Pizza Hut 2010 Annual Report Download - page 69

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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 bonus. Certain types of payments are excluded from
this policy, such as amounts payable under arrangements that apply to classes of employees other than the
NEOs or that predate the implementation of the policy, as well as any payment that the Committee
determines is a reasonable settlement of a claim that could be made by the NEO.
Compensation Recovery Policy
The Committee has adopted a Compensation Recovery Policy for stock awards and annual incentives
awarded after 2008. Pursuant to this policy, executive officers (including the NEOs) may be required to
return compensation paid based on financial results that were later restated. This policy applies only if the
executive officers engaged in knowing misconduct that contributed to the need for a material restatement,
or contributed to the use of inaccurate metrics in the calculation of incentive compensation. Under this
policy, when the Board determines in its sole discretion that recovery of compensation is appropriate, the
Company could require repayment of all or a portion of any bonus, incentive payment, equity-based award
or other compensation, to the fullest extent permitted by law.
Deductibility of Executive Compensation
The provisions of Section 162(m) of the Internal Revenue Code limits the tax deduction for
compensation in excess of one million dollars paid to certain executive officers. However, performance-
based compensation is excluded from the limit so long as it meets certain requirements. The Committee
believes that the annual incentive awards, stock option, stock appreciation rights, RSU and PSU grants
satisfy the requirements for exemption under Internal Revenue Code Section 162(m). Payments made
under these plans qualify as performance-based compensation.
For 2010, the annual salary paid to Mr. Novak exceeded one million dollars. The Committee sets
Mr. Novak’s salary as described above under the heading ‘‘Compensation of Our Chief Executive Officer.’’
The other NEOs were in each case paid salaries of less than one million dollars. The 2010 annual incentive
awards were all paid pursuant to our annual incentive program and will, therefore, be deductible. In this
regard, the Committee exercises ‘‘negative discretion’’ in setting payouts under the annual incentive plan.
Proxy Statement
By setting a high amount which can then be reduced at the Committee’s discretion, our annual incentive
plan meets the requirements of Section 162(m) of the Internal Revenue Code. In 2010, the Committee,
after certifying that EPS had exceeded the 10% growth target which would permit a maximum payout,
exercised its negative discretion to reduce the payout to the CEO from $10.0 million to $5.6 million. As
discussed beginning at page 45, this reduction was not a negative reflection on the CEO’s performance as
he, in fact, performed significantly above expectations (for example, EPS growth was 17%). While the
Committee does utilize ‘‘negative discretion’’ from a tax perspective, the Committee administers the plan,
in particular with the setting of objective performance criteria as discussed beginning at page 39, as if the
annual incentive plan was a non-discretionary plan. For example, if a performance measure is not attained
at a certain level, no bonus will be paid.
To the extent any of the NEOs deferred their annual incentive awards attributable to 2008 or prior
years into phantom shares of YUM common stock and received a matching contribution, those annual
incentives are no longer qualified under Section 162(m). However, we expect their incentives will be
deductible when paid because they will be paid only at a time when they will otherwise represent
deductible compensation, such as payments made when the executive is no longer a NEO. Due to the
Company’s focus on performance-based compensation plans and the deferral of compensation by certain
executive officers, we expect to continue to qualify most compensation paid to the NEOs as tax deductible.
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