 |
Introduction.
United States tax laws generally do not allow publicly-held companies to obtain tax
deductions for compensation of more than $1 million paid in any year to any of their five most highly
paid executive officers unless such payments are "performance-based" as defined in the tax laws. One
of the requirements for compensation to be performance-based under those laws is that the Company
must obtain share owner approval every five years of the material terms of performance goals for such
compensation. In accordance with Internal Revenue Service rules, the material terms which the share
owners approve constitute the framework within which the Management Development and Compensation
Committee (the Committee) would set the actual performance goals. Under the tax rules, the Committee
must be comprised solely of two or more outside directors. At the 1997 Annual Meeting, the share owners
approved the material terms of performance goals to be used by the Committee for awarding specified
executive compensation from the date of that meeting until the date of the 2002 Annual Meeting.
In this proposal, to enable the Company to continue to receive tax deductions for such executive
compensation awarded until the 2007 Annual Meeting, the Board is requesting share owner approval
of the material terms of performance goals - the framework for the Committee's specific actions and
awards - for three specified forms of compensation to be awarded to executive officers of the
Company during the next five years. The three forms of executive compensation are: (1) annual
bonuses under the GE Incentive Compensation Plan (the IC Plan); (2) Restricted Stock Units (RSUs)
granted under the 1990 GE Long-Term Incentive Plan (the 1990 Plan); and (3) long-term performance
awards granted under the 1990 Plan. The framework to be approved by the share owners is set forth
in the next section. Following that section is background material, as required by SEC rules,
summarizing the key terms of these awards, and the material features of the plans under which these
awards are granted. If approved by the share owners, this proposed framework of the material terms
of performance goals would enable the Company to continue to receive tax deductions for these forms
of compensation awarded to executive officers of the Company until the 2007 Annual Meeting.
Proposal: Approve the Material Terms of the Performance Goals.
As defined in the tax rules, the following are the material terms of performance goals which share
owners must approve if the Company is to obtain tax deductions for the specified forms of performance-based
compensation for executives whose total annual compensation exceeds $1 million: (i) the group of employees
whose compensation would be subject to the performance goals, which is described in the next paragraph;
(ii) the business measurements on which each of the performance goals is based, which are described in
the second paragraph below; and (iii) the maximum amounts payable to any executive officer under each
performance goal, which are described in the third paragraph below.
The group of employees whose compensation would be subject to the performance goals would be all
of the Company's executive officers, as defined in SEC rules. Currently, the Company has 22 executive
officers. The executive officers are listed annually in our Form 10-K filed with the SEC. Although
the tax laws only limit deductibility for compensation paid to the five most highly paid executive
officers, the performance goals will be applied to all executive officers in the event that one or
more of them should become one of the five most highly compensated during the five-year period covered
by this proposal.
The business measurement upon which the performance goal for annual bonuses under the IC Plan would
be based will be the Company's annual net earnings as determined under generally accepted accounting
principles (GAAP), adjusted to remove the effect under GAAP of unusual events (adjusted net earnings).
The performance goal for awards of RSUs granted under the 1990 Plan would also be based upon the
Company's annual adjusted net earnings. The performance goal for the payment of long-term performance
awards granted under the 1990 Plan to corporate executive officers would be based upon one or more of
the following business measurements: the Company's earnings per share, return on total capital, cash
flow, and operating margin rate. The performance goals for executive officers assigned to specific
business units other than GE Capital Services would be based on the earnings growth, operating margin
rate, working capital turnover, and inventory or receivable turnover of that unit for the performance
period, or a combination of those measurements. For executive officers assigned to GE Capital Services,
the goals would be based upon that unit's return on equity and net earnings growth during the period.
All of the measurements described above for long-term performance awards would be subject to adjustment
by the Committee to remove the effect of unusual events
The maximum amounts payable to any executive officer under each performance goal would be: (i) the
amount of any annual bonus paid to any executive officer under the IC Plan for any year could not
exceed one-tenth of one percent of the Company's adjusted net earnings for such year; (ii) no more
than 1,200,000 RSUs could be granted under the 1990 Plan to any executive officer during any three-year
period, although this number would be adjusted in the event of a stock split, stock dividend, or other
change in corporate structure; and (iii) the maximum fair market value of payments to any executive
officer under long-term performance awards granted under the 1990 Plan could not exceed one-tenth of
one percent of the Company's aggregate adjusted net earnings during the performance period.
