DEF 14A 1 ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.     )

Filed by the Registrant    x

Filed by a Party other than the Registrant    ¨

Check the appropriate box:

 

  ¨      

Preliminary Proxy Statement

     ¨       Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
  x      

Definitive Proxy Statement

     
  ¨      

Definitive Additional Materials

     
  ¨      

Soliciting Material Pursuant to § 240.14a-12

     

THE GAP, INC.

 

(Name of Registrant as Specified in Its Certificate)

 

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

  x       No Fee Required.
  ¨       Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
   (1)    Title of each class of securities to which transaction applies:
   (2)    Aggregate number of securities to which transaction applies:
   (3)    Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
   (4)    Proposed maximum aggregate value of transaction:
   (5)    Total fee paid:
  ¨       Fee paid previously with preliminary materials.
  ¨       Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.
   (1)    Amount Previously Paid:
   (2)    Form, Schedule or Registration Statement No.:
   (3)    Filing Party:
   (4)    Date Filed:


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LOGO

 

 

 

 

 

Notice of Annual Meeting

 

of Gap Inc. Shareholders

 

Proxy Statement

 

May 17, 2011

San Francisco, California

 


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THE GAP, INC.

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

DATE AND TIME

Tuesday, May 17, 2011

10:00 a.m., San Francisco Time

 

PLACE

Gap Inc. Headquarters

Two Folsom Street

 San Francisco, California 94105

 

ITEMS OF BUSINESS

Elect to the Board of Directors the ten nominees named in the attached Proxy Statement;

 

   

Ratify the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending on January 28, 2012;

 

   

Approve the Amendment and Restatement of The Gap, Inc. 2006 Long-Term Incentive Plan;

 

   

Hold an advisory vote on executive compensation as disclosed in these materials;

 

   

Hold an advisory vote on whether an advisory vote on executive compensation should be held every one, two or three years; and

 

   

Transact such other business as may properly come before the meeting.

 

RECORD DATE

You must be a shareholder of record at the close of business on March 21, 2011 to vote at the Annual Meeting.

 

INTERNET AVAILABILITY

In accordance with U.S. Securities and Exchange Commission rules, we are using the Internet as our primary means of furnishing our proxy materials to most of our shareholders. Rather than sending those shareholders a paper copy of our proxy materials, we are sending them a notice with instructions for accessing the materials and voting via the Internet. We believe this method of distribution makes the proxy distribution process more efficient, less costly and limits our impact on the environment. This Proxy Statement and our 2010 Annual Report to Shareholders are available at: www.gapinc.com/annualmeeting

 

PROXY VOTING

Whether or not you plan to attend the Annual Meeting, please vote as soon as possible. As an alternative to voting in person at the Annual Meeting, you may vote via the Internet, by telephone or, if you receive a paper proxy card in the mail, by mailing the completed proxy card.


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ADMISSION TO THE

ANNUAL MEETING

You are entitled to attend the Annual Meeting only if you were a Gap Inc. shareholder as of the close of business on March 21, 2011 or you hold a valid proxy for the Annual Meeting. Photo identification is required for admittance. In addition, if you are not a shareholder of record but hold shares through a broker, bank, trustee or nominee (i.e., in street name), you will be required to provide proof of beneficial ownership as of the Record Date. Proof of beneficial ownership can take the form of your most recent account statement prior to the Record Date, a copy of the voting instruction card provided by your broker, bank, trustee or nominee, a copy of the Notice of Internet Availability of Proxy Materials if one was mailed to you, or similar evidence of ownership.

 

WEBCAST

You may listen to our Annual Meeting by webcast at www.gapinc.com (follow the Investors, Financial News and Events, Webcasts links)

 

  By Order of the Board of Directors,

 

  LOGO

 

  Michelle Banks

 

  Corporate Secretary

 

  April 5, 2011


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TABLE OF CONTENTS

 

 

 

PROXY STATEMENT

     1   

The Proxy

     1   

Notice of Internet Availability

     2   

Webcast

     2   

Shareholders with the Same Last Name and Address

     2   

Vote Confidentiality

     2   

Voting Securities and Voting Rights

     3   

Other Business

     3   

Proposals of Shareholders

     4   

PROPOSALS REQUIRING YOUR APPROVAL

     5   

PROPOSAL NO. 1 — Election of Directors

     5   

Nominees for Election as Directors

     5   

Corporate Governance

     9   

Corporate Governance Guidelines

     9   

Code of Business Conduct

     9   

Director Independence

     9   

Board Leadership Structure

     9   

Risk Oversight

     10   

Board Meetings

     11   

Governance and Nominating Committee

     11   

Audit and Finance Committee

     13   

Compensation and Management Development Committee

     13   

Attendance of Directors at Annual Meetings of Shareholders

     14   

Communication with Directors

     14   

Stock Ownership Guidelines for Directors

     14   

Additional Corporate Governance Information

     14   

Compensation of Directors

     15   

Retainer and Meeting Fees

     15   

Equity Compensation

     15   

Expense Reimbursement and Other Benefits

     16   

Director Compensation Summary

     17   

PROPOSAL NO. 2 — Selection of Independent Registered Public Accounting Firm

     18   

Principal Accounting Firm Fees

     18   

Report of the Audit and Finance Committee

     19   

PROPOSAL NO. 3 — Approval of the Amendment and Restatement of The Gap, Inc. 2006 Long-Term Incentive Plan

     20   

Material Features of the 2011 Plan

     21   

Plan Benefits

     26   

PROPOSAL NO. 4 — Advisory Vote on Compensation of The Gap, Inc.’s Named Executive Officers

     29   

PROPOSAL NO. 5 — Advisory Vote on the Frequency of the Advisory Vote on the Compensation of The  Gap, Inc.’s Named Executive Officers

     30   

BENEFICIAL OWNERSHIP OF SHARES

     31   

Section 16(a) Beneficial Ownership Reporting Compliance

     33   


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EXECUTIVE COMPENSATION AND RELATED INFORMATION

     34   

Compensation Discussion and Analysis for Named Executive Officers

     34   

Compensation Committee Report

     48   

Summary Compensation Table

     49   

Grants of Plan-Based Awards

     52   

Outstanding Equity Awards at Fiscal Year-End

     54   

Option Exercises and Stock Vested

     57   

Nonqualified Deferred Compensation

     57   

Potential Payments Upon Termination

     58   

Equity Compensation Plan Information

     61   

OTHER INFORMATION

     63   

Policies and Procedures with Respect to Related Party Transactions

     63   

Certain Relationships and Related Transactions

     63   


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THE GAP, INC.

TWO FOLSOM STREET

SAN FRANCISCO, CALIFORNIA 94105

PROXY STATEMENT

 

 

This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of The Gap, Inc. for use at our Annual Meeting of Shareholders to be held on May 17, 2011, at 10:00 a.m., San Francisco Time, at Gap Inc. Headquarters, Two Folsom Street, San Francisco, California, 94105 and at any adjournment thereof.

This Proxy Statement will be first sent to shareholders on or about April 5, 2011. References in this Proxy Statement to “Gap Inc.,” “the Company,” “we,” “us,” and “our” refer to The Gap, Inc.

The Proxy

The persons named as proxyholders were selected by our Board of Directors and are officers of the Company.

The proxyholders will vote all proxies, or record an abstention or withholding, in accordance with the directions on the proxy. If no contrary direction is given, the shares will be voted as recommended by our Board of Directors as follows:

FOR the election of the directors nominated by the Board of Directors;

FOR the ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending January 28, 2012;

FOR the approval of the Amendment and Restatement of The Gap, Inc. 2006 Long Term Incentive Plan;

FOR the approval of the overall compensation of the Company’s named executive officers; and

FOR the approval of a frequency of every year for an advisory vote on the overall compensation of the Company’s named executive officers.

We will pay all expenses in connection with the solicitation of the proxies relating to this Proxy Statement, including the charges of brokerage houses and other custodians, nominees or fiduciaries for forwarding documents to security owners. In addition to solicitation by mail, certain of our officers, directors and employees (who will receive no extra compensation for their services) may solicit proxies by telephone, by fax or in person. We have also retained the services of Georgeson Shareholder Communications, Inc. to solicit the proxies of certain shareholders for the Annual Meeting. The cost of such services is estimated to be $8,000, plus reimbursement of out-of-pocket expenses.

You may revoke your proxy at any time before its exercise by writing to our Corporate Secretary at our principal executive offices as follows:

Corporate Secretary

Gap Inc.

Two Folsom Street

San Francisco, California 94105

You may also revoke your proxy by timely delivery of a properly executed, later-dated proxy (including a telephone or Internet vote) or by voting in person at the Annual Meeting.

 

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Notice of Internet Availability

We are using the Internet as our primary means of furnishing our proxy materials to most of our shareholders. Rather than sending those shareholders a paper copy of our proxy materials, we are sending them a “Notice of Internet Availability.” That notice contains instructions for accessing the materials and voting via the Internet. The notice also contains information on how to request a paper copy of the proxy materials by mail. We believe this method of distribution makes the proxy distribution process more efficient, less costly and limits our impact on the environment. This Proxy Statement and our 2010 Annual Report to Shareholders are available at:

www.gapinc.com/annualmeeting

Webcast

We are offering an audio webcast of the Annual Meeting at www.gapinc.com. If you choose to listen to the webcast, go to our website at www.gapinc.com (follow the Investors, Financial News and Events, Webcasts links) shortly before the start of the meeting and follow the instructions provided. Please note that this webcast will be “listen only.” If you would like to vote, ask questions, or otherwise interact with the meeting participants, you will need to attend the meeting in person. The webcast will be recorded and available for replay on www.gapinc.com for 30 days following the Annual Meeting.

Shareholders with the Same Last Name and Address

The Securities and Exchange Commission (“SEC”) has adopted rules that permit companies and intermediaries (such as brokers) to implement a delivery procedure called “householding.” Under this procedure, multiple shareholders who reside at the same address may receive a single copy of our Notice of Internet Availability or the annual report and proxy materials, unless the affected shareholder has provided contrary instructions. This procedure reduces printing costs and postage fees, and saves natural resources.

