Ingram Micro 2007 Annual Report Download - page 31

Long-Term Incentives
Intent of Long-Term Incentives. Long-term incentives are an important component of our total compensation
program and are intended to align the goals of our executives with those of our shareholders, increase shareholder
value, and retain executive officers. We grant both stock options and performance-vesting restricted stock units
because they reward and retain our officers in two ways. Stock options are awarded to align executive compensation
directly to increases in the price of our common stock which reflects increased shareholder value. Options
compensate our executives only if our stock price increases after the date of grant and the officer remains employed
for the vesting periods. We consider options an effective incentive and retention tool because it motivates our
officers to increase shareholder value and remain with the Company. We grant performance-vesting restricted stock
units to provide:
• incentives linked to the Company’s financial performance over which the executive team has significant
control;
• retention through the overlapping of multi-year performance periods (e.g., 2005-2007, 2006-2008, and
2007-2009); and
• award values which can increase or decrease in two ways — financial performance above or below target
levels results in additional or fewer earned shares, respectively, and better or worse than target financial
performance may result in increased or decreased share price.
Long-term incentives are granted under the 2003 Plan and the EIP, which were approved by shareholders. The
EIP in conjunction with the 2003 Plan permits the granting of stock options, stock appreciation rights, restricted
stock/units, performance shares, and cash awards.
Ingram Micro granted two types of long-term equity-based incentives to the executive officers in 2007: stock
options with a three-year vesting schedule and a ten-year term, and performance-vesting restricted stock units with a
three-year performance measurement period. The Committee approved the equity-based award values to be granted
to each executive officer at a Committee meeting prior to their annual grant in January 2007.
• In 2007, NEOs received 60% of their target long-term incentive award value in the form of stock options and
the remaining 40% in performance-vesting RSUs. This proportion was selected to reflect a balanced
emphasis on growth and improved efficiency in operating results, stock price appreciation, stock ownership,
and employment retention. The exercise price of options granted under the 2003 Equity Plan is the closing
share price on the date of grant.
• The performance share awards granted to executive officers in 2007 are earned based on metrics that support
increased shareholder value. For the 2007-2009 performance measurement period, the metrics are earnings
per share (“EPS”) growth rate and average return on invested capital (“ROIC”). These metrics were selected
because of their linkage to creating shareholder value and support of the Company’s three-year strategic
plan. ROIC is calculated by dividing net operating profit after tax (NOPAT) by average invested capital.
NOPAT is operating income less a provision for taxes calculated by multiplying operating income by the
effective tax rate for the period. Average invested capital is equity plus debt less cash and cash equivalents.
The three-year targets for EPS growth rate and average ROIC are placed in a matrix which encourages prudent
trade-offs between profitable growth and efficient use of capital. The performance targets (threshold, target, and
maximum) are based on the Company’s three-year strategic plan, various historical external market comparison
factors and other internal goals. The threshold performance targets for EPS growth rate and average ROIC are set to
be highly achievable and, if achieved, result in an award of 10% of the target number of shares. Target performance
is then based on the Company’s three-year strategic plan modified by various historical external market comparison
factors and, if achieved, results in an award of 100% of the target number of shares. Maximum award levels require
exceptional performance on both EPS and ROIC and is considered by management to be extremely difficult to
achieve; however, if achieved, the payout earned is 200% the target number of shares. The matrix for 2007 is built to
have more emphasis on ROIC until ROIC exceeds a target return rate and equal emphasis on EPS and ROIC after
ROIC exceeds the target rate.
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