Gap DEF 14A 2012
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant x
Filed by a Party other than the Registrant ¨
Check the appropriate box:
THE GAP, INC.
(Name of Registrant as Specified in Its Certificate)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
THE GAP, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
10:00 a.m., San Francisco Time
Two Folsom Street
San Francisco, California 94105
ADMISSION TO THE
TABLE OF CONTENTS
THE GAP, INC.
TWO FOLSOM STREET
SAN FRANCISCO, CALIFORNIA 94105
This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of The Gap, Inc. for use at our Annual Meeting of Shareholders to be held on May 15, 2012, at 10:00 a.m., San Francisco Time, at Gap Inc. Headquarters, Two Folsom Street, San Francisco, California, 94105 and at any adjournment thereof.
This Proxy Statement will be first sent to shareholders on or about April 3, 2012. References in this Proxy Statement to Gap Inc., the Company, we, us, and our refer to The Gap, Inc.
The persons named as proxyholders were selected by our Board of Directors and are officers of the Company.
The proxyholders will vote all proxies, or record an abstention, in accordance with the directions on the proxy. If no contrary direction is given, the shares will be voted as recommended by our Board of Directors as follows:
FOR the election of the directors nominated by the Board of Directors;
FOR the ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending February 2, 2013;
FOR the approval of the overall compensation of the Companys named executive officers; and
AGAINST the shareholder proposal regarding ending trade partnerships with Sri Lanka.
We will pay all expenses in connection with the solicitation of the proxies relating to this Proxy Statement, including the charges of brokerage houses and other custodians, nominees or fiduciaries for forwarding documents to security owners. In addition to solicitation by mail, certain of our officers, directors and employees (who will receive no extra compensation for their services) may solicit proxies by telephone, by fax or in person. We have also retained the services of Georgeson Shareholder Communications, Inc. to solicit the proxies of certain shareholders for the Annual Meeting. The cost of such services is estimated to be $8,000, plus reimbursement of out-of-pocket expenses.
You may revoke your proxy at any time before its exercise by writing to our Corporate Secretary at our principal executive offices as follows:
Two Folsom Street
San Francisco, California 94105
You may also revoke your proxy by timely delivery of a properly executed, later-dated proxy (including a telephone or Internet vote) or by voting in person at the Annual Meeting.
Notice of Internet Availability
We are using the Internet as our primary means of furnishing our proxy materials to most of our shareholders. Rather than sending those shareholders a paper copy of our proxy materials, we are sending them a Notice of Internet Availability. That notice contains instructions for accessing the materials and voting via the Internet. The notice also contains information on how to request a paper copy of the proxy materials by mail. We believe this method of distribution makes the proxy distribution process more efficient, less costly and limits our impact on the environment. This Proxy Statement and our 2011 Annual Report to Shareholders are available at:
We are offering an audio webcast of the Annual Meeting at www.gapinc.com. If you choose to listen to the webcast, go to our website at www.gapinc.com (follow the Investors, Financial News and Events & Webcasts links) shortly before the start of the meeting and follow the instructions provided. Please note that this webcast will be listen only. If you would like to vote, ask questions, or otherwise interact with the meeting participants, you will need to attend the meeting in person. The webcast will be recorded and available for replay on www.gapinc.com for 30 days following the Annual Meeting.
Shareholders with the Same Last Name and Address
The Securities and Exchange Commission (SEC) has adopted rules that permit companies and intermediaries (such as brokers) to implement a delivery procedure called householding. Under this procedure, multiple shareholders who reside at the same address may receive a single copy of our Notice of Internet Availability or the annual report and proxy materials, unless the affected shareholder has provided contrary instructions. This procedure reduces printing costs and postage fees, and saves natural resources.
If you received a household mailing this year and you would like to have additional copies mailed to you, please submit your request in writing to our transfer agent Wells Fargo Bank, N.A., Shareowner Services, Attn: Householding /The Gap, Inc., P.O. Box 64854, St. Paul, Minnesota 55164-0854, or by calling (651) 450-4104. Similarly, you may also contact our transfer agent if you received multiple copies of the Annual Meeting materials and would prefer to receive a single copy in the future.
If you hold your shares in street name (your shares are held in a brokerage account) you may revoke your consent to householding at any time by sending your name, the name of your brokerage firm, and your account number to Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717, or by calling (800) 542-1061.
If you are a shareholder of record (your shares are in your name and not held in a brokerage account) and you would like to opt out of householding for future mailings, please submit your request in writing to Wells Fargo Bank, N.A., Shareowner Services, Attn: Householding /The Gap, Inc., P.O. Box 64854, St. Paul, Minnesota 55164-0854, or call (651) 450-4104.
Proxy instructions, ballots and voting tabulations that identify individual shareholders are handled in a manner that protects the voting privacy of our shareholders. Your vote will not be disclosed to anyone, except
Voting Securities and Voting Rights
Our only outstanding voting securities are our shares of common stock, of which 490,175,292 shares were outstanding at the close of business on March 19, 2012. Only shareholders of record at the close of business on that date are entitled to vote at the meeting. Each shareholder is entitled to one vote per share on each matter submitted to the meeting.
The independent election inspector(s) appointed for the Annual Meeting will determine whether or not a quorum is present and will tabulate votes cast by proxy or in person at the Annual Meeting. The holders of a majority of the outstanding shares of our common stock, present in person or by proxy, will constitute a quorum for the transaction of business at the Annual Meeting.
Election of directors by shareholders will be determined by a majority of the votes cast with respect to each director, in person or by proxy, at the Annual Meeting. Pursuant to the Companys bylaws, a majority of the votes cast means that the number of shares voted for a director must exceed the number of votes cast against that director. Votes cast shall include votes for and against a nominee, and exclude abstentions and broker non-votes with respect to that nominees election. At any meeting of shareholders where nominees are subject to an uncontested election (the number of nominees is equal to the number of seats), any nominee for director who receives a greater number of votes against his or her election than votes for such election, shall submit to the Corporate Secretary of the Company a letter offering his or her resignation, subject to the Board of Directors acceptance. The Governance and Nominating Committee will consider the offer of resignation and will recommend to the Board the action to be taken. The Board of Directors will act promptly with respect to each such letter of resignation and will promptly notify the director concerned of its decision. The Board of Directors decision will be disclosed publicly.
The other matters submitted for shareholder approval at the Annual Meeting will be decided by the affirmative vote of a majority of the shares present, in person or by proxy, at the Annual Meeting and entitled to vote on the subject matter. Note that Proposals 2, 3, and 4 in this Proxy Statement are advisory only and will not be binding on the Company, the Board or any committee of the Board. The results of the votes on these proposals will be taken into consideration by the Company, the Board or the appropriate committee of the Board, as applicable, when making future decisions regarding these matters.
Abstentions are included in the determination of shares present for quorum purposes. Because abstentions represent shares entitled to vote, the effect of an abstention will be the same as a vote against a proposal. However, abstentions will have no effect on the election of directors.
If your shares are held in street name and you do not instruct your broker on how to vote your shares, your brokerage firm, in its discretion, may either leave your shares unvoted or vote your shares on routine matters. The proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the current fiscal year (Proposal 2) should be treated as a routine matter. To the extent your brokerage firm votes your shares on your behalf on this proposal, your shares also will be counted as present for the purpose of determining a quorum. On the other hand, your broker is not entitled to vote shares held for a beneficial holder on certain non-routine items, such as the election of directors (Proposal 1), the advisory vote on executive compensation (Proposal 3), and the shareholder proposal (Proposal 4), absent instructions from the beneficial holders of such shares.
If any other matter not mentioned in this Proxy Statement is properly brought before the meeting, including without limitation (i) matters about which the proponent failed to notify us on or before February 17, 2012, (ii) shareholder proposals omitted from this Proxy Statement and the form of proxy pursuant to the proxy rules of the SEC, and (iii) matters incidental to the conduct of the meeting, the proxyholders will vote upon such matters in accordance with their best judgment pursuant to the discretionary authority granted by the proxy. As of the date of the printing of this Proxy Statement, our management is not aware, nor has it been notified, of any other matters that may be presented for consideration at the meeting.
