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EXHIBIT 10.3
PENNZOIL-QUAKER STATE COMPANY
1999 LONG TERM PERFORMANCE INCENTIVE COMPENSATION PROGRAM
March 15, 1999
OVERVIEW
o The basic concept of the plan design is to target long-term incentive
values at market (e.g., 50th percentile pay for 50th percentile
performance, 55th percentile pay for 55th percentile performance, etc.).
The weighting of compensation delivered under different long-term devices
for senior management is as follows:
% OF EXPECTED VALUE DELIVERED
PLAN ELEMENT BY DEVICE
------------ -----------------------------
Stock Options 40%
Conditional Stock 20%
Long-Term Performance Plan 40%
Total 100%
o The employees participating in this plan structure for 1999 are the
Executive Tier, Tiers E-1 through E-7 and Tier X-1.
o Pennzoil-Quaker State employees below those listed above will continue to
have the same mix of stock options and conditional stock used in 1998
(i.e., 70% stock options and 30% conditional stock).
o The remainder of this report discusses the following aspects of the
recommended long-term performance plan design:
- -- Plan objectives;
- -- Basic plan design concept;
- -- Eligibility;
- -- Performance measurement;
- -- Performance standards;
- -- Award opportunities;
- -- Plan payouts;
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- -- Retirement/terminations;
- -- Tax treatment;
- -- Accounting treatment;
- -- Plan administration;
- -- Plan costs; and
- -- Award calculations.
PLAN OBJECTIVES
o Motivate participants to achieve outstanding company performance relative
to peers.
o Enable Pennzoil-Quaker State to attract and retain key employees by having
this plan serve as part of a competitive total pay package.
o Be easy to administer.
o Be reasonable in terms of company cash requirements and overall cost.
o Provide a tax-effective means for the Company to help participants
accumulate capital on a tax-deferred basis.
BASIC PLAN DESIGN CONCEPT
o Under the plan, participants will be provided an opportunity to receive an
award payment based on Pennzoil-Quaker State's total shareholder return
relative to industry peers during overlapping 3-year cycles.
o New performance cycles begin every year following the year the plan is
established.
o In addition to the initial and ongoing awards with 3-year cycles, two
additional awards will be made in 1999. One of the additional awards will
have a 1-year cycle and the other additional award will have a 2-year
cycle. The award opportunity for a 1-year cycle award should be one-third
of the opportunity of a 3-year cycle award, while the award opportunity for
a 2-year cycle award should be two-thirds of the opportunity of a 3-year
cycle award. However, the performance measures and standards would be the
same. The reason for these additional awards is to keep total award
opportunities, in aggregate, competitive for the next three year period.
o The recommended performance/payout cycle relationship is shown in Exhibit
1.
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Exhibit 1
PENNZOIL-QUAKER STATE COMPANY
PERFORMANCE/PAYOUT CYCLE RELATIONSHIP
1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ----
---- X
---------------------- X
---------------------------------------- X
-------------------------------------- X
-------------------------------------- X
--------------------------------------- X
X = Award earned at end of year shown
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ELIGIBILITY
o Eligibility for the plan will be reviewed and determined annually by
Pennzoil-Quaker State's CEO and the Compensation Committee of
Pennzoil-Quaker State's Board.
o Plan participation will be extended to key executives that can directly
impact the long-term success of the Company.
o Based on the Company's business needs and competitive market practices,
plan eligibility will be limited to executives in Tiers E-1 through E-7,
and Tier X-1*.
PERFORMANCE MEASUREMENT
o The recommended plan performance measure is Pennzoil-Quaker State's total
shareholder return compared to the industry peers listed in Exhibit 2.
o Total shareholder return will be defined using the same method required in
the total shareholder return graph of the proxy statement. Specifically,
$100 invested in Pennzoil-Quaker State stock on the first day of the
performance cycle, with dividends reinvested, compared to $100 invested in
each of the peer companies, with dividend reinvestment during the same
period.
