SanDisk 2005 Annual Report Download - page 44

Proxy Statement
In the future, restricted stock units will also be used to provide long-term incentive to the Company's
executive officers in an effort to minimize stock expense to the company and dilution. The restricted stock
units will be used in conjunction with stock option grants to provide competitively valued stock awards. Based
on the Black-Scholes valuation method, restricted stock will be used at a ratio of 1 unit to 3 options. The 2005
Plan caps the use of restricted shares to 10% of the pool.
CEO Compensation. The Compensation Committee increased the annual base salary for Dr. Harari,
the Company's Chief Executive Officer and President, to $725,000 for the 2005 fiscal year. It has been the
continuing objective of the Compensation Committee to provide Dr. Harari with a compensation package
that: (i) provides a level of base salary competitive with that paid to other chief executive officers of the peer
group companies and (ii) makes a significant percentage of the total compensation package contingent upon
Company performance. However, the base salary component of Dr. Harari's compensation package is
intended to provide him with a level of stability and certainty each year. Accordingly, this element of
Dr. Harari's compensation is not affected to any significant degree by Company performance factors and, for
the 2005 fiscal year, remained at the 50th percentile of the base salary levels in effect for other chief executive
officers at the same peer group of companies surveyed for comparative compensation purposes. The remaining
components of the compensation earned by Dr. Harari for the 2005 fiscal year were entirely dependent upon
both the Company's financial performance and his individual performance and provided no dollar guarantees.
Dr. Harari's share of the bonus pool established for the 2005 fiscal year was $1,450,000 because the
Company's performance, as measured in terms of net income before taxes and revenue growth, exceeded the
pre-established milestones for the 2005 fiscal year and his performance contributed substantially to that
financial result. His total incentive compensation for the 2005 fiscal year was 240% of his target bonus for that
year. In addition, due to provisions in the 1995 Plan that limited the maximum number of shares that may be
granted to any one individual over the term of the plan the Compensation Committee revisited Dr. Harari's
long term incentive compensation when the 2005 Incentive Plan was approved and granted Dr. Harari an
additional 200,000 stock options. The options were intended to provide Dr. Harari with a significant incentive
to remain in the Company's employ and to contribute to the creation of stockholder value in the form of stock
price appreciation. Accordingly, the options are subject to four-year vesting schedules and will not have any
value unless the market price of the Company's Common Stock appreciates over the market price in effect at
the time the grants were made.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the Internal Revenue
Code disallows a tax deduction to publicly-held companies for compensation paid to certain executive officers,
to the extent that compensation exceeds $1 million per officer in any year. The limitation applies only to
compensation which is not considered to be performance-based, either because it is not tied to the attainment
of performance milestones or because it is not paid pursuant to a stockholder-approved plan. The Compensa-
tion Committee believes it is important to maintain incentive compensation at the requisite level to attract and
retain the executive officers essential to the Company's financial success, even if all or part of that
compensation may not be deductible by reason of the Section 162(m) limitation. The Compensation
Committee believes that in establishing the cash and equity incentive compensation programs for the
Company's executive officers, the potential deductibility of the compensation payable under those programs
should be only one of a number of relevant factors taken into consideration, and not the sole governing factor.
Accordingly, the Compensation Committee may provide one or more executive officers with the opportunity
to earn incentive compensation, whether through cash bonus programs tied to the Company's financial
performance or equity awards in the form of restricted stock or restricted stock units, which may be in excess
of the amount deductible by reason of Section 162(m) or other provisions of the Internal Revenue Code. The
Compensation Committee believes that it is important to maintain cash and equity incentive compensation at
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