SanDisk 2009 Annual Report Download - page 42

employed with the Company during an important time when their prospects for continued employment following
the transaction are often uncertain, we provide Named Executive Officers with severance benefits pursuant to a
change in control benefits agreement if their employment is terminated by us without cause or by the executive
for good reason within twelve (12) months following a change in control. We believe that a protected period of
twelve (12) months following a change in control is in line with the severance protections provided to
comparable executives at our peer group companies. We also believe that these Named Executive Officers
should receive their change in control severance benefits if their employment is constructively terminated in
connection with a change in control. Given that none of the Named Executive Officers has an employment
agreement that provides for a fixed position or duties, or for a fixed base salary or fixed annual bonus, absent
some form of constructive termination severance trigger, potential acquirers could constructively terminate a
Named Executive Officer’s employment and avoid paying severance. For example, following a change in
control, an acquirer could materially demote a Named Executive Officer, reduce significantly his or her salary
and/or eliminate his or her annual bonus opportunity to force the Named Executive Officer to terminate his or her
own employment and thereby avoid paying severance. Because we believe that constructive terminations in
connection with a change in control are conceptually the same as actual terminations, and because we believe
that acquirers would otherwise have an incentive to constructively terminate Named Executive Officers to avoid
paying severance, the change in control agreements we have entered into with certain of our Named Executive
Officers permit the Named Executive Officers to terminate their employment in connection with a change in
control for certain “good reasons” that we believe result in the constructive termination of the Named Executive
Officers’ employment. In the event the employment of a Named Executive Officer is terminated under the
circumstances described above, we believe that providing these Named Executive Officers with a change in
control agreement with cash severance benefits based on a multiple of salary and target bonus levels (a multiple
of two (2) times for the Chief Executive Officer, one and one half (1
1
⁄ 2 ) times for the President and Chief
Operating Officer and one (1) times for the other Named Executive Officers) is consistent with our peer group
companies and provides them with financial security during a period of time when they are likely to be
unemployed and seeking new employment.
As discussed above under “Annual Cash Incentive Award,” the Committee has established a target bonus
percentage for each Named Executive Officer. Severance payments under the change of control agreements are
based on these target bonus percentages as in effect for the calendar year in which the change of control occurs,
regardless of actual performance and regardless of whether the Committee had the discretion to award a lower
bonus or no bonus. We believe that the use of target bonuses for this purpose is appropriate to provide certainty
to executives and to avoid disputes concerning the calculation of severance payments.
In the event that a Named Executive Officer becomes entitled to severance under the principles described
above, in addition to cash severance benefits, we believe that it is also appropriate to provide Named Executive
Officers with other severance protections, such as (1) continued medical insurance coverage for twenty-four
(24) months following termination; (2) accelerated vesting of outstanding equity awards (with accelerated
options to remain exercisable for twelve (12) months following termination, subject to the maximum term of the
option); and (3) executive outplacement benefits for twelve (12) months following termination (including resume
assistance, career evaluation and assessment, individual career counseling, financial counseling, access to one or
more on-line employment databases, private office and office support). Similar to cash severance benefits, we
believe these other severance benefits are consistent with the severance arrangements of our peer group
companies and provide the Named Executive Officers with financial and personal security during a period of
time when they are likely to be unemployed.
As part of their severance benefits under a change in control agreement, Named Executive Officers are also
reimbursed for the full amount of any excise taxes imposed on their severance payments and any other payments
under Section 4999 of the Internal Revenue Code. We provide the Named Executive Officers with a “gross-up”
for any parachute payment excise taxes that may be imposed because we have determined the appropriate level
of severance protections for each Named Executive Officer without factoring in the adverse tax effects on the
Named Executive Officers that may result under Section 4999 of the Internal Revenue Code. The excise tax
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