If you received a household mailing this year and you would like to have additional copies mailed to you, please submit your request in writing to our transfer agent Wells Fargo Bank, N.A., Shareowner Services, Attn: Householding /The Gap, Inc., P.O. Box 64854, St. Paul, Minnesota 55164-0854, or by calling (651) 450-4104. Similarly, you may also contact our transfer agent if you received multiple copies of the Annual Meeting materials and would prefer to receive a single copy in the future.

If you are a shareholder of record (your shares are in your name and not held in a brokerage account) and you would like to opt out of householding for future mailings, please submit your request in writing to Wells Fargo Bank, N.A., Shareowner Services, Attn: Householding /The Gap, Inc., P.O. Box 64854, St. Paul, Minnesota 55164-0854, or call (651) 450-4104 .

If you hold your shares in “street name,” (your shares are held in a brokerage account), you may revoke your consent to householding at any time by sending your name, the name of your brokerage firm, and your account number to Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717.

Vote Confidentiality

Proxy instructions, ballots and voting tabulations that identify individual shareholders are handled in a manner that protects the voting privacy of our shareholders. Your vote will not be disclosed to anyone, except

 

   

As required to tabulate and certify the vote;

 

   

As required by law; and/or

 

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If you provide written comments on your proxy card (the proxy card and comments would then be forwarded to us for review).

Voting Securities and Voting Rights

Our only outstanding voting securities are our shares of common stock, of which 582,680,075 shares were outstanding at the close of business on March 21, 2011. Only shareholders of record at the close of business on that date are entitled to vote at the meeting. Each shareholder is entitled to one vote per share on each matter submitted to the meeting.

The independent election inspector(s) appointed for the Annual Meeting will determine whether or not a quorum is present and will tabulate votes cast by proxy or in person at the Annual Meeting. The holders of a majority of the outstanding shares of our common stock, present in person or by proxy, will constitute a quorum for the transaction of business at the Annual Meeting.

Election of directors by shareholders will be determined by a majority of the votes of the shares present, in person or by proxy, at the Annual Meeting and entitled to vote on the election of directors. Pursuant to the Company’s bylaws, at any meeting of shareholders where nominees are subject to an uncontested election (the number of nominees is equal to the number of seats), any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “for” such election, shall submit to the Corporate Secretary of the Company a letter offering his or her resignation, subject to the Board of Directors’ acceptance. The Governance and Nominating Committee will consider the offer of resignation and will recommend to the Board the action to be taken. The Board of Directors will act promptly with respect to each such letter of resignation and will promptly notify the director concerned of its decision. The Board of Directors’ decision will be disclosed publicly.

With respect to the vote on the frequency of the advisory vote on the overall compensation of the Company’s named executive officers, if none of the frequency options receive a majority of the votes cast, the option receiving the greatest number of votes will be considered the frequency recommended by the Company’s shareholders. The other matters submitted for shareholder approval at the Annual Meeting will be decided by the affirmative vote of a majority of the shares present, in person or by proxy, at the Annual Meeting and entitled to vote on the subject matter.

Abstentions are included in the determination of shares present for quorum purposes. Because abstentions represent shares entitled to vote, the effect of an abstention will be the same as a vote against a proposal. However, abstentions will have no effect on the election of directors or the vote on the frequency of the advisory vote on the overall compensation of the Company’s named executive officers.

If your shares are held in street name and you do not instruct your broker on how to vote your shares, your brokerage firm, in its discretion, may either leave your shares unvoted or vote your shares on routine matters. The proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the current fiscal year should be treated as a routine matter. To the extent your brokerage firm votes your shares on your behalf on this proposal, your shares also will be counted as present for the purpose of determining a quorum.

Other Business

We received notice, dated February 1, 2011, of a shareholder proposal regarding ending trade in Sri Lanka. This proposal was received after the December 7, 2010 deadline for submission of proposals to be included in this Proxy Statement. To the extent that this proposal is raised at the Annual Meeting, the proxyholders will use their discretionary authority to vote against it.

 

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If any other matter not mentioned in this Proxy Statement is properly brought before the meeting, including without limitation (i) matters about which the proponent failed to notify us on or before February 17, 2011, (ii) shareholder proposals omitted from this Proxy Statement and the form of proxy pursuant to the proxy rules of the SEC, and (iii) matters incidental to the conduct of the meeting, the proxyholders will vote upon such matters in accordance with their best judgment pursuant to the discretionary authority granted by the proxy. As of the date of the printing of this Proxy Statement, our management is not aware, nor has it been notified, of any other matters that may be presented for consideration at the meeting.

Proposals of Shareholders

If a shareholder would like us to consider including a proposal in our Proxy Statement and form of proxy for our Annual Meeting in 2012, the Company’s Corporate Secretary must receive it no later than December 7, 2011. Proposals must be addressed to our Corporate Secretary at Gap Inc., Two Folsom Street, San Francisco, California 94105.

Our Amended and Restated Bylaws provide that in order for a shareholder to bring business before our Annual Meeting in 2012 (other than a proposal submitted for inclusion in the Company’s proxy materials), the shareholder must give written notice to our Corporate Secretary by no later than the close of business (San Francisco Time) on February 17, 2012, and no earlier than January 18, 2012 (i.e., not less than 90 days nor more than 120 days prior to the first anniversary of the date of our 2011 Annual Meeting). The notice must contain information required by our Bylaws, including a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the Annual Meeting, the name and address of the shareholder proposing the business, the number of shares of the Company’s stock beneficially owned by the shareholder, any material interest of the shareholder in the business proposed, any interests held by the shareholder in derivative securities of the Company or arrangements with persons holding derivative securities of the Company, and other information required to be provided by the shareholder pursuant to the proxy rules of the SEC. If a shareholder fails to submit the notice by February 17, 2012, then the proposed business would not be considered at our Annual Meeting in 2012 due to the shareholder’s failure to comply with our Bylaws. Additionally, in accordance with Rule 14a-4(c)(1) of the Securities Exchange Act of 1934, as amended, management proxyholders intend to use their discretionary voting authority with respect to any shareholder proposal raised at our Annual Meeting in 2012 as to which the proponent fails to notify us on or before February 17, 2012. Notifications must be addressed to our Corporate Secretary at Gap Inc., Two Folsom Street, San Francisco, California 94105. A copy of the full text of the Bylaw provisions relating to our advance notice procedure may be obtained by writing to our Corporate Secretary at that address or at www.gapinc.com (follow the Investors, Governance links).

 

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PROPOSALS REQUIRING YOUR APPROVAL

 

 

PROPOSAL NO. 1 — Election of Directors

NOMINEES FOR ELECTION AS DIRECTORS

Directors will be elected at the Annual Meeting to serve until the next Annual Meeting and until their successors are elected. The Governance and Nominating Committee of the Board of Directors has nominated the persons whose names are set forth below, all of whom are current directors. In the absence of instructions to the contrary, shares represented by the proxy will be voted for the election of all these nominees to the Board of Directors.

The Board of Directors has no reason to believe that any of the nominees will be unable to serve. However, if any nominee should for any reason be unavailable to serve, the Board of Directors may reduce the number of directors fixed by our Bylaws, or the proxies may be voted for the election of such other person to the office of director as the Board of Directors may recommend in place of the nominee. Set forth below is certain information concerning the nominees, including age, experience, qualifications and principal occupation during at least the last five years, based on data furnished by each nominee.

 

LOGO = Committee Chair     LOGO = Committee Member

 

      Nominee    Audit and
Finance
Committee
   Compensation
and
Management
Development
Committee
   Governance
and
Nominating
Committee
   
LOGO   

Adrian D. P. Bellamy, age 69.

Director since 1995.

 

Non-Executive Chairman of Williams-Sonoma, Inc. since May 2010. Non-Executive Chairman of Reckitt Benckiser Plc., a home products company, since 2003. Executive Chairman of the Body Shop International Plc., a personal care retailer, from 2006 to March 2008. Chairman of the Body Shop International Plc, from 2002 to 2006.

 

As the former chief executive officer of two retail companies, including DFS Group Limited, a private retailing company, and a director on the board of a total of six public companies, two of which he serves as chairman and one of which he currently serves as a director, Mr. Bellamy has extensive global experience regarding all aspects of the operations of large public companies, including companies in the retail industry.

 

        LOGO    LOGO

 

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LOGO = Committee Chair     LOGO = Committee Member

 

      Nominee    Audit and
Finance
Committee
   Compensation
and
Management
Development
Committee
   Governance
and
Nominating
Committee
   
LOGO   

Domenico De Sole, age 67.

Director since 2004.

 

Chairman of Tom Ford International, a luxury retailer, since 2005. President and Chief Executive Officer of Gucci Group NV, 1995-2004. Director of Newell Rubbermaid Inc. Former director of The Proctor & Gamble Company, 2001-2005, Delta Air Lines, Inc., 2005-2007, and Telecom Italia, 2004-2008.

 

As the former chief executive officer of a retailer and the current chairman of a retailer, Mr. De Sole has many years of global experience as a senior executive in the retail industry. In addition, as a former director of The Proctor & Gamble Company, he has insight into the global consumer goods market.

 

        LOGO     
   
LOGO   

Robert J. Fisher, age 56.

Director since 1990.

 

Managing Director, Pisces, Inc., an investment group, since March 2010. Interim President and Chief Executive Officer of Gap Inc., January 2007-August 2007. Non-executive Chairman of Gap Inc., 2004-August 2007. Executive of Gap Inc., 1992-1999. Various positions with Gap Inc., 1980-1992. Former director of Sun Microsystems, Inc., 1995-2006.

 

Mr. Fisher has extensive retail experience, including experience specific to Gap Inc. as a result of his many years serving in a variety of high-level Gap Inc. positions, including Chief Operating Officer, President of Gap Division, Chairman of the Board, and interim President and Chief Executive Officer.

 

          
         
LOGO   

William S. Fisher, age 54.

Director since 2009.

