Pottery Barn 2014 Annual Report Download - page 120

Stock Appreciation Rights
A participant generally will not recognize taxable income upon the grant of a stock appreciation right. Upon
exercise, the participant generally will recognize ordinary income in an amount equal to the difference between
the fair market value of the exercised shares on the exercise date and the corresponding exercise price of the
stock appreciation right. Any additional gain or loss recognized upon any later disposition of the shares would be
a capital gain or loss. As a result of Section 409A, however, stock appreciation rights granted with an exercise
price below the fair market value of the underlying stock may be taxable to the participant before exercise of an
award, and may be subject to additional taxes under Section 409A and comparable state laws.
Dividend Equivalents
A participant generally will recognize ordinary income each time a payment is made or shares are received
pursuant to the dividend equivalent equal to the fair market value of the payment made or shares received. If the
dividend equivalents are deferred, additional requirements must be met to ensure that the dividend equivalents
are taxable upon deferred receipt of cash or shares.
Deferred Stock Awards
A participant generally will not have taxable income upon the grant of a deferred stock award. Instead, a
participant generally will recognize ordinary income at the time of the receipt of the shares subject to the award
equal to the difference between the fair market value of the shares at the time of receipt and the amount, if any,
paid for the shares. However, an employee participant will be subject to employment taxes (FICA and, where
applicable, state disability insurance taxes) at the time a deferred stock award vests, even if the participant has
not yet received the shares subject to the award. We do not guarantee the federal or state income tax treatment of
the deferred amounts. If the Internal Revenue Service successfully asserts that the deferral was ineffective, the
recipient could be liable for taxes, interest and penalties. In addition, the recipient could be liable for additional
taxes, penalties and interest as a result of Section 409A and/or comparable state laws.
Tax Effects as a Result of Grants of Awards under the Incentive Plan
We generally will be entitled to a tax deduction in connection with the vesting, settlement or exercise of an award
under the plan in an amount equal to the ordinary income realized by a participant at the time the participant
recognizes such income, such as when a participant exercises a nonqualified stock option. Special rules limit the
deductibility of compensation paid to our Chief Executive Officer and to each of our next three most highly
compensated executive officers (other than our principal financial officer). Under Section 162(m), the annual
compensation paid to any of these specified executives will be deductible only to the extent that it does not
exceed $1,000,000. However, we can preserve the deductibility of certain compensation in excess of $1,000,000
if the conditions of Section 162(m) are met. Among others, these conditions include: (i) stockholder approval of
the material terms of the plan; (ii) setting limits on the number of awards that any individual may receive; and
(iii) for awards other than certain stock options and stock appreciation rights, establishing performance criteria
that must be met before the award actually will vest or be paid. The plan is intended to permit the committee to
grant awards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m),
thereby permitting us to continue to receive a federal income tax deduction in connection with such awards.
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
under the plan intended to comply with such exception will in fact comply.
The Board generally may amend or terminate the plan at any time and for any reason subject to participant
consent in certain circumstances. Amendments will be contingent on stockholder approval if required by
applicable law, stock exchange listing requirements or if so determined by the Board. By its terms, the amended
and restated plan will automatically terminate on March 25, 2025, unless its term is extended or it is earlier
terminated by the Board. In addition, as mentioned above and subject to limited exceptions, the committee may
not reduce the exercise price of stock options or stock appreciation rights, including canceling an existing stock
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