ADI » Topics » What is the purpose of the equity component of our executive compensation program?

This excerpt taken from the ADI DEF 14A filed Feb 3, 2010.
What is the purpose of the equity component of our executive compensation program?
 
The equity component of our executive compensation program is designed to (a) attract excellent candidates, (b) reward long-term (multi-year) Company performance measured by stock price appreciation, (c) align executive and shareholder interests, and (d) promote long-term retention. The Committee selected equity awards and stock price performance as the primary component of our long-term incentive program because it felt that other measures of Company performance were too difficult to target and predict over the same five-year vesting period it uses for stock options.
 


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All of our stock options have a term of ten years, and they generally vest in five equal installments on each of the first, second, third, fourth and fifth anniversaries of the date of grant. We believe that meaningful vesting periods encourage recipients to remain with the Company over the long-term and, because the value of the awards is based on our stock price, stock options encourage recipients to focus on achievement of longer-term goals, such as strategic growth, business innovation and shareholder return. In general, employees whose employment terminates (other than for death or disability) before the award fully vests forfeit the unvested portions of these awards. While we believe that our longer vesting periods serve our employee retention goals, they tend to increase the number of stock options outstanding at any given time compared to companies that grant stock options with shorter vesting schedules.
 
We annually set a goal to keep the shareholder dilution related to our equity ownership program to a certain percentage, net of forfeitures. This dilution percentage is calculated as the total number of shares of common stock underlying new option grants made during the year, net of management’s estimated forfeitures and cancellations for the year, divided by the total number of outstanding shares of our common stock at the beginning of the year. For fiscal 2009, our net dilution percentage was −0.54%, compared to 3.7% for our Peer Group. Our 2009 net dilution percentage was significantly lower than that of our Peer Group as a result of our continuing efforts to reduce the impact of stock option compensation expense on our financial statements by granting fewer equity awards and due to headcount reductions we made during the year, which resulted in the forfeiture of a number of equity awards held by those employees. We set the fiscal 2010 maximum gross dilution percentage related to our option program at 2.1%.
 
The size of the equity awards approved by our Compensation Committee for our executives are reflective of the executive’s individual responsibilities and where that person is in his or her career with ADI. In fiscal 2009, the Compensation Committee authorized grants of stock options to the Named Executive Officers, as follows:
 
Mr. Marshall — 75,000 options
 
Mr. McAdam — 75,000 options
 
Mr. Roche — 90,000 options
 
In granting these options, the Compensation Committee considered the equity compensation levels of comparable executives at the Peer Group companies, as well as the number of shares of Company stock and stock options that each of the executives already held. Mr. Fishman did not receive an equity award during 2009, under the terms of his retention agreement. Mr. Zinsner did not receive a 2009 annual equity grant because he received a new hire grant of 160,000 options and 35,000 restricted stock units when he joined the Company in January 2009.
 
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