Staples 2003 Annual Report Download - page 31

•Long-Term Stock Incentives: Long-term stock incentives are provided in the form of stock options and PARS.
Stock Options: In addition to base salary and bonuses, Staples’ executives are annually granted performance-based
long-term incentives represented by stock options. The intent of these awards is to further encourage retention and
promote identity of interest with Staples’ stockholders. The Committee also considers the fact that in the business
environment in which Staples competes for executives, stock options are an important part of executive
compensation. The continued future success of Staples is dependent on its ability to attract and retain key executives.
Accordingly, the Committee considers data about the level of stock options awarded in companies in its competitive
business group and in the competitive labor market in which Staples competes for executive talent.
Annual stock option awards of Staples common stock were made to executive officers in August 2002, the same
time that stock option awards were made to all stock option eligible associates of the Company. In granting these
options, the Committee considered the influence and business drivers within each executive’s area of responsibility.
These options vest, as with grants to all of Staples’ option eligible associates, as to 25% of the underlying shares
one year from the date of grant and ratably monthly thereafter over the next three years.
Performance Accelerated Restricted Stock (PARS): In order to maintain Staples’ high risk-high reward
philosophy, help retain key executives, maintain focus on stockholder returns and reinforce Staples’ compensation
philosophy, the Committee has adopted the use of PARS for certain key management, including its executive
officers. The shares may not be sold or transferred by the executive until they vest. Staples’ PARS issued in fiscal
2002 will vest on February 1, 2007 subject to acceleration upon achievement of certain pre-determined EPS growth
targets over the 2003 to 2005 fiscal years. EPS growth targets are determined by the Committee subject to approval
by the Board of Directors each year for PARS granted in that year. Once the PARS have vested, they become
unrestricted and may be sold or transferred. PARS granted to executive officers and other key managers in fiscal
year 2001 vest in May 2003 based on achievement of the fiscal year 2002 earnings per share acceleration target.
Mr. Sargent, Staples’ Chief Executive Officer, is eligible to participate in the same executive compensation program
available to other Staples executives, and his total annual compensation, including compensation derived from the Bonus
Plan and the stock option/PARS program, was set by the Committee in accordance with the same criteria. Mr. Sargent’s
annual salary was increased in fiscal 2002 from $730,000 to $1,000,000 in line with the median base salaries of chief
executive officers in the retail peer group. Under the Bonus Plan, the Company paid Mr. Sargent a bonus of $1,034,797
in fiscal 2002, placing his total cash compensation for that year at the median of the retail peer group. In fiscal 2002, the
Committee granted Mr. Sargent options to purchase 375,000 shares of Staples common stock and 100,000 PARS under the
options/PARS program. These grants were valued and based on the same factors the Committee considered in establishing
the size of other executive stock option grants and PARS. Using the Black-Scholes valuation for options, total annual
compensation paid by the Company to Mr. Sargent in fiscal 2002 placed him above the median of the retail peer group.
Tax Considerations
Under Section 162(m) of the Internal Revenue Code of 1986, as amended, certain executive compensation in excess
of $1 million paid to a public company’s chief executive officer and four other most highly-paid executives is not deductible
for federal income tax purposes unless the executive compensation is awarded under a performance-based plan approved
by the stockholders. The Committee intends to structure the bonus plan for executive officers to comply with Section 162(m)
and has previously adopted such a performance-based plan, the Executive Officer Incentive Plan, which expired on
February 1, 2003. A new Executive Officer Incentive Plan has been adopted by the Board, subject to stockholder approval,
and is being submitted for stockholder approval at the Annual Meeting and is discussed under Proposal 2 of this Proxy
Statement.
The Company’s stock option plans are performance-based and, accordingly, comply with Section 162(m). Finally, while
the Company’s PARS program has a significant performance component, it cannot be qualified under 162(m) without
compromising valuable executive incentives which the Committee believes outweigh any tax benefit to the Company.
Compensation Committee:
Martin Trust, Chairman
Arthur M. Blank
Richard J. Currie
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