Gap (GPS)

Compensation of the Chief Executive Officer

Mr. Pressler has served as President and Chief Executive Officer since September 2002. We adhere to the same basic principles described previously in evaluating and determining Mr. Pressler’s compensation. In consultation with the full Board of Directors, we identified specific objectives and performance criteria for fiscal 2005 to be used in addition to the Company’s financial results in evaluating Mr. Pressler’s performance. Pursuant to his employment agreement with the Company, Mr. Pressler’s base salary was initially set at $1,500,000 and has not been increased. In setting the CEO’s salary, we consider the same factors previously discussed for other executive officers as well as performance against the objectives and criteria described above. Based on our assessment of this information, we determined that Mr. Pressler’s base salary was appropriate and therefore no increase was made in fiscal 2005.

For fiscal 2005, Mr. Pressler was eligible to receive a cash bonus under Executive MICAP. The targeted amount was 125% of his base salary. The actual bonus could have ranged between 33% and 200% of the targeted amount unless the threshold earnings goal was not met, in which case no bonus is paid. The measures that were used to determine his bonus were earnings (70% weight), economic profit (20% weight), and free cash flow (10% weight), consistent with the criteria previously described for other executive officers. Based on performance against these measures, which we reviewed in detail and certified, Mr. Pressler did not receive an Executive MICAP cash bonus for fiscal 2005.

For fiscal year 2005, Mr. Pressler was eligible to receive a performance unit award based on performance against EPS growth goals set under Executive MICAP. The target annual award was equal to 50% of his base salary. The actual award could have ranged from 50% to 200% of the target award unless the threshold EPS growth goal was not met, in which case no award is made. We determined that the Company’s performance in fiscal 2005 did not meet the threshold EPS growth goal, and therefore no award was granted.

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Based on our review of the factors previously described for other executive officers and Mr. Pressler’s continued value to the organization, we approved the following stock option grants to Mr. Pressler in March 2005: 1) 500,000 stock options at the fair market value on the grant date which vest 25% per year over 4 years, and 2) a special grant of 1,000,000 stock options at the fair market value on the grant date. The special grant vests 50% in March 2010 subject to continued employment and achievement of a specified aggregate Earnings Per Share target for the period beginning fiscal 2005 and ending fiscal 2009. The remaining 50% vest in March 2011 subject to continued employment and achievement of a specified aggregate Earnings Per Share target for the period beginning fiscal 2005 and ending fiscal 2010. We established the Earnings Per Share targets at the time the awards were approved.

See the Summary Compensation Table/Tally Sheet for Chief Executive Officer on page 29 of this Proxy Statement which details the value of each component of Mr. Pressler’s compensation for fiscal 2005.

Compensation of the Chief Executive Officer

Mr. Pressler has served as President and Chief Executive Officer since September 2002. We adhere to the same basic principles described previously in evaluating and determining Mr. Pressler’s compensation. In consultation with the full Board of Directors, we identified specific objectives and performance criteria for fiscal 2004 to be used in addition to the Company’s financial results in evaluating Mr. Pressler’s performance. Pursuant to his employment agreement with the Company, Mr. Pressler’s base salary was initially set at $1,500,000. In setting the CEO’s salary, the Committee considers the same factors previously discussed for other executive officers as well as performance against the objectives and criteria described above. Based on our assessment of this information, we determined that Mr. Pressler’s base salary was competitive and therefore no increase was made in fiscal 2004.

For fiscal 2004, Mr. Pressler was eligible for an Executive MICAP bonus of between 41% and 250% of his base salary unless the threshold earnings goal was not met, in which case no bonus is paid. The measures that were used to determine his bonus were earnings, economic profit, and free cash flow, consistent with the criteria previously described for other executive officers. Based on performance against these measures, which we reviewed in detail and certified, Mr. Pressler received an Executive MICAP bonus in the amount of $1,119,140.

Upon his commencement of employment in September 2002, Mr. Pressler was granted options to purchase 5,000,000 shares of our common stock. Unlike most options, which are granted at market value, Mr. Pressler received a combination of discounted, market and “premium priced” options. The “premium priced” options are intended to reward Mr. Pressler only after shareholders have been delivered significant growth in the stock price, consistent with our intent to link executive rewards with shareholder value creation. Mr. Pressler did not receive any stock option awards in fiscal year 2003.

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Based on our review of the factors previously described for other executive officers and Mr. Pressler’s continued value to the organization, we approved the grant of 600,000 stock options to Mr. Pressler in March 2004. These stock options were granted at the fair market value on the grant date and vest 25% per year over four years.