SanDisk 2014 Annual Report Download - page 48

Section 162(m) Policy
Section 162(m) of the 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 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 share-based awards in the form of
restricted stock, RSUs or other forms of equity compensation, which may be in excess of the amount
deductible by reason of Section 162(m) or other provisions of the Code. The Compensation 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.
Accounting for Share-based Compensation
The Compensation Committee takes accounting considerations into account in designing
compensation plans and arrangements for the Company’s executive officers, other employees, and
Directors. Chief among these is ASC 718, the standard which governs the accounting treatment of share-
based compensation awards.
ASC 718 requires the Company to measure and record in the Company’s consolidated statement of
operations all share-based payments to executive officers, employees, and Directors based on their grant
date fair values. The application of ASC 718 involves judgment in the determination of inputs into the
Black-Scholes-Merton valuation model that the Company uses to determine the fair value of stock options.
These inputs are based upon assumptions as to the volatility of the underlying stock, risk free interest rates,
dividend yields, and the expected term of the options. As required under GAAP, the Company reviews its
valuation assumptions periodically, and, as a result, the Company’s valuation assumptions used to value
stock options granted in future periods may vary from the valuation assumptions the Company has used
previously.
ASC 718 also requires the Company to recognize the compensation cost of share-based payments
based upon the grant date fair value of the award in the Company’s consolidated statement of operations
over the period that an employee or Director is required to render service in exchange for the award
(which, generally, will correspond to the award’s vesting schedule). This calculation is performed for
accounting purposes and reported in the compensation tables below for the Company’s executive officers
and Directors, even though the Company’s executive officers and Directors may never realize any value
from their awards.
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