SanDisk 2006 Annual Report Download - page 23

many executives’ options can be exercised just one year after the grant date. For these reasons, we believe that stock
options can create a strong incentive to manipulate a company’s stock price through questionable or even fraudulent
accounting.
Questions have been raised regarding the use of stock options. Former Federal Reserve Chairman Alan
Greenspan blamed poorly-structured options for the ‘infectious greed’ of the 1990s because “they failed to properly
align the long-term interests of shareholders and managers.” A July 15, 2006 article in The Wall Street Journal noted
that even though our Company did not regularly grant stock options in September, two of SanDisk’s top executives
received option grants shortly after the 9/11 terrorist attacks after the price of the Company stock had gone down
30.9% from the September 10 closing price.
Similarly, we oppose granting executives time-vesting restricted stock that does not include any performance
requirements. In our view, time-vesting restricted stock rewards tenure, not performance. Instead, we believe
vesting requirements should be tailored to measure each individual executive’s performance through disclosed
benchmarks, in addition to the Company’s share price. To align their incentives with those of long-term share-
holders, we also believe that senior executives should be required to hold a significant portion of these performance-
vesting shares for as long as they remain executives of the Company.
Former SEC Chairman Richard Breeden has stated that “there is not a strong reason for granting restricted
stock rather than simply paying cash unless there are performance hurdles to vesting.”
SanDisk’s Statement in Opposition to Proposal No. 3
The Board of Directors believes this proposal does not serve the best interests of SanDisk or its stockholders
and recommends a vote AGAINST it.
Executive compensation at SanDisk is overseen by the Board of Directors through the Compensation
Committee. The Compensation Committee consists exclusively of independent directors who make decisions
they believe are in the best interests of the Company and our stockholders. Our Board and Compensation
Committee support the concept of performance-based compensation as an important component of executive
compensation. As discussed in this Proxy Statement, the Company’s current executive compensation programs are
intended to achieve three fundamental objectives: (1) attract, retain and motivate qualified executives; (2) hold
executives accountable for performance; and (3) align executives’ interests with the interests of our stockholders. In
particular, we believe that the incentive programs for our senior executives should be determined within a
framework based on the achievement of designated financial and other targets.
We believe that we have already implemented a flexible overall compensation program for senior executives
which links compensation to performance. Under our cash bonus program approved by our stockholders at our 2006
Annual Meeting of Stockholders, our senior executives receive cash bonuses if the Company achieves certain pre-
established company performance goals based on specific criteria set forth in our 2005 Incentive Plan. The
Compensation Committee selects the applicable criteria which under our 2005 Incentive Plan may include return on
total stockholder equity, earnings per share, net income or operating income (before or after certain delineated
charges), EBITDA, cost reduction goals and other specified performance goals. Since the adoption of this
performance-based bonus program, we have disclosed the performance-based criteria in effect for that year for
our senior executives. We also use stock option and restricted stock unit grants to align our executives’ long-term
interests with those of our stockholders, to help hold executives accountable for performance and to help attract,
retain and motivate executives. These grants typically vest over a four year period which further aligns the long-
term interests of our senior executives with those of our stockholders. These elements of our current executive
compensation program are designed to reward annual performance, long-term performance, and the creation of
stockholder value. We believe that adopting a policy that requires a significant portion of future equity compen-
sation grants to senior executives to automatically be performance-vesting restricted stock is unnecessary in light of
our current compensation programs and would put us at a competitive disadvantage by severely restricting the
Compensation Committee’s discretion to select from among those compensation vehicles that best compensate our
senior executives in a manner that is designed to enable us to achieve our goals of long-term success and increased
stockholder value.
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