 

Founder and Chief Executive Officer of Manzanita Capital Limited, a private equity fund, since 2001. Various positions with Gap Inc., 1986-1998.

 

Mr. Fisher brings extensive global retail experience to the Board as a result of his years serving in a variety of high-level Gap Inc. positions, including President of the International Division, as well as his service on the boards of a number of private retail companies, including Space NK and Diptyque.

 

              

 

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LOGO = Committee Chair     LOGO = Committee Member

 

      Nominee    Audit and
Finance
Committee
   Compensation
and
Management
Development
Committee
   Governance
and
Nominating
Committee
   
LOGO   

Bob L. Martin, age 62.

Director since 2002.

 

Lead Independent Director since 2003. Chief Executive Officer (part-time) of Mcon Management Services, Ltd., a consulting company, since 2002. Independent Consultant, 1999-2002. President and Chief Executive Officer of Wal-Mart International, a division of Wal-Mart Stores, Inc., 1984-1999. Director of Conn’s Inc. and SolarWinds, Inc. Former director of Dillards, Inc., 2003-2004, Edgewater Technology, Inc., 1999-2005, Furniture Brands International, Inc., 2003-2010, Guitar Center, 2004-2007, and Sabre Holdings Corporation, 1997-2007.

 

Mr. Martin has over 35 years of work experience in the retail industry. As the former chief executive officer of Wal-Mart International, a division of Wal-Mart Stores, Inc., during which he ran operations in 12 countries across 4 continents, Mr. Martin acquired extensive global governance experience. As the former executive vice president and chief information officer for Wal-Mart Stores, Inc., Mr. Martin has extensive insight into the area of IT and supply chain capabilities and strategies for a retail company.

 

        LOGO    LOGO
   
LOGO   

Jorge P. Montoya, age 64.

Director since 2004.

 

President, Global Snacks & Beverages, and President, Latin America, of The Procter & Gamble Company, a consumer products company, 1999-2004. Director of The Kroger Co. Former director of Rohm & Haas Company, 1996-2007.

 

Mr. Montoya spent over 30 years working for The Proctor & Gamble Company, during which time he acquired extensive experience in management, international growth, consumer products, and marketing.

 

   LOGO          
   
LOGO   

Glenn K. Murphy, age 49.

Director since 2007.

 

Chairman and Chief Executive Officer of Gap Inc. since August 2007. Chairman and Chief Executive Officer of Shoppers Drug Mart, a drugstore chain, 2001-2007.

 

As a result of his service as Gap Inc.’s Chairman and Chief Executive Officer, as well as his service in senior (including chief executive officer) positions at other large retail companies, Mr. Murphy has extensive management and leadership experience and a deep knowledge of the complex financial and operational issues that retail companies face.

 

              

 

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LOGO = Committee Chair     LOGO = Committee Member

 

      Nominee    Audit and
Finance
Committee
   Compensation
and
Management
Development
Committee
   Governance
and
Nominating
Committee
   
LOGO   

Mayo A. Shattuck III, age 56.

Director since 2002.

 

Chairman of Constellation Energy Group, an energy company, since 2002. President and Chief Executive Officer of Constellation Energy Group since 2001. Director of Capital One Financial Corporation.

 

Mr. Shattuck’s experience on the board of directors of two other public companies, along with his experience as the former chief executive officer of an investment bank and as the current chief executive officer of Constellation Energy Group, provides him with extensive knowledge of a number of important areas, including leadership, finance, risk assessment, compliance and governance.

 

   LOGO         LOGO
   
LOGO   

Katherine Tsang, age 53.

Director since 2010.

 

Chairperson of Greater China Standard Chartered Bank since 2009. Chairperson of Standard Chartered Bank (Taiwan) since 2009. Chairperson of Standard Chartered Bank (Hong Kong) since January 2011. Chief Executive Officer, China of Standard Chartered Bank (Hong Kong) from 2005 to 2009. Director of Baoshan Iron & Steel Co. Limited.

 

Ms. Tsang possess over two decades of work experience in the global banking industry, including senior executive positions at Standard Chartered Bank and service on the boards of three Standard Chartered Bank subsidiaries, which has provided her with extensive financial and consumer expertise. In addition, as the first woman and China native at Standard Chartered Bank to be appointed as a regional head of human resources, Ms. Tsang brings significant experience in management and international growth to the Board.

 

              
   
LOGO   

Kneeland C. Youngblood, age 55.

Director since 2006.

 

Founding partner of Pharos Capital Group, LLC, a private equity firm, since 1998. Director of Starwood Hotels & Resorts Worldwide, Inc. Former director of Burger King Holdings, Inc., 2004-2010.

 

Mr. Youngblood’s experience on the board of another consumer-facing public company and private companies, along with his experience working with a number of companies as the founding partner of a private equity firm, gives him a wide range of experience in a number of industries.

 

   LOGO          

Robert J. Fisher and William S. Fisher are brothers. Information concerning our executive officers who are not also directors is set forth in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

 

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CORPORATE GOVERNANCE

Corporate Governance Guidelines

We have adopted Corporate Governance Guidelines that outline, among other matters, the role and functions of the Board, the responsibilities of the various Board committees, and the procedures for reporting concerns to the Board. Our Corporate Governance Guidelines are available at www.gapinc.com (follow the Investors, Governance, Guidelines links).

Code of Business Conduct

Our Code of Business Conduct is designed to promote a responsible and ethical work environment for all Gap Inc. employees and directors. The Code contains guidelines on conflicts of interest, legal compliance, Company information and assets, and political contributions and activities. Our Code of Business Conduct is available at www.gapinc.com (follow the Investors, Corporate Compliance, Code of Business Conduct links).

Director Independence

The Board of Directors has determined that the following directors are independent under the New York Stock Exchange (“NYSE”) rules and have no direct or indirect material relationships with the Company:

 

Adrian D. P. Bellamy

  

William S. Fisher

  

Mayo A. Shattuck III

Domenico De Sole

  

Bob L. Martin

  

Katherine Tsang

Robert J. Fisher

  

Jorge P. Montoya

  

Kneeland C. Youngblood

In particular, the Board has determined that none of these directors have relationships that would cause them not to be independent under the specific criteria of Section 303A.02 of the NYSE Listed Company Manual. In making this determination with respect to Robert and William Fisher, the Board considered the following factors: (i) their prior service as officers of the Company; (ii) they are sons of the Company’s founders, Doris Fisher and Donald Fisher; (iii) Donald Fisher’s position as an executive officer of the Company prior to his passing in September 2009; (iv) the overall share ownership position of the Fisher family; (v) the lease agreements with Doris Fisher for the display of her personal art collection (further described on page 63); and (vi) the prior share repurchase agreements with members of the Fisher family (further described on page 63). After consideration of these factors, the Board concluded that there is no material relationship between the Company and Robert and William Fisher that would impact their independence under NYSE rules.

Board Leadership Structure

Our Company is led by Glenn Murphy, who has served as our Chairman and Chief Executive Officer (“CEO”) since August 2007. We believe that having Mr. Murphy act in both these roles is most appropriate for the Company at this time because it provides the Company with consistent and efficient leadership, both with respect to the Company’s operations and the leadership of the Board. In particular, having Mr. Murphy act in both these roles increases the timeliness and effectiveness of the Board’s deliberations, increases the Board’s visibility into the day-to-day operations of the Company, and ensures the consistent implementation of the Company’s strategies.

We also believe in the importance of independent oversight. We ensure that this oversight is truly independent and effective through a variety of means, including:

 

   

Our Corporate Governance Guidelines provide that at least two-thirds of our directors should be independent. Currently, all of our directors other than Mr. Murphy are independent.

 

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One of our independent directors acts as our Lead Independent Director. The Lead Independent Director leads each independent director session of the Board. He or she also serves as a liaison between the Chairman and the independent directors, approves certain information sent to the Board, and provides input to and approves meeting schedules and agendas. The Lead Independent Director is appointed by the independent directors annually. Bob L. Martin currently serves as our Lead Independent Director.

 

   

At each regularly scheduled Board meeting, all independent directors are scheduled to meet in an executive session without the presence of any management directors.

 

   

The charters for each of our standing committees of the Board (Audit and Finance, Compensation and Management Development, and Governance and Nominating) require that all of the members of those committees be independent.

We believe that the combined role of Chairman and CEO, together with the significant responsibilities of our Lead Independent Director and other independent directors described above, provides an appropriate balance between leadership and independent oversight.

Risk Oversight

Board Oversight of Risk

The Board has an active role in overseeing the management of the Company’s risks. Annually, the Company’s Internal Audit department performs a comprehensive enterprise risk assessment encompassing a number of significant areas of risk, including strategic, operational, compliance, financial, and reputational risks. The assessment process is designed to gather data regarding the most important risks that could impact the Company’s ability to achieve its objectives and execute its strategies. Primary assessment methods include interviews with key executives and Board members, review of critical Company strategies and initiatives, and monitoring of emerging industry trends and issues. The assessment is reviewed by the Company’s CEO, Chief Financial Officer (“CFO”), and Chief Compliance Officer and presented to the Board to facilitate discussion of high risk areas. It provides the foundation for the annual Internal Audit plan, management’s monitoring and risk mitigation efforts, and ongoing Board oversight. In addition, on a regular basis, management communicates with the Board, both formally and informally, about key initiatives, strategies and industry developments, in part to assess and manage the potential risks.

While the Board of Directors has the ultimate oversight responsibility for the risk management process, various committees of the Board also have responsibility for risk management. In particular, the Audit and Finance Committee focuses on financial and compliance risks, and the Compensation and Management Development Committee sets employee incentives with the goal of encouraging an appropriate level of risk-taking, consistent with the Company’s business strategies.

