Pottery Barn 2011 Annual Report Download - page 140

Were annual incentive bonuses awarded to named executive officers for fiscal 2011?
Yes. Annual incentive bonuses were awarded to our named executive officers for fiscal 2011 under the
company’s 2001 Incentive Bonus Plan (the “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 superior 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 when the company meets or exceeds specific objectives and goals established by the Compensation
Committee.
The stockholder-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. However,
because of the fact-based nature of the performance-based compensation exception under Section 162(m) and the
limited availability of binding guidance thereunder, we cannot guarantee that awards made under the Bonus Plan
that are intended to qualify as performance-based compensation under Section 162(m) will in fact qualify. 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 2011, 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, 2011, 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 2011, the Compensation
Committee established the primary performance goal for the Bonus Plan as positive net cash flow 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 as
described in management’s discussion and analysis of financial condition and results of operations appearing in
the company’s annual report to stockholders for the applicable year, or (ii) the effect of any changes in
accounting principles affecting the company’s or a business unit’s reported results. 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 uses its discretion to determine 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 utilizes its discretion to determine actual bonus amounts.
Why is the company seeking to raise the limits under the stockholder-approved Bonus Plan?
For fiscal 2011, the maximum award under our Bonus Plan may not exceed the lesser of $3,000,000 or 300% of
the recipient’s base salary as of the first day of the performance period. The Compensation Committee may grant
discretionary amounts in excess of this limitation outside of our Bonus Plan. However, any such amounts would
not be deductible to the Company. The purpose of the maximum award is to allow stockholders to guide the level
of compensation the Company may award. The Compensation Committee has historically provided reduced
awards from this allowable maximum to correlate the award to performance against business plan and individual
performance. At the same time, the maximum award should provide the Compensation Committee with the
necessary latitude to appropriately award for outstanding performance.
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