Proposals of Shareholders
If a shareholder would like us to consider including a proposal in our Proxy Statement and form of proxy for our Annual Meeting in 2013, the Companys Corporate Secretary must receive it no later than December 4, 2012. Proposals must be addressed to our Corporate Secretary at Gap Inc., Two Folsom Street, San Francisco, California 94105.
Our Amended and Restated Bylaws provide that in order for a shareholder to bring business before our Annual Meeting in 2013 (other than a proposal submitted for inclusion in the Companys proxy materials), the shareholder must give written notice to our Corporate Secretary by no later than the close of business (San Francisco Time) on February 14, 2013, and no earlier than January 15, 2013 (i.e., not less than 90 days nor more than 120 days prior to the first anniversary of the date of our 2012 Annual Meeting). The notice must contain information required by our Bylaws, including a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the Annual Meeting, the name and address of the shareholder proposing the business, the number of shares of the Companys stock beneficially owned by the shareholder, any material interest of the shareholder in the business proposed, any interests held by the shareholder in derivative securities of the Company or arrangements with persons holding derivative securities of the Company, and other information required to be provided by the shareholder pursuant to the proxy rules of the SEC. If a shareholder fails to submit the notice by February 14, 2013, then the proposed business would not be considered at our Annual Meeting in 2013 due to the shareholders failure to comply with our Bylaws. Additionally, in accordance with Rule 14a-4(c)(1) of the Securities Exchange Act of 1934, as amended, management proxyholders intend to use their discretionary voting authority with respect to any shareholder proposal raised at our Annual Meeting in 2013 as to which the proponent fails to notify us on or before February 14, 2013. Notifications must be addressed to our Corporate Secretary at Gap Inc., Two Folsom Street, San Francisco, California 94105. A copy of the full text of the Bylaw provisions relating to our advance notice procedure may be obtained by writing to our Corporate Secretary at that address or at www.gapinc.com (follow the Investors, Governance links).
NOMINEES FOR ELECTION AS DIRECTORS
Directors will be elected at the Annual Meeting to serve until the next Annual Meeting and until their successors are elected. The Governance and Nominating Committee of the Board of Directors has nominated the persons whose names are set forth below, all of whom are current directors. In the absence of instructions to the contrary, shares represented by the proxy will be voted for the election of all these nominees to the Board of Directors.
The Board of Directors has no reason to believe that any of the nominees will be unable to serve. However, if any nominee should for any reason be unavailable to serve, the Board of Directors may reduce the number of directors fixed by our Bylaws, or the proxies may be voted for the election of such other person to the office of director as the Board of Directors may recommend in place of the nominee. Set forth below is certain information concerning the nominees, including age, experience, qualifications and principal occupation during at least the last five years, based on data furnished by each nominee.
Robert J. Fisher and William S. Fisher are brothers. Information concerning our executive officers who are not also directors is set forth in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012.
Corporate Governance Guidelines
We have adopted Corporate Governance Guidelines that outline, among other matters, the role and functions of the Board, the responsibilities of the various Board committees, and the procedures for reporting concerns to the Board. Our Corporate Governance Guidelines are available at www.gapinc.com (follow the Investors, Governance, Guidelines links).
Code of Business Conduct
Our Code of Business Conduct is designed to promote a responsible and ethical work environment for all Gap Inc. employees and directors. The Code contains guidelines on conflicts of interest, legal compliance, Company information and assets, and political contributions and activities. Our Code of Business Conduct is available at www.gapinc.com (follow the Investors, Corporate Compliance, Code of Business Conduct links).
The Board of Directors has determined that the following directors are independent under the New York Stock Exchange (NYSE) rules and have no direct or indirect material relationships with the Company:
In particular, the Board has determined that none of these directors have relationships that would cause them not to be independent under the specific criteria of Section 303A.02 of the NYSE Listed Company Manual. In making this determination with respect to Robert and William Fisher, the Board considered the following factors: (i) with the exception of Robert Fishers brief period of service during 2007 as interim President and CEO of the Company during a CEO transition, neither Robert nor William Fisher has served as an officer of the Company in over 12 years; (ii) Donald Fisher (a founder of the Company and their father) ceased to be an executive officer of the Company upon his passing in September 2009; (iii) NYSE guidance indicates that ownership of even a significant amount of stock does not preclude a finding of independence; and (iv) the lease agreements with Doris Fisher (a founder of the Company and their mother) for the display of her personal art collection (further described on page 61) provide benefits to the Company, no financial benefits to Robert or William Fisher, and were negotiated with no involvement by Robert or William Fisher. After consideration of these factors, the Board concluded that there is no material relationship between the Company and Robert and William Fisher that would impact their independence under NYSE rules.
Board Leadership Structure
Our Company is led by Glenn Murphy, who has served as our Chairman and Chief Executive Officer (CEO) since August 2007. We believe that having Mr. Murphy act in both these roles is most appropriate for the Company at this time because it provides the Company with consistent and efficient leadership, both with respect to the Companys operations and the leadership of the Board. In particular, having Mr. Murphy act in both these roles increases the timeliness and effectiveness of the Boards deliberations, increases the Boards visibility into the day-to-day operations of the Company, and ensures the consistent implementation of the Companys strategies.
We also believe in the importance of independent oversight. We ensure that this oversight is truly independent and effective through a variety of means, including:
We believe that the combined role of Chairman and CEO, together with the significant responsibilities of our Lead Independent Director and other independent directors described above, provides an appropriate balance between leadership and independent oversight.
Board Oversight of Risk
The Board has an active role in overseeing the management of the Companys risks. Annually, the Companys Internal Audit department performs a comprehensive enterprise risk assessment encompassing a number of significant areas of risk, including strategic, operational, compliance, financial, and reputational risks. The assessment process is designed to gather data regarding the most important risks that could impact the Companys ability to achieve its objectives and execute its strategies. Primary assessment methods include interviews with key executives and Board members, review of critical Company strategies and initiatives, and monitoring of emerging industry trends and issues. The assessment is reviewed by the Companys CEO, Chief Financial Officer (CFO), and Chief Compliance Officer and presented to the Board to facilitate discussion of high risk areas. It provides the foundation for the annual Internal Audit plan, managements monitoring and risk mitigation efforts, and ongoing Board oversight. In addition, on a regular basis, management communicates with the Board, both formally and informally, about key initiatives, strategies and industry developments, in part to assess and manage the potential risks.
While the Board of Directors has the ultimate oversight responsibility for the risk management process, various committees of the Board also have responsibility for risk management. In particular, the Audit and Finance Committee focuses on financial and compliance risks, and the Compensation and Management Development Committee sets employee incentives with the goal of encouraging an appropriate level of risk-taking, consistent with the Companys business strategies.
Compensation Risk Assessment
Our management conducted a comprehensive review of each of the Companys compensation policies and practices for the purpose of determining whether any of those policies and practices are reasonably likely to have a material adverse effect on the Company. As a part of this review, each of the
Companys compensation policies and practices were compared to a number of specific factors that could potentially increase risk, including the specific factors that the SEC has identified as potentially triggering disclosure. The Company balanced these factors against a variety of mitigating factors. Examples of some of the mitigating factors are (i) compensation policies and practices are structured similarly across business units; (ii) the risk of declines in performance in our largest business units is well understood and managed; (iii) incentive compensation expense is not a significant percentage of any significant units revenues; (iv) for executives, a significant portion of variable pay is delivered through long-term incentives which carry vesting schedules over multiple years; (v) a mix of compensation vehicles and performance measures is used; (vi) stock ownership requirements for executives are in place; (vii) significant incentive plans are capped at all levels; (viii) threshold levels of performance must be achieved for the bulk of variable pay opportunities; and (ix) a clawback policy with respect to financial restatements is in place. Managements assessment was also presented to the Companys Chief Compliance Officer and the Chair of the Boards Compensation and Management Development Committee. As a result of managements review, the Company determined that its policies and practices are not reasonably likely to have a material adverse effect on the Company.
The Board met seven times during fiscal 2011. The Board of Directors has three standing committees: the Governance and Nominating Committee; the Audit and Finance Committee; and the Compensation and Management Development Committee, each described below. Each director nominee attended at least 75% of the meetings of the Board and committees on which he or she served. In addition, individual Board members often work together and with management outside formal meetings.
The independent directors are typically scheduled to meet without the presence of management during each regularly scheduled Board meeting. Our Lead Independent Director, Bob L. Martin, is responsible for organizing, managing and presiding over the independent director sessions of the Board, and reporting on outcomes of the sessions to the Chairman and CEO, as appropriate.
