Gap (GPS)

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 annual performance period. Bonuses are paid under the financial performance component only if threshold earnings 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 were based on earnings goals. Earnings before interest and tax is the measure used for those with Company-wide responsibilities and a similar measure is used for those with division-level responsibilities, in both cases subject to adjustment for certain items such as extraordinary and non-recurring items. The earnings measure was selected for fiscal 2008 because the Committee believed that earnings should continue to be a primary focus of executives and is a good measure of actual operating performance within their control and accountability.

For fiscal 2008, the Committee determined that for Mr. Peck, the financial performance component measurement would be based 100% on Gap Inc. results prior to August 21, 2008, the effective date of his Outlet Division appointment, and for the balance of the fiscal year would be based 50% on Outlet Division results and 50% on Gap Inc. results. The Committee also agreed that the payout under this component would be no less than the amount he would have received in his previous role as EVP, Strategy and Operations for the full fiscal year at his previous salary. The Committee determined this treatment was appropriate because Mr. Peck was instrumental in developing strategies for both organizations and continued the majority of his previous responsibilities following his appointment as President, Outlet Division. Based on performance results for the Outlet Division and Gap Inc., Mr. Peck’s actual payout under the financial component exceeded the amount he would have received in his previous role.

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For fiscal 2008, the financial performance component of the annual incentive bonus for Mr. Wyatt was based on the higher of the bonus payable had he remained in the role of President, Outlet at his previous salary for the entire fiscal year, or the prorated bonus payable based on his current role, as of August 21, 2008, as President, Old Navy. The Committee determined this treatment was appropriate because the strategies Mr. Wyatt put in place at Outlet impacted Outlet’s fiscal 2008 results, and in recognition of his ability to impact Old Navy results in fiscal 2008. Mr. Wyatt’s actual payout under the financial component was based on Outlet results at his previous salary.

The table below shows the fiscal 2008 earnings targets expressed as a percentage of fiscal 2007 actual results (normalized for transfers between divisions for comparison) that were established by the Committee to provide appropriate incentives in light of the Company’s continuing business turnaround, and the actual earnings percentage achieved after adjusting the results to exclude certain non-recurring costs.

Financial Performance Component

Bonus payments based on financial performance are generally made under the Executive MICAP. The Committee approves threshold, target and maximum performance goals at the beginning of each annual performance period. Bonuses are paid under the financial performance component only if threshold earnings goals are met. The Committee may reduce (but not increase) bonus payments payable under this component. Actual bonuses are generally paid in March.

For fiscal 2007, bonuses for financial performance were based on earnings goals. Earnings before interest and tax is the measure used for those with company-wide responsibilities and a similar measure is used for those with Division-level responsibilities, subject to adjustment for certain defined items such as extraordinary and non-recurring items. The earnings measure was selected because the Committee believed that for 2007 earnings should be a primary focus of executives and that measurement should be based on results within their control and accountability. The table below shows the fiscal 2007 earnings targets expressed as a percentage of fiscal 2006 actual results (normalized for transfers between divisions for comparison) that were established by the Committee to provide appropriate incentives in light of the Company’s business turnaround, and the actual earnings percentage achieved for fiscal 2007 after adjusting the results to exclude certain non-recurring restructuring and other costs.

Ms. Simmons’ bonus under the financial component was paid outside the Executive MICAP and was based on financial performance for the Company, weighted at 75% (50% prior to her promotion). Ms. Simmons’ target bonus as a percentage of base salary was increased to 75% upon her promotion in August 2007, consistent with other executives at her level.

For fiscal 2007, the financial performance component of the annual incentive bonus for Ms. Hansen was based on the higher of the bonus payable had she remained in the role of President, Banana Republic or the bonus payable in her current role as President, Gap North America. The

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Committee determined this treatment was appropriate because the strategies Ms. Hansen put in place at Banana Republic impacted Banana Republic’s fiscal 2007 results, and in recognition of her ability to impact Gap North America results in fiscal 2007. Ms. Hansen’s actual bonus was based on Gap North America results.

Robert J. Fisher and Mr. Murphy were not eligible to participate for fiscal 2007.

Financial Performance Component

Bonus payments based on financial performance are generally made under the Executive Management Incentive Compensation Award Plan (“Executive MICAP”), a description of which is located in the Proxy Statement for our 2005 Annual Meeting of Shareholders. The Committee approves threshold, target and maximum performance goals at the beginning of each performance period. Actual bonus amounts are calculated pursuant to a predetermined formula that incorporates the extent to which performance goals are achieved and the bonus target for each executive. Bonuses are paid under the Executive MICAP only if threshold earnings goals are met. The Committee may reduce (but not increase) bonus payments that would otherwise be payable based upon the predetermined formula. Actual bonuses are generally determined and paid in March.

For fiscal 2006, bonuses under the Executive MICAP were based on earnings (70% weight), economic profit (20% weight) and free cash flow (10% weight) goals, set for the Company in the case of Mr. Pressler, Mr. Pollitt and Ms. Sage-Gavin, and by division in the case of Ms. Hansen, Ms. Harriss and Ms. Ming. The definitions for earnings, economic profit, and free cash flow referenced in this section and in the following sections are detailed in the Executive MICAP. These non-GAAP financial measures and weightings were selected because we believed for 2006 that, while earnings improvement should be the primary focus of executives, effective use of capital and free cash flow generation should also be considered as part of a balanced assessment of financial performance. We determined that the use of these non-GAAP financial measures was appropriate to ensure that executives would focus on achieving financial results within their control and accountability that align with the Company’s overall financial growth strategy in fiscal 2006, as adjusted for certain defined items and expenses.

The threshold, target, and maximum performance goals based on these measures were set based on our intent that over time, there should be approximately an 80%-90% chance that the threshold performance level will be reached, a 60% chance that target level will be reached and a 10%-20% chance that maximum will be reached. However, our financial performance can be volatile

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and has not been easy to predict. In most cases, we achieved the threshold performance level required for bonus payments to executives in one of the past three years. For fiscal 2006, threshold earnings goals were not met and, as a result, no payment was made except in the case of Ms. Hansen in connection with the performance of the Banana Republic Division. Ms. Hansen received $738,904, which was 191% of the targeted amount for the financial performance component.