Stanley Furniture Company (STLY)

Types of Compensation That We Pay Executives

Our compensation program has only three principal elements: salary, annual bonus, and stock options. The remaining compensation paid through employee benefits and perquisites is not significant in amount or as a percentage of any executive’s compensation.

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Salary. We recognize that paying a reasonable cash salary is necessary to enable us to obtain and retain services of highly-skilled executives. A reasonable salary is a component of a well-rounded compensation program. Our CEO has agreed to a lower salary with the larger component of his compensation being stock options.

Annual Bonus. We believe that an annual cash bonus opportunity provides a means to measure and, if appropriate, reward elements of corporate performance that are closely related to the efforts of executives with operational responsibilities. Under the Summary Compensation Table following this section, the annual bonus is reported in the column labeled “Non-Equity Incentive Plan Compensation” rather than in the “Bonus” column. This reporting reflects that the annual cash bonus has preestablished non-discretionary goals that determine whether any amount will be paid.

Because our salaries alone would not be sufficient to reach a reasonable level of potential cash compensation, we believe it is appropriate and necessary to make bonus payments in cash on an annual basis when earned. We choose to pay bonuses in cash rather than stock because we anticipate that executives would use this payment to supplement their salaries. Also, if the annual bonus were paid in stock, the total compensation package would be overweighted in stock. The annual bonus as a percentage of an executive’s total potential cash compensation generally increases with the level and responsibilities of the executive. At his request, our CEO is not eligible for an annual bonus.

Long-term Incentive – Stock Options. We provide a long-term incentive compensation program that is based on our stock through the grant of stock options. For stockholders, the long-term value of our stock is the most important aspect of our performance. The price of our stock is the principal factor in stockholder value over time. Under the stock option program, we do not provide dividend equivalents on stock options before exercise. So the value of a stock option is tied directly and solely to increases in the market price of our stock.

We believe that stock-based incentives through stock options ensure that our top officers have a continuing stake in our long-term success. Our current policy is to grant stock option awards only to executive officers and key employees.

Employee Benefits and Perquisites. Our executives participate in all of the same employee benefit programs as other employees. The executives participate in these programs on the same basis as other employees. These programs are a tax-qualified 401(k) retirement plan, health and dental insurance, life insurance, disability insurance, and travel accident insurance. We provide a limited number of perquisites for executive officers which are below the threshold for reporting on the Summary Compensation Table following this section.

Types of Compensation That We Pay Executives

Our compensation program has only three principal elements: salary, annual bonus, and stock options. The remaining compensation paid through employee benefits and perquisites is not significant in amount or as a percentage of any executive’s compensation.

Salary. We recognize that paying a reasonable cash salary is necessary to enable us to obtain and retain services of highly-skilled executives. A reasonable salary is a component of a well-rounded compensation program.

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Annual Bonus. We believe that an annual cash bonus provides a means to measure and, if appropriate, reward elements of corporate performance that are closely related to the efforts of executives. Under the Summary Compensation Table following this section, the annual bonus is reported in the column labeled “Non-Equity Incentive Plan Compensation” rather than in the “Bonus” column. This reporting reflects that the annual cash bonus has preestablished non-discretionary goals that determine whether any amount will be paid.

Because our salaries alone would not be sufficient to reach a reasonable level of potential cash compensation, we believe it is appropriate and necessary to make bonus payments in cash on an annual basis when earned. We choose to pay bonuses in cash rather than stock because we anticipate that executives would use this payment to supplement their salaries. Also, if the annual bonus were paid in stock, the total compensation package would be overweighted in stock. The annual bonus as a percentage of an executive’s total potential cash compensation generally increases with the level and responsibilities of the executive.

Long-term Incentive – Stock Options. We provide a long-term incentive compensation program that is based on our stock through the grant of stock options. For stockholders, the long-term value of our stock is the most important aspect of our performance. The price of our stock is the principal factor in stockholder value over time. Under the stock option program, we do not provide dividend equivalents on stock options before exercise. So the value of a stock option is tied directly and solely to the market price of our stock.

We believe that stock-based incentives through stock options ensures that our top officers have a continuing stake in our long-term success. Our current policy is to grant only stock option awards to executive officers and key employees.

