The Gap 2008 Annual Report Download - page 67

Other than the stock option modification noted below, there were no other material modifications made to our
outstanding stock options and other stock awards in fiscal 2008, 2007, and 2006.
General Description of Stock Option and Other Stock Award Plans
The 1996 Stock Option and Award Plan (the “1996 Plan”) was established on March 26, 1996, and amended and
restated on January 28, 2003. The 1996 Plan was further amended and restated on January 24, 2006 and renamed
the 2006 Long-Term Incentive Plan (the “2006 Plan”). Under the 2006 Plan, nonqualified stock options and other
stock awards are granted to officers, directors, eligible employees, and consultants at exercise prices or with initial
values equal to the fair market value of the stock at the date of grant or as determined by the Compensation and
Management Development Committee of the Board of Directors (the “Committee”).
The 2002 Stock Option Plan (the “2002 Plan”) was established on January 1, 1999. On May 9, 2006, the 2002 Plan
was discontinued and only those awards then outstanding continue to be subject to the terms of the 2002 Plan
under which they were granted. The 2002 Plan empowered the Committee to award nonqualified stock options to
non-officer employees.
As of January 31, 2009, we had 125,982,981 shares of our common stock available for future issuance for our stock
option and other stock award plans. Stock options generally expire 10 years from the grant date, three months
after employee termination, or one year after the date of an employees’ retirement or death, if earlier. In addition,
stock options generally vest over a four year period, with shares becoming exercisable in equal annual installments
of 25 percent. Other stock awards generally vest over a four year period in equal annual installments of 25 percent.
Shares for stock options exercised by directors and employees in Japan are issued from treasury stock.
Stock Option and Other Stock Award Modification
In February 2007, the Committee approved the modification of certain stock options and other stock awards held
by designated employees such that at the time of an involuntary termination without cause, any outstanding,
unvested time-based options or other stock awards scheduled to vest within a defined time frame will be
accelerated. No material amounts were recognized in fiscal 2008 or 2007 as a result of the modification. The
modification clause expired in February 2009.
Compensation Cost for Stock Options
We use the Black-Scholes-Merton option-pricing model to determine the fair value of stock options. This model
requires the input of subjective assumptions that were developed based on SFAS 123(R) and the U.S. Securities and
Exchange Commission guidance contained in SAB 107, “Share-Based Payment.” The determination of the fair value
of stock options on the date of grant using an option-pricing model is affected by our stock price as well as
assumptions regarding expected term, expected volatility, dividend yield, and risk-free interest rate.
We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if
actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting award forfeitures and
record share-based compensation expense only for those awards that are expected to vest.
The fair value of options issued during fiscal 2008, 2007, and 2006 was estimated on the date of grant using the
following assumptions:
Fiscal Year
2008 2007 2006
Expected term (in years) .............................................................. 4.7 6.0 4.8
Expected volatility ................................................................... 38.3% 28.9% 28.7%
Dividendyield ....................................................................... 1.7% 1.6% 1.6%
Risk-free interest rate ................................................................. 2.5% 4.9% 4.6%
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