Pottery Barn 2004 Annual Report Download - page 88

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The 2001 Incentive Bonus Plan also is designed to qualify as “performance-based” compensation under Section
162(m) of the Internal Revenue Code (“Section 162(m)”). Under Section 162(m), the company may not receive a
federal income tax deduction for compensation paid to our Chief Executive Officer or any of the other four most
highly compensated executive officers to the extent that any of these persons receives more than $1 million in
any one year. However, the company may deduct compensation in excess of $1 million if it qualifies as
performance-based compensation under Section 162(m). Payments under the 2001 Incentive Bonus Plan are
intended to qualify as performance-based compensation, thereby permitting the company to receive a federal
income tax deduction for the payment of incentive compensation.
Who administers the plan?
The 2001 Incentive Bonus Plan is administered by a committee (the “Committee”) of the company’s Board of
Directors, consisting of two or more directors. The members of the Committee must qualify as “outside
directors” under Section 162(m) for purposes of qualifying compensation under the plan as performance-based
compensation. Currently, the Committee administering the plan is the Compensation Committee of the Board of
Directors.
What are the powers of the Committee?
The Committee has full power to administer the plan, including amending or revoking rules or procedures as it
deems proper for the administration of the plan. However, such actions may only be taken upon the agreement of
a majority of the Committee. Subject to the terms of the plan, the Committee has sole discretion to construe and
interpret the plan, make all determinations for the administration of the plan, grant awards under the plan,
including determining the terms and conditions of each award, such as the target amount and the performance
goals and, at any time, reduce any award to be paid out under the plan.
Who is eligible to receive awards?
Executive officers and those employees who are deemed “covered employees” for purposes of Section 162(m)
may participate in the amended and restated 2001 Incentive Bonus Plan during each fiscal year of the company.
For purposes of Section 162(m), covered employees include our Chief Executive Officer and the company’s next
four most highly compensated executive officers. An executive whose employment or service relationship with
the company terminates before the end of any award period is not entitled to participate in the plan or receive any
awards under the plan in a later fiscal year, unless he or she again becomes eligible to participate in the plan.
How are target awards established?
For each award period, the Committee establishes a performance award target based upon the achievement of a
specified goal relating to one or more performance goals for each plan participant. Award periods consist of one
or more fiscal years of the company, or one or more quarters of the company, as the Committee determines, and
the award periods may be different for different awards. The Committee must establish performance goals for an
award no later than the earlier of 90 days after the first day of the award period or the date on which 25% of the
award period has elapsed. The maximum award under the plan for each award period may not exceed $3,000,000
or 300% of each participant’s annual base salary in effect on the first day of the first fiscal year in the award
period, multiplied by the number of complete or partial fiscal years in the award period.
How are the amounts of individual awards established?
For each award period, the covered employee receives an award equal to the specific amount determined under
the formula relating to the performance goals that have been established for that award. The Committee has the
discretion to decrease the amount of any award payable under the plan.
What are performance goals?
We have designed the plan so that it permits us to pay compensation that qualifies as performance-based under
Section 162(m). This allows the Committee to make performance goals applicable to a participant with respect to
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