SanDisk 2005 Annual Report Download - page 43

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levels in effect for comparable positions at the peer group companies (determined on the basis of their
published 2004 fiscal year data), the experience and personal performance of the officer and internal
comparability considerations. The weight given to each of these factors differed from individual to individual,
as the Compensation Committee deemed appropriate. The compensation level for the Company's executive
officers for the 2005 fiscal year ranged from the 50th percentile to the 60th percentile of the base salary levels
in effect for executive officers with comparable positions at the peer group companies, based on the published
2004 fiscal year data for those companies.
In selecting companies to survey for such compensation purposes, the Compensation Committee
considered many factors not directly associated with the stock price performance of those companies, such as
geographic location, development stage, organizational structure and market capitalization. For this reason,
there is not a meaningful correlation between the companies included within the peer group identified for
comparative compensation purposes and the companies included within the S&P Semiconductor Company
Stock Index which the Company has selected as the industry index for purposes of the stock performance
graph appearing later in this Proxy Statement.
Annual Incentive Compensation. For the 2005 fiscal year, the Compensation Committee utilized a
traditional bonus formula as the first step in establishing the cash incentive component of each executive
officer's compensation package. Under the bonus formula in effect for the 2005 fiscal year, pre-tax profits
were set aside to fund the bonus pool at an average of 150% of target payout for achieving revenue and net
income growth targets for the fiscal year. Each executive officer's participation in that pool was based upon a
target bonus, which ranged from 75% to 100% of the officer's base salary for the 2005 fiscal year. However, the
actual bonuses paid from the pool were calculated by using a multiplier, which reflected the executive officer's
individual performance in the 2005 fiscal year. Multipliers ranged from 240% of base salary for exceptional
performance to 0% for performance requiring improvement. Accordingly, the executive officer's incentive
compensation for the 2005 fiscal year was dependent first upon the size of the bonus pool tied to the
Company's financial performance for the year based on the Company's achievement of actual net income
before taxes and revenue growth for the 2005 fiscal year in excess of the targeted net income before taxes and
target revenue growth in the Operating Plan approved by the Board for the 2005 fiscal year and then upon the
executive officer's individual performance.
The Compensation Committee may also recommend a discretionary bonus in recognition of special
contributions during the year. For the 2005 fiscal year, such discretionary bonuses were awarded to each of the
Company's executive officers in recognition of the substantial contributions each of them made to the
Company's financial results for the 2005 fiscal year.
Long-Term Incentive Compensation. Long-term incentives have historically been provided through
stock option grants. The grants are designed to align the interests of each executive officer with those of the
Company's stockholders and provide each individual with a significant incentive to manage the Company from
the perspective of an owner with an equity stake in the business. Each grant allows the individual to acquire
shares of the Company's Common Stock at a fixed price per share (the closing market price on the grant
date) over a specified period of time (up to 7 years). Each option generally vests and becomes exercisable in
installments over the executive officer's continued employment with the Company. Accordingly, the option
will provide a return to the executive officer only if the executive officer remains employed by the Company
during the applicable vesting period, and then only if the market price of the underlying shares appreciates
over the option term.
The number of shares subject to each option grant is set at a level intended to create a meaningful
opportunity for stock ownership based on the executive officer's current position with the Company, the size of
comparable awards made to individuals in similar positions within the industry, the individual's potential for
increased responsibility and promotion over the option term, and the individual's personal performance in
recent periods. The Compensation Committee also takes into account the number of unvested options held by
the executive officer in order to maintain an appropriate level of equity incentive for that individual. However,
the Compensation Committee does not adhere to any specific guidelines as to the relative option holdings of
the Company's executive officers.
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