Neiman Marcus 2010 Annual Report Download - page 59

Table of Contents
Stock options typically vest and become exercisable twenty or twenty-five percent on the first anniversary of the date of the
grant and thereafter in thirty-six (36) or forty-eight (48) equal monthly installments over the following thirty-six (36) or forty-eight
(48) months, beginning one month after the first anniversary of the date of grant until 100% of the option is fully vested and
exercisable provided that the participant is still employed by the Company at such time.
Because of the decline in capital markets and general economic conditions in fiscal years 2009 and 2010, the exercise prices
of these options were in excess of the estimated fair value of our common stock. In the second and third quarters of fiscal year 2010,
we commenced an exchange offer (Exchange Offer) for all outstanding and unexercised Accreting Options held by all eligible officers
including the named executive officers (Eligible Options), extended the option term with respect to the Fixed Price Options and
modified additional Fixed Price Options to purchase additional shares. Option holders were allowed to tender their Eligible Options
for new options at an exchange rate of 1.5 Eligible Options to 1.0 new option. The new options issued 1) have an initial exercise price
of $1,000 per share, which exercise price will escalate at a 10% compound rate per year through the fourth anniversary of the grant
date, 2) vest over four years and 3) generally expire eight years after the grant date. The tender offer was completed in
December 2009 with the tender of all Eligible Options and the issuance of new options for 23,411 shares.
In fiscal year 2011, stock options were awarded to Karen W. Katz, James E. Skinner and James J. Gold pursuant to new
employment agreements (fully described beginning on page 71) that were signed in connection with their promotions as discussed
under "2011 Executive Officer Compensation - Stock Options."
In addition, following the consummation of the Acquisition, the Neiman Marcus, Inc. Cash Incentive Plan (referred to as the
Cash Incentive Plan) was adopted in fiscal year 2006 to aid in the retention of certain key executives, including our named executive
officers. Under the Cash Incentive Plan, a $14 million cash bonus pool was created to be shared by participating members of senior
management, including the named executive officers. In the event of a change of control, or an initial public offering, as defined in
the Cash Incentive Plan, and if the internal rate of return to the Sponsors is positive, each participant in the Cash Incentive Plan,
subject generally to continued employment, will be entitled to a cash bonus based upon the number of options that were granted to the
participant in October 2005 under the Management Incentive Plan relative to the other participants in the Cash Incentive Plan.
Pursuant to the terms of Mr. Tansky's original employment agreement (as supplemented by his Director Services Agreement)
described beginning on page 70, his cash bonus under the Cash Incentive Plan has been fixed in the amount of $3,080,911.
Mr. Tansky is subject to the same payment terms as all other participants. Effective upon Ms. Glodt's retirement on June 30, 2011,
she will no longer be eligible for payments under the Cash Incentive Plan. If the internal rate of return to the Sponsors is not positive
following a change of control or an initial public offering, no amounts will be paid to those participating in the Cash Incentive Plan.
No amounts have been paid to date to any of the participants under the Cash Incentive Plan, including to Mr. Tansky, and none are
anticipated until a change of control or an initial public offering occurs.
In fiscal year 2011, the Compensation Committee approved a Cash EBITDA Incentive Plan (referred to as the EBITDA
Incentive Plan) for certain officers of the Company, including Messrs. Bangs, and Barnes. Ms. Katz, Ms. Glodt, and Messrs. Skinner,
Gold, and Maxwell are not participants in the EBITDA Incentive Plan. The objective of the EBITDA Incentive Plan is to focus all
participants on the achievement of a three-year cumulative and fiscal year 2013 EBITDA objective. Minimum annual and cumulative
EBITDA targets must be met before cash payouts are made. Based upon prior years experience, these targets, individually and
cumulatively, will be challenging for the Company to achieve. The definition of EBITDA is explained in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on page 34. If the performance metrics are met, a cash
payout will be made within sixty (60) days of the end of fiscal year 2013. Potential cash payouts will be structured in five incentive
tiers with a fixed dollar payout for each tier equal to approximately thirty percent (30%) of the participant's base salary in effect in
fiscal year 2013. The EBITDA Incentive Plan is more fully described on page 73.
Risk Assessment of Compensation Policies and Programs
We have reviewed our compensation policies and programs for all employees, including the named executive officers, and
we do not believe that these policies and practices create risks that are reasonably likely to have a material adverse effect on the
Company. The three major components of our overall compensation program were reviewed and the following conclusions were
made:
— Base salaries are determined by an industry peer group analysis and based on the overall experience of each individual.
Merit increases are based on financial as well as individual performance and are generally kept within a specified
percentage range for all employees, including the named executive officers.
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