EXHIBIT 10.11
=======================
ULTRAMAR DIAMOND SHAMROCK
CORPORATION
1998 ANNUAL INCENTIVE PLAN
Ultramar Diamond Shamrock Corporation's Annual Incentive Plan ("AIP") is
designed to incentivize participants to enhance shareholder value.
In making decisions under the AIP regarding participation and awards, it is
appropriate to consider the following:
. providing substantial compensation incentive for AIP participants to
ensure their focus in carrying out the Company's annual operating plans;
. maintaining the competitiveness of the Company's program in attracting,
rewarding, and retaining executives and other key employees;
. the program's sensitivity to corporate financial and stock market
performance; and
. the extent to which participants are building a significant ownership
stake in the Company and thus more closely identifying with the interests
of shareholders.
Incentive targets will vary according to a participant's position and the
relative impact a participant can have on the company's operations, typically as
measured by total shareholder return ("TSR") and return on capital employed
("ROCE"). The payment of any awards is conditioned on the Company's earnings and
financial condition.
Awards will be determined by the 1998 results of the total Company and business
units using TSR and ROCE performance measures, and where applicable the
participant's individual performance. These performance measures are described
in more detail below.
I. CRITERIA FOR PARTICIPATION
Officers, high-level and select middle-level professionals who have been
nominated by the Company's management, based upon their potential to
impact the Company's performance, may participate in the AIP.
The Compensation Committee designates individuals or positions as eligible
for participation in the AIP.
II. TARGET BONUS
Target bonuses are expressed as a percentage of the participant's base
salary. Performance above or below target performance produces an award
that is respectively greater or smaller than the target bonus.
The Compensation Committee, in its sole discretion, determines a
participant's target bonus. Target bonus percentages may be set at
different levels, depending on the participant's scope of responsibility.
Generally, the higher the level of responsibility, the greater the target
bonus percentage. The Compensation Committee may also consider
1998 ANNUAL INCENTIVE PLAN
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such factors as the participant's dedication, ingenuity, initiative, and
other contributions made toward the Company's success. In no event may any
participant's total annual award exceed 200% of his target bonus.
III. PERFORMANCE MEASURES
For the Chief Executive Officer ("CEO") and Chief Operating Officer
("COO"), 60% of the bonus is determined by the TSR performance measure, and
40% by the ROCE (at the "Total Company" measurement level) performance
measure.
In the case of corporate executives and other corporate participants (other
than the CEO and COO), 40% of the bonus is determined by the TSR
performance measure, 40% by the ROCE (at the "Total Company" measurement
level) performance measure, and 20% by the individual performance measure.
For participants in business units ("Units") below the Total Company level,
the bonus is determined by the TSR performance measure for 40%, the Unit's
ROCE performance measure for 40%, and the individual performance measure
for 20%.
The TSR, ROCE, and individual performance measures are calculated as a
percent of target award, and reflect the Compensation Committee's
assessment of the appropriate award levels for attaining different levels
of relative performance. The Compensation Committee, in its sole
discretion, may change the minimum and maximum measure levels during an AIP
year.
TSR Performance Measure
-----------------------
The TSR performance measure is UDS' share price appreciation plus dividends
measured against the Company's peer group of refining and marketing
companies ("Peer Group"). Members of the Peer Group are listed in Chart V.
For each calendar quarter UDS' TSR is calculated and compared to the UDS'
"Peer Group Average TSR" for the same period (see Chart I). The quarterly
Peer Group TSR is first determined by calculating each Peer Group member's
TSR; the Peer Group Average TSR is the simple, equally weighted average of
the individual TSR results.
The "point spread" is the difference between the quarterly UDS TSR and the
Peer Group Average TSR. The "point spread" is annualized and applied
against the TSR Incentive Scale (Chart II).
