Dollar General 2006 Annual Report Download - page 122

the merger, all shares of Dollar General restricted stock and RSUs will, unless otherwise agreed
by the holder and Parent, vest and be converted into the right to receive the merger consideration
of $22.00 per share of Dollar General common stock. All options to acquire shares of Dollar
General common stock will vest immediately prior to the effective time of the merger and
holders of such options will, unless otherwise agreed by the holder and Parent, be entitled to
receive an amount in cash equal to the excess, if any, of the merger consideration of $22.00 per
share of Dollar General common stock over the exercise price per share of Dollar General
common stock subject to the option.
What long-term incentives were awarded to NEOs in fiscal 2006?
As a result of the competitive data provided by Hewitt in fiscal 2006 and in the past, the
Committee has been aware that our prior long-term incentive economic values have been well
below those of the competitive market. While considering what long-term incentive awards to
grant in fiscal 2006, the Committee decided that these values should be increased to be closer to
the market in order to help retain our NEOs, many of whom are relatively new.
In considering ways to increase these values, the Committee considered granting
performance-based RSUs in addition to the time-vested stock options and RSUs which have
recently comprised the long-term component of NEO compensation. After studying this
approach, however, the Committee decided not to incorporate performance-based RSUs into the
2006 long-term incentive component due to the difficulty inherent in setting goals three years
into the future for a company undergoing transformation and implementing significant strategic
change. In making this decision, the Committee was able to draw upon its specific observations
of other companies that implemented performance-based plans and the resulting demotivating
impact caused by goals set three years into the future that could not be adjusted to recognize
significant changes in the business or in the external environment without losing the tax
deductibility of the incentive payments.
At its March 2006 meeting, the Committee instead decided to increase the long-term
compensation value for NEOs by approximately 20-25% by increasing the economic value
delivered by time-vested stock options and RSUs. Even with this increase in value, long-term
compensation for our NEOs continues to be below the comparative market median.
At the same time, the Committee also decided to change the allocation from the previous
80%/20% (stock options/RSUs) to 70%/30% (stock options/RSUs), which, according to Hewitt,
more closely aligns with market practice.
The actual grant date fair value of the 2006 stock option and RSU awards and the number
of options and shares awarded during 2006 to NEOs, are presented in the Grants of Plan-Based
Awards Table set forth in this report.
At its January 2007 meeting, the Committee decided to further adjust the relationship of
options and RSUs to reflect a 50%/50% allocation of the economic value for long-term incentive
grants made in fiscal 2007. This decision was based in part on the limited availability of shares
for use as options under the current shareholder-approved option program and in part to position
us for transitioning to a new compensation strategy that will be more effective in retaining key
employees.
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