Pier 1 2007 Annual Report Download - page 107

Compensation Discussion and Analysis
The purpose of this Compensation Discussion and Analysis disclosure is to provide material information
about Pier 1’s compensation objectives and policies for its named executive officers and to put into perspective
the tabular disclosures and related narratives that follow it.
Compensation Policies, Principles, and Objectives
Pier 1’s success is dependent, in a large part, on being able to successfully attract, motivate and retain a
qualified management team and employees. Sourcing qualified candidates to fill important positions within
Pier 1, especially management, in the highly competitive retail environment has challenges. Thus, Pier 1’s
overall compensation philosophy is that an executive’s compensation should be structured to ensure Pier 1’s
ability to attract and retain highly skilled and motivated individuals who will lead Pier 1 to successful
performance that is consistent with shareholders’ interests. This is accomplished by creating total compensa-
tion packages which are competitive in the retail industry, fair and equitable among the executives, and which
provide strong incentives for the long-term success and performance of Pier 1. Additionally, Pier 1 provides
short-term and long-term incentives to its executives to motivate effective management of major functions,
teamwork, and effective expense control. Success on these fronts leads to overall success of Pier 1. Pier 1
believes that as an executive’s level of responsibility increases, a greater portion of that executive’s potential
total compensation should come from performance based plans. This aligns management’s interests with
shareholders’ interests because the executive’s potential total compensation increases as company performance
increases.
Putting this philosophy into operation results in a total compensation package for Pier 1’s executive
officers approximately equal to the 50th percentile of Pier 1’s peer group when Pier 1 achieves planned
financial goals. Total compensation packages are designed to provide a 75th percentile opportunity when Pier
1’s results significantly exceed planned financial goals. In general, Pier 1’s target peer group percentile for
base salary, short-term incentives and long-term incentives is the peer group’s 50th percentile. For fiscal 2007,
Pier 1 selected a group of peer companies to benchmark the base salary element of total compensation. That
group included Bed Bath & Beyond Inc., Blockbuster Inc., Borders Group, Inc., Charming Shoppes, Inc., The
Gap, Inc., The Home Depot, Inc., J. C. Penney Company, Inc., Jo-Ann Stores, Inc., Kohl’s Corporation,
Linen’s ’n Things, Inc., Liz Claiborne, Inc., Michaels Stores, Inc., Payless ShoeSource Inc., PETsMART,
RossStores, Inc., Sears, Roebuck, and Co., Target Corporation, Walgreen Co., Williams-Sonoma, Inc., and Zale
Corporation. For the short-term and long-term incentive elements of the total compensation package the peer
group, in addition to the listed companies, also included Brinker International, Inc. and Neiman Marcus Group,
Inc., but excluded Sears, Roebuck, and Co. Data for these companies was provided by an outside consultant.
Executive Compensation Components
In addition to base salary, short-term incentives, and long-term incentives, Pier 1’s compensation program
includes perquisites, retirement plans, and employment and post-employment agreements. With respect to
Mr. Smith, who became Pier 1’s president and chief executive officer on February 19, 2007, these elements
are discussed separately below under the caption Employment Agreements and Post-Employment Consulting
Agreements. References in the discussion below to Pier 1’s chief executive officer refer to Mr. Girouard.
Base Salary — Base salary is designed to reward an executive’s individual performance and contribution
to the organization plus promote retention. In practice, Pier 1 management through its human resources
compensation group, Pier 1’s chief executive officer, or both, recommends to the compensation committee
base pay adjustments for Pier 1’s executive officers at the beginning of each fiscal year. The recommendation
for fiscal 2007 was to increase base pay for the executive vice presidents but not for the chief executive
officer. Consideration was given to the current pay of these officers in comparison to the 50
th
percentile of the
selected peer group. Pier 1 management recommended targeting the 50
th
percentile for fiscal 2007 given the
results of company performance in fiscal 2006. The data showed that the chief executive officer’s base salary
was between the 50
th
and 75
th
peer group percentiles, and the base salaries of the executive vice presidents as
a group approximated the 50
th
peer group percentile. Other factors considered and presented to the
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