The TSR performance measure percentage of target award is determined by
averaging the quarterly target award percentages achieved during the AIP
year. There is no award where the annualized quarterly point spread is less
than - 10 percentage points. There is no limitation on the quarterly
percentage of target award that can be achieved.
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ROCE Performance Measure
------------------------
The ROCE performance measure is composed of two internal ROCE measurements.
The first component is the actual ROCE for the year compared to the target
(or budgeted) ROCE. The second measurement compares ROCE "normalized" for
refining margins. "Normalized ROCE" compares ROCE for the year recalculated
at 1997 industry refining margins to the target ROCE. This second
measurement adjusts ROCE to reflect how efficiently the business is managed
independent of industry refining margins variability. The ROCE performance
measure is determined on a full-year basis.
These target ROCE components will be established for the Company ("Total
Company") and one or more Units. For 1998 the ROCE measure will be
established for Total Company, and the West Coast, Southwest, Northeast
(including Canada), and Petrochemicals (actual ROCE measure only) Units.
Early in the first quarter each year, the Compensation Committee
establishes the target ROCE performance measures for the year.
The two ROCE performance measure components are weighted equally to
determine the total ROCE performance measure. The ROCE measure results are
compared against the ROCE Performance Measure Scale (Chart III). Each ROCE
component has a separate scale for its portion of the percentage of target
award. The scale for ROCE at actual margins reaches a maximum 200% of
target award. The scale for ROCE at budgeted refining margins has no limit.
The calculation of the percentage of target award achieved for the ROCE
performance measure for any of the Company's Canadian operations will be
calculated in Canadian dollars, so as to neutralize currency exchange rate
shifts during the year.
Individual Performance Measure
------------------------------
A participant's individual performance is compared to the achievement of
objectives which may include, but are not limited to, attainment of
significant objective or quantifiable goals, and developmental goals in
such ares as leadership, communication, and affirmative action. The
percentage of target award achieved may range from 0% (failed to achieve
objectives) to 200% (exceeded all expectations in achieving the
objectives). The employee and his manager establish individual performance
objectives, and progress and priorities are reviewed periodically during
the year. Establishment of three to five individual objectives is
suggested. An example of the calculation of a participant's award is set
out in Chart IV.
IV. ANNUAL INCENTIVE THRESHOLD
Payment of any award is within the Compensation Committee's discretion.
Before any funds become available for the AIP, the Committee will generally
require that there be sufficient earnings before interest, taxes,
depreciation, and amortization ("EBITDA") to cover the AIP "Annual
Incentive Threshold." The Annual Incentive Threshold is the total of
budgeted expenses for dividends, debt service, current taxation, corporate
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administration, and the total potential payout (calculated at target award
level) for the AIP and all variable pay programs for employees not
participating in the AIP.
If sufficient funds are not available to pay the bonuses as calculated,
all awards may be prorated by the ratio of the actual funds available for
the AIP to the total calculated. In its sole discretion, the Compensation
Committee may cause the balance of such prorated awards to be paid in
stock or restricted stock.
V. BONUS ADJUSTMENTS
At its discretion, the Compensation Committee may adjust actual
performance measure results for extraordinary events or accounting
adjustments resulting from significant asset purchases or dispositions or
other events not contemplated or otherwise considered by the Compensation
Committee when the performance measure targets were set.
VI. BONUS PAYOUT
Awards typically are determined in January or February for performance in
the preceding year. Awards are paid in cash, unless the participant has
elected, or is required to receive, a portion of his award in restricted
stock.
Beginning in the year 2000 (at the time of award payout), if a participant
does not hold shares of Company stock sufficient to meet any applicable
stock ownership guidelines that have been approved by the Compensation
Committee, the participant will receive a restricted stock award in lieu
of cash. The current applicable stock ownership guidelines are set out in
Chart VI. The number of restricted shares is determined by dividing the
dollar amount of 25% of the total award by the closing share price on the
award date (the Canadian dollar exchange rate on the date of the award
will be used for Canadian participants). All stock awards are granted
pursuant to the Company's Long-Term Incentive Plan.