Governance and Nominating Committee
The Boards Governance and Nominating Committee is composed solely of independent directors, as defined under NYSE rules. The Committee met three times in fiscal 2011.
The members of the Governance and Nominating Committee are: Adrian D. P. Bellamy, Bob L. Martin (chair), and Mayo A. Shattuck III. This Committee assists the Board of Directors in fulfilling its oversight responsibilities relating to the Companys corporate governance matters, including the development of corporate governance guidelines, periodic evaluation of the Board, its committees and individual directors, identification and selection of director nominees, and such other duties as directed by the Board of Directors. The Committees charter is available at www.gapinc.com (follow the Investors, Governance, Board of Directors, Board Committees links).
Nomination of Directors
The Governance and Nominating Committee has the responsibility to identify, evaluate, and recommend qualified candidates to the Board. The Chairman and CEO, as well as at least two independent directors, must interview any qualified candidates prior to nomination. Other directors and members of management interview each candidate as requested by the Chairman and CEO or chair of the Committee.
The Committee engages third-party independent consultants to identify potential director nominees based on identified criteria and a needs assessment. These consultants have also assisted the Committee in identifying a diverse pool of qualified candidates and in evaluating and pursuing individual candidates at the direction of the Committee.
The Committee will also consider director nominees recommended by shareholders. Our Bylaws provide that in order for a shareholder to propose director nominations at the meeting of shareholders in 2013, the shareholder must give written notice to our Corporate Secretary by no later than the close of business (San Francisco Time) on February 14, 2013, and no earlier than January 15, 2013 (i.e., not less than 90 days nor more than 120 days prior to the first anniversary of the date of our 2012 Annual Meeting). The notice must contain information required by our Bylaws about the identity and background of each nominee and the shareholder making the nomination, including interests in derivative securities or arrangements with persons holding derivative securities, relationships or arrangements between the nominee and the shareholder making the nomination, and information that would enable the Board to determine a nominees eligibility to serve as an independent director. The notice also must contain other information that must be disclosed in proxy solicitations for election of directors under the proxy rules of the SEC (including information regarding the director nominees experience, qualifications, attributes and/or skills), the nominees consent to the nomination and to serve if elected, and certain other information required by our Bylaws. If a shareholder fails to submit the notice by February 14, 2013, then the nominee(s) of the shareholder will not be considered at our Annual Meeting in 2013 in accordance with our Bylaws. Notifications must be addressed to our Corporate Secretary at Gap Inc., Two Folsom Street, San Francisco, California 94105. A copy of the full text of the Bylaw provisions relating to our advance notice procedure may be obtained at www.gapinc.com (follow the Investors, Governance links) or to any shareholder on request by writing to our Corporate Secretary at the above address.
Qualifications and Diversity of Board Members
All director nominees must possess certain core competencies, some of which may include experience in retail, consumer products, international business/markets, real estate, store operations, logistics, product design, merchandising, marketing, general operations, strategy, human resources, technology, media or public relations, finance or accounting, or experience as a CEO or CFO. In addition to having one or more of these core competencies, Board member nominees are identified and considered on the basis of knowledge, experience, integrity, leadership, reputation, and ability to understand the Companys business. The Board believes that this diversity, including differences in backgrounds, qualifications, experiences, personal characteristics, gender and ethnicity/race, is important to the effectiveness of the Boards oversight of the Company. Accordingly, diversity is a factor that is considered in the identification and recommendation of potential director candidates. All director nominees are pre-screened to ensure that each candidate has qualifications that complement the overall core competencies of the Board. The screening process also includes conducting a background evaluation and an independence determination.
Evaluation of Directors
The Governance and Nominating Committee is also responsible for overseeing a formal evaluation process to assess the composition and performance of the Board, each committee, and each individual director on an annual basis. The assessment is conducted to identify opportunities for improvement and skill set needs, as well as to ensure that the Board, committees, and individual members have the appropriate blend of diverse experiences and backgrounds, and are effective and productive. As part of the process, each member completes a questionnaire that includes Board, committee and individual assessments. While results are aggregated and summarized for discussion purposes, individual responses are not attributed to any member and are kept confidential to ensure honest and candid feedback is received. The Committee discusses opportunities and agrees upon plans
for improvement as appropriate and reports the results annually to the Board. A director will not be nominated for reelection unless it is affirmatively determined that he or she is substantially contributing to the overall effectiveness of the Board.
Audit and Finance Committee
The Boards Audit and Finance Committee is composed solely of independent directors, as defined under SEC and NYSE rules. The Committee met eight times in fiscal 2011.
The members of the Audit and Finance Committee are Isabella D. Goren, Jorge Montoya, Mayo A. Shattuck III (chair), and Kneeland C. Youngblood (who is not standing for reelection). This Committee assists the Board of Directors in fulfilling its oversight responsibilities relating to the integrity of our financial statements, compliance with legal and regulatory requirements, the registered public accounting firms qualifications, independence and performance, the performance of the Internal Audit function, the effectiveness of the corporate compliance program, and such other duties as directed by the Board of Directors. The Committees charter is available at www.gapinc.com (follow the Investors, Governance, Board of Directors, Board Committees links).
Audit Committee Financial Expert
Our Board of Directors has determined that the Audit and Finance Committee has two members who are audit committee financial experts as determined under Regulation S-K Item 407(d)(5) of the Securities Exchange Act of 1934: Mr. Shattuck and Ms. Goren, both of whom are independent directors as determined under applicable NYSE listing standards.
Compensation and Management Development Committee
The Boards Compensation and Management Development Committee is composed solely of independent directors, as defined under SEC and NYSE rules. The Committee met six times in fiscal 2011.
The members of the Compensation and Management Development Committee are Adrian D. P. Bellamy (chair), Domenico De Sole, Bob L. Martin, and Katherine Tsang. This Committee assists the Board of Directors in fulfilling its oversight responsibilities relating to executive officer and director compensation, succession planning for senior management, development and retention of senior management, and such other duties as directed by the Board of Directors. The Committees charter is available at www.gapinc.com (follow the Investors, Governance, Board of Directors, Board Committees links).
The Committee approves all of the Companys executive compensation policies and programs and all compensation awarded to executive officers. Our CEO evaluates each executive officer and discusses with the Committee his assessment and recommendations for compensation. The CEO is not present during the Committees deliberations about his own compensation. The Committee also oversees senior management development, retention, and succession plans. The Committee has delegated authority, within defined parameters, to the CEO or Committee Chair to approve grants of stock units to employees below the Vice President level (see the Long-Term Incentive Grant Practices section on page 42 for more details). The Committee has also delegated authority, within defined parameters, to the Companys Human Resources personnel to make certain non-material changes to the Companys employee benefit plans.
The Committee has engaged Frederic W. Cook & Co. as its independent executive compensation consultant. The consultant is consulted by the Committee from time to time on the compensation program structure and specific individual compensation arrangements (see the Role of the CEO and Compensation Consultant section on page 35 for more details).
Compensation Committee Interlocks and Insider Participation
During fiscal 2011, Messrs. Bellamy, De Sole, and Martin, and Ms. Tsang served on the Compensation and Management Development Committee of the Board of Directors. During fiscal 2011, none of our executive officers served on the board of directors of any company where one of that companys executive officers served as one of our board members.
Attendance of Directors at Annual Meetings of Shareholders
Our policy regarding attendance by directors at our Annual Meeting of Shareholders states that our Chairman, Lead Independent Director, and committee chairs should attend and be available to answer questions at our Annual Meeting, if reasonably practicable. Our policy also encourages all other directors to attend. All of our director nominees attended our 2011 Annual Meeting except Ms. Goren, who was appointed to the Board of Directors after our 2011 Annual Meeting.
Communication with Directors
Interested parties can send direct communications to our Board of Directors (through our Chairman, Lead Independent Director, and Corporate Secretary) by email to: email@example.com.
Stock Ownership Guidelines for Directors
We have adopted minimum stock ownership guidelines for our Directors. Each non-management director should, within three years of joining the Board of Directors, hold stock of the Company worth at least three times the annual base retainer then in effect. Management directors are required to own stock of the Company in accordance with our stock ownership requirements for executives, described on page 42. Our insider trading policy prohibits speculation in Gap Inc. stock, including prohibiting short sales, and prohibits directors from entering into transactions intended to hedge their ownership interest in the Companys stock.
