This excerpt taken from the AN DEF 14A filed Apr 28, 2006.
A core component of our compensation program is the AutoNation Operating Performance Plan (the AOP), the annual bonus program in which bonus-eligible corporate-level employees participate. The AOP is designed to incentivize management to improve our operating performance and to use capital to generate high returns. We structured the AOP for 2005 to reward participants upon the achievement of specified levels of operating income per share (75% weight) and operating income as a percentage of gross profit (25% weight). Bonus awards under the AOP for 2005 were payable on a sliding scale based on AutoNations actual achievement relative to the predetermined goals, with the possibility that bonuses earned may exceed or be less than the targeted level. In calculating the level of AutoNations performance under the AOP, we adjust operating income per share to reflect a capital charge for acquisitions and the repurchase of shares of the companys common stock, as well as to exclude the effect of certain extraordinary or one-time items. The capital charge is designed to encourage the productive use of capital and discourage unproductive uses of capital. The operating income as a percentage of gross profit metric is designed to incentivize management to increase variability in the companys expense structure and to maximize the productivity of the companys operations so that bottom-line profitability and stockholder value are maximized.
In accordance with the terms and objectives of the AOP, we established an incentive bonus program for 2005 for AutoNations senior executive officers under the AutoNation, Inc. Senior Executive Incentive Bonus Plan (the Plan), which was approved by stockholders in 2002. For 2005, we selected Mike Jackson, Chairman and Chief Executive Officer, Michael E. Maroone, Director, President and Chief Operating Officer, Craig T. Monaghan, Executive Vice President and Chief Financial Officer, and Jonathan P. Ferrando, Executive Vice President, General Counsel and Secretary, to participate in the Plan. Under the terms of the Plan, the Subcommittee sets specific annual performance goals (while actual performance relative to the target remains substantially uncertain within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended) and establishes an objective formula for calculating the amount of the target awards for participants. The Subcommittee has absolute negative discretion to eliminate or reduce the amount of any award under the Plan. The target incentive award percentages assigned to our executive officers are set forth below.
The performance goals that we established for 2005 under the Plan for the executives named above were the same as we established for 2005 under the AOP for all corporate participants operating income per share (75% weight) and operating income as a percentage of gross profit (25% weight) which we believe assures that all AutoNation employees are appropriately aligned to achieve the companys objectives. One hundred percent of the final bonus determination for each participant in the Plan is based upon achievement against the predetermined performance goals. After the end of the year, the Subcommittee calculated the level of AutoNations actual performance against the goals set for 2005 (after reflecting the capital charges and other adjustments noted above) and made corresponding bonus awards to Messrs. Jackson, Maroone, Monaghan and Ferrando under the Plan and to other corporate-level employees under the AOP. Based on the companys performance, bonus awards under the Plan and the AOP were paid at approximately 86% of the targeted levels. Actual payouts for our executive officers for 2005 are shown in the Summary Compensation Table on page 22. The Plan was the only bonus program in which the companys senior executive officers named above participated in 2005. We believe that the AOP plan has been
effective in driving appropriate capital allocation decisions and focusing management on improving operating performance and efficiency.