Participants may increase the percentage of bonus payment taken in
restricted shares. They may also request that the Compensation Committee
extend the restriction period beyond the minimum two years up to a maximum
of five years. In both cases elections and requests must be made prior to
October 1st of the AIP year to secure tax deferral treatment on the share
grant.
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CHART 1
COMPUTATION OF TOTAL SHAREHOLDER RETURN ("TSR")
-----------------------------------------------
1. For each calendar quarter:
TSR is calculated at the end of each calendar quarter, using the last trading
day's closing price for the preceding quarter (the beginning price) and the
current quarter (the ending price) plus the dividend for the period.
Ending Price + Dividends - 1
------------------------
Beginning Price
For example, UDS' TSR is calculated as follows, assuming a beginning
price of $32, an ending price of $33, and $.275 in dividends:
$33.00 + $.275 - 1 = 3.98%
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$32.00
This calculation is performed for UDS and each company in its Peer Group. UDS'
TSR is compared to its Peer Group's average TSR to determine the "point spread."
The Peer Group's average is determined by a simple (not weighted) average of the
TSR results for the Peer Group.
The point spread is annualized by multiplying it by 4, and is then compared to
the Total Sharehold Return Incentive Scale (Chart II) to determine the
annualized percentage of target award achieved. The quarterly percentage of
target award is then determined by dividing by 4 the annualized percentage of
target award indicated on Chart II.
For example, the "point spread" is calculated as follows, assuming
UDS' TSR was 3.5% and its Peer Group average TSR was -1.5%:
3.5% - (-1.5%) = 5% percentage points
4 x 5% = 20% (the annualized point spread)
Applying the 20% point spread to Chart II reflects that 160% of target
award was achieved for the quarter. Since 160% is the annualized
percentage of target award, in this example 40% (one-fourth of 160%)
is the quarterly percentage of target award achieved.
2. At the end of the AIP year:
The quarterly percentages of target award achieved during the AIP year are
averaged (totaled and divided by 4) to yield the total TSR performance measure's
percentage of target award achieved for the AIP year.
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CHART II
TOTAL SHAREHOLDER RETURN INCENTIVE SCALE
----------------------------------------
- --------------------------------------------------------------------------------
TSR PERCENTAGE POINT SPREAD % OF TARGET AWARD*
- --------------------------------------------------------------------------------
55 to 60 300%
50 to 55 280%
45 to 50 260%
40 to 45 240%
35 to 40 220%
30 to 35 200%
25 to 30 180%
20 to 25 160%
15 to 20 140%
10 to 15 120%
5 to 10 100%
-5 to 5 90%
-10 to -5 75%
- --------------------------------------------------------------------------------
The scale is continued on a linear basis above 60%, with each 5 percentage
point increment equaling a 20% increment for the annualized percentage of target
award achieved.
_____________________________
* annualized
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CHART III
ROCE PERFORMANCE MEASURE SCALE/1/
---------------------------------
- --------------------------------------------------------------------------------
ROCE ACHIEVED AT
ROCE ACHIEVED AT ACTUAL PAYOUT% OF TARGET NORMALIZED REFINING
MARGINS AWARD MARGINS
- --------------------------------------------------------------------------------
N/A/2/ 270/3/ 125/4/
130 200 115
100 130 100
85 60 85
70 25 80
*70 0 *80
- --------------------------------------------------------------------------------
Results between points on the scale will be interpolated.
___________________________________
/1/ ROCE as a percentage of budget.
/2/ Awards under ROCE Achieved at Actual Margins are limited to a 200% payout
for this measure.
/3/ Scale to be continued above 270% for ROCE at Normalized Refining Margins,
with each percentage point increment equaling a 10% increment for the percentage
of target award.
/4/ Awards under ROCE Achieved at Normalized Refining Margins are not limited.
* Less than.
