Staples 2007 Annual Report Download - page 47

Within 90 days after the beginning of each plan year, the Compensation Committee establishes specific
performance objectives for the payment of bonus awards for that plan year. Under the Executive Officer Incentive
Plan, the performance objectives for each plan year are based on one or more of the following measures: sales,
earnings per share, return on net assets, return on equity and customer service levels. The Compensation Committee
may determine that special one-time or extraordinary gains or losses should or should not be included in determining
whether such performance objectives have been met. In addition, customer service target levels are based on customer
satisfaction surveys conducted by a third party. The Compensation Committee believes that the performance
objectives established each fiscal year for the Executive Officer Incentive Plan are important in that year to driving
sustainable growth and increasing stockholder value.
For each plan year, a specified percentage of each bonus award is based upon each of the performance objectives
selected by the Compensation Committee for that plan year. For each of the performance objectives that are met, a
corresponding portion of the bonus award is paid. Each performance objective has an associated threshold level that
must be achieved for any of the bonus award associated with such objective to be paid. Under the terms of our
Executive Officer Incentive Plan, bonuses are not paid unless we achieve minimum earnings per share. The maximum
bonus award payable to a named executive officer was $3 million during any of our 2003 through 2007 plan years and
would be $4 million during any of our 2008 through 2012 plan years. In addition, the Compensation Committee
presently limits bonus awards to twice a named executive officer’s target bonus award. Generally in March of each
year, the Compensation Committee determines whether the performance objectives for the previous plan year have
been achieved.
Each of the named executive officers was eligible to participate in our Executive Officer Incentive Plan during
our 2007 fiscal year. In March 2007, the Compensation Committee selected four performance objectives for our 2007
fiscal year which are based on the following four Company-wide measures: (1) 15% growth in earnings per share,
which was weighted at 30% of the targeted bonus award; (2) a 10% increase in return on net asset dollars, which was
weighted at 30% of the targeted bonus award; (3) 10% total sales growth, which was weighted at 20% of the targeted
bonus award; and (4) improved customer service, which was weighted at 20% of the targeted bonus award. The goals
were set aggressively, with a payout only upon achieving a minimum of 7% earnings per share growth. The return on
net assets, sales and customer service goals are business unit specific for Messrs. Doody and Parneros and reflect total
business unit performance for Messrs. Sargent, Mahoney and Miles, and all of the goals were based on the financial
plan for our 2007 fiscal year. The total sales component was added for 2007 to reinforce the importance of sales
growth as one of our key business objectives. The Compensation Committee believes that these objectives are
collectively the most important drivers of both our short term and long term success, with earnings per share and
return on net assets being the most important indicators of value creation and sales and customer service serving as
the metrics that most closely track our customers’ response to our product and service offerings. In prior years, greater
weight was given to earnings per share (40%) and return on net asset dollars (40%) and the resulting weighting this
year was intended to reinforce the importance of these two elements, while giving the appropriate weight to the sales
component.
For purposes of our 2007 Executive Officer Incentive Plan, the performance objectives are calculated as follows.
Earnings per share is calculated using the amounts set forth in our financial statements, excluding the impact of the
settlement of our California wage and hour class action litigation that we reported in the third quarter of 2007. Return
on net asset (RONA) dollars are calculated as net operating profit after tax (NOPAT) for the most recent 12 months,
less the average of the most recent 13 months’ net asset balance, multiplied by 11.7%, which is our long-term weighted
average cost of capital. To more accurately reflect the nature and performance of our business, we make certain
adjustments to the amounts set forth in our financial statements to calculate RONA dollars. To calculate NOPAT, we
begin with our business unit income and add back rent and deduct depreciation on capitalized rent and taxes on
adjusted income. To calculate net assets, we begin with our balance sheet net assets and add back interest bearing
debt, net capitalized rent and implied goodwill and deduct corporate cash. Sales are calculated using the amounts set
forth in our financial statements. Both the RONA dollar and sales objectives exclude the difference between the
actual and budgeted impact of foreign currency exchange. The customer service score for our retail business is
calculated by tabulating the total number of ‘‘extremely satisfied’’ customers, reflecting a rating of five on a five point
scale, divided by the total number of completed customer surveys. The survey invitations are randomly printed on the
cash register receipt, and the program is administered by a third party. The customer service score for our delivery
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