This excerpt taken from the WDC DEF 14A filed Dec 15, 2006.
Executive Compensation Components
Western Digitals executive compensation package consists primarily of the following components:
Base Salary. Executive officer base salaries are reviewed annually, and base salary levels are generally targeted at the median of competitive data. The base salaries of individual executive officers can and do vary from this salary benchmark based on such factors as the competitive environment, the executives experience level and scope of responsibility, Western Digitals financial condition, current performance, future potential and the overall contribution of the executive. The Committee exercises its judgment based on all the factors described above in making its decisions. No specific formula is applied to determine the weight of each criterion.
Annual Incentive Compensation. Western Digitals Incentive Compensation Plan, or ICP, formally links cash bonuses for executive officers and other participating employees to Western Digitals semiannual operating performance. The Committee establishes target awards under the ICP for each executive officer, expressed as a percentage of the executives semiannual base salary. The Committee then semiannually establishes operating and/or financial performance goals under the ICP. For each of the first half and second half of fiscal 2006, these goals were earnings per share and revenue. The bonus pool payable under the ICP for each semiannual period can vary from 0% to 200% of the aggregate target bonuses, depending upon Western Digitals performance against the pre-established goals. Individual awards to executive officers can also vary from their targets, depending upon the size of the bonus pool and their individual performance.
Equity and Other Long-Term Incentive Awards. The Committee views the grant of equity-based compensation and other like awards to be a key component of its overall compensation program. Executive officers, as well as other key employees, are eligible to receive periodic grants of incentive or non-qualified stock options, restricted stock, stock units, performance stock units and/or other cash or equity-based incentive awards pursuant to Western Digitals 2004 Performance Incentive Plan. Vesting schedules are designed to balance the goals of encouraging retention of executive officers and rewarding long-term performance and commitment to Western Digital. While all executive officers are eligible, the type of award as well as the size of the grant each executive officer receives is determined and approved by the Committee in consultation with the Vice President, Human Resources and the Chief Executive Officer (except in the case of the CEOs own equity and other long-term incentive awards, which are determined and approved solely by the Committee).
The amount of each executive officers award is determined by the Committee based upon the executives individual performance, the executives current compensation package, the value of the executives unvested stock options and restricted stock or stock units, comparable competitive company practices, and the Committees appraisal of the executives anticipated long-term future contribution to Western Digital.
In February 2006, based on a review and analysis provided by the Committees independent consultant, the Committee approved certain changes to Western Digitals long-term incentive program including limiting the participation in the program to employees within senior management. For the most senior participants, including all
of Western Digitals executive officers, the long-term incentive opportunity includes a combination of restricted stock units, stock options and long-term performance cash, which are divided in accordance with guidelines established by the Committee. Since the Committees adoption of the new long-term incentive program, the Committee continues to make the determination of the amount of awards in light of the factors described above, and presently intends to make the awards generally consistent with the new long-term incentive program guidelines and structure.
In particular, long-term incentive compensation that may be awarded by the Committee includes:
Stock Options: The Committee believes that the grant of stock options to executive officers with an exercise price per share equal to the fair market value of Western Digitals common stock on the date of grant is an effective incentive for executive officers to create value for Western Digitals stockholders and is an effective means of motivating, retaining and rewarding executives who are in a position to contribute to Western Digitals long-term growth and profitability.
Restricted Stock and Restricted Stock Units: The Committee considers awards of restricted stock or restricted stock units to be the key component of compensation when long-term retention is desired. In February 2006, the Committee initiated the award of restricted stock units to employees in lieu of restricted stock in order to enable the recipient to defer the payout of such awards in accordance with Western Digitals Deferred Compensation Plan. By their nature, restricted stock and stock unit awards create both retention and stockholder alignment and, therefore, can be a useful compensation tool.
Long-Term Cash Awards: The Committee considers long-term cash awards to be performance based. This program formally links long-term cash awards for executive officers and other participating employees to Western Digitals operating performance over a multiple year timeframe and based upon a pre-determined financial metric approved by the Committee. The total amount payable pursuant to a long-term cash award can vary from 0% to 200% of the target award, depending upon Western Digitals performance against the pre-established goals.
In addition, from time to time, Western Digital may grant cash and/or equity awards to key employees whose retention is deemed critical to Western Digitals future success. The purpose of these awards is to retain critical talent by providing a significant incremental opportunity for capital accumulation and to focus participants on increasing the value of Western Digitals common stock.
All equity awards and long-term cash awards are granted by the Committee pursuant to Western Digitals 2004 Performance Incentive Plan and certain other cash awards are documented by individual agreements with the executive. The awards vest in accordance with schedules designed to maximize retention value for the executives receiving such awards. In addition, beginning in October 2006, all equity awards will be granted in accordance with a grant policy that Western Digital has implemented to achieve additional process improvements adopted by the Board of Directors in response to the recommendation of a special committee of the Board following a company-initiated, voluntary review of Western Digitals historical stock options. These additional process improvements are designed to improve Western Digitals controls and procedures with respect to the granting of stock options, restricted stock units and other equity awards.
Severance Benefits. Executive officers are eligible to receive certain severance benefits under Western Digitals Executive Severance Plan and Change of Control Severance Plan. These plans are described in more detail under Employment Contracts, Termination of Employment and Change in Control Arrangements beginning on page 27.
Benefits. Benefits offered to executive officers serve a different purpose than do the other elements of total compensation. In general, they provide a safety net of protection against the financial catastrophes that can result from illness, disability or death. These benefits are largely those that are offered to the general employee population, with some variation, primarily with respect to eligibility for participation in the Deferred Compensation Plan, the availability of expanded medical benefits, and the availability of various limited allowances, including life insurance, financial planning and club memberships. The Committee believes that the benefits offered to executive officers generally are competitive. From time to time, Western Digitals Human Resources Department obtains data to help ensure that such benefit plans and programs remain competitive and reports its findings to the Committee.