SanDisk 2007 Annual Report Download - page 33

companies. We also believe that these Named Executive Officers should receive their change in control severance
benefits if their employment is constructively terminated in connection with a change in control. Given that none of
the Named Executive Officers has an employment agreement that provides for a fixed position or duties, or for a
fixed base salary or actual or target annual bonus, absent some form of constructive termination severance trigger,
potential acquirors could constructively terminate a Named Executive Officer’s employment and avoid paying
severance. For example, following a change in control, an acquiror could materially demote a Named Executive
Officer, reduce significantly his or her salary and/or eliminate his or her annual bonus opportunity to force the
Named Executive Officer to terminate his or her own employment and thereby avoid paying severance. Because we
believe that constructive terminations in connection with a change in control are conceptually the same as actual
terminations, and because we believe that acquirors would otherwise have an incentive to constructively terminate
Named Executive Officers to avoid paying severance, the change in control agreements we have entered into with
our Named Executive Officers permit the Named Executive Officers to terminate their employment in connection
with a change in control for certain “good reasons” that we believe result in the constructive termination of the
Named Executive Officers’ employment. In the event the employment of a Named Executive Officer is terminated
under the circumstances described above, we believe that providing these Named Executive Officers with a change
in control agreement with cash severance benefits based on one (1) times (two (2) times for the Chief Executive
Officer) salary and bonus levels is consistent with our peer group companies and provides them with financial
security during a period of time when they are likely to be unemployed and seeking new employment.
In the event that a Named Executive Officer becomes entitled to severance under the principles described
above, in addition to cash severance benefits, we believe that it is also appropriate to provide Named Executive
Officers with other severance protections, such as (1) continued medical insurance coverage for 24 months
following termination; (2) accelerated vesting of outstanding equity awards (with accelerated options to remain
exercisable for twelve months following termination, subject to the maximum term of the option); and (3) executive
outplacement benefits for twelve months following termination (including resume assistance, career evaluation and
assessment, individual career counseling, financial counseling, access to one or more on-line employment
databases, private office and office support). Similar to cash severance benefits, we believe these other severance
benefits are consistent with the severance arrangements of our peer group companies and provide the Named
Executive Officers with financial and personal security during a period of time when they are likely to be
unemployed.
As part of their severance benefits under a change in control agreement, the Named Executive Officers are also
reimbursed for the full amount of any excise taxes imposed on their severance payments and any other payments
under Section 4999 of the Internal Revenue Code. We provide the Named Executive Officers with a “gross-up” for
any parachute payment excise taxes that may be imposed because we have determined the appropriate level of
severance protections for each Named Executive Officer without factoring in the adverse tax effects on the Named
Executive Officers that may result under Section 4999 of the Internal Revenue Code. The excise tax gross-up is
intended to make the Named Executive Officers whole for any adverse tax consequences they may become subject
to under Section 4999 of the Internal Revenue Code, and to preserve the level of severance protections that we have
determined to be appropriate.
We generally do not believe that Named Executive Officers should be entitled to severance benefits merely
because a change in control transaction occurs. The payment of severance benefits is generally only triggered by an
actual or constructive termination of employment in connection with a change in control. However, we determined
that it was advisable to provide for one year of accelerated vesting of equity awards in the event of a change in
control pursuant to the change in control agreements. In addition, under the terms of our stock incentive plans, if
there is a liquidation, sale of all or substantially all of our assets, or merger or reorganization that results in a change
in control of the Company, and such outstanding awards will not be continued or assumed following the transaction,
then, like all other employees, the Named Executive Officers may receive immediate vesting and/or payout of their
outstanding long-term incentive compensation awards. Although this vesting will occur whether or not a Named
Executive Officer’s employment terminates, we believe it is appropriate to fully vest share-based awards in these
change in control situations because such a transaction may effectively end the Named Executive Officers’ ability to
realize any further value with respect to the share-based awards.
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