Additional Corporate Governance Information
If you would like further information regarding our corporate governance practices, please visit the governance and compliance sections of www.gapinc.com (follow the Investors link). Those sections include:
Retainer and Meeting Fees
The table below shows the annual retainer, attendance fees, and committee chair retainer we paid to our non-employee directors in fiscal 2011:
Employee directors are not eligible for the annual retainer or attendance fees, and are not eligible to serve on committees or as committee chairs.
Non-employee directors receive the following under our 2011 Long-Term Incentive Plan:
The annual stock units granted to continuing non-employee directors following the Companys annual shareholders meeting, as well as the initial grant made to any non-employee director who is first elected to the Board at the Companys annual shareholders meeting, are granted on June 30 of each year; provided, however, that if the Companys annual shareholders meeting takes place after June 30, then the related stock unit grants will be granted on the first business day following that meeting. All initial stock units to new non-employee directors who are appointed other than at the annual shareholders meeting are granted on the date of appointment. The number of stock units are rounded down to the
nearest whole share. These stock units are fully-vested but are subject to a three-year deferral period. During the deferral period, the stock units earn dividend equivalents which are reinvested in additional units annually. Following the deferral period, shares in an amount equal in value to the stock units, including units acquired through dividend equivalent reinvestment, will be issued to each non-employee director unless a further deferral election has been made; provided, however, that shares and accumulated dividend equivalents will be issued immediately upon ceasing to be a director of the Company.
Expense Reimbursement and Other Benefits
We also pay for or reimburse directors for approved educational seminars and for travel expenses related to attending Board, committee, and approved Company business meetings. Additionally, we provide non-employee directors access to office space and administrative support for Company business from time to time.
Directors and their spouses are eligible to receive discounts on our merchandise in accordance with the Gap Inc. corporate employee merchandise discount policy.
In January 2006, we established The Gap, Inc. Deferred Compensation Plan (DCP) whereby highly compensated employees, including executive officers, and non-employee directors may elect to defer receipt of certain eligible income. The DCP allows eligible employees to defer a percentage of their salary and bonus on a pre-tax basis, and allows non-employee directors to defer their retainers and meeting fees. The deferred amounts are indexed to the participants choice of approved investment funds. Non-employee director deferrals are not matched, and above-market or preferential interest rate options are not available on deferred compensation.
The Non-Employee Director Retirement Plan is an unfunded deferred compensation plan that provides for annual benefits if a non-employee director has served on the Board for five consecutive years and is still a director at age 72. In fiscal 1996, the Board of Directors terminated this plan for future directors. Mr. Bellamy is the only current director who may be eligible for plan benefits, assuming he meets the requirements of the plan, including remaining on the Board until age 72. In that event, he would receive an annual benefit payment equal to $27,000. The duration of these annual payments would equal the number of years that he served on the Board. If Mr. Bellamy dies before the maximum payment period expires, payments would continue for the life of his surviving spouse, or until the end of the maximum payment period, whichever is sooner.
Directors are eligible to participate in our Gift Match Program available to all employees, under which we match contributions to eligible nonprofit organizations, up to certain annual limits. In fiscal 2011, Mr. Murphy, our Chairman and CEO, had an annual matching limit of $100,000. The annual limit for non-employee directors was $15,000 under the Gift Match Program. Mr. Murphy, as an employee, is also eligible to participate in our Board Service Program that matches nonprofit board service by Senior Director or above level employees with contributions to eligible nonprofit organizations, up to an annual limit of $10,000.
Director Compensation Summary
The following table sets forth certain information regarding the compensation of our directors in fiscal 2011, which ended January 28, 2012.
PROPOSAL NO. 2 Selection of Independent Registered Public Accounting Firm
The Audit and Finance Committee of the Board of Directors has selected Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending February 2, 2013. If shareholders fail to ratify the selection of Deloitte & Touche LLP, the Audit and Finance Committee will reconsider the selection. If the selection of Deloitte & Touche LLP is approved, the Audit and Finance Committee, in its discretion, may still direct the appointment of a different independent auditing firm at any time and without shareholder approval if the Audit and Finance Committee believes that such a change would be in the best interest of us and our shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE SELECTION OF DELOITTE & TOUCHE LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.
Representatives of Deloitte & Touche LLP are expected to be present, available to make statements, and available to respond to appropriate shareholder questions at the Annual Meeting.
Principal Accounting Firm Fees
The following table sets forth the aggregate fees paid and accrued by us for audit and other services for the fiscal years ended January 28, 2012 and January 29, 2011 provided by our principal accounting firm, Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively Deloitte & Touche).
The Audit and Finance Committee has a policy to pre-approve all services performed by our independent registered public accounting firm. This policy requires that all services performed by Deloitte & Touche, whether audit or non-audit services, must be pre-approved by the Audit and Finance Committee or a designated member of the Audit and Finance Committee, with any such services reported to the entire Audit and Finance Committee at the next scheduled meeting.
Report of the Audit and Finance Committee
The Audit and Finance Committee assists the Board of Directors in fulfilling its oversight responsibilities relating to the integrity of our financial statements, compliance with legal and regulatory requirements, the independent registered public accounting firm qualifications, independence and
performance, the performance of the Internal Audit function, the effectiveness of the corporate compliance program, and such other duties as directed by the Board of Directors. The Committee operates under a written charter (available at www.gapinc.com, follow the Investors, Governance, Board of Directors, Board Committees links) adopted by the Board of Directors. The Committee is composed exclusively of directors who are independent under New York Stock Exchange listing standards and Securities and Exchange Commission rules.
The Committee has reviewed and discussed the audited financial statements of the Company for the fiscal year ended January 28, 2012 with the Companys management. In addition, the Committee has discussed with Deloitte & Touche LLP, the Companys independent registered public accounting firm, the matters required to be discussed by the applicable Public Company Accounting Oversight Board and Securities and Exchange Commission requirements.
The Committee also has received the written disclosures and the letter from Deloitte & Touche LLP required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountants communications with the Committee concerning independence, and the Committee has discussed the independence of Deloitte & Touche LLP with that firm.
Based on the Committees review and discussions noted above, the Committee recommended to the Board of Directors that the Companys audited financial statements be included in the Companys Annual Report on Form 10-K for the fiscal year ended January 28, 2012 for filing with the Securities and Exchange Commission.
Mayo A. Shattuck III (Chair)
Isabella D. Goren
Jorge P. Montoya
Kneeland C. Youngblood
Notwithstanding anything to the contrary in any of the Companys previous or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this Proxy Statement or future filings with the Securities and Exchange Commission, in whole or in part, this report shall not be deemed to be incorporated by reference into any such filing.
PROPOSAL NO. 3 Advisory Vote on the Compensation of The Gap, Inc.s Named Executive Officers
Pursuant to Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Company is providing shareholders with an advisory (non-binding) vote on the overall compensation of our named executive officers. Accordingly, the following resolution will be submitted for a shareholder vote at the 2012 Annual Meeting:
RESOLVED, that the shareholders of The Gap, Inc. (the Company) approve, on an advisory basis, the overall compensation of the Companys named executive officers, as described in the Compensation Discussion and Analysis section, the accompanying compensation tables, and the related narrative disclosure pursuant to Item 402 of Regulation S-K, set forth in the Proxy Statement for this Annual Meeting.
The Board and the Compensation and Management Development Committee, which is comprised entirely of independent directors, will consider the outcome of the shareholders non-binding advisory vote when making future executive compensation decisions to the extent they can determine the cause or causes of any significant positive or negative voting results.
As described in detail under the section entitled Compensation Discussion and Analysis, our executive compensation program is designed to provide the level of compensation necessary to attract, motivate, and retain talented and experienced executives and to motivate them to achieve short-term and long-term goals, thereby enhancing shareholder value and creating a successful company. Overall, we believe our executive compensation program meets each of our compensation objectives. The table below highlights key compensation practices both the practices we believe support strong governance principles and the practices we have not implemented because we do not believe they would serve our shareholders long-term interests. We were pleased to have received over 98% of all votes cast in support of the overall compensation of our executives at our 2011 Annual Meeting of Shareholders.
