Pottery Barn 2005 Annual Report Download - page 100

of the Securities Exchange Act of 1934, as amended. Members of the committee must also qualify as “outside
directors” under Section 162(m) of the Internal Revenue Code so that we can receive a federal tax deduction for
certain compensation paid under the plan to our Chief Executive Officer and the next four highest paid
employees. The committee may delegate its authority under the plan to two or more members of the Board, but
only with respect to grants to certain of our employees with a corporate rank below senior vice president.
What are the powers of the committee?
Subject to the terms of the plan, the committee has the sole discretion to: (i) select the employees and directors
who will receive awards; (ii) determine the terms and conditions of awards such as the exercise price and vesting
schedule; and (iii) interpret the provisions of the plan and outstanding awards. The committee may not reduce the
exercise price of stock options or stock appreciation rights, nor may it allow employees to cancel an existing
stock option or stock appreciation right in exchange for a new award, without prior consent from our
shareholders.
Who is eligible to receive awards?
The committee selects the employees and non-employee directors who will be granted awards under the plan. In
addition, our non-employee directors receive awards under the plan as compensation for Board service. The
actual number of employees and non-employee directors who will receive an award under the plan cannot be
determined in advance because the committee has the discretion to select the participants. As of March 14, 2006,
469 employees and seven non-employee directors were eligible to participate in the plan.
What awards may non-employee directors receive?
Non-employee directors are eligible for any of the awards available under the plan. In addition, our
non-employee directors will receive annual awards under the non-employee director award program portion of
the plan, in connection with their service on our Board. The plan previously was amended to provide that such
annual awards may be of nonqualified stock options or such other awards as the committee determines.
Pursuant to the non-employee director award program portion of the plan, each new non-employee director will
receive an option to purchase a number of shares of our common stock determined by the committee, or such
other awards as the committee determines, upon his or her election to the Board and annually thereafter on the
date of our Annual Meeting provided that he or she has then served as a non-employee director for at least three
months. For 2006, each new non-employee director will receive an option to purchase 13,500 shares of our
common stock upon the director’s election to the Board and each continuing non-employee director who has
served as a non-employee director for at least three months will receive an option to purchase 12,500 shares of
our common stock. In addition, the chairperson of the Audit and Finance Committee will receive an option to
purchase 3,000 shares of our common stock and the chairperson of each of the Compensation and Nominations
and Corporate Governance Committees will receive an option to purchase 1,000 shares of our common stock.
The exercise price of each option granted to a non-employee director shall be equal to 100% of the fair market
value on the date of grant of the shares covered by the option. Subject to the terms of the plan, the committee
determines the other terms and conditions applicable to the options.
What is a stock option?
A stock option is the right to acquire shares of our common stock at a fixed exercise price for a fixed period of
time. Under the plan, the committee may grant nonqualified stock options and incentive stock options. Our
practice has been to grant nonqualified stock options under the plan. The committee will determine the number of
shares covered by each option, but the committee may not grant more than an aggregate of 1,000,000 shares
covered by options or stock appreciation rights to any one person during any calendar year.
What is the exercise price of an option?
The exercise price of the shares subject to each option is set by the committee, but cannot be less than 100% of
the fair market value on the date of grant of the shares covered by the option. With respect to an incentive stock
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