Compensation Risk Assessment

Our management conducted a comprehensive overall review of each of the Company’s compensation policies and practices for the purpose of determining whether any of those policies and practices are reasonably likely to have a material adverse effect on the Company. As a part of this review, each of the Company’s compensation policies and practices were compared to a number of specific factors that could potentially increase risk, including the specific factors that the SEC has identified as potentially triggering disclosure. The Company balanced these factors against a variety of mitigating factors. Examples of some of the mitigating factors are (i) compensation policies and practices are structured similarly across business units; (ii) the risk of declines in performance in our largest business units is well understood and managed; (iii) incentive compensation expense is not a significant

 

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percentage of any significant unit’s revenues; (iv) for executives, a significant portion of variable pay is delivered through long-term incentives which carry vesting schedules over multiple years; (v) a mix of compensation vehicles is used; (vi) stock ownership requirements for executives are in place; (vii) significant incentive plans are capped at all levels; (viii) threshold levels of performance must be achieved for the bulk of variable pay opportunities; and (ix) a clawback policy with respect to financial restatements is in place. Management’s assessment was also presented to the Company’s Chief Compliance Officer and the Chair of the Board’s Compensation and Management Development Committee. As a result of management’s review, the Company determined that its policies and practices are not reasonably likely to have a material adverse effect on the Company.

Board Meetings

The Board met seven times during fiscal 2010. The Board of Directors has three standing committees: the Governance and Nominating Committee; the Audit and Finance Committee; and the Compensation and Management Development Committee, each described below. Each director nominee attended at least 75% of the meetings of the Board and committees on which he or she served. In addition, individual Board members often work together and with management outside formal meetings.

The independent directors are typically scheduled to meet without the presence of management during each regularly scheduled Board meeting. Our Lead Independent Director, Mr. Martin, is responsible for organizing, managing and presiding over the independent director sessions of the Board, and reporting on outcomes of the sessions to the Chairman and CEO, as appropriate.

Governance and Nominating Committee

The Board’s Governance and Nominating Committee is composed solely of independent directors, as defined under NYSE rules. The Committee met five times in fiscal 2010.

The members of the Governance and Nominating Committee are: Adrian D. P. Bellamy, Bob L. Martin (chair), and Mayo A. Shattuck III. This Committee assists the Board of Directors in fulfilling its oversight responsibilities relating to the Company’s corporate governance matters, including the development of corporate governance guidelines, periodic evaluation of the Board, its committees and individual directors, identification and selection of director nominees, and such other duties as directed by the Board of Directors. The Committee’s charter is available at www.gapinc.com (follow the Investors, Governance, Board of Directors, Board Committees links).

Nomination of Directors

The Governance and Nominating Committee has the responsibility to identify, evaluate, and recommend qualified candidates to the Board. The Chairman and CEO, as well as at least two independent directors, must interview any qualified candidates prior to nomination. Other directors and members of management interview each candidate as requested by the Chairman and CEO or chair of the Committee.

The Committee engages third-party independent consultants to identify potential director nominees based on identified criteria and a needs assessment. These consultants have also assisted the Committee in identifying a diverse pool of qualified candidates and in evaluating and pursuing individual candidates at the direction of the Committee.

The Committee will also consider director nominees recommended by shareholders. Our Amended and Restated Bylaws provide that in order for a shareholder to propose director nominations at the

 

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meeting of shareholders in 2012, the shareholder must give written notice to our Corporate Secretary by no later than the close of business (San Francisco Time) on February 17, 2012, and no earlier than January 18, 2012 (i.e., not less than 90 days nor more than 120 days prior to the first anniversary of the date of our 2011 Annual Meeting). The notice must contain information required by our Bylaws about the identity and background of each nominee and the shareholder making the nomination, including interests in derivative securities or arrangements with persons holding derivative securities, relationships or arrangements between the nominee and the shareholder making the nomination, and information that would enable the Board to determine a nominee’s eligibility to serve as an independent director. The notice also must contain other information that must be disclosed in proxy solicitations for election of directors under the proxy rules of the SEC (including information regarding the director nominee’s experience, qualifications, attributes and/or skills), the nominee’s consent to the nomination and to serve if elected, and certain other information required by our Bylaws. If a shareholder fails to submit the notice by February 17, 2012, then the nominee(s) of the shareholder will not be considered at our Annual Meeting in 2012 in accordance with our Bylaws. Notifications must be addressed to our Corporate Secretary at Gap Inc., Two Folsom Street, San Francisco, California 94105. A copy of the full text of the Bylaw provisions relating to our advance notice procedure may be obtained at www.gapinc.com (follow the Investors, Governance links) or to any shareholder on request by writing to our Corporate Secretary at the above address.

Qualifications and Diversity of Board Members

All director nominees must possess certain core competencies, some of which may include experience in retail, consumer products, international business/markets, real estate, store operations, logistics, product design, merchandising, marketing, general operations, strategy, human resources, technology, media or public relations, finance or accounting, or experience as a CEO or CFO. In addition to having one or more of these core competencies, Board member nominees are identified and considered on the basis of knowledge, experience, integrity, leadership, reputation, and ability to understand the Company’s business. The Board believes that this diversity, including differences in backgrounds, qualifications, experiences, and personal characteristics, including gender and ethnicity/race, is important to the effectiveness of the Board’s oversight of the company. Accordingly, this diversity is a factor that is considered in the identification and recommendation of potential director candidates. All director nominees are pre-screened to ensure that each candidate has qualifications that complement the overall core competencies of the Board. The screening process also includes conducting a background evaluation and an independence determination.

Evaluation of Directors

The Governance and Nominating Committee is also responsible for overseeing a formal evaluation process to assess the composition and performance of the Board, each committee, and each individual director on an annual basis. The assessment is conducted to identify opportunities for improvement and skill set needs, as well as to ensure that the Board, committees, and individual members have the appropriate blend of diverse experiences and backgrounds, and are effective and productive. As part of the process, each member completes a questionnaire that includes Board, committee and individual assessments. While results are aggregated and summarized for discussion purposes, individual responses are not attributed to any member and are kept confidential to ensure honest and candid feedback is received. The Committee discusses opportunities and agrees upon plans for improvement as appropriate and reports the results annually to the Board. A director will not be nominated for reelection unless it is affirmatively determined that he or she is substantially contributing to the overall effectiveness of the Board.

 

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Audit and Finance Committee

The Board’s Audit and Finance Committee is composed solely of independent directors, as defined under SEC and NYSE rules. The Committee met nine times in fiscal 2010.

The members of the Audit and Finance Committee are Jorge Montoya, Mayo A. Shattuck III (chair), and Kneeland C. Youngblood. This Committee assists the Board of Directors in fulfilling its oversight responsibilities relating to the integrity of our financial statements, compliance with legal and regulatory requirements, the registered public accounting firm’s qualifications, independence and performance, the performance of the Internal Audit function, the effectiveness of the corporate compliance program, and such other duties as directed by the Board of Directors. The Committee’s charter is available at www.gapinc.com (follow the Investors, Governance, Board of Directors, Board Committees links).

Audit Committee Financial Expert

Our Board of Directors has determined that the Audit and Finance Committee has one member who is an “audit committee financial expert” as determined under Regulation S-K Item 407(d)(5) of the Securities Exchange Act of 1934: Mr. Shattuck who is an “independent” director as determined under applicable New York Stock Exchange listing standards.

Compensation and Management Development Committee

The Board’s Compensation and Management Development Committee is composed solely of independent directors, as defined under SEC and NYSE rules. The Committee met six times in fiscal 2010.

The members of the Compensation and Management Development Committee are Adrian D. P. Bellamy (chair), Domenico De Sole, and Bob L. Martin. This Committee assists the Board of Directors in fulfilling its oversight responsibilities relating to executive officer and director compensation, succession planning for senior management, development and retention of senior management, and such other duties as directed by the Board of Directors. The Committee’s charter is available at www.gapinc.com (follow the Investors, Governance, Board of Directors, Board Committees links).

The Committee approves all of the Company’s executive compensation policies and programs and all compensation awarded to executive officers. Our CEO evaluates each executive officer and discusses with the Committee his assessment and recommendations for compensation. The CEO is not present during the Committee’s deliberations about his own compensation. The Committee also oversees senior management development, retention, and succession plans. The Committee has delegated authority, within defined parameters, to the CEO or Committee Chair to approve grants of stock units to employees below the Vice President level (see the “Long-Term Incentive Grant Practices” section on page 44 for more details).

The Committee has engaged Frederic W. Cook & Co. as its independent executive compensation consultant. The consultant is consulted by the Committee from time to time on the compensation program structure and specific individual compensation arrangements (see the “Role of the CEO and Compensation Consultant” section on page 38 for more details).

Compensation Committee Interlocks and Insider Participation

During fiscal 2010, Messrs. Bellamy, De Sole, and Martin served on the Compensation and Management Development Committee of the Board of Directors. During fiscal 2010, none of our executive officers served on the board of directors of any company where one of that company’s executive officers served as one of our board members.

 

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Attendance of Directors at Annual Meetings of Shareholders

Our policy regarding attendance by directors at our Annual Meeting of Shareholders states that our Chairman, Lead Independent Director, and committee chairs should attend and be available to answer questions at our Annual Meeting, if reasonably practicable. Our policy also encourages all other directors to attend. All of our director nominees attended our 2010 Annual Meeting except Ms. Tsang, who was appointed to the Board of Directors in August 2010 after our 2010 Annual Meeting.

Communication with Directors

Interested parties can send direct communications to our Board of Directors (through our Chairman, Lead Independent Director, and Corporate Secretary) by email to: board@gap.com.

Stock Ownership Guidelines for Directors

We have adopted minimum stock ownership guidelines for our Directors. Each non-management director should, within three years of joining the Board of Directors, hold stock of the Company worth at least three times the annual base retainer then in effect. Management directors are required to own stock of the Company in accordance with our stock ownership requirements for executives, described on page 45. Our insider trading policy prohibits speculation in Gap Inc. stock, including prohibiting short sales, and prohibits directors from entering into transactions intended to hedge their ownership interest in the Company’s stock.