Shareholders are encouraged to read the Compensation Discussion and Analysis section of this Proxy Statement, the accompanying compensation tables, and the related narrative disclosures, which more thoroughly discuss how our compensation policies and procedures implement our compensation philosophy.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE TO APPROVE, ON AN ADVISORY BASIS, THE OVERALL COMPENSATION OF THE COMPANYS NAMED EXECUTIVE OFFICERS BY VOTING FOR THIS RESOLUTION.
PROPOSAL NO. 4 Shareholder Proposal
Stephen M. Jaeger and Yasodha Natkunam, 708 Salvatierra Street, Stanford, CA, 94305, who have represented that they collectively own 125 shares of the Companys common stock through the Jaeger-Natkunan Family Trust (UAD 02/20/2003), have given notice of their intention to present a proposal at the annual meeting. The proposal and the proponents supporting statement appear below in italics.
The Board strongly opposes the adoption of this proposal and asks shareholders to review the Boards response to this proposal, which follows the proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE AGAINST THIS SHAREHOLDER PROPOSAL.
Ending Trade Partnerships with Sri Lanka
Shareholder Proposal for Gap Inc
In 2009, at the end of the long-standing civil war in Sri Lanka, an estimated 40,000 Tamil civilians were killed and a further 300,000 interned in military camps and subjected to torture, rape and extrajudicial executions, in direct violation of international humanitarian law. The United Nations Secretary Generals panel of experts report on Sri Lanka1 found credible allegations of war crimes and crimes against humanity, which is currently being appraised by the UN Human Rights Council in Geneva. UKs Channel 4 News also released a documentary of these mass atrocities.2 Sri Lankas Government-appointed Lessons Learned and Reconciliation Commission has thus far failed to provide substantive evidence of accountability. Situation reports in 2011 from various organizations, including Amnesty International,3 raise grave allegations of on-going human rights violations in Sri Lanka. The US Senate unanimously passed Resolution 84,4 calling for measures for lasting peace in Sri Lanka. The US Senates Committees on Appropriations has proposed that international institutions vote against any loan, agreement or other financial support (except humanitarian aid) for Sri Lanka unless it complies with standards set by international law. But, the Sri Lankan Governments position of impunity continues to empower manufacturers such as Brandix, a major supplier of Gap Inc, to expand its operations in Sri Lanka.
We are concerned that a reputable company such as Gap Inc, which is one of the largest garment manufacturers in Sri Lanka, will appear to endorse the crimes perpetrated by the Government of Sri Lanka, if it continues its trade with that country. We believe that this claim is not merely theoretical since Gap Inc is providing Sri Lanka with the foreign exchange that keeps its massive military viable.
We believe that negative publicity from national press and consumer protests targeting Gap Inc stores, can damage the companys reputation, hurt employee morale, and increase its cost to acquire and retain customers, all of which can negatively impact Gap Incs shareholders.
We believe that shareholders do not want to be connected to human rights violations, but through their investments in Gap Inc securities, they may inadvertently be funding such atrocities in Sri Lanka.
In the face of human rights concerns, we see no compelling reason to invest in companies that fund human rights violations, particularly since Sri Lanka has failed to address human rights issues despite continued calls by the international community. We believe there are ample alternatives for Gap Inc to temporarily move its manufacturing base to other cost-effective regions that pose no such threat.
We, as shareholders of Gap Inc, request that the Board institute phased procedures for Gap Inc to end trade partnerships with Sri Lanka, until the Government of Sri Lanka ceases human rights violations.
In addition to preventing investments in Sri Lanka, the proposal calls for corrective actions to address existing investments in other countries that are associated with violations of human rights.
Board of Directors Statement Against the Shareholder Proposal
Gap Inc. shares the Proponents concerns for the protection of human rights and is committed to advancing the rights of garment workers around the world. The Board has considered this proposal and the issues surrounding the protection of human rights as it pertains to our business operations, and recommends a vote against this proposal for the following reasons:
FOR ALL OF THE FOREGOING REASONS, THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THIS SHAREHOLDER PROPOSAL.
BENEFICIAL OWNERSHIP OF SHARES
The following table sets forth certain information as of March 19, 2012, to indicate beneficial ownership of our common stock by (i) each person known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock, (ii) each director and nominee and each executive officer named in the Summary Compensation Table of this Proxy Statement, and (iii) all of our directors and executive officers as a group. Unless otherwise indicated, beneficial ownership is direct and the person indicated has sole voting and investment power. Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
Note Regarding Various Fisher Family Holdings: SEC rules require reporting of beneficial ownership of certain shares by multiple parties, resulting in the same shares being listed multiple times in the table above. The 81,000,000 shares held by Fisher Core Holdings L.P. (see footnote 8 above) are included three additional times in the above table under the names of Messrs. Robert J. Fisher, John J. Fisher, and William S. Fisher (that is, there are only 81,000,000 shares rather than 324,000,000 shares). In addition, the shares described in footnotes (4), (5) and (10) above for which voting and investment power is shared by Messrs. Robert J. Fisher, John J. Fisher, and William S. Fisher actually represent an aggregate of 26,490,492 shares, rather than 52,980,984 shares, as a result of that shared voting and investment power. For purposes of the above table, removing the shares counted multiple times results in an aggregate total ownership of 30.1% of outstanding shares for Messrs. John J. Fisher, Robert J. Fisher, William S. Fisher and Fisher Core Holdings L.P. The aggregate total ownership of Mrs. Doris F. Fisher and Messrs. John J. Fisher, Robert J. Fisher, William S. Fisher and Fisher Core Holdings L.P. is 38.1% of outstanding shares. Mrs. Doris F. Fisher, and Messrs. John J. Fisher, Robert J. Fisher, and William S. Fisher each disclaim beneficial ownership over shares owned by other members of the Fisher family and Fisher Core Holdings L.P., except as specifically disclosed in the footnotes above.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Companys directors and executive officers, and holders of more than 10% of the Companys common stock, to file with the SEC reports about their ownership of the Companys common stock. Such directors, officers and 10% shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
Securities and Exchange Commission regulations require us to identify in this Proxy Statement anyone who filed a required report late during the most recent fiscal year. Based on our review of forms we received, or written representations from reporting persons stating that they were not required to file these forms, we believe that during fiscal 2011 all Section 16(a) filing requirements were satisfied on a timely basis.
For Named Executive Officers (Executives)
Summary of Fiscal 2011
Fiscal 2011 was a challenging year for much of the global economy, as well as the retail industry and many of our customers. Unemployment remained high in our core North American market and consumers remained focused on value and were cautious about spending, which directly impacted our business. The economic crisis in Europe and natural disaster in Japan further increased stock market volatility and affected our performance. At Gap Inc., store traffic was sluggish, and our top-line performance did not meet our expectations. In addition, our largest expense, cost of goods sold, escalated sharply in 2011 as a result of global cotton price inflation, which put significant pressure on our margins. We did not achieve our incentive compensation earnings targets and, as a result, payouts under our incentive plans for fiscal 2011 performance were below target. While it was a difficult year, we also achieved a number of noteworthy successes:
As in past years, our compensation programs continue to align executives with our short and long-term objectives. We were pleased to have received over 98% of all votes cast in support of the overall compensation of our executives at our 2011 Annual Meeting of Shareholders. The Compensation and Management Development Committee of the Board of Directors (the Committee) considered the results of this advisory vote and believes that it shows that our shareholders support our compensation philosophy and executive compensation programs. We did not change the overall elements of our compensation programs in fiscal 2011 following the shareholder vote. Within that same framework, in the first quarter of 2011, we made compensation decisions intended to (i) motivate achievement of performance goals, (ii) address the uncertainty and headwinds created by volatile and rising product input costs, and (iii) support retention of key executives. These actions included:
Fiscal 2011 CEO Summary
Our CEO received a significant grant of performance shares and stock options in 2007 as part of his initial compensation package. No further stock grants were made until 2010, when he received performance shares under the LGP. In 2011, we granted him additional performance shares under the LGP and stock options consistent with the structure for other executives. The long-term incentive grant value he received in 2011 increased from the two prior years because no stock options were awarded in 2008 through 2010 in light of the significance of his initial compensation package.