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Exhibit 2
PENNZOIL-QUAKER STATE COMPANY
LISTING OF PEER COMPANIES CONSIDERED FOR TSR
CALCULATIONS FOR LONG-TERM PERFORMANCE PLAN
Church & Dwight Inc. Newell
Clorox Oneida LTD
Colgate Palmolive Procter & Gamble
Dial Ralston Purina Co.
General Housewares Revlon Inc.
Kimberly-Clark Corp. Samsonite Corp.
Lancaster Colony Scotts Company
Libbey Inc. Sunbeam
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PERFORMANCE STANDARDS
o At the start of each new performance cycle, Pennzoil-Quaker State will
define threshold, target, and maximum performance on the total shareholder
return objective.
o The standards shown in the table below will be used for the 1999-2001
performance cycle and for the 1-year and 2-year cycle awards to be made in
1999.
PENNZOIL-QUAKER STATE TSR
PERFORMANCE LEVEL DEFINITION RANKING RELATIVE TO PEERS*
----------------- ---------- --------------------------
Maximum Outstanding performance 3rd of 17 (88th %ile)
Target Expected or budgeted performance 8th of 17 (56th %ile)
Threshold** Minimal acceptable performance for incentive 13th of 17 (25th %ile)
payout
* If mergers/acquisitions result in a reduction in the number of
peer companies during the cycle, these rankings will be converted
to equivalent percentiles to calculate awards.
** Pennzoil-Quaker State must also achieve a minimum actual total
shareholder return of 6% per year (averaged over the performance
cycle) before any payouts may be made under the plan.
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AWARD OPPORTUNITIES
o The long-term performance plan award opportunities for the plan eligible
positions (by performance level) are shown below.
AWARDS AS % OF BASE SALARY, BY EXECUTIVE TIER*
CORPORATE ----------------------------------------------------------------------------------------------
PERFORMANCE E-7 E-6 E-5 E-4 E-3 E-2 E-1 X1
----------- --- --- --- --- --- --- --- --
Maximum 282% 240% 192% 162% 150% 129% 90% 75%
Target 94% 80% 64% 54% 50% 43% 30% 25%
Threshold 24% 20% 16% 14% 13% 11% 8% 6%
Below Threshold 0% 0 0 0 0 0 0 0
o These award ranges are for each 3-year performance cycle and assume that a
new cycle is established each year.
o Awards for performance between stated levels would be calculated using the
awards matrix described later in this report.
* The long-term performance awards will be calculated using the
percentages shown in the table and the participant's base salary on
the last day of the applicable performance cycle. These award levels,
at target, represent market 55th percentile rates when combined with
recommended stock option and conditional stock awards.
PLAN PAYOUTS
o Payouts under the plan will be made as soon as possible after the
completion of each performance cycle.
o As a rule, the payouts will be made within three months after the
completion of the cycle.
o All awards typically will be paid as one-time lump-sum cash payments with
taxes withheld at a flat rate of 28%.
o Payouts under the plan are both savings and investment plan and retirement
plan eligible.
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RETIREMENT AND TERMINATIONS
o To receive an award under the plan, the participant must generally be
employed on the last day of the performance cycle.
o Exceptions to this policy will be made for retirement, long-term
disability, death, or involuntary termination during the cycle for reasons
other than cause, in which case the award will be prorated to reflect the
actual months of service during the cycle. Award payouts under these
exceptions would still be made at the end of the performance cycle.
TAX TREATMENT
o The employee will have to pay ordinary income tax on all awards when they
are paid to the participant (not when they are earned).
o The company will receive a tax deduction in the amount of income realized
by the participant in the year the award is paid.
ACCOUNTING TREATMENT
o The Company's projected obligation under the long-term performance cash
plan will be an expense that will be estimated and accrued periodically on
its financial statements.
PLAN ADMINISTRATION
o The plan will be administered by Pennzoil-Quaker State's CEO for all
positions except his own, in which case the Compensation Committee will
administer the plan.
o The Compensation Committee will be responsible for approving award
opportunities, performance measures, performance standards, and actual
award payments.
o Also, any modifications or amendments to the plan will be made at the sole
discretion of the Compensation Committee.
o In addition, the company will retain the right to terminate or modify the
plan at any time. (However, cycles that have already begun are a
contractual obligation of the company.)
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