This excerpt taken from the WDC DEF 14A filed Sep 24, 2007.
Long-Term Incentive Compensation Elements
Long-term incentive compensation to our executive officers consists of stock options, restricted stock units and long-term performance cash awards that are each awarded under our 2004 Performance Incentive Plan.
Stock Options. We believe that stock options serve as an effective means to motivate our executives to contribute to the long-term growth and profitability of our company and thereby create value for our stockholders. Stock options also function as a retention incentive for our executives as they generally vest and become exercisable in periodic installments over a four-year period, contingent upon the executives continued employment. Accordingly, each option will provide a return to the executive only to the extent he remains employed with us during the vesting period, and only if the fair market value of the underlying shares appreciates over the vesting period.
Except as otherwise determined by the Compensation Committee, stock options typically vest 25% on the first anniversary of their grant date and 6.25% at the end of each three-month period thereafter until they become fully vested four years after their grant date. Stock options granted prior to May 2007 had a term of ten years and, with respect to grants made after May 2007, stock options will have a seven-year term.
Restricted Stock Units. Restricted stock units represent the right to receive an equivalent number of shares of our common stock at the time the restricted stock units vest without the payment of an exercise price or other consideration. Like stock options, restricted stock units encourage retention and create stockholder alignment.
Except as otherwise determined by the Compensation Committee, restricted stock units typically vest on the third anniversary of their grant date, except that restricted stock units granted to new hire employees generally vest in substantially equal installments on each of the first, second and third anniversaries of their grant date.
Long-term Performance Cash Awards. Long-term performance cash awards represent the right to receive a payment of cash at the end of a fixed performance period depending upon our achievement of one or more operating and/or other financial performance goals established by the Compensation Committee. The purpose of the performance cash awards is to focus executives on the achievement of key financial operating objectives over a multi-year period. The total amount payable pursuant to a long-term performance cash award can vary from 0% to 200% of the target award, depending upon our performance against the established performance goals.
As described below, the Compensation Committee selected operating income and revenue as the performance goals for all long-term performance cash awards made in fiscal 2007. Because each long-term performance cash award is tied to our financial performance over an annual or multiple-year period, disclosure of the specific performance goals established by the Compensation Committee pursuant to each of these awards would cause us competitive harm because they could signal to our competitors our future expectations and strategies, including
with respect to pricing, market share growth and capital expenditures. However, the performance goals were established at levels that we intended to be challenging. At the time the goals were established, we believed there was substantial uncertainty as to whether the goals would actually be obtained at the established levels. In setting such challenging goals, we believe the long-term performance cash awards help to motivate our executives to improve our overall financial performance and, in doing so, help to drive the performance of our common stock over the long term.