The Committee has established business measurements and maximum amounts that it considers to
be appropriate in light of foreseeable contingencies and future business conditions. If approved
by the share owners, this proposal would not limit the Company's right to award or pay other forms
of compensation (including, but not limited to, salary, or other stock-based awards under the 1990
Plan) to the Company's executive officers, regardless of whether or not the performance goals for
annual bonuses, RSUs, or long-term performance awards in this proposal are achieved in any future
year, and whether or not payment of such other forms of compensation would be tax deductible. The
key terms of the three forms of performance-based compensation covered in this proposal, and the
plans under which they are paid or awarded, are described below.
Background: Terms of Awards and Plans.
As noted above, and as required by SEC rules, the following sections describe both the general terms
of the awards that will be subject to the performance goals and the material features of the plans
under which the awards are granted.
|
Annual Bonuses and Material Features of the IC Plan.
Annual bonuses for members of management and other key employees of the Company and its affiliates,
other than GE Capital Services which maintains separate bonus plans appropriate to its business,
are determined and paid under the IC Plan. This plan authorizes the Board to appropriate to an
incentive compensation reserve (the IC Reserve) each year up to 10% of the amount by which the
Company's consolidated net earnings exceed 5% of the Company's average consolidated capital investment,
each as defined in the IC Plan. Any amount in the IC Reserve not paid to participants in a given
year may be carried forward and paid in subsequent years. The IC Plan is administered by the
Committee. The Committee selects employees eligible to participate in the IC Plan, provided that
at least one-half of one percent of the total number of employees in the Company and its consolidated
affiliates must be designated to participate each year. Currently, about 2,500 employees are eligible
for and received bonuses for 2001 under the IC Plan.
Each year, the Committee determines the amount of the IC Reserve and the total amount to be paid
to participants. The Committee also determines the specific annual bonus for each officer of the Company.
In the case of executive officers, that amount has been, and if this proposal is approved would continue
to be, a percentage of annual net earnings, subject to certain adjustments specified by the Committee
in writing, and would also be subject to a maximum annual limit discussed above. Bonuses are paid as
soon as practicable following these determinations, except that the Committee may require deferral of,
or may permit a participant to elect to defer, all or part of his or her bonus. The Committee may pay
out deferred bonuses in cash or in such other manner as the Committee may specify, including in shares.
In recent years, all payouts of deferred amounts, including those relating to stock units, have been in
cash. Non-deferred payments may be made in cash, or in shares of Company common stock valued at their
then fair market value, or in other securities.
Share owner approval must be obtained for any amendment to the IC Plan that would increase the
amount which may be appropriated to the IC Reserve. Otherwise, the Board may amend, suspend, or
terminate the IC Plan, including amending the plan in a way that might increase the Company's costs.
Stock units under the IC Plan are subject to adjustment in the event of a stock split, stock dividend,
or other change in corporate structure. The amounts paid to the named executive officers for 2001 under
the IC Plan are disclosed in the column labeled Bonus in the Summary Compensation Table on
page 20 (Annual Compensation).
For 2001, all executive officers as a group and all employees other than executive officers as a group
were paid a total of $40.5 million and $180.4 million, respectively, in bonuses under the IC Plan.
The amount of bonuses to be paid to IC Plan participants for 2002 if this proposal is approved cannot
presently be determined.
Restricted Stock Units Under the 1990 Plan.
If this proposal is approved, RSUs would be awarded based upon achievement of a pre-established
performance goal for adjusted net earnings, as discussed above. Each RSU gives the executive
officer the right to receive a share of GE stock, or an equivalent cash payment, and is subject
to a risk of forfeiture upon certain kinds of employment terminations during a restricted period
specified by the Committee when the RSU is granted. Although the Committee would have discretion
to vary the forfeiture conditions of RSUs granted upon achievement of the performance goal,
RSUs previously granted by the Committee generally provide for forfeiture if the executive
officer is terminated by the Company or voluntarily leaves the Company before retirement,
with this risk of forfeiture lapsing as to 25% of RSUs three years after grant, as to an
additional 25% seven years after grant, and as to the remaining 50% at retirement. Each RSU
also provides quarterly cash payments equal to the amount of dividends paid on GE stock. RSUs
are non-transferable. The last sales price of the Company's stock on February 15, 2002 was $37.11
as reported on the Consolidated Tape of New York Stock Exchange Listed Securities. The number of
RSUs to be awarded following the 2002 Annual Meeting under the 1990 Plan if this proposal is
approved cannot presently be determined.
Long-Term Performance Awards Under the 1990 Plan.
The proposed performance goals also relate to long-term performance awards to be made to executive
officers under the 1990 Plan. These long-term performance awards generally represent rights valued
as determined by the Committee and payable to the executive officer upon achievement of specified
performance goals during a specified performance period of greater than one year. Under a long-term
performance award, the Committee will first determine, after the end of the performance period,
whether the executive officer has become entitled to a payment of his or her performance award.
