SanDisk 2012 Annual Report Download - page 63

Proxy Statement
Named Executive Officers, only upon certain terminations of employment in connection with a change in control
of the Company, and for the Chief Executive Officer, upon certain other terminations of employment.
Executive Severance Benefits Agreement Upon a Change in Control. Uncertainty regarding the continued
employment of the executive officers upon the occurrence or potential occurrence of a change in control
transaction results from the fact that many change in control transactions result in significant organizational
changes, particularly at the senior executive level. However, the Company generally does not believe that the
executive officers should be entitled to cash severance benefits merely because a change in control transaction
occurs. In order to encourage the executive officers to remain employed with the Company during an important
time when their prospects for continued employment following the transaction are often uncertain, the Company
provides executive officers with severance benefits pursuant to a change in control agreement, if their
employment is terminated by the Company without “cause” or by the executive officer for “good reason” (as
those terms are defined in the agreements) within three (3) months before or eighteen (18) months following a
change in control (a “Qualifying Termination”). The Company believes that a protected period of three
(3) months before and eighteen (18) months following a change in control is in line with the severance
protections provided to comparable executive officers at the Company’s peer companies. 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 severance trigger upon “good reason,” 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. Since the
Company believes that constructive terminations in connection with a change in control are conceptually the
same as actual terminations, and because the Company believes that acquirers would otherwise have an incentive
to constructively terminate Named Executive Officers to avoid paying severance, the change in control
agreements the Company has entered into with its Named Executive Officers permit the Named Executive
Officers to terminate their employment in connection with a change in control for certain “good reasons” that the
Company believes result in the constructive termination of the Named Executive Officers’ employment.
None of the change in control agreements of the Named Executive Officers provide for a tax “gross-up”
obligation by the Company in the event of any excise tax payable as a result of Section 280G of the Code and
instead, provides a “Best Results” methodology (which means that if a Named Executive Officer would be
subject to such excise tax, any payments and benefits must be reduced to avoid triggering the excise tax if the
reduction would result in a greater after-tax amount to the executive officer compared to the amount the
executive officer would receive net of the excise tax if no reduction were made). The change in control
agreements are for a term of four (4) years and, with the exception of Mr. Mehrotra’s agreement, provide for a
severance payment of one and one-half times the annual base salary and target bonus, as well as eighteen
(18) months of Company-paid medical insurance, in the event of a Qualifying Termination. Under
Mr. Mehrotra’s change in control agreement, in the event of a Qualifying Termination, the severance payment is
two times the annual base salary and target bonus and his entitlement to Company-paid medical insurance is for
twenty-four (24) months.
As discussed under “Annual Cash Incentive Awards” and “Subsequent Committee Actions,” the
Compensation Committee has established a target bonus percentage for each Named Executive Officer.
Severance payments under the change in control agreements are based on these target bonus percentages as in
effect for the calendar year in which the change in control occurs, regardless of actual performance and
regardless of whether the Compensation Committee had the discretion to award a lower bonus or no bonus. The
Company believes that the use of target bonuses for this purpose is appropriate to provide certainty to the
executive officers and to avoid disputes concerning the calculation of severance payments.
The change in control agreements with the Named Executive Officers also provide certain other severance
protections, such as (i) accelerated vesting of outstanding equity awards (with accelerated options to remain
51