Gap (GPS)

Stock Options

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, as well as competitive practice, stock options have generally been weighted more heavily than the stock units described below as a percentage of total long-term incentive value before consideration of any special grants. The Committee approved grants of stock options in the first quarter of fiscal 2008 to executives other than the CEO, consistent with prior grant practice. Awards made to division presidents and the CFO were of a similar size to each other and were larger than those made to other executives based on their role in the organization and competitive practice.

Stock Options

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, and competitive practice, stock options have generally been weighted more heavily than the stock units described below as a percentage of total long-term incentive value. No awards of stock options were made to other executives in fiscal 2007 given the substantial value of the awards described above. For fiscal 2008, the Committee approved grants of stock options to executives, consistent with prior grant practice.

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Stock Options

We believe stock options focus executives on managing the Company from the long-term perspective of an owner with an equity stake in the business. Stock options provide value to the recipient only if the price of our stock increases above the option exercise price. Because of this inherent linkage to increased shareholder returns and competitive practice, stock options have generally been weighted more heavily than the performance units described below as a percentage of total long-term incentives. Similarly, stock options granted to Mr. Pressler in the past represented a higher percentage of total long-term incentives than in the case of other executives. The Committee determined that, in order to continue to motivate and retain key talent, it was in the best interests of the Company to grant stock options to executives in the first quarter of fiscal 2006, consistent with our usual grant practice. The Committee determined the amount of each grant made in 2006 based on the factors previously described. Ms. Robertson’s initial grant was larger than annual grants made to other executives based on the Committee’s judgment of what was required to induce her to join the Company, the value of awards she had received at her former employer, and to enable long-term retention. No award was made to Mr. Pressler in fiscal 2006 in light of the Company’s performance and the significant award made to him in fiscal 2005.

Stock Options

We believe that stock options focus executives on managing the Company from the long-term perspective of an owner with an equity stake in the business. Stock options are tied to the future performance of the Company’s stock and provide value to the recipient only if the price of the Company’s stock increases above the option exercise price. It has been our practice to grant stock options to executive officers on an annual basis, usually in the first quarter of each fiscal year. Options typically are scheduled to vest 25% per year beginning one year from the date of grant, and executives generally must be employed by the Company at the time of vesting in order to exercise the options. We determined that, in order to continue to motivate and retain key talent, it was in the best interests of the Company to grant stock options to executives in the first quarter of 2005. In order to determine the appropriate number of options to be granted to executive officers, we considered competitive practices, including the grant value of options in relation to the executive’s role, performance and potential, internal comparisons, and shareholder dilution. In addition, we considered such factors as awards previously granted to an individual, an individual’s outstanding awards, the vesting schedule of the individual’s outstanding awards, the aggregate total of all outstanding options and awards, and the relative value of awards offered by comparable companies to executives in comparable positions. Special additional stock options and other stock rights may be granted or approved from time to time to executive officers in connection with promotions, assumption of additional responsibilities and other factors.