The performance shares granted in 2007 gave our CEO the opportunity to earn up to 2 million shares based on cumulative net earnings performance over a four year period. Based on our performance over this period, no shares were earned, demonstrating how the value actually realized by executives can vary significantly from the grant date fair value required in the Summary Compensation Table. None of the stock options granted in 2007 have been exercised.
As described above, our stock price, and returns to our shareholders must increase significantly for the stock options granted in 2011 to create meaningful value for the CEO. For performance shares granted under the LGP, based on performance against goals through fiscal 2011 and assuming achievement of target performance in future periods, actual shares earned would be below the target number of shares.
It is important to recognize that the grant date fair value of the performance shares and stock options described above and set forth in our Summary Compensation Table is for accounting and disclosure purposes, and is not actual earned compensation value. The chart below compares the aggregate grant date fair value (as disclosed in the current and prior year Grants of Plan-Based Awards table of our proxy statement) of outstanding (vested and unvested) grants to the CEO against the realized and current value of those same awards at the end of fiscal 2011 based on our closing price of $18.93. Performance shares under the LGP that continue to be subject to multi-year performance goals and are not yet earned are not included in the chart.
The chart below shows the proportion of each major component of our CEOs compensation, as reported in the Summary Compensation Table, the majority of which is weighted toward incentive compensation tied to the financial performance of the Company and the long-term return realized by shareholders.
Overall, we believe our executive compensation program met each of our compensation objectives. The table below highlights key compensation practices both the practices we believe support strong governance principles and the practices we have not implemented because we do not believe they would serve our shareholders long-term interests.
Our compensation program is intended to align total compensation for executives with the short-and long-term performance of the Company and to enable us to attract and retain executive talent. Specifically, the program is designed to:
Our program rewards executives for the achievement of corporate and divisional financial and operating objectives, for their individual contributions to these results, and for optimizing long-term returns to shareholders. The majority of each executives total compensation opportunity is weighted toward incentive compensation tied to the financial performance of the Company and the long-term return realized by shareholders. When we do not achieve targeted performance levels and/or our stock does not appreciate, compensation that can be realized by our executives is substantially reduced. When
we exceed targeted performance levels and/or our stock price appreciates, compensation that can be realized by our executives is substantially increased. We believe that this is the most effective means of aligning executive incentives with our shareholders interests.
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 limited perquisites that are available to a broader group of employees or that are intended to maximize productivity.
The use and weight of each compensation element is based on the judgment of the Committee regarding the importance of each compensation objective in supporting the Companys business and talent strategies, as well as the structure of these elements for executives at other companies. Base salary, benefits and perquisites represent less than half of each executives potential compensation at target performance levels, to emphasize the importance of performance-based compensation.
Compensation Analysis Framework
The Committee reviews executive compensation at least annually. The Committees review includes base salary, annual incentives, long-term incentives and the value of benefits and perquisites. Each element is considered individually and in total using tally sheets, which are intended to summarize all of the elements of total actual and potential compensation and wealth accumulation. The tally sheets present the dollar value of each compensation component, including accumulated vested and unvested long-term incentive gains and potential gains using stock price assumptions, vesting schedules for long-term incentive awards, accumulated deferred compensation and potential severance benefits.
The Committee also uses a summary of compensation data covering other companies to support its analysis. The Committee selected a broad spectrum of retail and consumer products companies for purposes of comparing market compensation levels (the peer group) because we have both recruited from and lost executive talent to these industries in the past and to ensure appropriate scope and complexity relative to the Company. Because the size of the peer group companies varies considerably, regression analysis is used where appropriate to adjust the compensation data for differences in company revenues.
The peer group is reviewed by the Committee each year. The peer group used in 2011 was comprised of the companies listed below and was unchanged from 2010.
The majority of peer group companies provide compensation data through surveys conducted by Towers Watson, an international consulting company. The surveys provide levels of base salary, annual incentives, and long-term incentive grant values in a summarized form, and we believe that this data provides a reasonable indicator of total compensation values for the peer group. This data is supplemented by information obtained through proxy statement disclosures and other public sources. The Committee uses the market survey data along with the tally sheet data as a frame of reference to inform compensation decisions, but compensation is not set to meet specific benchmarks or percentiles.
In conducting its analysis and determining compensation, the Committee also considers these factors:
The Committee also considers managements recommendations and advice from the Committees independent compensation consultant. Significant weight is placed on the recommendations of the CEO for compensation other than his own. The Committee also reviews the accounting and tax implications of each compensation element, and shareholder dilution in the case of equity awards. Analysis for each compensation component and the decisions that were made are described below.
Role of the CEO and Compensation Consultant
The CEO evaluates each executive using the factors described above under Compensation Analysis Framework and makes recommendations to the Committee about the structure of the compensation program and individual arrangements. The CEO is generally present at Committee meetings when compensation, other than his own, is considered and approved. However, approval rests solely with the Committee.
The Committee has engaged Frederic W. Cook & Co. as its independent compensation consultant to advise the Committee periodically on the compensation program structure and individual compensation arrangements. The consultant was selected by the Committee and does not provide any other services to the Company. The consultant attends Committee meetings from time to time, presents an annual briefing on retail-industry compensation trends and developments, and is also available to the Committee outside of meetings as necessary. The consultant reports directly to the Committee, although the consultant meets with management from time to time to obtain information necessary to advising the Committee.
Base salaries are set at a level that the Committee believes will effectively attract and retain top talent, considering the factors described above under Compensation Analysis Framework. In addition, the Committee considers the impact of base salary changes on other compensation components where
applicable. Potential deferred compensation accumulation and severance benefits are also impacted when base salaries are changed, but these effects are generally not considered when making base salary decisions. The Committee generally reviews base salaries for executives in the first fiscal quarter, and as needed in connection with promotions or other changes in responsibilities. The table below summarizes base salaries during fiscal 2011, and changes that occurred during the year.
Annual Incentive Bonus
Fiscal 2011 Annual Bonus
The Company has an annual cash incentive bonus program for executives to motivate and reward achievement of financial and individual objectives and to provide a competitive total compensation opportunity. Mr. Murphys annual incentive bonus was based exclusively on earnings performance given his role as CEO and direct accountability for operating results, and his target percentage of base salary was higher to ensure competitiveness and to recognize the impact of his role relative to other executives. For executives other than Mr. Murphy, the annual incentive bonus continued to be based on two components:
In setting the fiscal 2011 annual bonus structure, the Committee considered the Companys business priorities and the factors described above under Compensation Analysis Framework. The table below describes the target annual bonus and potential payout range for each executive.
Financial Performance Component
Bonus payments based on financial performance are generally made under the Executive Management Incentive Compensation Award Plan (Executive MICAP). The Committee approves threshold, target and maximum performance goals at the beginning of each performance period. Bonuses are paid under the financial performance component only if threshold goals are exceeded. The Committee may reduce (but not increase) earned bonuses under this component. Actual bonuses are generally paid in March.
Bonuses for financial performance for fiscal 2011 were based on earnings goals. Earnings before interest and taxes was used to measure both Company and division performance, in both cases subject to potential adjustment for certain items such as extraordinary and non-recurring items. The earnings measure was selected for fiscal 2011 because the Committee believed that earnings should continue to be the primary focus of executives and is a good measure of actual operating performance within their control and accountability.
In light of rising and volatile product input costs, in particular cotton prices, the Committee determined that setting the performance measurement period for the financial component of the 2011 annual bonus to two six-month periods was prudent. This allowed for establishment of goals for performance periods over which potential performance could be more accurately projected. The results were weighted 45% for the first half of the year and 55% for the second half of the year due to the seasonality of our business. Bonus payouts under the financial component were made following completion of the full fiscal year, based on results for each six-month performance period.
The table below shows, on an aggregate basis, the first half and second half fiscal 2011 earnings goals expressed as a percentage of fiscal 2010 actual results (as reported). With a still-cautious consumer and limited ability to offset product cost increases with corresponding price increases, earnings goals were set at a level that was lower than our fiscal 2010 results. The Committee decided that ensuring that meaningful incentives were in place was important in order to motivate the best performance possible in a situation where it became apparent during the first half that it would be very challenging to achieve earnings at a level close to fiscal 2010 performance. Also shown are the actual earnings percentages achieved (based on weighted results for first half and second half performance as described above). The results for the first half were adjusted to exclude the estimated impact of the natural disaster in Japan in March 2011, which the Committee viewed as an event over which management had no control. No other adjustments to the results were made other than the use of budgeted foreign exchange rates for each half for division executives to eliminate currency fluctuations at the division level.