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CHART IV
EXAMPLE OF AIP AWARD CALCULATION
--------------------------------
Assume the following for this example:
. the participant is in the Total Company (Corporate) category
. the target ROCE is 8.61%
. the actual ROCE is 6.02%
. ROCE at normalized refining margins is 9.91%
. actual ROCE performance is 69.92% (6.02%/8.61%)
. ROCE at normalized refining margins performance is 115.10%
(9.91%/8.61%)
For an AIP participant earning $130,000 per year and a 25% target bonus, the
award is determined as follows:
1. The ROCE performance measure (40% of total award) portion of the bonus
payout:
By referring to the applicable ROCE Performance Measure Scale (Chart III):
. Actual margin ROCE results at 69.92% of target = 0% of target award
. ROCE results at normalized refining margins at 115.10% of target =
200.7% of target award
ROCE Performance Measure Percentage of Salary =
[(0% percentage of target award + 200.7% percentage of target
award) / 2]
X 25% target bonus X 40% ROCE performance measure weight =
10.035%
ROCE Performance Measure Bonus Payout = 10.035% X $130,000 = $13,045.50
2. The TSR performance measure (40% of total award) portion of the bonus
payout:
The Company's TSR point spread (by calendar quarterly):
- --------------------------------------------------------------------------------
QUARTER ACTUAL POINT SPREAD % TARGET AWARD*
- --------------------------------------------------------------------------------
1st + 7.5% 180%
2nd - 3.0% 0%
3rd + 4.0% 140%
4th + 6.0% 160%
Total 480%
- --------------------------------------------------------------------------------
______________________________
* Annualized by multiplying the point spread by 4 and applying each quarter's
results against Chart II to determine the Incentive % Target achieved for each
quarter; these values are totaled (480%) and divided by 4 to determine the
Incentive Target % achieved for the AIP year (120%).
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TSR Performance Measure Percentage of Salary =
40% TSR performance measure weight X 25% target bonus X 120%
percentage of target award = 12%
TSR Performance Measure Bonus Payout = 12% of $130,000 = $15,600
3. The Individual performance measure (20% of total award for this
participant) portion of the bonus payout:
Individual Performance Measure Percentage of Salary =
20% individual performance measure weight X 25% of target bonus X
110% percentage of target award = 5.5%
Individual Performance Measure Bonus Payout = 5.5% of $130,000 =
$7,150
In this example this participant's total bonus would be $13,045.50 + $15,600 +
$7,150 = $35,795.50.
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CHART V
PEER GROUP
----------
ASHLAND, INC.
COASTAL CORP.
CROWN CENTRAL PETROLEUM
GIANT INDUSTRIES INC.
HOLLY CORP.
SUN COMPANY INC.
TOSCO CORP.
USX-MARATHON GROUP
VALERO ENERGY CORP.
1998 ANNUAL INCENTIVE PLAN
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CHART VI
EMPLOYEE STOCK OWNERSHIP GUIDELINES
-----------------------------------
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EMPLOYEE GROUP GUIDELINE
-------------------------------------------------------------------------
CEO & COO 3 X ANNUAL BASE PAY
EXECUTIVE TEAM MEMBERS 2 X ANNUAL BASE PAY
VICE PRESIDENTS* 1 X ANNUAL BASE PAY
SENIOR MANAGERS 1 X ANNUAL BASE PAY
- ---------------------------------------------------------------------------
* Vice Presidents of UDS or any of its subsidiaries
. Shares to be counted toward ownership:
. personal or beneficially owned shares
. Company-sponsored program shares (e.g. ESOP)
. restricted shares
. for senior managers only - the value of vested stock options which
exceed the exercise price
. Certification of ownership level will be required before AIP bonus
payout.
. If after the three-year transition period beginning January 1, 1997, a
participant does not own sufficient Company stock to meet the applicable
ownership guideline, 25% of the participant's bonus award will be paid
in restricted shares.