Pottery Barn 2009 Annual Report Download - page 143

Were annual incentive bonuses awarded to named executive officers for fiscal 2009?
Yes. Annual incentive bonuses were awarded to our named executive officers, other than Mr. Harvey, for fiscal
2009 under the company’s 2001 Incentive Bonus Plan (the “Bonus Plan”). Mr. Harvey was not eligible to
participate in the Bonus Plan for fiscal 2009 because he did not meet the eligibility criteria at the beginning of the
fiscal 2009 performance award period. Instead, Mr. Harvey participated in, and his fiscal 2009 annual incentive
bonus was granted under, the company’s FY2009 Management Bonus Plan (the “Management Bonus Plan”).
How are the parameters for annual incentive bonuses determined under the Bonus Plan?
Annual incentives are set based on a variety of factors tailored to assist the company in driving financial and
operating performance as well as retention.
The company promotes strong performance by rewarding executive officers, including the named executive
officers, for achieving specific performance objectives with an annual cash bonus paid through the Bonus Plan
or, in some cases, through discretionary bonuses outside of the Bonus Plan. The company pays bonuses under the
Bonus Plan only when the company meets or exceeds specific objectives and goals established by the
Compensation Committee.
The shareholder-approved Bonus Plan is intended to qualify annual incentives as deductible performance-based
compensation under Internal Revenue Code Section 162(m), which otherwise restricts our ability to deduct
executive compensation in excess of $1,000,000 per executive per year. In accordance with Internal Revenue
Code rules, the Bonus Plan payout criteria are specified by the Compensation Committee in the first quarter of
each fiscal year. For fiscal 2009, the Bonus Plan limited the maximum payout to each executive to three times
the executive’s base salary as of February 2, 2009, the first day of the performance period. The Compensation
Committee has historically set target incentive levels (“target bonuses”) for each executive below this level.
Under the Bonus Plan, the Compensation Committee generally sets a primary, critical performance goal. If this
goal is not met, no bonuses are payable under the Bonus Plan. If this performance goal is met, maximum bonuses
become available under the Bonus Plan for each named executive officer. For fiscal 2009, the Compensation
Committee established the primary performance goal for the Bonus Plan as positive net cash provided by
operating activities (excluding extraordinary non-recurring cash charges) as provided on the company’s
consolidated statements of cash flows. The Compensation Committee felt this goal was appropriate for the
reasons discussed below. Although maximum bonuses would be available if this goal was met, the Compensation
Committee did not expect to pay maximum bonuses or even target bonuses if only this goal was met. The
Compensation Committee is permitted, and fully expected, to apply negative discretion in determining the actual
amount, if any, to be paid to any named executive officer.
Why did the Compensation Committee choose positive net cash provided by operating activities as the primary
performance goal under the Bonus Plan?
The Compensation Committee chose positive net cash flow provided by operating activities as the primary
performance goal for fiscal 2009 because it believed that maintaining strong positive net cash flow was critical to
the success of the company in fiscal 2009. The achievability of the goal was deemed substantially uncertain for
purposes of Internal Revenue Code Section 162(m) because it was based on positive net cash flow. When the
positive net cash objective for fiscal 2009 was first established, it was thought to be reasonably attainable based
upon the company’s historic and expected levels of net cash flow.
How does the Compensation Committee apply negative discretion under the Bonus Plan?
If the primary performance goal is achieved, then the Compensation Committee decides if (and how) to apply its
negative discretion to reduce bonuses from the maximum available under the Bonus Plan. In doing so, the
Compensation Committee evaluates company performance against the business plan approved by the Board in
the first fiscal quarter and individual performance. The Compensation Committee also establishes secondary
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