Pier 1 2009 Annual Report Download - page 135

contention in the supporting statement that the proposal ‘‘will focus senior executives on building
sustainable long-term corporate value.’’ If Pier 1 Imports were to base the awarding of annual
performance-based incentive payments or other long-term compensation relative to the performance of
companies that are losing value, the probability of such compensation being payable could be higher
than when compared to the requirements of Pier 1 Imports’ current executive compensation program
that are specific to Pier 1 Imports.
Pier 1 Imports’ annual performance-based incentive for senior executives is administered by the
board of directors’ compensation committee, whose duties include establishing a performance measure
and quantifying it for each year for the payment of cash incentive awards. For fiscal 2009, the
committee established a performance measure of adjusted consolidated operating cash earnings before
interest, taxes, depreciation and amortization from all domestic and international operations, but not
including discontinued operations, unusual or non-recurring charges nor recurring non-cash items, each
as determined by the committee, or a subcommittee. We refer to this measure as the Profit Goal. For
fiscal 2009, the committee set the Profit Goal target level of $40,000,000 based on projected company
performance, for a senior executive to receive 100% of his or her cash incentive award potential. A
threshold Profit Goal of $25,600,000 would result in the senior executive receiving 10% of his or her
cash incentive award potential; and at $48,000,000, the senior executive could receive 150% of his or
her cash incentive award potential. The Profit Goal targets and corresponding cash incentive award
levels recommended by the committee were subsequently approved by the board of directors. Neither
the Profit Goal target level of $40,000,000 nor the minimum level of $25,600,000 were met for fiscal
2009; and, accordingly, none of Pier 1 Imports’ senior executives or key management participants
received any incentive payments with respect to the fiscal 2009 performance of Pier 1 Imports.
For fiscal 2009, Pier 1 Imports’ long-term incentive plan for senior executives consisted of stock
option awards and restricted stock awards (time-based) issued under the Pier 1 Imports, Inc. 2006
Stock Incentive Plan. Pursuant to the plan, the compensation committee adopted a mix of stock options
and time-based restricted stock as long-term incentives for the senior executives. 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. Each of these awards
was subsequently approved by the board of directors.
Stock option awards are designed to promote Pier 1 Imports’ success by providing value to senior
executives only upon a corresponding increase in value to shareholders. Pier 1 Imports believes that
time-based restricted stock provides a long-term incentive opportunity that is both competitive in the
retail industry and effective as a retention tool. To remain competitive, given our turnaround efforts,
Pier 1 Imports must also design its executive incentive package to ensure its ability to attract and retain
a highly skilled and motivated executive team, which is critical to its future success and to maximizing
shareholder value. Pier 1 Imports’ executive pay, therefore, includes a healthy mix of annual cash
incentive awards and long-term compensation components. Overall pay is heavily weighted toward
incentive-based awards that are realized only when the established performance goals are achieved.
Using targets that are benchmarked to exceed peer group performance, however, is unrealistic given
the turnaround environment in which Pier 1 Imports currently operates. Further, benchmarking the
performance of a peer group of companies would be difficult given the size of the home furnishings
industry and the fact that no single company competes directly in all aspects of Pier 1 Imports’
business. In addition, in this economic environment, using benchmarked targets that are tied to peer
group performance may result in the payment of incentive awards for performance unrelated to
improved financial performance or stock appreciation at Pier 1 Imports.
As stated above, no senior executive or key management employee of Pier 1 Imports earned or
received a performance cash incentive award for fiscal 2009 because the established minimum Profit
Goal for that year was not met. Additionally, all stock option awards outstanding, including those
37