Gap (GPS)

Elements of Compensation

The main components of our executive compensation program are:

We have chosen these elements because we believe each supports achievement of one or more of our compensation objectives, and that together they have been and will continue to be effective in this regard. We also provide our executives with benefits and perquisites.

The use and weight of each compensation element is based on the judgment of the Compensation and Management Development Committee of the Board of Directors (the “Committee”) regarding the importance of each compensation objective in supporting the Company’s business and talent strategies, as well as the structure for these elements for executives at other companies. Base salary, benefits and perquisites represent less than half of each executive’s potential compensation at target performance levels, reflecting the importance of performance-based compensation. We use cash compensation primarily for short-term incentives and rewards, base salaries, matching contributions in our retirement plans, new hire signing bonuses, and severance arrangements.

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Elements of Compensation

The main components of our executive compensation program are:

We have chosen these elements because we believe each supports achievement of one or more of our compensation objectives, and that together they have been and will continue to be effective in this regard.

The use and weight of each compensation element is based on the judgment of the Compensation and Management Development Committee of the Board of Directors (the “Committee”) regarding the importance of each compensation objective in supporting the Company’s business and talent strategies, as well as the structure for these elements for executives at other companies. Base salary, benefits and perquisites represent less than half of each executive’s potential compensation at target performance levels reflecting the importance of performance-based compensation. We use cash compensation primarily for short-term incentives and rewards, base salaries, matching contributions in our retirement plans, new hire signing bonuses, and severance arrangements.

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Elements of Compensation

The main components of our executive compensation program include:

We have chosen these primary elements because each supports achievement of one or more of our compensation objectives, and we believe that together they have been and will continue to be effective in this regard.

The Compensation and Management Development Committee of the Board of Directors (the “Committee”) reviews the executive compensation program and specific individual compensation arrangements at least annually. The use and weight of each compensation element is based on a subjective determination by the Committee of the importance of each compensation objective in supporting the Company’s business and talent strategies, as well as the prevalence, weight and value of these elements for executives at other companies. In order to meet our compensation objectives, the majority of each executive’s potential compensation is based on performance against annual

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financial and operating goals and the performance of our stock. Base salary, benefits and perquisites represent less than half of each executive’s potential compensation at target performance levels. We use cash compensation primarily for short-term incentives and rewards, base salaries, matching contributions in our retirement plans, new hire signing bonuses, and severance arrangements.

The Committee’s annual review includes base salary, annual incentives, long-term incentives (including accumulated vested and unvested long-term incentive gains) and the value of benefits (including accumulated deferred compensation and potential severance benefits) and perquisites. Each element is considered individually and in total using “tally sheets” and a summary of compensation data from other companies. The Committee selected a broad spectrum of retail and consumer products companies for purposes of comparing compensation levels (the “peer group”) because we have both recruited from and lost executive talent to these industries in the past and we expect that this will continue.

The peer group is generally reviewed by the Committee each year and may change based on their evaluation, business combinations or similar events. During fiscal 2006, changes to the peer group were made to create a better balance between applicable industry segments. The current peer group is comprised of the following companies:

Compensation data is solicited from the peer group companies through surveys prepared by Towers Perrin, a national consulting company. Most peer group companies typically provide data to Towers Perrin for this purpose. This data is supplemented by information obtained through publicly filed proxy statement disclosures and other public sources. Compensation surveys from Towers Perrin provide levels of base salary, annual incentives, and long-term incentives in a summarized form. We believe that survey and proxy data in these areas provide a reasonable indicator of total compensation for the peer group. The Committee reviews comparisons of our pay levels against compensation paid by the peer group. Compensation is generally targeted within the broad range of compensation paid by the peer group; however, the Committee uses its judgment to determine pay levels necessary to attract and retain executive talent. In exercising its judgment, the Committee looks beyond the competitive data and places significant weight on individual job performance (based on specific financial and operating objectives for each executive, as well as leadership behaviors), compensation history, future potential, internal comparisons, retention risk for executives, and compensation at former employers in the case of new hires, as well as management’s recommendations. Our performance during fiscal 2006 was below our expectations, and in most cases we did not meet our performance objectives. As a result, in most cases actual compensation in fiscal 2006 fell below the median of the peer group data.

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The CEO evaluates each executive using the factors described above and makes recommendations about compensation to the Committee. The Committee determines the structure of the compensation program and individual arrangements. Executives may provide feedback on compensation arrangements, but approval of compensation arrangements rests solely with the Committee. The CEO is not present during the Committee’s deliberations about his own compensation.

The Committee has engaged Frederic W. Cook & Co. as its independent executive compensation consultant, who is consulted by the Committee from time to time on the compensation program structure and specific individual compensation arrangements. The consultant was selected by the Committee, does not provide any other services to the Company, and receives compensation only for services provided to the Committee. The consultant attends Committee meetings from time to time and also communicates with the Committee Chair outside of meetings as necessary. The consultant reports directly to the Committee and not to management, though the consultant meets with management from time to time to gather information on proposals that management makes to the Committee. The Committee can replace the consultant or hire additional consultants at any time.

In January 2007, Mr. Robert J. Fisher, our current Chairman of the Board, assumed the additional role of Interim President and CEO while we conduct a search for a successor to Mr. Pressler, who ceased to be our President and CEO in January 2007. Mr. Robert J. Fisher will continue to receive his regular director compensation as Chairman and a non-employee member of our Board of Directors, but will not become an employee or receive compensation for his additional responsibilities as Interim President and CEO at this time.

The Company’s founder, Mr. Donald G. Fisher, is an executive officer and director of the Company and was compensated as an employee. However, his compensation level did not put him in the category of a named executive officer. Mr. Donald G. Fisher does not receive additional compensation for his Board service.