Individual Objectives Component
Executives other than the CEO were eligible to receive bonuses based on individual and organizational objectives. At the beginning of the year, an average of over 30 objectives were established for each executives business unit or function(s). For fiscal 2011, these objectives consisted of initiatives centered on six key themes: (1) People, which included developing a globally effective organization and diversity; (2) Product, which included pipeline speed and pricing; (3) Stores, which included product availability, brick & click and supply chain reengineering; (4) Growth, which included new store openings in key markets; (5) Productivity initiatives, and (6) Creativity initiatives. In each case, there were additional specific subcategories of goals.
In addition to the organizational objectives listed above, each executive also had individual objectives specific to his or her role.
The extent to which these objectives were met, partially met, or exceeded was assessed qualitatively by the CEO at the end of the fiscal year. In this regard, while certain of the objectives had quantitative components, there was no formulaic link between the extent to which a particular objective was satisfied and the ultimate payout that an executive received. The CEO had the discretion to take only some of the goals into account, and could consider some of them more heavily than others. In addition, in judging each executives individual performance, the CEO took into account any additional initiatives and challenges that the executive faced over the course of the year. Payout amounts were then recommended to the Committee for consideration and approval.
For fiscal 2011, target earnings goals applicable to each executive were not achieved and, as a result, payouts under the financial performance component were below target amounts. The table below describes for each executive the actual achievement levels for (1) first half financial performance, (2) second half financial performance, (3) full year weighted performance, and (4) the individual component, as well as the actual bonus earned for fiscal 2011.
In February 2012, Mr. Wyatt ceased to be an executive officer of the Company. As a result, he did not receive a rating for the individual objectives component, or an annual bonus payout for fiscal 2011.
Stock-based long-term incentives create a direct link between executive compensation and shareholder returns by linking a significant portion of total compensation to the performance of the Companys stock. Unlike some of the members of our peer group, the Company does not have a pension plan, and we rely on long-term incentives to provide a substantial percentage of each executives potential retirement savings. Stock-based awards are granted under our 2011 Long-Term Incentive Plan (the Plan), which has been approved by our shareholders.
Long-term incentives are typically granted annually to executives (or, in the case of new executives, at the time they join the Company). However, there may also be grants in connection with promotions, to promote retention, and/or to create focus on specific performance objectives. Annual long-term incentive awards have typically consisted of stock options and, based on achievement of performance goals, stock units or performance shares. From time to time, the Committee also grants stock units that vest based on continued service with the Company specifically to promote retention.
In determining the long-term incentive structure and award amounts, the Committee considered the factors described above under Compensation Analysis Framework, including a review of each individuals accumulated vested and unvested awards, the current value and potential value over time using stock appreciation assumptions, vesting schedules, comparison of individual awards between executives and in relation to other compensation elements, shareholder dilution and accounting expense.
We believe stock options focus executives on managing the Company from the long-term perspective of an owner. Stock options provide value to the recipient only if the price of our stock increases. Because of this inherent linkage to increased shareholder returns, we believe stock options are an important component of executive long-term incentive compensation, but that this component as a percentage of total long-term incentive value before consideration of any special grants should typically be weighted at less than 50% so that the majority of long-term incentive value at grant is placed on full-value awards subject to achievement of performance goals. Consistent with prior grant practice, the Committee approved grants of stock options in the first quarter of fiscal 2011, including the first grant to the CEO since 2007. Award amounts were differentiated based on the executives role in the organization and competitive practice.
Stock Units and Performance Shares
A portion of long-term incentives is delivered in units representing full-value shares of our stock to drive performance, promote retention and foster a long-term ownership perspective. Unlike stock options, full-value share awards, in combination with stock ownership requirements, subject executives to the same downside risk experienced by shareholders but still encourage retention if our stock price does not appreciate, and help to focus executives on sustaining the value of the Company. In general, we believe the grant or vesting of a significant percentage of full-value shares for executives should be based on performance against annual or long-term objectives unless they are made to offset compensation from prior employment in the case of new hires. However, to balance the Companys performance, retention, and ownership objectives, in the past we have granted stock units or other full-value shares that vest only for continued service with the Company and we may do so in the future.
2007 CEO New Hire Performance Shares
When Mr. Murphy joined the Company in 2007, he was granted performance shares. Performance shares were chosen to focus Mr. Murphy directly on sustained improvements in financial performance, and to further link his compensation to shareholder returns and sustaining the value of the Company. Cumulative net earnings was selected as the performance measure, because net earnings is widely followed as a performance indicator by investors, is straightforward and simple, and cumulative performance against this metric is generally correlated to long-term shareholder returns.
Mr. Murphys performance shares were based on the achievement of cumulative reported net earnings goals for fiscal years 2008 through 2011 described below, subject to adjustment for certain extraordinary items and other non-recurring events.
Actual cumulative net earnings through fiscal 2011 were $4.106 billion. Because the minimum performance level was not achieved, no shares were earned.
LGP (Long-Term Growth Program)
The executive leadership team participates in the LGP, which is intended to promote sustained improvement in financial performance and long-term value creation for shareholders, while taking into account the inherent difficulty in setting long-term performance goals in the volatile retail industry. The key features of the program are described below:
The strategic rationale for selecting performance shares was to link the executives compensation to changes in our stock price and returns to our shareholders over an extended period, helping to balance risks and potential rewards. The use of average attainment of annual earnings goals over a three-year period, coupled with the use of a cumulative earnings measure at the Company level over this time frame, maintains our ability to set realistic goals at the division level while creating focus on results over a longer time horizon and a stronger linkage to overall long-term company results for all executives. The Committee believes that the LGP strikes an appropriate balance between meeting our compensation objectives and establishing performance goals over a timeframe that is realistic, and will appropriately reward executives for superior financial performance and shareholder returns over the long-term.
The table below describes the potential payout range as a percentage of the target award for the fiscal 2011-2013 performance period. The target number of shares was determined using our closing stock price on the date of grant and a percentage of base salary for each executive. The performance share grants represent only an opportunity to earn actual shares of the Companys stock based on achievement of performance goals over three years. The associated amount listed in the Summary Compensation Table under Stock Awards is the grant date fair value for accounting purposes, which is the required disclosure under SEC rules, not the compensation that may be actually realized by each executive. For example, based on our performance in 2010 and 2011, the actual awards Mr. Murphy would earn under outstanding LGP grants would be below the target number of shares but above threshold, assuming target performance was achieved in future periods. The same threshold, target, and maximum earnings goals described above under Fiscal 2011 Annual Bonus applied to the 2011 performance year under the LGP. All payments are in shares at vesting and dividends are not paid or accrued on unvested shares.
In February 2012, Mr. Wyatt ceased to be an executive officer of the Company. As a result, the performance shares in the table above were cancelled.
The table below describes for each executive the actual achievement levels as a percentage of target shares for the completed fiscal years under the LGP awards for the fiscal 2010-2012 and fiscal 2011-2013 performance periods described above. The annual goal for fiscal 2011 was weighted for presentation in the table below based on the separate two six-month goals. Final achievement is still subject to a cumulative company earnings goal over the same three year performance period.
Special Stock Unit Grants
Mr. Peck received a stock unit grant of 75,000 shares in March 2011 in connection with his appointment as President, Gap North America. The grant was made in recognition of the significance of his new role, to position the retention value of his long-term incentives appropriately relative to other executives, and to enhance the retention value of those incentives.
Mr. Keiser received a stock unit grant of 50,000 shares in November 2011 in recognition of additional responsibilities. The grant was made to position the retention value of his long-term incentives appropriately relative to other executives and to enhance the retention value of those incentives.
The grants for Messrs. Peck and Keiser will vest 50% two years following the grant date to create a retention incentive for a shorter time horizon and 50% three years following the grant date to promote longer-term retention.
Long-Term Incentive Grant Practices
It has been our practice to grant long-term incentives to executives on an annual basis, usually in the first quarter of each fiscal year. This timing was selected because it follows the release of our annual financial results and completion of annual performance reviews. We also grant long-term incentives on other dates to newly hired executives and periodically in connection with promotions or for special recognition and retention. Grants are typically approved by the Committee at a meeting and are effective on the meeting date or, if approved by unanimous written consent, the date of the last signature on the consent. However, the effective date for new hires is no earlier than the first day of employment. Grants to employees below the Vice President level are approved by the CEO or Committee Chair on a monthly basis using authority delegated by the Committee, typically for new employees hired in the prior month.
