Pottery Barn 2007 Annual Report Download - page 128

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expectations. Based on the results achieved, the Compensation Committee has applied negative discretion and
has authorized only a portion of the target bonus amounts to be paid to the named executive officers. At the
March 2008 Compensation Committee meeting, based on a review of each named executive officer’s
performance relative to expectations and a subjective assessment of performance against goals and objectives,
the Chief Executive Officer made award recommendations to the Compensation Committee that were below the
target bonus amounts. The Compensation Committee approved the reduced awards to the named executive
officers as recommended by the Chief Executive Officer.
For fiscal 2008, the Compensation Committee again determined that a prescribed company goal relating to
company profitability (the “Fiscal 2008 Company Objective”) will be the sole criterion for payment of bonus
amounts under the 2001 Incentive Bonus Plan, because the Compensation Committee continues to believe that
profitability is the most significant measure of performance. The achievability of the Fiscal 2008 Company
Objective is deemed substantially uncertain for purposes of Internal Revenue Code Section 162(m) because it is
based on profitability. However, the Fiscal 2008 Company Objective is reasonably attainable based upon the
company’s historic and expected levels of profitability. As was the case in fiscal 2007, if the Fiscal 2008
Company Objective is achieved, the maximum amount payable is then available for payment to executive
officers, including named executive officers, as fully deductible compensation. However, the Compensation
Committee is permitted to apply negative discretion in determining the actual amount to be paid to any executive
officer.
How is long-term incentive compensation determined?
The third primary component of the company’s executive compensation program consists of long-term equity
compensation awards. The Compensation Committee continues to believe that equity compensation awards are
important for motivating executive officers and other employees to increase shareholder value over the long term.
Prior to fiscal 2006, stock options were granted to our named executive officers. Starting with fiscal 2006, the
Compensation Committee decided to begin granting stock-settled stock appreciation rights (“SSARs”) to named
executive officers, since they are accounted for identically to options but result in less dilution, both within the 2001
Long-Term Incentive Plan and with respect to the company’s outstanding shares. The equity awards granted to
named executive officers are designed to be competitive with those offered by comparable companies for each
named executive officer’s job level, e.g., between the 50th and 75th percentile of our comparable companies, to
reflect the Chief Executive Officer and Compensation Committee’s assessment of such executive’s on-going
contributions to the company, to create an incentive for such executives to remain with the company, and to provide
a long-term incentive to help the company achieve its financial and strategic objectives. Prior to fiscal 2007, the
company also granted restricted stock units to certain of the named executive officers. Although no restricted stock
units were granted to the named executive officers in fiscal 2007, the Compensation Committee has granted such
equity awards in fiscal 2008 and intends to continue to grant such equity awards in the future, since these awards are
useful retention tools and also result in less dilution than options and SSARs.
In determining the type and number of equity awards granted to an individual executive, the Compensation
Committee considered such factors as:
• The individual’s performance and contribution to the profitability of the company;
• The type and number of awards previously granted to an individual;
• An individual’s outstanding awards;
• The vesting schedule of the individual’s outstanding awards;
• The relative value of awards offered by comparable companies to executives in comparable positions to
fairly benchmark awards of different sizes and equity instruments; and
• Additional factors, including succession planning and retention of the company’s high potential
executives.
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