Gap (GPS)

Executives Other Than the CEO

We have historically evaluated severance benefits for executives on a case by case basis, with no formal plan in which all executives participate. Severance arrangements are intended to provide income security in case of an involuntary termination other than for cause. Severance typically includes base salary continuation, payments in lieu of health and welfare benefits continuation, outplacement services and continued financial planning services. Severance payments typically stop or are reduced if the executive secures other employment. The Company may also grant severance benefits as part of a negotiated termination of employment in exchange for a release of claims against the Company and other agreements in the Company’s interests.

In 2007, the Committee approved the severance benefits described on page 46 for certain executives in the case of an involuntary termination other than for cause prior to February 13, 2009. During 2008, the Committee reviewed these severance arrangements in light of the approaching expiration date and determined that the benefits were effective and should be continued through February 12, 2012, with the exception of the provision for acceleration of long-term incentive vesting which was eliminated effective upon the expiration of the current provision. As part of its review, the Committee analyzed the same factors described above for the CEO. These arrangements provide no tax gross up or enhanced benefits in the case of a change of control of the Company. The Committee believes that, based on its analysis, the benefits are appropriate and reasonable. In addition, while compensation decisions affect potential payouts under severance arrangements, this generally did not affect decisions on other compensation elements as these provisions may never come into effect.

Executives Other Than the CEO

The departure of our former CEO, Mr. Pressler, in January 2007, along with the Company’s business performance and external market speculation regarding corporate structure changes, created uncertainty and distraction among key executives. The Committee determined that the lack of formal income protection in the case of an involuntary termination contributed to this uncertainty. In order to mitigate the business risk from the potential departure of key executives, the Committee approved the severance benefits described on page 50 for certain executives in the case of an involuntary termination other than for cause prior to February 13, 2009. In determining the benefits for each executive, the Committee considered the individual circumstances of each executive, competitive practice at selected peer group companies and general industry, accounting and tax implications, and the potential benefits that could be received by each executive at multiple future points in time using a wealth accumulation analysis and considering both vested and unvested compensation. There are no tax gross up or enhanced benefits in the case of a change of control of the Company. The Committee believes that, based on its analysis, the benefits are appropriate and reasonable. In addition, while compensation decisions affect potential payouts under severance arrangements, this generally did not affect decisions on other compensation elements as these provisions may never come into effect.