SanDisk 2007 Annual Report Download - page 30

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. Such an award was made to each Named Executive Officer in fiscal 2007. The Company continued to
utilize a bonus formula to fund a bonus pool for fiscal 2007; 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 2007 contained a target incentive amount,
expressed as a percentage of base salary, which was approved by the Compensation Committee. For Named
Executive Officers other than the Chief Executive Officer, the target incentive amount reflected the recommen-
dation 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 com-
pensation 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 2007, Dr. Harari’s
target bonus was 125% of base salary, Mr. Mehrotra’s target bonus was 95% of base salary, Ms. Bruner’s target
bonus was 85% of base salary, and the remaining Named Executive Officers’ respective target bonuses were 75% of
their respective base salaries. In each case, the target bonus was based on the Named Executive Officer’s full rate of
base salary as of December 31, 2007, not taking into account the base salary reduction discussed above under Base
Salaries.
The performance goal for fiscal 2007 under the cash incentive awards was the Company’s earning per share for
fiscal 2007 (excluding stock compensation and acquisition- related charges). The decision to utilize the earnings per
share measure for fiscal 2007, rather than the revenue and net income measures as used in prior years, was based
upon the significant pricing downturn being experienced within the NAND flash industry in early fiscal 2007. In
that environment, the Compensation Committee determined that the most appropriate measure of financial
performance by the Company would be earnings per share. The Compensation Committee also determined that
a non-GAAP EPS measure, excluding stock compensation and charges related to acquisition accounting, would
provide the most relevant measure of the Company’s performance in comparison to the previous year and in
comparison to its annual operating plan. In addition to establishing target incentive amounts for Named Executive
Officers, the Compensation Committee approved a range of potential multipliers of the target incentive amount
based on the Company’s achievement of earnings per share goals. The maximum multiplier was 0% of target for
performance below a threshold level, up to 37.5% of target for performance at the threshold level, and up to 225% of
target for exceptional performance. The bonus multipliers at the threshold and maximum levels were reduced from
the multipliers in effect for fiscal 2006, because achievement of the maximum goal in fiscal 2007 would not have
been as valuable to the Company’s stockholders as achievement of the maximum goals in fiscal 2006. The
probabilities of achieving the fiscal 2007 goals were not estimated. Achievement of the threshold goal was believed
to be attainable, but because of difficult market conditions within the industry in early 2007, its achievement was not
believed to be certain. It was believed that achievement of the maximum performance goal was possible, but, given
the prevailing market conditions within the industry, its achievement would have constituted a particularly positive
performance by the Company.
Based on the Company’s achievement relative to the performance goals in fiscal 2007 and the range of
potential multipliers, the maximum multiplier for fiscal 2007 was 129% 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 such maximum multiplier. For 2007, the
Compensation Committee exercised its discretion to pay bonuses at a rate less than the maximum multiplier, and
approved bonuses at 86% of target (as opposed to 129%) for the Named Executive Officers employed by the
Company at year-end, and the 86% multiplier was applied to the target bonus rate multiplied by the base salary rate
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