Pottery Barn 2007 Annual Report Download - page 103

PROPOSAL 3
APPROVAL OF EQUITY AWARD EXCHANGE PROGRAM
What is this proposal?
This is a proposal to approve the equity award exchange program. On April 23, 2008, our Board of Directors
authorized, subject to shareholder approval, an equity award exchange program (the “exchange program”) that
will permit our eligible employees to exchange certain outstanding stock options and/or stock-settled stock
appreciation rights (“SSARs”) (the options and/or SSARs eligible for the exchange program are referred to here
as “eligible awards”) with an exercise price above the per-share 52-week high of our common stock (measured as
of the start date of the exchange program) for a lesser number of restricted stock units to be granted under our
2001 Long-Term Incentive Plan. Our intent in using the 52-week high threshold of our common stock is to
ensure that only outstanding stock options and/or SSARs that are substantially “underwater” (meaning the
exercise prices of such awards are greater than our stock price) are eligible for the exchange program.
Why is the exchange program important?
For a number of reasons, we believe the exchange program is an important component in our strategy to align
employee and shareholder interests through our equity compensation practices. We believe that the exchange
program is important for the company because it will permit us to:
• provide renewed incentives for the employees who participate in the exchange program by issuing them
restricted stock units that will vest over a period of time following the exchange if they remain employed
with us. The restricted stock units will provide immediate intrinsic value to our employees and, at the
same time, the opportunity for even greater value if the stock price increases. Providing renewed
incentives to our employees is the primary purpose of the exchange program, and we believe the
exchange program will enable us to enhance long-term shareholder value by aligning the interests of our
employees more fully with the interests of our shareholders.
• meaningfully reduce our total number of outstanding equity awards, or “overhang,” represented by
outstanding awards that have high exercise prices and may no longer incentivize their holders to remain
as our employees. Keeping these awards outstanding does not serve the interests of our shareholders and
does not provide the benefits intended by our equity compensation program. By replacing the awards with
a lesser number of restricted stock units, our overhang is decreased. The overhang represented by the
restricted stock units issued pursuant to the exchange program will reflect an appropriate balance between
the company’s goals for its equity compensation program and our interest in minimizing our overhang
and the dilution of our shareholders’ interests.
• recapture value from compensation costs that we already are incurring with respect to outstanding equity
awards. These awards were granted at the then fair market value of our common stock. Under applicable
accounting rules, we will have to recognize approximately $97 million in compensation expense related
to these awards, $41 million of which has already been expensed as of February 3, 2008 and $56 million
of which we will continue to be obligated to expense, even if these awards are never exercised because
the majority remain underwater. We believe it is not an efficient use of the company’s resources to
recognize compensation expense on awards that do not provide value to our employees. By replacing
options and SSARs that have little or no retention or incentive value with restricted stock units that will
provide both retention and incentive value while not creating additional compensation expense (other than
immaterial expense that might result from fluctuations in our stock price after the exchange ratios have
been set but before the exchange actually occurs), the company will be making efficient use of its
resources.
The exchange program may take place if and only if the exchange program is approved by our shareholders.
If our shareholders do not approve the exchange program, eligible awards will remain outstanding and in
effect in accordance with their existing terms. We will continue to recognize compensation expense for these
eligible awards, even though the awards may have little or no retention or incentive value.
13
Proxy