This excerpt taken from the CHUX DEF 14A filed Apr 19, 2007.
Answers to particular questions regarding the plan
Management level employees of the company typically have received annual cash bonuses. What is different about the plan?
Nothing. The plan merely puts into a written document precisely what the company has been doing for many years; namely, linking pay with performance by awarding cash bonuses to certain employees based on the achievement by the company and/or its operating units of certain performance targets which are established each year. We do not currently anticipate that amounts paid under the plan in the foreseeable future will be materially different than amounts paid historically.
If nothing has changed, why does the company need the plan at all?
The substantive reason for the plan (and asking shareholders to approve it) is to allow the company to deduct amounts over $1,000,000 (if any) that it pays to certain company employees as an expense in calculating the companys Federal income taxes pursuant to Section 162(m) of the Internal Revenue Code; i.e., to lower the companys taxes. In addition, having a written document which clearly defines certain ground rules for determining bonuses is good corporate practice.
What is Section 162(m) of the Internal Revenue Code?
Generally speaking, Section 162(m) limits the ability of a company to deduct compensation in excess of $1,000,000 paid to named executive officers of public companies (i.e., the CEO and the next four highest paid individuals). Compensation that is performance-based is excluded from this calculation and does not count against this $1,000,000 threshold.
Stock options and stock appreciation rights which are issued at market price at the time of grant are considered to be performance based and are therefore excluded from the relevant calculation. On the other hand, cash bonuses and restricted stock awards are only considered to be performance-based when they are (i) paid pursuant to a plan that has been approved by the companys shareholders (and re-approved every five years), and (ii) based on objective measures established at the outset of the relevant period by a board or committee consisting solely of outside directors. It is the first of these criteria that the company is now trying to satisfy. The company has typically satisfied the second criteria with respect to its cash bonus plan.
What happens if the plan is not approved by the shareholders?
The only thing that will happen is that the company may lose the ability to deduct amounts over $1,000,000 (if any) that it pays to certain company employees as an expense in calculating its Federal income taxes. This would increase the taxes the company pays and reduce earnings per share.
We believe that at least a part of a management-level employees annual cash compensation should be tied to achieving measurable results, and that a cash incentive plan is needed to attract and retain highly qualified management personnel. Therefore, even if the plan is not approved, the company will continue to establish performance targets for its management-level employees and pay them a cash bonus as part of their annual compensation if those targets are achieved.
Do all employees participate in the plan?
No. Although the committee has the discretion to include or exclude employees from the plan, the plan only applies to officers of the company and its operating units, although the company does award performance based cash awards to many of its employees, including restaurant level management.
The plan contemplates a maximum award of $3,000,000 to any covered officer. Does the company plan on awarding this much money to anyone?
Not in the foreseeable future. Pursuant to the Internal Revenue Code, the plan has to specify a maximum limit, and $3,000,000 was chosen as a maximum payout because it represents a level that the company reasonably believes, based on current facts and circumstances, will not be realized in practice. It is possible that in order to satisfy Section 162(m) the committee may establish targets that, if met, would grant a covered officer the ability to earn an award of $3,000,000, but the committee may then exercise its negative discretion to substantially scale back the award to amounts more in line with historical practice.
All of that said, because awards are typically based on an individuals base salary as well as company performance, it is possible that awards under the plan could one day approach the maximum limit of $3,000,000, and you should vote on the plan assuming that a $3,000,000 maximum award is possible.