse.
• Restrictions on PSUs will lapse upon satisfaction of both a service condition (continuous employment) and a performance condition (based on Cumulative ROIC and Relative Cumulative Free Cash Flow Divided by Cumulative Adjusted EBITDA, adjusted by Relative TSR modifier).
• The maximum number of shares that can be earned is 225% of the target PSUs, and the maximum value is capped at 5.5 times the grant date share price multiplied by the target PSUs.
• In the event of termination of employment, PSUs are generally cancelled, except in cases of death, involuntary termination following a change in control or covered transaction, or total disability, where the service condition may be deemed satisfied.
• The performance condition is deemed satisfied at the target level in the event of a change in control, and at the greater of target or actual performance in the event of a covered transaction if certain termination conditions are met.
• The agreement includes provisions for adjustments in the event of mergers, acquisitions, or other transactions involving peer companies.
• The company has the right to amend, alter, or terminate the PSUs without the consent of the participant, provided it does not significantly diminish the rights of the participant without consent, or if required by law or accounting standards.
• The PSUs, any shares issued, and any amount received from the sale of shares are subject to potential cancellation, recoupment, rescission, or payback in accordance with any recoupment policy adopted by the company.

Sentiment

Score: 7

Explanation: The document is a standard legal agreement outlining the terms of an equity award. It is neutral in tone and does not express any particular sentiment. The terms are generally favorable for the participant, but also include safeguards for the company.

Positives

• The award agreement provides a clear path for participants to earn shares based on company performance and their service.
• The inclusion of dividend equivalents ensures that participants benefit from the company's dividend payouts.
• The performance metrics are tied to key financial indicators, aligning participant incentives with company goals.
• The agreement includes provisions for various termination scenarios, providing some protection for participants in certain circumstances.
• The maximum value limitation protects the company from excessive payouts in the event of a significant increase in share price.

Negatives

• PSUs are generally cancelled upon termination of employment, except in specific circumstances.
• The maximum number of shares that can be earned is capped at 225% of the target PSUs.
• The maximum value of shares issued is capped at 5.5 times the grant date share price multiplied by the target PSUs.
• The company has the right to amend or terminate the PSUs, which could potentially reduce the value of the award.
• PSUs are subject to potential cancellation, recoupment, rescission, or payback, which introduces uncertainty for participants.

Risks

• The actual number of PSUs earned depends on the company's performance, which is subject to market conditions and other factors.
• The value of the shares received depends on the company's stock price, which can fluctuate.
• The company has the right to amend or terminate the PSUs, which could potentially reduce the value of the award.
• PSUs are subject to potential cancellation, recoupment, rescission, or payback, which introduces uncertainty for participants.
• Changes in the company's peer group could affect the relative performance metrics.

Future Outlook

The document does not contain any specific forward-looking statements or guidance regarding the company's future performance, other than the terms of the award agreement itself.

Management Comments

• The Committee of Baker Hughes Company has granted Performance Share Units (PSUs) to the individual named in this Award Agreement.
• The Company will pay the Participant an amount equal to the Dividend Equivalents unpaid as of the date that the restrictions lapse (without interest) upon such lapse date.
• The Committee shall certify the extent, if any, to which the Performance Condition was achieved.

Industry Context

This type of performance-based equity award is common in the energy industry to incentivize executives and key employees to achieve company goals and align their interests with those of shareholders. The specific metrics used (ROIC, Free Cash Flow, TSR) are typical measures of financial performance and shareholder value creation.

Comparison to Industry Standards

• The use of performance share units (PSUs) is a common practice among large public companies, particularly in the energy sector, to align executive compensation with company performance.
• The specific performance metrics used, such as ROIC, free cash flow, and relative TSR, are widely recognized as key indicators of financial health and shareholder value creation.
• The vesting period of three years is also a typical timeframe for long-term incentive awards.
• The maximum payout of 225% of target PSUs is within the range of what is seen in similar companies.
• The use of a relative TSR modifier is a common way to incentivize outperformance compared to peers.
• Companies like SLB and Halliburton also use similar performance-based equity awards for their executives, often with similar metrics and vesting periods.

Stakeholder Impact

• Shareholders: The agreement aligns executive compensation with company performance, which can benefit shareholders.
• Employees: The agreement provides a clear path for participants to earn shares based on their service and the company's performance.
• Executives: The agreement provides a significant incentive for executives to achieve company goals and create shareholder value.

Next Steps

• The Committee will certify the extent to which the performance condition was achieved.
• The Company will issue shares to the participant upon the lapse of restrictions.
• The Company will pay dividend equivalents upon the lapse of restrictions.

Key Dates

Keywords

Performance Share Units, PSUs, Incentive Plan, Stock Award, ROIC, Free Cash Flow, TSR, Dividend Equivalents, Shareholder Return, Executive Compensation