If so, the Committee will determine whether that payment will be paid in cash, shares of stock, or
crediting of stock units, and whether such stock units would be payable in cash or stock. The Committee
may also permit the participant to elect the form of payment for all or a portion of the award. The
amount payable for long-term performance awards that may be granted under the 1990 Plan if this
proposal is approved cannot presently be determined.
Material Features of the 1990 Plan.
The 1990 Plan, which was most recently approved by the share owners at the 1997 Annual Meeting,
authorizes the granting of various awards until May 1, 2007 to the approximately 183,000 salaried
employees of the Company and its subsidiaries and affiliates in which the Company has a significant
equity interest. The 1990 Plan permits the granting of: (1) stock options, including incentive
stock options entitling the optionee to favorable tax treatment under Section 421 and 422 of the
Internal Revenue Code of 1986 (ISOs), (2) stock appreciation rights (SARs), (3) restricted stock
and restricted stock units (RSUs), (4) performance awards, (5) dividend equivalents, and (6) other
awards valued in whole or in part by reference to or otherwise based on Company common stock, which
are called "other stock-based awards." The general terms of stock options and SARs are described on
pages 22-23 (Stock Options and Stock Appreciation Rights). RSUs and performance awards are generally described above in this proposal. Dividend
equivalents granted to participants represent a right to receive payments equivalent to dividends
or interest with respect to a specified number of shares. "Other stock-based awards" are awards for
which the Committee establishes virtually all terms and conditions. The Committee has not granted
any "other stock-based awards." Nothing contained in the 1990 Plan prevents the Company or
any affiliate from adopting or continuing in effect other or additional compensation arrangements.
The 1990 Plan is administered by the Committee, which may select eligible employees to whom awards
are granted; determine the types of awards to be granted and the number of shares covered by such awards;
set the terms and conditions of such awards; and cancel, suspend, and amend awards. Awards may provide
that upon exercise the participant will receive cash, stock, other securities, other awards, other
property, or any combination thereof, as the Committee shall determine. The Committee's determinations
and interpretations under the 1990 Plan will be binding on all interested parties. Awards generally are
granted for no cash consideration, and are generally non-transferable except upon the death of a
participant. Awards, primarily stock options, have been granted to a total of approximately 40,000
employees under the 1990 Plan in recent years. The Committee has no current plan to significantly
change the number of employees receiving grants under the 1990 Plan.
The exercise price per share of stock purchasable under any stock option, the grant price of any
SAR, and the purchase price of any security which may be purchased under any other stock-based award
shall not be less than 100% of the fair market value of the stock or other security on the date of
the grant of such option, SAR, or other stock-based award. However, if the Committee so determines,
in the case of certain awards retroactively granted in tandem with or in substitution for other
awards under the 1990 Plan or for any outstanding awards granted under any other plan of the Company,
the exercise, grant or purchase price may be the price on the date of grant of such other awards. The
Board may amend, alter, or discontinue the 1990 Plan at any time, including amending it in ways that
might increase the cost to the Company, provided that share owner approval must generally be obtained
for any amendment that would increase the number of shares available for awards or that would permit
the granting of options, SARs, or other stock-based awards encompassing rights to purchase shares at
prices below fair market value at the time of the award.
Subject to adjustment as described below, ninety-five one hundredths of one percent (0.95%) of the
issued shares of the Company's common stock including treasury shares as of the first day of each
calendar year (including any partial year) during which the 1990 Plan is in effect shall become
available for granting awards in such year. Based on the number of such shares issued on January
1, 2002, an additional 105,879,512 shares became available for awards in 2002. Under the 1990 Plan,
all shares available for granting awards in any year that are not used will be available for use in
subsequent years. In the event of a stock split, stock dividend, or other change in corporate
structure, the Committee may adjust the number and type of shares which may be made the subject
of new awards or are then subject to outstanding awards and other award terms. The Committee is
also authorized, for similar purposes, to make adjustments in performance award criteria or in the
terms and conditions of other awards in recognition of unusual or nonrecurring events affecting
the Company or its financial statements or of changes in applicable laws, regulations, or accounting
principles. The awards that may be granted under the 1990 Plan following the 2002 Annual Meeting
cannot presently be determined.
|
Conclusion.
In summary, if the share owners approve this proposal, the material terms of the performance goals
described above will constitute the framework within which the Committee will set specific performance
goals for the three forms of compensation also described above to be awarded to executive officers
of the Company between the dates of the 2002 and 2007 Annual Meetings, and therefore preserve the
Company's ability to obtain tax deductions for such compensation.
Your Board of Directors therefore recommends a vote FOR the proposal to approve the material
terms of executive officer performance goals.
|
|
