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EXHIBIT 10.3(b)
PENNZOIL-QUAKER STATE COMPANY
2000 LONG-TERM PERFORMANCE
INCENTIVE PROGRAM
February 25, 2000
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, 75th
percentile pay for 75th percentile performance, etc.). The weighting of
compensation delivered under different long-term devices for senior
management is as follows:
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PLAN ELEMENT % OF EXPECTED VALUE DELIVERED BY DEVICE
------------ ---------------------------------------
Stock Options 40%
Conditional Stock 20%
Long-Term Performance Plan 40%
---
Total 100%
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-- The employees participating in this plan structure for 2000 are the
Executive Tier, Tiers E-1 through E-7 and Tier X-1.
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.
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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 was
established.
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
2000 2001 2002 2003 2004 2005
- ---- ---- ---- ---- ---- ----
- ------------------------- X
------------------------- X
------------------------ X
------------------------ X
X = Award earned at end of year shown
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ELIGIBILITY
o Eligibility for the plan should be reviewed and determined annually by
Pennzoil-Quaker State's CEO and the Compensation Committee of
Pennzoil-Quaker State's Board.
o Plan participation should 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,
Towers Perrin recommends that plan eligibility continue to be limited to
executives in Tiers E-1 through E-7, and Tier X-1*.
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* Note: This recommendation is consistent with current prevailing
market practice.
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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. Oneida LTD
Clorox Procter & Gamble
Colgate Palmolive Ralston Purina Co.
Dial Revlon Inc.
Kimberly-Clark Corp. Samsonite Corp.
Lancaster Colony Scotts Company
Libbey Inc. Sunbeam
Newell Rubbermaid Inc.
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PERFORMANCE STANDARDS
o At the start of each new performance cycle, Pennzoil-Quaker State will need
to define threshold, target, and maximum performance on the total
shareholder return objective.
o Given the company's executive pay philosophy, the standards shown in the
table below will be used for the 2000-2002 performance cycle.
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PERFORMANCE PENNZOIL-QUAKER STATE TSR
LEVEL DEFINITION RANKING RELATIVE TO PEERS*
- ----------- ------------------------------ --------------------------
Maximum Outstanding performance 3rd of 16 (87th%ile)
Target Expected or budgeted 8th of 16 (53rd%ile)
performance
Threshold** Minimal acceptable performance 12th of 16 (27th%ile)
for incentive payout
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- --------------------------------------------------------------------------------
* 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 suggested long-term performance plan award opportunities for the plan
eligible positions (by performance level) are shown below.
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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 315% 285% 240% 192% 171% 120% 111% 72%
Target 105% 95% 80% 64% 57% 40% 37% 24%
Threshold 26% 24% 20% 16% 14% 10% 9% 6%
Below Threshold 0% 0 0 0 0 0 0 0
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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.
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* The long-term performance awards should 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.
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PLAN PAYOUTS
o Payouts under the plan should be made as soon as possible after the
completion of each performance cycle.
o As a rule, the payouts should be made within three months after the
completion of the cycle.
o All awards typically should be paid as one-time lump-sum cash payments with
taxes withheld at a flat rate of 28%. (Note: If Pennzoil-Quaker State makes
all award payments in cash no shareholder approval is required. If the
Company wants to retain flexibility to make award payments in company
shares, shareholder approval is required.)
o Please note that payouts under the plan are both savings and investment plan
and retirement plan eligible.
RETIREMENT AND TERMINATIONS
o To receive an award under the plan, Towers Perrin recommends that the
participant must generally be employed on the last day of the performance
cycle.
o Exceptions to this policy should be made for retirement, long-term
disability, death, or involuntary termination during the cycle for reasons
other than cause, in which case the award should 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 receives a tax deduction in the amount of income realized by the
participant in the year the award is paid.
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ACCOUNTING TREATMENT
o The Company's projected obligation under the long-term performance cash plan
would be an expense that should be estimated and accrued periodically on its
financial statements.
PLAN ADMINISTRATION
o The plan should be administered by Pennzoil-Quaker State's CEO for all
positions except his own, in which case the Compensation Committee should
administer the plan.
o The Compensation Committee should be responsible for approving award
opportunities, performance measures, performance standards, and actual award
payments.
o Also, any modifications or amendments to the plan should be made at the sole
discretion of the Compensation Committee.
o In addition, the company should 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.)
PLAN COST
o Towers Perrin estimates the annualized cost of the performance plan for each
of the next 4 years would be as follows, assuming four different levels of
performance:
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2000 ESTIMATED ANNUAL COST
PERFORMANCE LEVEL ($000)
- ----------------- --------------------------
Maximum $11,634
Target $ 3,878
Threshold $ 970
Below Threshold $ 0
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o These costs would obviously change each year depending on movements in the
company's executive salaries and the specific positions covered by the plan.
The costs shown above assume the Company's current executive salaries and
that executives in tiers E-7 through E-1, and X-1 are the only plan
participants.
AWARD CALCULATIONS
o Exhibit 3 provides an example of how plan performance and payouts would be
determined for one 3-year performance cycle.
o As shown in the exhibit, award payouts are tied directly to Pennzoil-Quaker
State's total shareholder return performance relative to peers.