Pizza Hut 2008 Annual Report Download - page 74

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• the Company that made the original equity grant may no longer exist after a change in control
and employees should not be required to have the fate of their outstanding equity tied to the
new company’s future success
• supporting the compelling business need to retain key employees during uncertain times
• providing a powerful retention device during change in control discussions, especially for more
senior executives whose equity awards represents a significant portion of their total pay
package
• a double trigger on equity awards provides no certainty of what will happen when the
transaction closes
As shown under ‘‘Change in Control’’ beginning on page 75, the Company will provide tax gross-ups
for the named executive officers for any excise taxes due under Section 4999 of the Internal Revenue Code.
The effects of Section 4999 generally are unpredictable and can have widely divergent and unexpected
effects based on an executive’s personal compensation history. Therefore, to provide an equal level of
benefit across individuals without regard to the effect of the excise tax, the Company and Compensation
Committee continue to believe that Section 4999 tax gross-up payments are appropriate for the Company’s
most senior executives.
The Company does provide for pension and life insurance benefits in case of retirement as described
beginning at page 74 and the continued ability to exercise options in case of retirement. Vesting of RSUs
under the EID program accelerates once an employee reaches age 55 with 10 years of service. The
Committee does not specifically consider the change in control benefits or any of these other benefits in
determining each named executive officers other compensation elements, although the Committee is
aware of these items of compensation when making annual compensation decisions. With respect to
consideration of how these benefits fit into the overall compensation policy, the change of control benefits
are reviewed from time to time by the Committee for competitiveness. When last reviewed by the
Committee in 2006, its independent consultant indicated that these benefits generally fall below the
average for companies of our size and, therefore, fall within (and arguably under) the competitive norm.
As noted above, the Committee believes the benefits provided in case of a change in control are
Proxy Statement
appropriate and are consistent with the policy of attracting and retaining highly qualified employees.
In analyzing the reasonableness of these change in control benefits, the Committee chose not to
consider wealth accumulation of the executives (although this information was provided to the Committee)
in determining whether these benefits should be provided. This is because, if properly designed, the
Committee believes a change in control program protects shareholder interests by enhancing employee
focus during rumored or actual change in control activity through:
• incentives to remain with the Company despite uncertainties while a transaction is under
consideration or pending
• assurance of severance and benefits for terminated employees
• access to equity components of total compensation after a change in control
Future Severance Agreement Policy
As recommended by shareholders in 2007, the Committee approved a new policy in 2007 to limit
future severance agreements with our executives. The Committee adopted a policy under which the
Company will seek shareholder approval for future severance payments to a named executive officer if
such payments would exceed 2.99 times the sum of (a) the named executive officer’s annual base salary as
in effect immediately prior to termination of employment; and (b) the highest annual bonus awarded to
the named executive officer by the Company in any of the Company’s three full fiscal years immediately
preceding the fiscal year in which termination of employment occurs or, if higher, the executive’s target
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