Gap (GPS)

Compensation Philosophy

Our philosophy is to maximize shareholder value over time by aligning executive compensation with the Company’s financial and operational performance, individual contribution, and shareholder returns. The executive compensation program is designed to:

The program is heavily oriented toward incentive compensation tied to the annual and long-term financial performance of the Company and the long-term return realized by shareholders. Corporate and divisional performance is evaluated by reviewing the extent to which financial, operational and strategic goals are achieved. Performance criteria are reviewed each year to ensure consistency with the Company’s business strategies. Executive officers are also given annual goals against which individual performance is evaluated.

The following three main components comprised the Company’s executive compensation program during fiscal 2005:

We review the executive compensation program annually to ensure that the overall package and each component are competitive and appropriately weighted. This review includes base salary, incentive bonuses and long-term incentives (including accumulated unvested long-term incentive gains). We believe that the labor market for retailing executives includes a broader group of companies than those in the retail industry. Therefore, we selected a peer group that includes a spectrum of over 30 retail and consumer products companies for purposes of comparing compensation levels. Market data for the peer group is obtained from compensation surveys prepared by national consulting

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companies and considered when setting executive compensation. The compensation surveys used summarized data, levels of base salary, target annual cash incentives, and equity- based and other long-term incentives. We believe that among the companies in the peer group, survey data in these areas provides, by and large, a reliable indicator of total compensation. We use the median as the benchmark against which our pay levels are compared. However, we also look beyond the competitive survey data during our deliberations and place significant weight on individual job performance, future potential, and the importance of retention of individual executives based on their criticality to our business. Each year, the CEO evaluates executive officers and discusses with us his assessment of these factors and how they should impact compensation decisions. Based on our assessment of this information, we consider the CEO’s compensation recommendations and make any modifications we determine are appropriate. We review and approve all individual compensation actions and employment arrangements for executive officers, including any severance benefits.

Compensation Philosophy

Our philosophy is to maximize shareholder value over time by aligning executive compensation with the Company’s financial and operational performance, individual contribution, and shareholder returns. The executive compensation program is designed to:

The program is heavily oriented toward incentive compensation tied to the annual and long-term financial performance of the Company and the long-term return realized by shareholders. Corporate and divisional performance is evaluated by reviewing the extent to which financial, operational and strategic goals are achieved. Performance criteria are reviewed each year to ensure consistency with the Company’s business strategies. Executive officers are also given annual goals against which individual performance is evaluated.

Three main components comprised the Company’s executive compensation program during fiscal 2004:

We review the executive compensation program annually to ensure that the overall package and each component are competitive and appropriately weighted. This review includes base salary, incentive bonuses and long-term incentives (including accumulated unvested long-term incentive gains). We believe that the labor market for retailing executives includes a broader group of companies than those in the retail industry. Therefore, market data from compensation surveys prepared by national consulting companies, which includes specialty retail, consumer/branded goods and companies in our local labor markets, are considered when setting executive compensation. We use the median as the benchmark against which our pay levels are compared. However, we also look beyond the competitive survey data during our deliberations and place significant weight on individual job performance, future potential, and the importance of retention of individual executives based on their criticality to our business. Each year, the CEO evaluates executive officers and discusses with us his assessment of these factors and how they should impact compensation decisions. Based on our assessment of this information, we consider the CEO’s compensation recommendations and make any modifications we determine are appropriate. We approve all individual compensation actions and employment arrangements for executive officers, including any severance benefits.