Gap (GPS)

Performance Units

A portion of long-term incentives is delivered in units representing full value shares of our stock to promote retention and an ownership perspective. Unlike stock options, full value share awards, in combination with our stock ownership requirements, subject executives to the same downside risk experienced by our shareholders, but provide superior retention value compared to stock options if our stock price does not significantly appreciate. In general, we believe the grant or vesting of a significant percentage of full value share awards for executives should be based on performance against annual or long-term objectives unless they are made to offset compensation from a prior employer in the case of a new hire. However, to meet the Company’s objective to retain key executive talent, we may grant performance units or other full value share awards which vest based only on continued service with the Company.

Executives are eligible under Executive MICAP to earn performance units payable in shares of our stock based on achievement of annual performance goals (“performance stock awards”). The Committee approves threshold, target, and maximum performance goals and potential awards at the beginning of each annual performance period. Actual awards are calculated pursuant to a predetermined formula that incorporates the extent to which performance goals are achieved and the award target for each executive. Awards are made only if threshold performance levels are met. The Committee may reduce (but not increase) actual awards that would otherwise be granted based upon the predetermined formula. Actual awards are generally determined and granted in March. Awards are subject to a vesting period based on continued service with the Company. For fiscal 2006, the awards are scheduled to vest 50% two years following the grant date to create a significant retention incentive for a shorter time horizon and 50% three years following the grant date to promote longer term retention.

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For fiscal 2006, performance stock awards 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. Pursuant to her employment offer, Ms. Robertson was not eligible to earn a performance stock award for fiscal 2006. No award was made if the threshold earnings goal was not met. The measures were changed from the Gap Inc. EPS growth measure used during fiscal 2005 to create greater focus on achievement of division financial results in the case of Ms. Hansen, Ms. Harriss and Ms. Ming and on corporate operating results in the case of Mr. Pressler, Mr. Pollitt, and Ms. Sage-Gavin. The threshold, target, and maximum performance goals based on these measures were set using the same estimated likelihood of achievement as that used for our annual incentive bonus. Over the two years the program has been in place, we have not achieved threshold performance levels in most cases.

The table below describes the target award, the potential award range as a percentage of base salary for each executive officer, and the actual award earned for fiscal 2006. The target award percentage for Division Presidents, including Ms. Hansen, Ms. Harriss and Ms. Ming, was increased from 30% to 40% of base salary for fiscal 2006 to create greater focus on division financial results.

For fiscal 2006, threshold earnings goals were not met and no performance stock awards were made except in the case of Ms. Hansen in connection with the performance of the Banana Republic Division. Ms. Hansen received an award of 191% of the targeted amount.

In addition to the program described above, the following performance units were granted:

In April 2006, the Committee granted Ms. Harriss performance units covering 100,000 shares and Ms. Hansen performance units covering 50,000 shares. These grants were made to promote retention and to incent and reward achievement of a cumulative earnings goal for the period beginning January 2006 and ending in February 2008. Vesting of these awards is contingent on achievement of the earnings goal. Vesting of these awards is also contingent on continued service with the Company and this restriction will lapse 50% in April 2008 and 50% in April 2009. As a result, the performance units granted to Ms. Harriss were cancelled following her departure from the Company. Based on the financial performance of the Company during fiscal 2006, we believe the likelihood that the performance units granted to Ms. Hansen will ultimately vest is low.

In January 2007, the Committee considered the retention risk for key executives that was created by the departure of Mr. Pressler and our challenging business environment, a highly competitive market for executive talent, and the lack of bonus payouts and long-term incentive value for some executives. The Committee determined that it was in the best interests of our Company to

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take action to promote retention of key executives by approving grants of performance units at the end of fiscal 2006 to Ms. Hansen, Mr. Pollitt, Ms. Robertson and Ms. Sage-Gavin which will vest based on continued service with the Company. The vesting schedule is 50% two years following the grant date and 50% three years following the grant date, except for Mr. Pollitt, whose award will vest 25% one year following the grant date, 25% two years following the grant date and 50% three years following the grant date due to heightened near-term retention risk. In determining award amounts, the Committee considered the executive’s role, the value that would be needed to retain each executive (using a subjective assessment), the ratio of base salary represented by the value of outstanding, unvested awards taken together with the performance unit awards, and the potential value over time of all outstanding awards and potential compensation based on performance. The Committee determined that a portion of the awards should vest no later than two years from the grant date to create a significant retention incentive for the critical retention period, with the remainder vesting after three years to promote longer term retention.

Performance Units

Executive officers are eligible under Executive MICAP to earn performance units payable in shares of our stock each year based on achievement of specific performance goals. Specific measurements that can be used by the Committee (in its sole discretion) each period are detailed in the Executive MICAP. We approve threshold, target, and maximum performance goals and potential awards at the beginning of each annual performance period. Actual awards are calculated pursuant to a predetermined formula that incorporates the extent to which performance goals are achieved and the award target for each executive officer. Awards are made only if threshold performance levels are met. We certify the attainment level of all goals and approve specific grants to executive officers. We also review the performance of each executive officer and, in our sole discretion, may reduce (but not increase) actual awards. Following grant, awards are subject to a vesting period based on continued service with the Company.

For fiscal 2005, awards were based on performance against Earnings Per Share (EPS) growth goals set for the Company. The target annual award was equal to 30% of the executive officer’s base salary, except for the CEO, whose target award was 50%. Awards could have ranged from 50% to 200% of the target amount unless the threshold EPS growth goal was not met, in which case no award is made. We determined that the Company’s performance in fiscal 2005 did not meet the threshold EPS growth goal and therefore no awards were granted to executive officers, including the CEO.

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