Additional Corporate Governance Information

If you would like further information regarding our corporate governance practices, please visit the governance and compliance sections of www.gapinc.com (follow the Investors link). Those sections include:

 

   

Our Corporate Governance Guidelines (available in print on request to our Corporate Secretary);

 

   

Our Code of Business Conduct (available in print on request to our Corporate Secretary);

 

   

Our Committee Charters;

 

   

Our Certificate of Incorporation;

 

   

Our Bylaws;

 

   

A method for interested parties to send direct communications to our Board of Directors (through our Chairman, Lead Independent Director, and Corporate Secretary) by email to board@gap.com; and

 

   

Methods for employees and others to report suspected violations of our Code of Business Conduct or accounting, internal accounting controls, or auditing concerns to our Global Integrity and Compliance department by confidential email to global_integrity@gap.com or through our Code Hotline (866) GAP-CODE. Callers from outside North America must dial their country’s AT&T Direct Access Code, then our Code Hotline. Code Hotline calls are answered by a live operator from an outside company, and are free, confidential and may be made anonymously. Accounting, auditing, and other significant concerns are referred by the Global Integrity & Compliance department to the Audit and Finance Committee.

 

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COMPENSATION OF DIRECTORS

Retainer and Meeting Fees

The table below shows the annual retainer, attendance fees, and committee chair retainer we paid to our non-employee directors in fiscal 2010:

 

Fiscal Year 2010 Director Compensation  

Annual Retainer

   $ 70,000   

Additional Annual Retainer for Committee Chairs

    

Audit and Finance Committee

     20,000   

Compensation and Management Development Committee

     20,000   

Governance and Nominating Committee

     10,000   

Additional Annual Retainer for Lead Independent Director

     20,000   

Fee per Board Meeting (1)

       

Fee per regularly scheduled Committee Meeting

     1,500   

Footnotes

 

(1)  

Non-employee directors who reside primarily outside of North America receive a fee of $2,000 for attendance at each Board and/or committee meeting requiring travel to the United States, in addition to the committee meeting fee.

 

Employee directors are not eligible for the annual retainer or attendance fees, and are not eligible to serve on committees or as committee chairs.

Equity Compensation

Non-employee directors receive the following under our 2006 Long-Term Incentive Plan:

 

   

Each new non-employee director automatically receives stock units with an initial value of $125,000 based on the then-current fair market value of the Company’s common stock.

 

   

Each continuing non-employee director automatically receives, on an annual basis, stock units with an initial value of $125,000 at the then-current fair market value of the Company’s common stock; provided that the value of the first annual stock unit grant for newly-appointed non-employee directors (i.e., non-employee directors who were appointed after the Company’s last annual shareholders meeting) is prorated based on the number of days that the director has served between his or her appointment and the date of the first annual stock unit grant.

The annual stock units granted to continuing non-employee directors following the Company’s annual shareholders meeting, as well as the initial grant made to any non-employee director who is first elected to the Board at the Company’s annual shareholders meeting, are granted on June 30 of each year; provided, however, that if the Company’s annual shareholders meeting takes place after June 30, then the related stock unit grants will be granted on the first business day following that meeting. All initial stock units to new non-employee directors who are appointed other than at the annual shareholders meeting are granted on the date of appointment. The number of stock units are rounded down to the nearest whole share. These stock units are fully-vested but are subject to a three-year deferral period. During the deferral period, the stock units earn dividend equivalents which are reinvested in additional units annually. Following the deferral period, shares in an amount equal in value to the stock units, including units acquired through dividend equivalent reinvestment, will be issued to each non-employee director unless a further deferral election has been made; provided, however, that shares and accumulated dividend equivalents will be issued immediately upon the resignation or retirement of a non-employee director.

 

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Expense Reimbursement and Other Benefits

We also pay for or reimburse directors for approved educational seminars and for travel expenses related to attending Board, committee, and approved Company business meetings. Additionally, we provide non-employee directors access to office space and administrative support for Company business from time to time.

Directors and their spouses are eligible to receive discounts on our merchandise in accordance with the Gap Inc. corporate employee merchandise discount policy.

In January 2006, we established The Gap, Inc. Deferred Compensation Plan (“DCP”) whereby highly compensated employees, including executive officers, and non-employee directors may elect to defer receipt of certain eligible income. The DCP allows eligible employees to defer a percentage of their salary and bonus on a pre-tax basis, and allows non-employee directors to defer their retainers and meeting fees. The deferred amounts are indexed to the participant’s choice of approved investment funds. Non-employee director deferrals are not matched, and above-market or preferential interest rate options are not available on deferred compensation.

The Non-Employee Director Retirement Plan is an unfunded deferred compensation plan that provides for annual benefits if a non-employee director has served on the Board for five consecutive years and is still a director at age 72. In fiscal 1996, the Board of Directors terminated this plan for future directors. Mr. Bellamy is the only current director who may be eligible for plan benefits, assuming he meets the requirements of the plan, including remaining on the Board until age 72. In that event, he would receive an annual benefit payment equal to $27,000. The duration of these annual payments would equal the number of years that he served on the Board. If Mr. Bellamy dies before the maximum payment period expires, payments would continue for the life of his surviving spouse, or until the end of the maximum payment period, whichever is sooner.

Directors are eligible to participate in our Gift Match Program available to all employees, under which we match contributions to eligible nonprofit organizations, up to certain annual limits. In fiscal 2010, Mr. Murphy, our Chairman and CEO, had an annual matching limit of $100,000. The annual limit for non-employee directors was $15,000 under the Gift Match Program. Mr. Murphy, as an employee, is also eligible to participate in our Board Service Program that matches nonprofit board service by Senior Director or above level employees with contributions to eligible nonprofit organizations, up to an annual limit of $10,000.

 

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Director Compensation Summary

The following table sets forth certain information regarding the compensation of our directors in fiscal 2010, which ended January 29, 2011.

 

Name (1)  

Fees

Earned

or Paid

in Cash

($)

   

Stock

Awards

($) (2)

   

Option

Awards

($) (3)

   

Non-Equity

Incentive

Plan

Compensation

($)

   

Change in

Pension

Value and

Nonqualified

Deferred

Compensation

Earnings

($) (4)

   

All Other

Compensation

($) (5)

   

Total

($)

 

Adrian D.P. Bellamy

    105,000           124,992           0           0           21,547           14,750           266,289      

Domenico De Sole

    77,500        124,992        0        0        0        15,000        217,492   

Robert J. Fisher

    70,000        124,992        0        0        0        15,000        209,992   

William S. Fisher

    70,000        77,042        0        0        0        15,000        162,042   

Bob L. Martin

    115,000        124,992        0        0        0        10,000        249,992   

Jorge P. Montoya

    88,500        124,992        0        0        0        6,500        219,992   

James M. Schneider

    58,500        124,992        0        0        0        0        183,492   

Mayo A. Shattuck III

    106,500        124,992        0        0        0        15,000        246,492   

Katherine Tsang

    39,000        124,997        0        0        0        0        163,997   

Kneeland C. Youngblood

    82,000        124,992        0        0        0        0        206,992   
Footnotes
(1)   

Glenn K. Murphy was compensated as our CEO and received no additional compensation as our Chairman or as a Director. Mr. Murphy’s compensation is reported in the Summary Compensation Table and related executive compensation tables, beginning on page 49.

 

Mr. Schneider resigned from the Board of Directors effective October 8, 2010.

 

Ms. Tsang joined the Board of Directors effective August 16, 2010.

   
(2)    This column reflects the aggregate grant date fair value for awards of stock during fiscal 2010, computed in accordance with FASB ASC 718. All stock awards reported in this column were granted in fiscal 2010. The following directors had outstanding stock awards as of fiscal 2010 year-end: Mr. Bellamy (23,345), Mr. De Sole (23,209), Mr. Robert Fisher (29,104), Mr. William Fisher (7,839) Mr. Martin (17,450), Mr. Montoya (17,450), Mr. Shattuck (17,450), Ms. Tsang (7,090), and Mr. Youngblood (17,450). For the period during which the payment of these units is deferred (see page 15), they will earn dividend equivalents which are reinvested in additional units annually. Please refer to Note 8, “Share-Based Compensation,” in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K filed on March 28, 2011 for the relevant assumptions used to determine the valuation of our stock awards.
   
(3)    No stock options were granted to our directors in fiscal 2010. The following directors had outstanding option awards as of fiscal 2010 year-end: Mr. Bellamy (39,043), Mr. De Sole (22,500), Mr. Robert Fisher (35,980), Mr. Martin (15,000), Mr. Montoya (26,565), and Mr. Shattuck (38,410).
   
(4)    The amount in this column for Mr. Bellamy represents the estimated change in present value of his accumulated benefit under the Company’s Non-Employee Director Retirement Plan, described on page 16.
   
(5)   

This column represents any Company matching contributions under the Company’s Gift Match Program (see “Expense Reimbursement and Other Benefits,” on page 16.

 

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PROPOSAL NO. 2 — Selection of Independent Registered Public Accounting Firm

The Audit and Finance Committee of the Board of Directors has selected Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending January 28, 2012. If shareholders fail to ratify the selection of Deloitte & Touche LLP, the Audit and Finance Committee will reconsider the selection. If the selection of Deloitte & Touche LLP is approved, the Audit and Finance Committee, in its discretion, may still direct the appointment of a different independent auditing firm at any time and without shareholder approval if the Audit and Finance Committee believes that such a change would be in the best interest of us and our shareholders.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE SELECTION OF DELOITTE & TOUCHE LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.

Representatives of Deloitte & Touche LLP are expected to be present, available to make statements, and available to respond to appropriate shareholder questions at the Annual Meeting.

Principal Accounting Firm Fees

The following table sets forth the aggregate fees billed to us for the fiscal years ended January 29, 2011 and January 30, 2010 by our principal accounting firm, Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively “Deloitte & Touche”).

 

Fiscal Year 2010 and 2009 Accounting Fees   
Fees (see notes below)      Fiscal Year 2010        Fiscal Year 2009  

Audit Fees

     $ 4,119,000          $ 4,216,000    

Audit-Related Fees

       185,000           169,000   

Tax Fees

       12,000           123,000   

All Other Fees

       4,000           4,000   

Total

     $ 4,320,000         $ 4,512,000   

 

“Audit Fees” consists of fees for professional services rendered in connection with the audit of our consolidated annual financial statements, the review of our interim condensed consolidated financial statements included in quarterly reports, and the audits in connection with statutory and regulatory filings or engagements.

