Kroger 2010 Annual Report Download - page 59

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Performance Goals for annual bonuses will include the following components: (i) EBITDA; (ii) identical
sales; (iii) achievement of strategic initiatives; and (iv) achievement of supermarket fuel center goals for
EBITDA, gallons sold, and number of fuel centers. Initially the Performance Goals for long-term bonuses
will include the following components: (i) performance in four key categories in Kroger’s strategic plan,
(ii) reduction in operating costs as a percentage of sales, and (iii) performance in categories designed to
measure associate engagement. No single Cash Bonus to a participant may exceed $5,000,000.
CE R T A I N FE D E R A L IN C O M E TA X CO N S E Q U E N C E S
Nonstatutory Stock Options, Stock Appreciation Rights, and Performance Units. A grantee will not
recognize income on the grant of a nonstatutory stock option, stock appreciation right or performance
unit, but generally will recognize ordinary income upon the exercise thereof. The amount of income
recognized upon the exercise of a nonstatutory stock option generally will be measured by the excess,
if any, of the fair market value of the shares at the time of exercise over the exercise price, provided the
shares issued are either transferable or not subject to a substantial risk of forfeiture. The amount of income
recognized upon the exercise of a stock appreciation right or a performance unit, in general, will be equal
to the amount of cash received and the fair market value of any shares received at the time of exercise,
provided the shares issued are either transferable or not subject to a substantial risk of forfeiture, plus the
amount of any taxes withheld. Under certain circumstances, income on the exercise of a performance unit
will be deferred if the grantee makes a proper election to defer such income. In some cases the recognition
of income by a grantee from the exercise of a performance unit may be delayed for up to six months if a
sale of the shares would subject the grantee to suit under Section 16(b) of the Exchange Act unless the
grantee elects to recognize income at the time of receipt of such shares. In either case, the amount of
income recognized is measured with respect to the fair market value of the common stock at the time the
income is recognized.
In the case of ordinary income recognized by a grantee as described above in connection with the
exercise of a nonstatutory stock option, a stock appreciation right, or a performance unit, Kroger will be
entitled to a deduction in the amount of ordinary income so recognized by the grantee, provided Kroger
satisfies certain federal income tax withholding requirements.
Incentive Shares and Restricted Stock. A grantee of incentive shares or restricted stock is not required
to include the value of such shares in ordinary income until the first time the grantee’s rights in the shares
are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, unless the
grantee elects to be taxed on receipt of the shares. In either case, the amount of such income will be equal
to the excess of the fair market value of the stock at the time the income is recognized over the amount
paid for the stock. Kroger will be entitled to a deduction in the amount of the ordinary income recognized
by the grantee for Kroger’s taxable year which includes the last day of the grantee’s taxable year in which
such grantee recognizes the income, provided Kroger satisfies certain federal income tax withholding
requirements.
General. The rules governing the tax treatment of options, stock appreciation rights, performance units,
incentive shares and restricted stock and stock acquired upon the exercise of options, stock appreciation
rights and performance units are quite technical, so that the above description of tax consequences is
necessarily general in nature and does not purport to be complete. Moreover, statutory provisions are,
of course, subject to change, as are their interpretations, and their application may vary in individual
circumstances. Finally, the tax consequences under applicable state law may not be the same as under the
federal income tax laws.