Pier 1 2007 Annual Report Download - page 108

compensation committee were the fact that the chief executive officer and executive vice presidents did not
receive a base pay increase in fiscal 2006 and there was no bonus paid to the chief executive officer and
executive vice presidents for fiscal years 2004, 2005, and 2006. Concerns were expressed regarding the need
to ensure a competitive pay package in order to retain these key executives and, as a result, the compensation
committee agreed to support management’s recommendation. The full board approved the compensation
committee’s recommendation of these increases effective April 23, 2006.
Short-term Incentives — Pier 1 designs short-term incentive pay to reward an executive’s contribution to the
organization’s annual financial performance. During fiscal 2007, Pier 1 maintained a short-term incentive plan
for its executives and key members of management. The short-term incentive plan used a performance measure
of earnings before interest, taxes, depreciation, and amortization from all domestic and international operations,
but not including discontinued operations nor unusual or non-recurring charges, each as determined by the
compensation committee, or a subcommittee. We refer to this measure generally as EBITDA except in the
context of discussion of Mr. Smith’s employment agreement below which has a specific definition of EBITDA.
EBITDA was selected as the financial measure because it is a prevalent measure used by other retail companies
and focuses on factors that an individual participant’s actions can affect. In addition, EBITDA is a better measure
of core operating profitability because it eliminates the effects of financing and tax decisions and reflects cash
being generated by Pier 1. The offering of a short-term incentive plan maintains a competitive position with Pier
1’s peer group because meeting annual goals leads to long-term success of Pier 1.
Two important factors went into developing the short-term incentive plan for fiscal 2007:
• Pier 1 must achieve a meaningful earnings level before a bonus is paid; and
• Competitive pay issue concerns were a consideration since a short-term bonus payment had not been
earned in fiscal years 2004, 2005, and 2006.
These factors were discussed with the compensation committee and, as a result, the compensation committee
and board approved the plan and set the target EBITDA for fiscal 2007 at $150,000,000. The incentive plan
was designed to pay an initial 10% of an individual’s bonus potential when EBITDA reached $70,000,000.
The plan would pay 100% of an individual’s bonus potential at $150,000,000 EBITDA and a maximum of
150% of an individual’s bonus potential at $225,000,000 EBITDA. Participants must be employed with Pier 1
at the end of fiscal 2007 to receive a bonus, if any.
A participant’s bonus potential is expressed as a percentage of the participant’s base salary. In fiscal
2007, those were 100% of annual base salary for Pier 1’s chief executive officer and 75% of annual base
salary for the other named executive officers. Pier 1 believes that these levels are competitive when compared
to Pier 1’s peer group. The minimum level of EBITDA was not achieved in fiscal 2007; therefore, no
participant in the plan, including the named executive officers, received a bonus.
Long-term Incentives — Pier 1 designs its long-term incentive awards to support Pier 1’s overall
objectives of long-term company success and performance, competitiveness in the retail industry, and retention
of executives. Pier 1’s long-term incentive plan is comprised of stock options awards, performance based
restricted stock awards and time based restricted stock awards. Both stock option and performance based
restricted stock are designed to promote Pier 1’s success by providing value to the executive only when there
is a corresponding increase in shareholder value. Time based restricted stock provides a long-term incentive
opportunity that is both competitive in the retail industry and serves as a retention tool. Restricted stock
awards have voting rights and are eligible to receive cash dividends, should cash dividends be paid on Pier 1’s
common stock.
Pier 1’s fiscal 2007 long-term incentive plan included three elements: (1) non-qualified stock option
awards that vest equally over a four year period beginning on the first anniversary of the grant date; (2) time
based restricted stock that vests 33%, 33% and 34% over a three year period beginning on the first anniversary
of the grant date; and (3) performance based restricted stock that vests at the end of a three year period if Pier
1 achieves a cumulative EBITDA target for those three years. Management through its human resources
compensation group recommended and a subcommittee of the compensation committee approved a three year
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