Employee Benefits and Perquisites. Our executives participate in all of the same employee benefit programs as other employees. The executives participate in these programs on the same basis as other employees. These programs are a tax-qualified 401(k) retirement plan, health and dental insurance, life insurance, disability insurance, and travel accident insurance. We provide a limited number of perquisites for executive officers which are below the threshold for reporting on the Summary Compensation Table following this section.

Types of Compensation That We Pay Executives

Our compensation program has only three principal elements: salary, annual bonus, and stock options. The remaining compensation paid through employee benefits and perquisites is not significant in amount or as a percentage of any executive’s compensation.

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Salary. We recognize that paying a reasonable cash salary is necessary to enable us to obtain and retain services of highly-skilled executives. A reasonable salary is a component of a well-rounded compensation program.

Annual Bonus. We believe that an annual cash bonus provides a means to measure and, if appropriate, reward elements of corporate performance that are closely related to the efforts of executives. Under the Summary Compensation Table following this section, the annual bonus is reported in the column labeled “Non-Equity Incentive Plan Compensation” rather than in the “Bonus” column. This reporting reflects that the annual cash bonus has preestablished non-discretionary goals that determine whether any amount will be paid. Under the Summary Compensation Table, the “Bonus” column is used for discretionary payments without preestablished goals. Despite the change in terminology by the SEC, we refer to our annual cash incentive program as a bonus program.

Because salaries alone would not be sufficient to reach a reasonable level of potential cash compensation, we believe it is appropriate and necessary to make bonus payments in cash on an annual basis when earned. We choose to pay bonuses in cash rather than stock because we anticipate that executives would use this payment to supplement their salaries. Also, if the annual bonus were paid in stock, the total compensation package would be overweighted in stock. The annual bonus as a percentage of an executive’s total potential cash compensation generally increases with the level and responsibilities of the executive.

Long-term Incentive – Stock Options. We provide a long-term incentive compensation program that is based on our stock through the grant of stock options. For stockholders, the long-term value of our stock is the most important aspect of our performance. The price of our stock is the principal factor in stockholder value over time. Under the stock option program, we do not provide dividend equivalents on stock options before exercise. So the value of a stock option is tied directly and solely to the market price of our stock. Stock options are a means of aligning financial interests of executives and stockholders.

We believe that stock-based incentives through stock options ensures that our top officers have a continuing stake in our long-term success. We maintain the Stanley Furniture Company, Inc. 2000 Incentive Plan and the Stanley Furniture Company, Inc. 1994 Stock Option Plan to provide employees with opportunities to acquire common stock. In the past, we have made stock option awards and performance stock awards. Our current policy is to grant only stock option awards to executive officers and key employees.

Employee Benefits. Our executives participate in all of the same employee benefit programs as other employees. The executives participate in these programs on the same basis as other employees. These programs are a tax-qualified retirement plan, health and dental insurance, life insurance, disability insurance, and travel accident insurance.

Our only active retirement plan is a 401(k) plan in which executives participate on the same basis as other employees. We make a matching contribution to the 401(k) plan. The amount of the matching contribution depends on the percentage of their own compensation, up to IRS limits, that each executive chooses to defer in the 401(k) plan. The amount of our matching contributions for the named executive officers ranged from $ 4,229 to $ 6,600 as shown in the “All Other Compensation” column on the Summary Compensation Table following this section.

Before 1996, we maintained an active qualified defined benefit pension plan for all of our eligible employees and also maintained a non-qualified, unfunded supplemental retirement plan primarily for executives. After December 31, 1995, both of these plans were frozen and no new benefits were accrued under either plan after 1995. Effective October 1, 2006, the qualified defined benefit pension plan was terminated.

We also maintain a frozen deferred compensation plan in which our chief financial officer, Mr. Payne, is the only executive officer who participates. The plan is funded by company-owned life insurance and we currently pay the premiums by borrowing on the cash surrender value of the insurance.

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Perquisites. We provide a limited number of perquisites for executive officers. We provide estate and tax planning services to encourage executives to address these important issues in a time-efficient manner. We do not own a plane and do not provide any personal aircraft use for executives. We provide our chief executive officer, Mr. Scheffer, with a company car that is leased for him. Mr. Scheffer is taxed on all personal use of the car. The car is a part of his overall compensation program and is provided because our office location in Stanleytown, Virginia requires Mr. Scheffer to travel by car to visit factories, vendors and customers. We also provide a very small amount of perquisites related to normal operation of an executive office, such as free coffee, estimated at a value of less than $200 per year to an executive.