 

“Audit-Related Fees” consists primarily of fees for professional services rendered in connection with the audit of our employee benefit plans, audit procedures required by store leases, capital verification reports, and consents for registration statements.

 

“Tax Fees” consists of fees billed for professional services rendered for tax compliance and tax advice. These services include assistance regarding federal, state and international tax compliance, and competent authority proceedings.

 

“All Other Fees” consists of fees for products and services other than the services reported above. In fiscal 2010 and fiscal 2009, this category included licensing fees related to accounting research software.

 

The Audit and Finance Committee has a policy to pre-approve all services performed by our independent registered public accounting firm. This policy requires that all services performed by Deloitte & Touche, whether audit or non-audit services, must be pre-approved by the Audit and Finance Committee or a designated member of the Audit and Finance Committee, with any such services reported to the entire Audit and Finance Committee at the next scheduled meeting.

 

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Report of the Audit and Finance Committee

The Audit and Finance Committee assists the Board of Directors in fulfilling its oversight responsibilities relating to the integrity of our financial statements, compliance with legal and regulatory requirements, the independent registered public accounting firm qualifications, independence and performance, the performance of the Internal Audit function, the effectiveness of the corporate compliance program, and such other duties as directed by the Board of Directors. The Committee operates under a written charter (available at www.gapinc.com, follow the Investors, Governance, Board Committees links) adopted by the Board of Directors. The Committee is composed exclusively of directors who are independent under New York Stock Exchange listing standards and Securities and Exchange Commission rules.

The Committee has reviewed and discussed the audited financial statements of the Company for the fiscal year ended January 29, 2011 with the Company’s management. In addition, the Committee has discussed with Deloitte & Touche LLP, the Company’s independent registered public accounting firm, the matters required to be discussed by the applicable Public Company Accounting Oversight Board and Securities and Exchange Commission requirements.

The Committee also has received the written disclosures and the letter from Deloitte & Touche LLP required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Committee concerning independence, and the Committee has discussed the independence of Deloitte & Touche LLP with that firm.

Based on the Committee’s review and discussions noted above, the Committee recommended to the Board of Directors that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011 for filing with the Securities and Exchange Commission.

Mayo A. Shattuck III (Chair)

Jorge P. Montoya

Kneeland C. Youngblood

Notwithstanding anything to the contrary in any of the Company’s previous or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this Proxy Statement or future filings with the Securities and Exchange Commission, in whole or in part, this report shall not be deemed to be incorporated by reference into any such filing.

 

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PROPOSAL NO. 3 — Approval of the Amendment and Restatement of The Gap, Inc. 2006 Long-Term Incentive Plan

We are requesting that shareholders approve the amendment and restatement of our 2006 Long-Term Incentive Plan (the “2006 Plan”), to be known upon approval as the 2011 Long-Term Incentive Plan (the “2011 Plan”). Section 162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”) requires that shareholders approve the material terms of the 2011 Plan at least every five years. The 2006 Plan was most recently approved by the Company’s shareholders at the 2006 Annual Meeting of Shareholders. Therefore, the Company is asking shareholders to approve the 2011 Plan in order to satisfy Section 162(m) and also to adopt other changes described below in this proposal.

The amendment and restatement of the 2011 Plan was adopted by the Board of Directors on February 17, 2011, subject to shareholder approval. Approval of the 2011 Plan requires the affirmative vote of a majority of the shares of our common stock (“Shares”) that are present in person or by proxy at the Annual Meeting and entitled to vote on this matter. If the shareholders approve the 2011 Plan, it will replace the current version of the 2006 Plan.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE PROPOSAL TO APPROVE THE AMENDMENT AND RESTATEMENT OF THE GAP, INC. 2006 LONG-TERM INCENTIVE PLAN.

General

The primary purpose for this request is to satisfy Section 162(m) as described above and to make the following material changes to the 2006 Plan:

(1) Increase the number of Shares authorized for issuance under the 2011 Plan by the sum of 25,000,000;

(2) Provide that the number of Shares that remain available for issuance under the 2011 Plan will be reduced by two Shares, instead of three Shares under the 2006 Plan, for each Share issued pursuant to an award other than an option or stock appreciation right;

(3) Provide that any option or stock appreciation right settled in cash (rather than Shares) will result in the reduction of the number of Shares available for issuance under the 2011 Plan by the number of Shares having a fair market value equal to the cash delivered on the date of settlement;

(4) Modify the performance goals and adjustments thereto that may be used under the 2011 Plan;

(5) Require shareholder approval before implementing a program providing for the repurchase of outstanding and unexercised stock options or stock appreciation rights whether in the form of a cash payment or otherwise;

(6) Delete a provision permitting the exchange, without shareholder approval, of outstanding awards for different types of awards and/or cash having a total value equal to or less than the exchanged award; and

(7) Revise the per participant fiscal year limit on awards of stock units, performance units or performance shares.

We believe strongly that the approval of the 2011 Plan is essential to our success. Our employees are our most valuable assets. Stock options and other awards such as those provided for under the 2011 Plan are vital to our ability to attract and retain outstanding and highly skilled employees, especially in

 

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the extremely competitive market in which we must compete. Such awards also are crucial to our ability to motivate employees to achieve our goals.

The proposed modifications to the 2011 Plan are designed to allow the Company to continue to attract, retain and motivate people whose skills and performance are critical to the Company’s success, while giving shareholders greater input over use of the 2011 Plan. Some of the proposed changes to the 2011 Plan will restrict use of the 2011 Plan and reinforce our commitment to practices that we believe constitute higher standards for the markets in which we operate. We will continue to monitor the environment in which we operate and make changes to our equity compensation program to help us meet our goals, including achieving long-term shareholder value.

Material Features of the 2011 Plan

The following is a summary of the material features of the 2011 Plan and its operation. This summary does not purport to be a complete description of all of the provisions of the 2011 Plan and is qualified in its entirety by reference to the 2011 Plan, a copy of which is attached as Appendix A to this Proxy Statement and incorporated herein by reference.

Purpose

The purpose of the 2011 Plan is to permit grants of stock options, stock appreciation rights, restricted stock, unrestricted stock, performance units, performance shares, and stock units (collectively, “Awards”) to eligible participants. The 2011 Plan is intended to provide incentives to further the growth and profitability of the Company and to encourage stock ownership on the part of (1) employees of the Company and its affiliates, (2) consultants and others who provide significant services to the Company and its affiliates (“consultants”), and (3) directors of the Company who are employees of neither the Company nor any of its affiliates (“non-employee directors”). The 2011 Plan also is intended to permit the payment of qualified performance-based compensation under Section 162(m). However, because of the fact-based nature of the performance-based compensation exception under Section 162(m) and the limited availability of binding guidance thereunder, the Company cannot guarantee that Awards made under the Plan that are intended to qualify as performance-based compensation under Section 162(m) will in fact so qualify.

Eligible Participants

Employees, consultants and non-employee directors are eligible to be selected to receive one or more different types of Awards. However, incentive stock options (which are entitled to favorable U.S. federal tax treatment) may be granted only to employees of the Company or any subsidiary of the Company at the time of grant. The actual number of individuals who will receive Awards cannot be determined in advance because the Committee retains the discretion to select the participants.

Administration

The 2011 Plan is administered by the Compensation and Management Development Committee of the Board of Directors (the “Committee”). The Committee will consist of two or more directors who qualify as “non-employee directors” under Rule 16b-3 under the Securities Exchange Act of 1934, and as “outside directors” under Section 162(m) (so that the Company can be eligible to receive a federal tax deduction for certain compensation paid under the 2011 Plan).

Subject to the terms of the 2011 Plan, the Committee has the discretion to select the employees, consultants and non-employee directors who will be granted Awards, determine the terms and conditions of Awards (for example, the exercise price and vesting schedule), and to construe and

 

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interpret the provisions of the 2011 Plan and outstanding Awards. Notwithstanding the foregoing, Awards granted to non-employee directors shall be subject to Board approval if so required by the Committee Charter. In addition, the Committee may not reprice Awards or exchange Awards for other Awards, cash or a combination thereof, without the approval of the shareholders. The Committee may delegate all or any part of its authority to one or more directors or officers of the Company, but only the Committee itself can make Awards to participants who are executive officers of the Company.

If an Award expires or is canceled, forfeited or repurchased by the Company for any reason, the unvested or cancelled number of Shares that were subject to the Award (plus the number of additional Shares, if any, that counted against the share pool using the share counting rule in effect at the time the Award was granted) generally will be returned to the available pool of Shares reserved for issuance under the 2011 Plan. Except for shares of restricted stock that are forfeited (rather than vesting), Shares actually issued under the 2011 Plan or withheld to pay the exercise price of an Award or to satisfy tax withholding obligations with respect to an Award will not be returned to the 2011 Plan and will not be available for future issuance under the 2011 Plan. Also, if the Company experiences a dividend or other distribution, merger, reorganization, consolidation, recapitalization, separation, liquidation, stock split, reverse stock split, split-up, spin-off, Share combination, repurchase, or exchange of Shares or other securities of the Company, other significant corporate transaction or other change affecting the Shares, the Committee shall, as it deems appropriate, equitably adjust the number, kind and class of securities reserved for issuance under the 2011 Plan, the number, kind, class, and price of securities subject to outstanding Awards and the per-person numerical limits on Awards to reflect the stock dividend or other change.

