Pottery Barn 2010 Annual Report Download - page 166

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 paid under the Bonus Plan 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 2010, the Bonus Plan limited the maximum payout to
each executive to the lower of three times the executive’s base salary as of February 1, 2010, the first day of the
performance period or $3,000,000. 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 2010, the Compensation
Committee established the primary performance goal for the Bonus Plan as positive net cash provided by
operating activities (excluding any non-recurring charges) as provided on the company’s consolidated statements
of cash flows, with adjustments to any evaluation to exclude (i) any extraordinary non-recurring items and/or in
management’s discussion and analysis of financial condition and results of operations appearing in the
company’s annual report to shareholders for the applicable year, or (ii) the effect of any changes in accounting
principles affecting the company’s or a business unit’s reported activities. 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. See below for a
discussion of if and how the Compensation Committee applies negative discretion.
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 2010 because it believed that maintaining strong positive net cash flow was critical to
the success of the company in fiscal 2010. 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 2010 was first established, it was thought to be reasonably attainable based
upon the company’s history of achieving positive net cash flow and expected levels of net cash flow.
Did the company achieve positive net cash by operating activities for fiscal 2010?
Yes, for fiscal 2010, the company achieved positive net cash by operating activities as described above. Since
this primary, critical performance goal was achieved, maximum bonuses became available under the Bonus Plan
for fiscal 2010 for each named executive officer. As described below, the Compensation Committee used its
negative discretion available to decrease bonuses actually awarded under the Bonus Plan to below the maximum
available levels for all named executive officers other than our Chief Executive Officer.
How does the Compensation Committee decide if and how to apply negative discretion under the Bonus Plan?
If the primary performance goal is achieved, as it was in fiscal 2010, then the Compensation Committee decides
if (and how) to apply its negative discretion to reduce bonuses from the maximum available under the Bonus
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