SanDisk 2006 Annual Report Download - page 32

the Compensation Committee approved a base salary reduction for Named Executive Officers of 15% (20% for the
Chief Executive Officer), effective March 1, 2007.
Annual Cash Incentive Award
None of our Named Executive Officers has an employment agreement or other contractual right to a fixed
actual or target bonus for any given year. Historically, the Company utilized a formula to set aside pre-tax net
income to fund a discretionary bonus pool. Each executive officer’s participation in that bonus pool was based upon
a target bonus, which generally ranged from 75% to 100% of the officer’s base salary. However, actual bonuses paid
from the pool were calculated based upon the Company’s achievement of pre-tax net income and revenue growth
targets under the Company’s Operating Plan for the fiscal year and upon the officer’s individual performance. The
Compensation Committee also retained discretion to recommend an additional discretionary bonus in recognition
of special contributions during the fiscal year. Cash bonuses paid to the Company’s executive officers generally
were not “performance-based” for purposes of Section 162(m) of the Internal Revenue Code and were therefore
subject to the deductibility limitations of Section 162(m), as explained in more detail below under “Section 162(m)
Policy.”
In fiscal 2006, the Company amended the 2005 Plan to provide for the grant of cash incentive awards intended
to qualify as performance-based under Section 162(m) in lieu of discretionary cash bonuses to Named Executive
Officers beginning in fiscal 2006. The Company continued to utilize a bonus formula to fund a bonus pool for fiscal
2006; however, the amount of the pool allocated to Named Executive Officers was determined under the cash
incentive awards. The remaining portion of the bonus pool was allocated among other employees in generally the
same manner as in years prior to fiscal 2006.
The Named Executive Officers’ cash incentive award for fiscal 2006 contained a target incentive amount,
expressed as a percentage of base salary, which was approved by the Compensation Committee upon the
recommendation of the Chief Executive Officer. The percentage target bonus for each Named Executive Officer
was generally determined by reference to comparable bonus opportunities at our peer group companies, internal
comparability with percentage targets of other executives and the executive’s level of responsibility, experience and
knowledge. The target incentive amounts generally increase as an executive’s responsibilities increase, reflecting
our compensation philosophy that, as an executive officer’s level of responsibility increases, a greater portion of that
officer’s total compensation should be dependent on the Company’s performance. For fiscal 2006, Dr. Harari’s
target bonus was 100% of base salary, Mr. Mehrotra’s target bonus was 85% of base salary and the remaining
Named Executive Officers’ respective target bonuses were 75% of their respective base salaries.
The performance goals for fiscal 2006 under the cash incentive awards were after-tax net income and revenue
growth relative to the Company’s Operating Plan (excluding stock compensation and acquisition- related charges),
reflecting the Compensation Committee’s belief that net income and revenue growth are the financial metrics that
most closely correlate to growth in stockholder value and are straightforward to administer and communicate. In
addition to establishing target incentive amounts for Named Executive Officers, the Compensation Committee
approved a matrix used to calculate a multiplier of the target incentive amount based on the Company’s achievement
of the two performance goals. The multiplier ranged from a minimum of 0% of target for performance below a
threshold level to a maximum of 375% of target for exceptional performance. Based on the Company’s achievement
of the performance goals in fiscal 2006 and the bonus matrix, the multiplier for fiscal 2006 was 205% of target.
Under the terms of the cash incentive awards, the Compensation Committee may exercise discretion to reduce (but
not increase) the amount of the bonus otherwise payable to a Named Executive Officer based on the formula
described above. For fiscal 2006, the Compensation Committee exercised its discretion to pay bonuses at a rate less
than the maximum multiplier provided for under the bonus matrix based on the Company’s 2006 fiscal perfor-
mance. Specifically, for fiscal 2006, the Compensation Committee approved bonuses at 150% of target (as opposed
to 205%) for the Chief Executive Officer, President and Chief Financial Officer, and approved bonuses at 138% of
target (as opposed to 205%) for the other Named Executive Officers employed by the Company at fiscal year-end.
In exercising this discretion with respect to Named Executive Officers, the Compensation Committee generally
considers a variety of factors, including whether a larger portion of the bonus pool should be allocated to other
employees, the Named Executive Officer’s position and the Named Executive Officer’s individual performance for
the year. No specific weightings were assigned to these factors, and the assessment was more subjective than
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