Performance Goals

Awards under the 2011 Plan may be made subject to performance conditions as well as time-vesting conditions. Such performance conditions may be established and administered in accordance with the requirements of Section 162(m) for Awards intended to be qualified performance-based compensation thereunder. To the extent that performance conditions under the 2011 Plan are applied to awards intended to be qualified performance-based compensation under Section 162(m), such performance conditions shall be based on an objective formula or standard utilizing one or more of the following objectively defined and non-discretionary factors pre-established by the Committee in accordance with Section 162(m): (1) comparable store sales growth, (2) earnings, (3) earnings per share, (4) return on equity, (5) return on net assets, (6) return on invested capital, (7) gross sales, (8) net sales, (9) net earnings, (10) free cash flow, (11) total shareholder return, (12) stock price, (13) gross margin, (14) operating margin, (15) market share, (16) inventory levels, (17) expense reduction, and (18) employee turnover (each, a “Performance Goal”) and any combination of the Performance Goals.

As determined by the Committee, the Performance Goals may, to the extent consistent with the performance-based compensation exception under Section 162(m), (a) differ from participant to participant and from award to award, (b) be based on the performance of the Company as a whole or the performance of a specific participant or one or more subsidiaries, divisions, departments, regions, stores, segments, products, functions or business units of the Company, (c) be measured on a per share, per capita, per unit, per square foot, per employee, per store basis, and/or other objective basis (d) be measured on a pre-tax or after-tax basis, and (e) be measured on an absolute basis or in relative terms (including, but not limited to, the passage of time and/or against other companies, financial metrics and/or an index).

In addition, the impact of objectively defined and non-discretionary items (includable in one or more of the following categories) may be taken into account in any manner preestablished by the Committee in accordance with Section 162(m) when determining whether a Performance Goal has been attained: (1) changes in generally accepted accounting principles (“GAAP”); (2) nonrecurring items, if any, that may be defined in an objective and non-discretionary manner under U.S. GAAP accounting standards

 

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or other applicable accounting standards in effect from time to time; (3) the sale of investments or non-core assets; (4) discontinued operations, categories or segments; (5) legal claims and/or litigation and insurance recoveries relating thereto; (6) amortization, depreciation or impairment of tangible or intangible assets; (7) reductions in force or early retirement programs; (8) investments, acquisitions or dispositions; (9) political, legal and other business interruptions (such as due to war, insurrection, riot, terrorism, confiscation, expropriation, nationalization, deprivation, seizure, and regulatory requirements); (10) natural catastrophes; (11) currency fluctuations; (12) stock based compensation expense; (13) early retirement of debt; (14) conversion of convertible debt securities; and (15) termination of real estate leases. Each of the adjustments described above may relate to the Company as a whole or any part of the Company’s business or operations.

Stock Option Awards

A stock option is the right to acquire Shares at a fixed exercise price for a fixed period of time. Under the 2011 Plan, the Committee may grant nonqualified stock options and/or incentive stock options. The number of Shares covered by each option will be determined by the Committee, but during any fiscal year of the Company, no participant may be granted options covering more than 18,000,000 Shares. The exercise price of the Shares subject to each option is set by the Committee but cannot be less than 100% of the fair market value (on the date of grant) of the Shares covered by the option. The exercise price of incentive stock options shall not be less than 110% of fair market value if the participant owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its subsidiaries. The total fair market value of the Shares (determined on the grant date) covered by incentive stock options that first become exercisable by any participant during any calendar year also may not exceed $100,000.

Options become exercisable and terminate at the times and on the terms established by the Committee, but options generally may not expire later than ten years after the date of grant (such term to be limited to five years in the case of an incentive stock option granted to a participant who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its subsidiaries). If the participant terminates service before his or her option’s normal expiration date, the Option may terminate sooner than its normal expiration date, depending upon the reason for the termination.

The exercise price of each option must be paid in full at the time of exercise. The Committee also may permit payment through the tender of Shares that are already owned by the participant, by cashless or “net” exercise, or by any other means that the Committee determines to provide legal consideration for the Shares and is consistent with the 2011 Plan’s purpose. Any taxes required to be withheld must be paid by the participant at the time of exercise.

Stock Appreciation Right Awards

Stock appreciation rights (“SARs”) are Awards that give a participant the right to receive payment from the Company in an amount equal to: (1) the excess of the fair market value of a Share on the date of exercise over the exercise price, multiplied by (2) the number of Shares with respect to which the SAR is exercised. SARs may be granted as a separate Award or together with an option. Proceeds from SAR exercises may be paid in cash or Shares, as determined by the Committee. The number of Shares covered by each SAR will be determined by the Committee, but during any fiscal year of the Company, no participant may be granted SARs for more than 18,000,000 Shares.

Awards of SARs may be granted in connection with all or any part of an option or may be granted independently of options. The Committee determines the terms and conditions of each SAR. However, the exercise price of a SAR may not be less than 100% of the fair market value of a Share on the grant

 

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date. SARs expire at the times established by the Committee, but subject to the same maximum time limits as are applicable to options granted under the 2011 Plan.

Restricted and Unrestricted Stock Awards

Restricted stock awards are shares of the Company’s common stock which vest in accordance with terms established by the Committee in its discretion. Unrestricted stock awards are shares of the Company’s common stock that have no restrictions such as vesting terms. The number of Shares of restricted and unrestricted stock granted to any employee or consultant will be determined by the Committee, but during any fiscal year of the Company, no participant may be granted more than 2,000,000 Shares.

In determining the vesting schedule for any Award of restricted stock, the Committee may impose whatever conditions to vesting it determines to be appropriate. For example, the Committee may (but is not required to) provide that restricted stock will vest only if one or more performance objectives are satisfied and/or only if the participant remains employed with the Company for a specified period of time. If the Committee desires that the Award be intended to qualify as performance-based compensation under Section 162(m), any restrictions will be based on a specified list of performance goals (see “Performance Goals” above for more information).

Unless the Committee determines otherwise, Shares of restricted stock will be held by the Company as escrow agent until any restrictions on the Shares have lapsed. The Committee may accelerate the time at which any restriction may lapse or be removed.

On the date set forth in the Award agreement, all unvested restricted stock will be forfeited to the Company.

Stock Unit, Performance Unit, and Performance Share Awards

Stock units, performance units, and performance shares are Awards in which amounts are credited to a bookkeeping account established for the participant. A stock or performance unit has an initial value that is established by the Committee at the time of its grant. A performance share has an initial value equal to the fair market value of a Share on the date of grant. The number of stock units, performance units or performance shares granted to any employee or consultant will be determined by the Committee, but during any fiscal year of the Company, no participant may be granted stock units, performance units or performance shares having, in the aggregate, a grant date value (assuming maximum payout) greater than $20 million or covering more than 2,000,000 Shares, whichever is greater.

Whether a stock unit, performance unit or performance share Award actually will result in a payment to a participant will depend upon the extent to which the performance objectives, if any, established by the Committee are satisfied and the vesting criteria, if any, are met. The applicable performance objectives, vesting criteria and all other terms and conditions of the Award will be determined at the discretion of the Committee and may be based upon the achievement of Company-wide, business unit or individual goals, which may include continued employment or service, or any other basis determined by the Committee. In order for an Award of performance units, performance shares or stock units to qualify as “performance-based” compensation under Section 162(m), the Committee must use one or more of the Performance Goals that are discussed above.

After a stock unit, performance unit or performance share Award has vested (that is, after any applicable performance objective(s) have been achieved and/or any applicable vesting criteria satisfied), the participant will be entitled to a payment of cash and/or Shares, as determined by the Committee.

 

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However, upon grant of an Award of performance shares, performance units or stock units, the Committee may set terms and conditions for deferral of payment of an Award of performance shares, performance units or stock units. The deferral period will be fixed by the Committee on the date of grant and any Award may provide for the earlier termination of such period in the event of a change in control of the Company or other similar transaction or event.

On the date set forth in the Award agreement, all unearned or unvested performance shares, performance units or stock units will be forfeited to the Company.

Nontransferability of Awards

Awards granted under the 2011 Plan may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the applicable laws of descent and distribution. If permitted by the Committee (at its discretion), a participant may designate one or more beneficiaries to receive any vested but unpaid Awards following his or her death. Notwithstanding the foregoing, a Participant may, if the Committee (in its discretion) so permits, transfer an Award granted on or after January 24, 2006, to an individual or entity other than the Company. Any such transfer shall be made in accordance with such procedures as the Committee may specify from time to time.

 

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Plan Benefits

As described above, the number of Awards (if any) that an individual may receive under the 2011 Plan is in the discretion of the Committee and therefore cannot be determined in advance. Our named executive officers and directors have an interest in this proposal by virtue of their being eligible to receive equity awards under the 2011 Plan. The following table sets forth (1) the total number of Shares subject to stock options granted under the 2006 Plan to the listed persons and groups during the last fiscal year of the Company, (2) the average per Share exercise price of such options, (3) the total number of restricted stock units granted under the 2006 Plan to the listed persons and groups during the last fiscal year of the Company, (4) the dollar value of such restricted stock units based on $21.91 per Share, the last reported trade price for Shares on March 21, 2011, (5) the total number of performance units granted under the 2006 Plan to the listed persons and groups during the last fiscal year of the Company, (6) the dollar value of such performance units based on $21.91 per Share, the last reported trade price for Shares on March 21, 2011, (7) the total number of performance shares granted under the 2006 Plan to the listed persons and groups during the last fiscal year of the Company, and (8) the dollar value of such performance shares based on $21.91 per Share, the last reported trade price for Shares on March 21, 2011.

 

2011 Long-Term Incentive Plan  
   
Name and Principal Position    Number of
Stock
Options
Granted
    Average
Per Share
Exercise
Price of
Stock
Options
    Number of
Restricted
Stock
Units
    Dollar
Value of
Restricted
Stock Units
    Number of
Performance-
Based
Awards (2)
    Dollar Value
of
Performance-
Based
Awards
 

Glenn Murphy

Chairman and Chief Executive Officer

     N/A        N/A        N/A        N/A        750,000      $ 16,432,500      

Sabrina Simmons

EVP and Chief Financial Officer

     100,000      $ 23.07           N/A        N/A        149,336      $ 3,271,952   

Marka Hansen

Former President, Gap North America (1)

     90,000      $ 23.07        N/A        N/A        131,526      $ 2,881,735   

Arthur Peck

President, Gap North America

     100,000      $ 23.07        N/A        N/A        151,810      $ 3,326,157   

J. Tom Wyatt

President, Old Navy

     120,000      $ 23.07        N/A        N/A        195,056      $ 4,273,677   

All executive officers as a group

     545,000      $ 23.07        25,000      $ 547,750        1,680,724         $ 36,824,663   

All directors, excluding executive officers, as a group

     N/A        N/A        65,035      $ 1,424,917        N/A        N/A   

All employees, excluding executive officers, as a group

     1,839,553         $ 22.89        2,411,307         $ 52,831,736           1,059,761      $ 23,219,364   

Footnotes

 

1.

