Pier 1 2007 Annual Report Download - page 105

We believe that common compensation practices have contributed to excessive executive compensation.
Compensation committees typically target senior executive total compensation at the median level of a selected
peer group, then they design any annual and long-term incentive plan performance criteria and benchmarks to
deliver a significant portion of the total compensation target regardless of the company’s performance relative
to its peers. High total compensation targets combined with less than rigorous performance benchmarks yield
a pattern of superior-pay-for-average-performance. The problem is exacerbated when companies include annual
bonus payments among earnings used to calculate supplemental executive retirement plan (SERP) benefit
levels, guaranteeing excessive levels of lifetime income through inflated pension payments.
We believe the Company’s Plan fails to promote the pay-for-superior-performance principle. Our Proposal
offers a straightforward solution: The Compensation Committee should establish and disclose financial and
stock price performance criteria and set peer group-related performance benchmarks that permit awards or
payouts in its annual and long-term incentive compensation plans only when the Company’s performance
exceeds the median of its peer group. A senior executive compensation plan based on sound pay-for-superior-
performance principles will help moderate excessive executive compensation and create competitive compen-
sation incentives that will focus senior executives on building sustainable long-term corporate value.
Pier 1’s Response
The proposal requests that Pier 1’s board, through the compensation committee, implement a performance
based incentive plan for senior executives (covering both annual performance based incentive and long-term
compensation) using financial performance criteria that are benchmarked against peer companies. The annual
performance based incentive and long-term compensation would be payable only in the event that Pier 1’s
performance exceeded the peers’ mean or median performance for the related financial criteria. Pier 1’s
current incentive plans (annual and long-term) already utilize financial performance criteria benchmarked
against peer companies. They do not condition awards, however, on performance exceeding the mean or
median of the peers’ performance on the selected financial performance criteria. In our opinion, the proposal
is unnecessary in light of Pier 1’s current operating environment and is repetitive in certain aspects of Pier 1’s
current policies and practices.
For fiscal 2007 and earlier years, Pier 1’s annual performance based incentive for executives has been
governed by our senior management bonus plan, which was approved by our shareholders on June 22, 2002.
This plan is administered by a subcommittee of the board’s compensation committee whose duties include
establishing performance goals each year for the payment of incentive bonuses. For fiscal 2007, the
subcommittee established a performance goal of earnings before interest, taxes, depreciation and amortization
from all domestic and international operations, but not including discontinued operations nor unusual or non-
recurring charges, each as determined by the subcommittee, (“EBITDA”), and set a target EBITDA level of
$150,000,000, based on projected company performance, for an executive to receive 100% of his or her bonus
potential. To determine the EBITDA levels at which bonuses could be earned, the subcommittee considered
recommendations from Pier 1’s compensation consultant, Hewitt Associates LLC. Hewitt’s recommendations
were derived from a survey of 65 peer companies in the S&P 1500 Specialty Retail Companies. The survey
covered performance measure payout levels relative to initial targets at which those peer companies’ associates
were earning incentive bonuses. The EBITDA targets and corresponding bonus levels recommended by the
subcommittee were subsequently approved by Pier 1’s board.
For fiscal 2007, Pier 1’s long-term incentive plan for executives was comprised of stock option awards
and restricted stock awards (time based and performance based) issued under our 2006 stock incentive plan
which was approved by our shareholders on June 22, 2006. This plan is administered by the same
subcommittee referenced above. Pursuant to the plan, the subcommittee adopted a mix of stock options, time
based restricted stock and performance based restricted stock as long-term incentives for Pier 1’s executives
for fiscal 2007. The stock option awards were granted at an exercise price equal to the market price on the
date of grant and vest equally over four years beginning one year after grant. The time based restricted stock
awards vest 33%, 33%, and 34% over three years beginning one year after the date of grant. The performance
based restricted stock awards cliff vest after three years from the date of grant, if a cumulative EBITDA target
of $331,000,000 is met for fiscal years 2007, 2008, and 2009. Each of these grants was subsequently approved
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