Pier 1 2008 Annual Report Download - page 110

Committee”), a new peer group was selected for executive compensation benchmarking. This group of peer
companies was used to benchmark executive officer perquisites, executive and non-employee director stock
ownership guidelines and non-employee director compensation. The group included Bed Bath & Beyond Inc.,
Blockbuster Inc., Borders Group, Inc., Charming Shoppes, Inc., Cost Plus, Inc., Eddie Bauer Holdings, Inc.,
Jo-Ann Stores, Inc., Kirkland’s, Inc., Liz Claiborne Inc., PetSmart, Inc., Restoration Hardware, Inc., Ross
Stores, Inc., Stein Mart, Inc., Tuesday Morning Corporation, Williams-Sonoma, Inc., and Zale Corporation.
Executive Compensation Components
In addition to base salary, short-term incentives, and long-term incentives, Pier 1 Imports’ compensation
program in fiscal 2008 included perquisites, retirement plans, and employment and post-employment
agreements. With respect to Mr. Smith, who became Pier 1 Imports’ 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.”
Base Salary — Pier 1 Imports designs base salary to (i) reflect an individual’s experience, skills and level
of responsibility, (ii) provide a fixed amount of compensation commensurate with market conditions for similar
jobs, (iii) reflect an executive’s individual performance and contribution, and (iv) aid in the retention of key
personnel. In fiscal 2008, Pier 1 Imports management, through its human resources compensation group and
Pier 1 Imports’ chief executive officer, recommended to the compensation committee base pay adjustments for
Pier 1 Imports’ executive officers at the beginning of the fiscal year. That recommendation was to increase
base pay for the executive vice presidents. The current pay of these officers was considered in comparison to
the 50th percentile of the selected peer group. The chief executive officer’s base salary was addressed in his
employment agreement, therefore a base salary increase for him was not presented for consideration. The data
showed that the chief executive officer’s base salary was between the 50th and 75th peer group percentiles,
and the base salaries of the executive vice presidents as a group approximated the 50th peer group percentile.
Another factor considered and presented to the compensation committee was that no cash incentive awards
were made to executive vice presidents for Pier 1 Imports’ fiscal years 2004, 2005, 2006 and 2007. The need
to ensure a competitive pay package in order to retain these key executives given the recent hiring of Mr. Smith
and his plans to develop and implement business priorities as part of a turnaround strategy for Pier 1 Imports
was a critical factor in the base salary analysis. The committee viewed the base salary recommendations, after
taking into account the above factors, to be within a reasonable range around the 50th peer group percentile.
As a result, the compensation committee agreed to support management’s recommendation of these increases
effective April 22, 2007.
Short-term Incentives — Pier 1 Imports designs short-term incentive pay to motivate executives to achieve
superior annual performance for Pier 1 Imports and to reward an executive’s contribution to achieving that
financial performance. During fiscal 2008, Pier 1 Imports maintained a short-term incentive plan for its
executives and key members of management. The short-term incentive plan used a performance measure of
consolidated operating cash earnings from continuing operations before interest, taxes, depreciation, and
amortization (“EBITDA”), but not including unusual or non-recurring charges nor certain non-cash items, each
as determined by the compensation committee, or a subcommittee. We refer to this measure as the Profit Goal.
EBITDA was selected as the underlying financial measure of Pier 1 Imports’ Profit Goal because it is a
prevalent measure used by other retail companies and focuses on factors that an individual participant’s actions
can affect. In addition, the Profit Goal is a better measure of core operating profitability because it eliminates
the effects of financing and tax decisions as well as unusual charges and more closely reflects cash being
generated by Pier 1 Imports’ ongoing core operations. The offering of a short-term incentive plan maintains a
competitive position with Pier 1 Imports’ peer group because meeting annual financial goals leads to the long-
term success of Pier 1 Imports. Also, designing the short-term incentive Profit Goal specifically around Pier 1
Imports’ financial operations reinforces Pier 1 Imports’ turnaround strategy thereby leading to profitability
over time.
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