Big Lots 2007 Annual Report Download - page 29

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compensation consistent with other companies within our peer group. We believe the amounts and
elements of compensation that we offer are comparable with most companies in our peer group. If we
fail to offer competitive amounts and elements of compensation to candidates and our executives, we
believe our ability to attract and retain a high level of executive talent would be impaired.
Each of the elements of compensation serves a different role in attracting and retaining executives.
Salary serves as a short-term retention tool. Bonus under the Big Lots 2006 Bonus Plan (“2006
Bonus Plan”) is based on annual corporate financial performance, and is designed primarily to retain
executives on a year-to-year basis. Stock options issued under the 2005 Incentive Plan vest over four
years in prorated annual increments, and provide executives with an incentive to remain with us
through the seven year term of the stock option. Restricted stock, which generally vests only if we
meet a threshold corporate financial goal (“first trigger”) and then either we meet a higher corporate
financial goal (“second trigger”) or five years lapse, encourages retention for up to five years, with the
period being reduced if we are performing at a high level. While we believe the personal benefits and
perquisites offered to executives are immaterial in amount, we believe that the executives’ perceived
value of these benefits, and the convenience of having these benefits when faced with the demands of
their positions, makes them a meaningful component of our compensation program.
• Motivate executives to contribute to our success and reward them for their performance.
We use the bonus and equity components of our executive compensation program as the primary
tools to motivate our executives to continually improve our business in order to promote sustainable
profitability and enhanced shareholder value. While we work to achieve the corporate financial goals
set by our Board each year, we also want to provide meaningful incentives to exceed those goals. We
believe creating a culture where our executives are constantly striving to exceed expectations will
benefit the strength of our business and, ultimately, our shareholders.
For an executive to earn a bonus under the 2006 Bonus Plan, we must achieve a minimum amount of
corporate performance established by the Committee at a time when that amount of performance is
substantially uncertain. Though bonuses will be paid for years in which we meet minimum or targeted
corporate performance amounts, our executives also have an opportunity to earn up to double the
amount of their target bonus compensation if we exceed targeted corporate performance amount.
Conversely, if we do not meet the minimum corporate performance amount, executives do not receive a
bonus under the 2006 Bonus Plan. We believe this structure is essential to inspire executives to not only
meet the goals we set, but to surpass those goals.
Restricted stock granted to executives under the 2005 Incentive Plan is a full value award. Accordingly,
we believe it is appropriate to require that at least a threshold corporate financial goal (i.e., the first
trigger) be met before restricted stock issued under the 2005 Incentive Plan may vest. We believe this
has the effect of encouraging positive performance, while protecting our other shareholders from
being diluted in the absence of our performance. As discussed above, restricted stock awarded to
our executives vests on an accelerated basis if we achieve the second trigger. The second trigger is
established when the award is made, and is typically based on a projected multi-year operating plan.
Consequently, while the restricted stock awarded to our executives may vest after several years if we
repeatedly perform in line with our goals, our executives have an incentive to meet or exceed those
goals at a faster rate in order to accelerate the vesting of their restricted stock.
• Align executive compensation with shareholder interests.
We pay bonuses to executives under the 2006 Bonus Plan only if we meet or exceed corporate
performance objectives. Stock options awarded under the 2005 Incentive Plan are valuable only if the
market price of our common shares increases over the exercise price during the period in which the
stock options may be exercised. Restricted stock awarded under the 2005 Incentive Plan vests only if
we achieve a threshold corporate performance goal (i.e., the first trigger), and the value is determined
by the market price of our common shares. The realization and value of each of these elements of
compensation is dependent upon our performance, appreciation in shareholder value, or both.