Bed Bath & Beyond (BBBY)

Equity Compensation

The Company’s overall approach to equity compensation is to make equity awards comprised of a combination of stock options and restricted stock to all executive officers, including the named executive officers, and a small number of other executives.  Commencing in fiscal 2007, these grants are made on May 10 of each year (or the following trading day should such date fall on a weekend or holiday).  The vesting provisions relating to equity compensation have been and continue to be determined with the principal purpose of retaining the Company’s executives and key employees.  The Company believes its equity compensation policies have been highly successful in the long term retention of its executives and key employees, including its named executive officers.

Consistent with the Company’s historic practice, the stock options vest over time, subject, in general, to the named executive officers remaining in the Company’s employ on specified vesting dates.  Vesting of

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Equity Compensation

In connection with the Hewitt Study, the Compensation Committee examined possible changes to the Company’s prior sole reliance on stock options for equity incentive awards, including, among other things, the possibility of replacing stock options, in whole or in part, with awards of restricted stock.  In conducting its evaluation, the Compensation Committee considered changes to the accounting rules pertaining to the compensation cost of stock-based payments to employees and the desirability of achieving various goals, including promoting long-term employee stock ownership, enhancing employee retention, minimizing dilution, providing employees with rewards for the Company’s success and linking employee pay to shareholder returns.

Accordingly, beginning with its 2005 fiscal year, the Company changed its overall approach to equity compensation and has, since that time, made equity awards comprised of a combination of stock options and restricted stock to all executive officers, including the named executive officers, and a small number of other officers.  Commencing in fiscal 2007, these grants are made on May 10 of each year (or the following trading day should such date fall on a weekend or holiday).  Consistent with the Company’s historic practice, the stock options vest over time, subject, in general, to the named executive officers remaining employed by the Company on specified vesting dates.  Vesting of the restricted stock awarded to these named executive officers is dependent on (i) the Company’s achievement of a performance-based test for the fiscal year in which the grant is made, and (ii) assuming achievement of the performance-based test, time vesting, subject, in general, to the executive remaining in the Company’s employ on the specified vesting dates.  The performance-based test requires that the Company’s net income in the fiscal year exceed the Company’s net income in the prior fiscal year or that the Company’s net income as a percentage of sales place it in the top half of the companies in the S&P Retailing Index with respect to such measurement.  Net income is adjusted for such purpose to reflect (i) mergers, acquisitions, consolidations or dispositions, (ii) changes in accounting methods, and (iii) extraordinary items, as defined in APB 30, or stock repurchase or dividend activity.  The Company believes that this performance-based test meets the standard for performance-based compensation under the Internal Revenue Code, so that the restricted stock awards will be deductible compensation for certain executives

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Equity Compensation

In connection with the Hewitt Study, the Compensation Committee examined possible changes to the Company’s sole reliance on stock options for equity incentive awards, including, among other things, the possibility of replacing stock options, in whole or in part, with awards of restricted stock.  In conducting its evaluation, the Compensation Committee considered changes to the accounting rules pertaining to the compensation cost of stock-based payments to employees and the desirability of achieving various goals, including promoting long-term employee stock ownership, enhancing employee retention, minimizing dilution, providing employees with rewards for the Company’s success and linking employee pay to shareholder returns.  The Company elected to early adopt the accounting rule which requires companies to measure employee stock-based compensation awards using a fair value method and record expense in its financial statements, namely at the beginning of its third fiscal quarter during the 2005 fiscal year.

Accordingly, the Company changed its overall approach to equity compensation and has, in the last two years, made equity awards comprised of a combination of stock options and restricted stock to all executive officers, including the named executive officers, and a small number of other officers.  Commencing in fiscal 2007, these grants are made on a fixed date annually (or the following trading day should such date fall on a weekend or holiday).  Consistent with the Company’s historic practice, the stock options vest over time, subject, in general, to the named executive officer’s remaining employed by the Company on specified vesting dates.  Vesting of the restricted stock awarded to these named executive officers is dependent on (i) the Company’s achievement of a performance-based test for the fiscal year in which the grant is made, and (ii) assuming achievement of the performance-based test, time vesting, subject, in general, to the executive remaining in the Company’s employ on the specified vesting dates.  The performance-based test requires that the Company’s net income in the fiscal year exceed the Company’s net income in the prior fiscal year or that the Company’s net income as a percentage of sales place it in the top half of the companies in the S&P Retailing Index with respect to such measurement.  The Company believes that this performance test meets the standard for performance-based compensation under the Internal Revenue Code, so that the restricted stock awards will be deductible compensation for certain executives if their annual compensation exceeds $1 million.

All executives (other than those discussed in the preceding paragraph) and associates awarded incentive compensation receive grants consisting solely of restricted stock.  Vesting of restricted stock awarded to these employees is based solely on time-vesting with no performance test.

All awards of restricted stock and stock options are made under the Company’s 2004 Incentive Compensation Plan, approved by the Company’s shareholders, which is the only equity incentive plan under which the Company can currently make awards of equity compensation.

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The report prepared by the special committee of independent members of the Board appointed to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters identified a number of deficiencies in the process of granting and documenting stock options and restricted stock.  The committee recommended, and the Company has adopted, revised measurement dates for certain option grants.  As a result of the revised measurement dates that resulted in higher market prices and as the result of the correction of certain other errors relating to the accounting for equity-based compensation, the Company incurred charges to its income statement in the third quarter of the fiscal year ended March 3, 2007 and made certain adjustments in its balance sheet as of that date.  The Company believes that the adjustments were not material to the Company’s financial statements in any of the periods to which such changes would have related and, therefore, no revisions to its historic financial statements have been made.  Also as a result of the revised measurement dates, the Company undertook a remediation program under which the Company made cash payments to over 1,600 associates (excluding senior executives and certain other officers) in the fourth quarter of the fiscal year ended March 3, 2007 to compensate these associates for the increase in exercise prices on certain stock option grants so as to protect them from certain potential adverse tax consequences.  For further details, see our Management’s Discussion and Analysis of Financial Condition and Results of Operations in the accompanying Annual Report.  With the approval of the Compensation Committee, the Company engaged human resources, accounting and tax consultants in connection with this remediation program.

The report also made recommendations for improvements in the process of granting stock options and restricted stock awards.  On October 9, 2006, the Board of Directors adopted the special committee’s recommendations, with such additional improvements in the Company’s stock option and restricted stock processes as the Board of Directors and special committee may approve.  The management of the Company prepared and presented to the Board of Directors an implementation plan with respect to the recommendations, which the Board of Directors approved on December 8, 2006.  Substantially all of the recommendations have been implemented, including the grant of all equity grants for new hires, promotions or other events on the same fixed date each month (or the following trading day should such date fall on a weekend or holiday), and the Company continues to implement the recommendations during fiscal 2007.  Though not required by the recommendations, this implementation also includes the granting of annual grants on the same fixed date each year (or the following trading day should such date fall on a weekend or holiday).