Gap (GPS)

Annual Incentive Bonus

We believe a significant portion of compensation for executive officers should be based on the financial performance of the Company, with the opportunity to earn substantial awards in connection with superior business performance. The Company makes cash incentive bonus payments under the Executive Management Incentive Compensation Award Plan (“Executive MICAP”), which is a performance-based plan intended to motivate executive officers by directly linking awards to specific corporate and/or division performance goals. Specific measurements that can be used by the Committee (in its sole discretion) each period are detailed in the Executive MICAP, a description of which is located in the Proxy Statement for our 2005 Annual Shareholder’s Meeting. We approve threshold, target and maximum performance goals and potential bonuses at the beginning of each performance period. Actual bonus amounts are calculated pursuant to a predetermined formula that incorporates the extent to which performance goals are achieved and the bonus target for each executive officer. Bonuses are paid under the Executive MICAP only if threshold earnings goals are met. We certify the attainment level of all goals and approve specific payments to executive officers. We also review the performance of each executive officer and, in our sole discretion, may reduce (but not increase) actual bonus payments under the Executive MICAP.

For fiscal year 2005, cash incentive bonuses under the Executive MICAP were based on performance compared to goals for earnings (70% weight), economic profit (20% weight) and free cash flow (10% weight) set for the Company and/or each division. Executive officers were eligible to receive a target bonus of between 50% and 125% of their base salary. Based on performance against these goals, payouts could have ranged from 33% of the executive’s target bonus at threshold performance to 200% of the executive’s target bonus at maximum performance. However, we determined that the Company’s performance in fiscal 2005 did not meet the threshold criteria for bonus payments to executive officers set forth at the beginning of the period. Accordingly, executive officers, including the CEO, did not receive any cash awards under Executive MICAP except for Cynthia Harriss, who received a modest bonus based on the portion of fiscal 2005 during which she led the Outlet Division and the performance of that division.

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Annual Incentive Bonus

We believe a significant portion of compensation for executive officers should be based on the financial performance of the Company, with the opportunity to earn substantial awards in connection with superior business performance. The Company makes incentive bonus payments under the Executive Management Incentive Compensation Award Plan (“Executive MICAP”), which is a performance-based plan intended to motivate executive officers by directly linking awards to specific corporate and/or division performance goals. Specific measurements that can be used by the Committee (in its sole discretion) each period include comparable sales growth, earnings, economic profit, free cash flow, return on equity, return on net assets, sales volume, and total sales. We approve threshold, target and maximum performance goals and potential bonuses prior to the beginning of each performance period. Actual bonus amounts are calculated pursuant to a predetermined formula that incorporates the extent to which earnings goals are achieved and the bonus target for each executive officer. Bonuses are paid under the Executive MICAP only if threshold earnings goals are met. We certify the attainment level of all goals and approve specific payments to executive officers. We also review the performance of each executive officer and, in our sole discretion, may reduce (but not increase) actual bonus payments under the Executive MICAP.

For fiscal year 2004, incentive bonuses under the Executive MICAP were based on performance compared to target earnings, economic profit and free cash flow goals set for the Company and/or each division. Executive officers were eligible to receive a bonus of between 16% and 250% of their base salary based on performance against these goals. We determined that the Company’s performance met the threshold criteria for bonus payments set forth at the beginning of the period, though targeted levels of performance were not achieved. For those executive officers whose performance goals were based on a combination of division and Company performance, the threshold criteria were not achieved in all cases. Accordingly, executive officers, including the CEO, received an Executive MICAP bonus in cases where the threshold criteria were achieved. Payouts were below target levels.