All stock options granted to employees during fiscal 2011 had an exercise price equal to the closing price of our stock on the date of grant.
Stock options typically vest based on continued service at a rate of 25% annually beginning one year from the grant date, which we have determined helps meet our retention objectives. We have also used other vesting schedules to align with timing of compensation being forfeited at a prior employer for new hires or to align with critical retention periods. Stock options are typically granted for a maximum term of ten years and vested options are exercisable for three months following employment termination. Vesting is generally accelerated upon death or retirement if the stock options are held for at least one year.
Stock units that are granted to executives other than the CEO have in most cases been scheduled to vest over three years, but the schedule may differ based on critical retention or performance periods, or the vesting of compensation being forfeited at a prior employer for new hires. Executives generally must be employed on the vesting date or awards are forfeited. Vesting is generally accelerated upon death or retirement if the awards are held for at least one year and any performance conditions have been previously satisfied.
Stock Ownership Requirements for the Executive Leadership Team
In 2004, we adopted minimum stock ownership requirements for certain executive positions to more closely link executive and shareholder interests, to balance potential rewards and risks, and to encourage a long-term perspective in managing the company. Each covered executive had five years from December 1, 2004 (or from the first day named as a covered executive, if later) to reach the requirement. The number of required shares was increased effective January 31, 2010.
As of January 28, 2012, all covered executives had either met the shares requirement in the table below or had remaining time to do so.
Executives not meeting the requirement must retain 50% of after-tax shares acquired through stock compensation programs until the requirement is reached.
A complete description of the requirements, including accepted forms of ownership, is located at www.gapinc.com (follow the Investors, Governance, Executive Stock Ownership links). The Companys insider trading policy applicable to executives prohibits speculation in the Companys stock, including prohibiting short sales and prohibiting executives subject to the ownership requirements from entering into transactions intended to hedge their ownership interest, up to the amount of the ownership requirement.
Benefits and Perquisites
Medical, dental, life and disability insurance and other benefits that are available to all full-time headquarter employees are available to executives. The following additional benefits and limited perquisites are also available to executives, with no related tax gross-ups for any associated taxable income:
The terms of Mr. Murphys post-termination severance benefits were determined through the course of arms-length negotiations of his employment agreement. As part of these negotiations, the
Committee considered competitive practice at selected peer group companies and general industry, accounting and tax implications, and the potential compensation that could be realized at multiple future points in time using a wealth accumulation analysis. We entered into the termination of employment provisions in order to address competitive concerns when Mr. Murphy was recruited by providing fixed compensation amounts that would offset the potential risk of joining the Company and foregoing other opportunities. Enhanced benefits in the case of a change of control of the Company were also included for the same reasons and to help ensure retention of Mr. Murphy and continuity in the case of a potential or actual change of control. These benefits do not include tax gross ups for additional taxes that may be due under Section 280G and only provide for acceleration of outstanding equity in the event of an actual change in control and termination of employment. The Committee determined that the benefits and structure were well within normal competitive practice, reasonable and appropriate for the circumstances, and were necessary to attract Mr. Murphy to the Company. The provisions are described in more detail on page 55. In addition, while compensation decisions affect potential payouts under severance arrangements, those arrangements generally did not affect decisions on other compensation elements as these severance provisions may never come into effect.
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 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 Companys interests.
In 2011, the Committee extended the severance benefits described on page 57 for certain executives in the case of an involuntary termination other than for cause prior to February 13, 2015. As part of its review, the Committee analyzed the same factors described above for the CEO and used its judgment in determining the level of benefits that would provide reasonable income security. 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 conservative relative to peer group practices. In addition, while compensation decisions affect potential payouts under severance arrangements, those arrangements generally did not affect decisions on other compensation elements as these severance provisions may never come into effect.
In February 2012, Mr. Wyatt ceased to be an executive officer and did not receive any severance benefits.
Accounting and Tax Considerations
Accounting, tax and related financial implications to the Company and executives are considered during the analysis of our compensation and benefits program and individual elements. Overall, the Committee seeks to balance attainment of our compensation objectives with the need to maximize current tax deductibility of compensation that may impact earnings and other measures of importance to shareholders. The Committee determined that the accounting and tax impacts described below were reasonable in light of our objectives.
In general, base salary, annual cash incentive bonus payments, and the costs related to benefits and perquisites are recognized as compensation expense at the time they are earned or provided. Share-based compensation expense is recognized in our consolidated statements of income for stock options, stock units, and performance shares.
Subject to the exceptions and limits below, we deduct for federal income tax purposes all payments of compensation and other benefits to executives. We do not deduct deferred compensation until the year that the deferred compensation is paid to an executive.
Section 162(m) of the Internal Revenue Code generally does not allow a tax deduction to public companies for compensation over $1,000,000 paid to the principal executive officer or any of the three most highly compensated executive officers (other than the principal executive officer or principal financial officer) unless the compensation is based on attainment of pre-established objective performance goals and certain other requirements are met. It is the Companys preference to qualify executive compensation as deductible under Section 162(m) where we determine it is consistent with the Companys interests and compensation objectives. Our compensation plans have generally been designed to permit awards that qualify as deductible under Section 162(m). However, the individual objectives component of the annual incentive bonus is qualitative in nature and is subject to the deduction limits of Section 162(m). In addition, stock units, other than performance shares, that have vesting based only on continued service are also subject to the deduction limits of Section 162(m). Amounts deferred under the Deferred Compensation Plan are not subject to the Section 162(m) deduction limitation in the year of deferral.
Section 4999 and Section 280G of the Internal Revenue Code provide that executives could be subject to additional taxes if they receive payments or benefits that exceed certain limits in connection with a change in control of the Company and that the Company could lose an income tax deduction for such payments. We have not provided any executive with tax gross ups or other reimbursement for tax amounts the executive might be required to pay under Section 4999.
Section 409A of the Internal Revenue Code imposes additional taxes and interest on underpayments in the event an executive defers compensation under a plan that does not meet the requirements of Section 409A. We believe we are operating in compliance with Section 409A and have structured our compensation and benefits programs and individual arrangements in a manner intended to comply with the requirements of IRS regulations.
Recovery and Adjustments to Awards
Subject to the approval of the Board, the Company will require reimbursement and/or cancellation of any bonus or other incentive compensation, including stock-based compensation, awarded to an executive officer or other member of the Companys executive leadership team after April 1, 2007 where all of the following factors are present: (a) the award was predicated upon the achievement of certain financial results that were subsequently the subject of a restatement, (b) in the Boards view, the executive engaged in fraud or intentional misconduct that was a substantial contributing cause to the need for the restatement, and (c) a lower award would have been made to the executive based upon the restated financial results. In each such instance, the Company will seek to recover the individual executives entire annual bonus or award for the relevant period, plus a reasonable rate of interest.
Compensation Committee Report
The Compensation and Management Development Committee (the Committee) has reviewed and discussed this Compensation Discussion and Analysis with management. Based on the review and discussions, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Companys annual report on Form 10-K for the fiscal year ended January 28, 2012 and the Proxy Statement for the 2012 Annual Meeting of Shareholders.
Adrian D.P. Bellamy (Chair)
Bob L. Martin
Domenico De Sole
Summary Compensation Table
The following table shows compensation information for fiscal 2011, which ended January 28, 2012, for our CEO, CFO and the three other most highly compensated executive officers at year-end, as required under SEC rules (named executive officers). The table also shows compensation information for fiscal 2010 and fiscal 2009, which ended January 29, 2011 and January 30, 2010, respectively, for those named executive officers who also were named executive officers in either of those years.
Grants of Plan-Based Awards
The following table shows all plan-based awards granted to the named executive officers during fiscal 2011, which ended on January 28, 2012. The option awards and the unvested portion of the stock awards identified in the table below are also reported in the Outstanding Equity Awards at Fiscal Year-End table.
Outstanding Equity Awards at Fiscal Year-End
The following table shows all outstanding equity awards held by the named executive officers at the end of fiscal 2011, which ended on January 28, 2012.