This excerpt taken from the HBI DEF 14A filed Mar 10, 2008.
Proposal 3 Approval of the Hanesbrands Inc. Performance-Based Annual Incentive Plan
At the Annual Meeting, our stockholders will be asked to approve the Hanesbrands Inc. Performance-Based Annual Incentive Plan, or the AIP. We previously adopted the AIP, and the Board has recommended it for stockholder approval. Pursuant to its terms, the AIP will terminate if it is not approved by our stockholders. Stockholder approval of the AIP is being sought to ensure that any bonuses we pay qualify as deductible performance-based compensation under Section 162(m) of the Internal Revenue Code.
Awards made under the AIP to our named executive officers in 2007 are reported in the Summary Compensation Table appearing below and are discussed in the Compensation Discussion and Analysis section below. Amounts, if any, payable under the AIP for 2008 and future years are dependent on performance and are therefore not determinable at this time. No additional advance approval of the AIP will be required for purposes of Internal Revenue Code Section 162(m) unless the Compensation Committee changes the material terms of the AIP.
The following is a summary of the AIP, which is qualified in its entirety by reference to the AIP, a copy of which is attached as Appendix C.
Material Features of the AIP
Purpose. The purpose of the AIP is to motivate performance and to advance the interests of Hanesbrands by linking a portion of the annual compensation paid to participants to the achievement of financial objectives and key performance indicators, while contributing to increased long-term stockholder value. The AIP provides annual bonuses designed to satisfy the conditions for performance-based compensation under Internal Revenue Code Section 162(m) that qualifies for an exemption from Section 162(m)s $1 million limit on deductible compensation.
Eligible Participants. Eligible participants include all executive officers and each other employee of Hanesbrands who has been selected to participate in the AIP, and in 2007 consisted of approximately 960 employees.
Incentive Pool. Under the AIP, the Compensation Committee will grant annual incentive award opportunities to key employees of Hanesbrands. Each annual incentive award will be paid out of an incentive pool established for a performance period. Typically, the performance period will be our fiscal year. The
incentive pool will equal 3.0% of Hanesbrands operating income for the performance period. Our operating income is our operating income for the applicable performance period as reported in our income statement and as adjusted to eliminate the effects of charges for restructurings, discontinued operations, extraordinary items, other unusual or non-recurring items, and the cumulative effect of tax or accounting changes.
Individual Awards. Within 90 days of the start of a performance period, the Compensation Committee will allocate a percentage of the incentive pool to participants that the Compensation Committee believes may be subject to the limitations of Section 162(m). In no event may more than 40% of the total pool for a performance period be allocated to any one participant. A participants allocation of the incentive pool is the maximum potential award for Internal Revenue Code purposes. Awards made under the AIP to our named executive officers in 2007 were below the maximum potential awards, and are reported in the Summary Compensation Table appearing below and discussed in the Compensation Discussion and Analysis section below. The actual award attributable to any performance period may be reduced before payment as discussed in the next paragraph.
Award Payment and Reduction. At the end of each performance period, each named executive officers incentive award will be certified by the Compensation Committee based on the employees allocated portion of the incentive pool and the attainment of specified performance measures. The Compensation Committee may reduce (but in no event may increase) the amount payable to any executive officer based upon financial and non-financial goals established by the Compensation Committee discussed in the Compensation Discussion and Analysis section below.
Payment of any award shall be made in cash (or in stock or stock-based awards under the Omnibus Incentive Plan). Employees also may elect to defer payments pursuant to the terms of any deferred compensation plan then in effect.
The Compensation Committee may make retroactive adjustments to, and employees, including named executive officers, would be required to reimburse us for, any cash or equity-based incentive compensation paid to employees where such compensation was predicated upon achieving certain financial results that were substantially the subject of a restatement, if as a result of the restatement it is determined that the employees otherwise would not have been paid such compensation, regardless of whether or not the restatement resulted from the employees misconduct. While the foregoing decision is made in the discretion of the Compensation Committee, the AIP provides that Hanesbrands shall, to the extent permitted by governing law, require reimbursement of any cash or equity based incentive compensation paid to any named executive officer where: (i) the payment was predicated upon the achievement of certain financial results that were subsequently the subject of a substantial restatement, and (ii) in the view of the Compensation Committee the named executive officer engaged in fraud or misconduct that caused or partially caused the need for the substantial restatement.
The Compensation Committee may make retroactive adjustments and seek reimbursement for any AIP payment previously paid to a participating employee where a participating employee breaches any confidentiality, proprietary information, or non-compete provisions of any agreement or plan then in effect between Hanesbrands and the employee.
Administration. The AIP is administered by the Compensation Committee. Each member of the Compensation Committee is an outside director within the meaning of Internal Revenue Code Section 162(m). The Compensation Committee has the authority to interpret the AIP, to prescribe, amend and rescind rules and regulations relating to it and to make all other determinations deemed necessary or advisable for the administration of the AIP. The determinations of the Compensation Committee pursuant to its authority under the AIP shall be conclusive and binding.
Amendment and Termination. The Compensation Committee, subject to the approval of the Board where required, may alter, amend, suspend or terminate the AIP at any time, but any amendment to the AIP shall be approved by our stockholders if approval is necessary for annual bonuses to continue qualifying as performance-based compensation under Internal Revenue Code Section 162(m).
Certain Federal Income Tax Consequences
All amounts paid pursuant to the AIP constitute taxable income to the employee when received. If a participant elects to defer a portion of the award, the participant may be entitled to defer the recognition of income. Generally, and subject to Internal Revenue Code Section 162(m), we will be entitled to a federal income tax deduction when amounts paid under the AIP are included in employee income. Subject to stockholder approval of the AIP, the failure of any aspect of the AIP to satisfy Internal Revenue Code Section 162(m) shall not void any action taken by the Compensation Committee under the AIP.
As stated above, the AIP is being submitted for stockholder approval at the Annual Meeting so that payments under the AIP can qualify for deductibility by Hanesbrands under Internal Revenue Code Section 162(m). However, stockholder approval of the AIP is only one of several requirements under Internal Revenue Code Section 162(m) that must be satisfied for amounts payable under the AIP to qualify for the performance-based compensation exemption under Internal Revenue Code Section 162(m), and approval of the AIP by stockholders should not be viewed as a guarantee that all amounts paid under the AIP will in practice be deductible by Hanesbrands.
The foregoing is only a summary of the effect of federal income taxation upon employees and Hanesbrands with respect to amounts paid pursuant to the AIP. It does not purport to be complete and does not discuss the tax consequences arising in the context of the employees death or the income tax laws of any municipality, state or foreign country in which the employees income or gain may be taxable.
The Board unanimously recommends a vote FOR approval of the AIP.