Gap (GPS)

Post-Termination Arrangements

CEO

The terms of Mr. Murphy’s 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 benefits that could be received 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. The Committee determined based on its analysis that the benefits and structure are well within normal competitive practice, reasonable and appropriate for the circumstances, and necessary to attract Mr. Murphy to the Company. The provisions are described in more detail on page 44.

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Executives Other Than the CEO

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

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

Post-Termination Arrangements

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 has typically included base salary continuation, payments in lieu of health and welfare benefits continuation, outplacement services and continued financial planning services. Severance payments typically stop or are reduced if the executive secures other employment. The Company may also grant severance benefits upon involuntary job elimination or as part of a negotiated termination of employment in exchange for a release of claims against the Company and other agreements in the Company’s interests.

Executives Other Than the CEO

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

CEO

The terms of Mr. Murphy’s post-termination severance benefits were determined through the course of arms-length negotiations of his employment agreement. As part of these negotiations, the Committee analyzed the same factors described above for executives other than the CEO in determining amounts payable and triggering events. 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

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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. The Committee determined based on its analysis that the benefits and structure are well within normal competitive practice, reasonable and appropriate for the circumstances, and necessary to attract Mr. Murphy to the Company. The provisions are described in more detail on page 48.

Post-Termination Arrangements

We have historically evaluated inclusion of severance benefits for executives on a case by case basis, with no formal plan in which all executives participate. Severance arrangements are generally intended to provide income security in the case of an involuntary termination other than for cause during a defined period of time following the first date of employment or, less frequently, the start date for a new role within the Company. Severance has typically included base salary continuation, payments in lieu of health and welfare benefits continuation, outplacement services and continued financial planning services. The Company may also grant severance benefits upon involuntary job elimination or as part of a negotiated termination of employment in exchange for a release of claims against the Company and other agreements in the Company’s interests. During fiscal 2006, we did not have any agreements providing for severance benefits for any executives other than for Mr. Pressler, Ms. Ming and Ms. Robertson.

Mr. Pressler stepped down from the position of President and CEO in January 2007 and, as a result, the severance benefits detailed on page 45 were provided in accordance with his employment agreement. Severance benefits provided to Ms. Ming, who left the Company in October 2006, are detailed on page 46. Ms. Harriss, who left the Company in February 2007, did not receive severance benefits.

The departure of Mr. Pressler in January 2007, along with the Company’s business performance and external market speculation regarding corporate structure changes, created substantial uncertainty and distraction among key executives. The Committee determined that the lack of formal income protection in the case of an involuntary termination (other than for cause) was a contributing factor to this uncertainty and that action was required to mitigate the associated business risk created by the potential departure of key executives. Based on this determination, in February 2007 the Committee approved the severance benefits described on page 44 for certain executives in the case of an involuntary termination other than for cause prior to February 13, 2009. In determining the nature of the benefits for each executive, the Committee considered the individual circumstances of each executive, competitive practice, accounting and tax implications, and the potential benefits that could be received by each executive at multiple future points in time.