Pottery Barn 2006 Annual Report Download - page 118

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We rely on executive compensation benchmarking surveys and proxy data that provided summarized data levels
of base salary, target annual cash incentives, and equity-based and other long-term incentives. We believe that
among the comparable companies, survey data in these areas provide a reliable indicator of the primary
components of total compensation. In addition, our independent executive compensation consultant, Frederic W.
Cook provides us with information on the competitiveness of the company’s compensation programs. We met
during the year to review, discuss and analyze the data.
How are base salaries determined?
We review and set the company’s executive officers’ base salaries, including those of the named executive
officers, on an annual basis. This review occurred in March 2006 to confirm appropriate base salaries for fiscal
2006. We believe that executive officers’ base salaries must be sufficiently competitive to attract and retain key
executives. Accordingly, base pay and annual increases are determined through an analysis of each individual’s
salary and total target compensation relative to salaries for similar positions at comparable companies and, to a
lesser extent, through a subjective analysis of each individual’s experience and past and anticipated contributions
to the company’s success. In determining compensation, we also consider overall company performance. For
fiscal 2006, the company’s executive officers’ base salaries fell generally within the third quartile (i.e., 50th to
75th percentile) of similarly situated executive officers at comparable companies.
In addition to an annual review of base salaries, we also evaluate base salaries on an on-going basis to reflect
promotions or changes in responsibility. The following base salary adjustments were made in fiscal 2006 to
reflect promotions and the increased responsibilities of certain named executive officers:
Date of Salary Adjustment Previous Base Salary Adjusted Base Salary
Ms. Alber ............................. August 15, 2006 $625,000 $800,000
Mr. DeMattei .......................... August 15, 2006 $570,000 $675,000
Ms. McCollam ......................... August 15, 2006 $540,000 $725,000
How are annual incentives determined?
The company promotes outstanding performance by rewarding executive officers for achieving specific
performance objectives with an annual cash bonus paid through the company’s 2001 Incentive Bonus Plan or, in
some cases, through discretionary bonuses granted outside of the plan. The company pays bonuses under the plan
only when the company meets or exceeds a specific corporate earnings objective as established by us in the first
quarter of each fiscal year. Bonuses to executive officers, whether granted within or outside of the 2001 Incentive
Bonus Plan, are based on the company’s performance and on each executive officer’s individual performance. If
the company or the executive officer fails to fully meet some or all of the company or individual objectives, the
award may be significantly reduced or even eliminated. Conversely, if the objectives are overachieved, awards
may be subject to lesser or no reduction.
This plan is intended to qualify bonus payments as deductible performance-based compensation under Internal
Revenue Code Section 162(m), which otherwise restricts our ability to deduct certain executive compensation to
$1 million per executive per year. In accordance with Internal Revenue Service rules, our 2001 Incentive Bonus
Plan payout criteria are specified by the Compensation Committee in the first quarter of each fiscal year. Bonus
amounts are not paid until we certify that the performance objectives have been achieved.
In March 2006, we established a fiscal 2006 target annual incentive amount under the 2001 Incentive Bonus Plan
(the “target bonus”) for all of the company’s executive officers, including the Chief Executive Officer. The target
bonuses for the named executive officers were above the 50th percentile of annual incentive bonus targets of
similarly situated executive officers at comparable companies. Base salaries and bonus targets together place the
annual cash compensation for our named executive officers above the 50th percentile of similarly situated
executive officers at comparable companies.
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