  

Ms. Hansen ceased to be an executive officer of the Company in February 2011.

   

2.

  

For awards in this column, the number of shares represent the maximum number of shares that could be issued under performance-based awards. Please refer to the Compensation Discussion and Analysis section and the Grants of Plan-Based Awards table in this Proxy Statement for additional details on these awards.

 

 

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U.S. Federal Income Tax Consequences

The following is a general summary of the federal income tax consequences to U.S. taxpayers and the Company of Awards under the 2011 Plan. Tax consequences for any particular individual may be different. Participants should consult with their own tax advisors for more detailed information on how Awards will be taxed in their particular circumstances.

Nonqualified Stock Options and SARs

No amount is included in the taxable income of a participant when a nonqualified stock option or SAR is awarded or vests. Upon exercise of a nonqualified stock option, a participant will recognize ordinary income equal to the difference between the fair market value of the Shares received and the exercise price. Upon exercise of a SAR, a participant will recognize ordinary income equal to the amount of cash received and the fair market value of any Shares received from the Company (before tax withholding). Any additional gain or loss recognized upon a later sale or other disposition of the acquired Shares is generally taxed as capital gain or loss.

Incentive Stock Options

No amount is included in the taxable income of a participant when an incentive stock option is granted or exercised. However, the participant may be subject to the alternative minimum tax in the year of exercise because the difference between the fair market value of the Shares received and the exercise price is included in the amount of the participant’s alternative minimum taxable income for that year. If the participant exercises the option and then sells the acquired Shares more than two years after the grant date and more than one year after the exercise date, the difference between the sale price and the exercise price will be taxed as long-term capital gain or loss. If the participant exercises the option and sells the acquired Shares before the end of the two- or one-year holding periods, however, the difference between the fair market value of the stock on the date of the option exercise and the exercise price is taxed as ordinary income. If the value of the Shares has decreased following the option exercise, the participant’s ordinary income is limited to the difference between the sale price and the exercise price. If the value of the Shares has increased following the option exercise, the difference between the fair market value of the Shares at the time of exercise and the sale price is taxed as capital gain.

Restricted Stock, Unrestricted Stock, Stock Units, Performance Units and Performance Shares

No amount is included in the taxable income of a participant upon receipt of restricted stock, stock units, performance units, or performance shares if such Awards are subject to vesting requirements. The participant will generally recognize ordinary income upon vesting and payout of the restricted stock, stock units, performance units or performance shares. In the case of stock units, performance units, or performance shares, if the Committee has set terms and conditions for the deferral of payment of the Award following the time of vesting, the participant will recognize ordinary income at the time of such payment. Alternatively, with respect to restricted stock, a participant may elect under Code Section 83(b) to be taxed at the time of the Award. An election under Section 83(b) must be filed with the Internal Revenue Service (with a copy to the Company) within 30 days after the date of the Award. A participant receiving unrestricted stock will recognize income at the time of the Award. With respect to restricted stock and unrestricted stock, the amount of ordinary income recognized by the participant will be equal to the fair market value of the Shares at the time income is recognized minus any amount paid for the Shares. With respect to stock units, performance units or performance shares, the amount of ordinary income will be equal to the amount of cash and/or the fair market value of Shares (at the time income is recognized) that the participant receives from the Company (before tax withholding) minus any amount paid for the Shares. In general, any gain or loss recognized upon sale of the Shares thereafter will be taxed as a capital gain or loss.

 

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Tax Effect on the Company

The Company generally will be entitled to a tax deduction in connection with an Award made under the 2011 Plan in an amount equal to the ordinary income realized by a participant and at the time the participant recognizes such income (for example, when a participant exercises a nonqualified stock option). Special rules limit the deductibility of compensation paid to the Company’s Chief Executive Officer and the Company’s other three most highly compensated executive officers (other than the Chief Financial Officer). Under Section 162(m), the annual compensation paid to any of these executive officers will be deductible only to the extent that it does not exceed $1 million. However, the Company can preserve the deductibility of certain compensation paid in excess of $1 million if the conditions of Section 162(m) are met. These conditions include shareholder approval of the 2011 Plan, setting limits on the number of Awards that any individual may receive, and for Awards other than options, establishing performance criteria that must be met before the Award actually will vest or be paid. The 2011 Plan has been designed with the intention that the Committee may grant Awards that qualify as “performance-based compensation” for purposes of Section 162(m). However, because of the fact-based nature of the performance-based compensation exception under Section 162(m) and the limited availability of binding guidance thereunder, the Company cannot guarantee that Awards made under the Plan that are intended to qualify as performance-based compensation under Section 162(m) will in fact so qualify.

THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION UPON PARTICIPANTS AND THE COMPANY WITH RESPECT TO THE GRANT AND EXERCISE OF AWARDS UNDER THE 2011 PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF A SERVICE PROVIDER’S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE SERVICE PROVIDER MAY RESIDE.

Amendment and Termination

The Board generally may amend or terminate the 2011 Plan at any time and for any reason. However, no amendment, suspension or termination may impair the rights of any participant in the 2011 Plan without his or her consent. Amendments will be contingent on shareholder approval if required by applicable law.

Summary

We are requesting that shareholders approve the 2011 Long-Term Incentive Plan. We believe that employees with an ownership stake in our business become highly motivated to achieve our corporate goals and increase long-term shareholder value. The proposed changes are necessary for us to attract and retain the best employees in our industry — the people who will drive the future success of the Company and create long-term value for you, our shareholders.

 

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PROPOSAL NO. 4 — Advisory Vote on the Compensation of The Gap, Inc.’s Named Executive Officers

Pursuant to Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Company is providing shareholders with an advisory (non-binding) vote on the overall compensation of our named executive officers. Accordingly, the following resolution will be submitted for a shareholder vote at the 2011 Annual Meeting:

“RESOLVED, that the shareholders of The Gap, Inc. (the “Company”) approve, on an advisory basis, the overall compensation of the Company’s named executive officers, as described in the Compensation Discussion and Analysis section, the accompanying compensation tables, and the related narrative disclosure pursuant to Item 402 of Regulation S-K, set forth in the Proxy Statement for this Annual Meeting.”

The Board and the Compensation and Management Development Committee, which is comprised entirely of independent directors, expect to take into account the outcome of the shareholders’ non-binding advisory vote when considering future executive compensation decisions to the extent they can determine the cause or causes of any significant positive or negative voting results.

As described in detail under the section entitled “Compensation Discussion and Analysis,” our executive compensation program is designed to provide the level of compensation necessary to attract, motivate, and retain talented and experienced executives and to motivate them to achieve short-term and long-term goals, thereby enhancing shareholder value and creating a successful company. We believe that our compensation program, with its balance of short-term incentives, long-term incentives and share ownership requirements, rewards sustained performance that is aligned with long-term shareholder interests and reflects our ongoing governance principles. For example:

 

   

Our compensation programs are heavily weighted toward performance with limited perquisites, no supplemental executive retirement plan (SERP), and conservative severance benefits.

 

   

We have no employment contracts of defined length with our executives and no multi-year guarantees for base salary increases, bonuses or equity compensation.

 

   

We have executive stock ownership requirements and an incentive compensation recoupment (“clawback”) policy covering our executives.

 

   

None of our executives are entitled to tax gross-up payments other than relocation related payments that are also generally available to other employees.

 

   

We have not re-priced stock options nor do we intend to without seeking shareholder approval.

 

   

We have no incentive compensation arrangements for executives that create potential material risk for the Company, based on a risk assessment as described on page 10 of this proxy statement.

Shareholders are encouraged to read the “Compensation Discussion and Analysis” section of this Proxy Statement, the accompanying compensation tables, and the related narrative disclosures, which more thoroughly discuss how our compensation policies and procedures implement our compensation philosophy.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE TO APPROVE, ON AN ADVISORY BASIS, THE OVERALL COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICERS BY VOTING “FOR” THIS RESOLUTION.

 

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PROPOSAL NO. 5 — Advisory Vote on the Frequency of the Advisory Vote on the Compensation of The Gap, Inc.’s Named Executive Officers

Pursuant to Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, at least once every six years the Company is required to submit for shareholder vote a non-binding resolution to determine whether the advisory vote on the compensation of the Company’s named executive officers should occur every one, two, or three years.

After careful consideration of the various arguments supporting each frequency level, the Board of Directors believes that submitting the advisory vote on executive compensation to shareholders on an annual basis is appropriate for the Company and its shareholders at this time.

The proxy card provides shareholders with four choices (every one, two, or three years, or abstain).

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR A FREQUENCY OF EVERY “ONE YEAR”.

 

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BENEFICIAL OWNERSHIP OF SHARES

 

 

The following table sets forth certain information as of March 21, 2011, to indicate beneficial ownership of our common stock by (i) each person known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock, (ii) each director and nominee and each executive officer named in the “Summary Compensation Table” of this Proxy Statement, and (iii) all of our directors and executive officers as a group. Unless otherwise indicated, beneficial ownership is direct and the person indicated has sole voting and investment power. Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended.

 

     
      Shares Beneficially Owned         
Name of Beneficial Owner   

Common

Stock

    

Awards

Vesting Within

60 Days (1)

     Total     

% of

Class (2)

 

Directors and Named Executive Officers

                 

Adrian D. P. Bellamy

     59,105         62,388          121,493          *   

Domenico De Sole

     6,458         45,709         52,167         *   

Robert J. Fisher (3) (7)

     109,135,768         65,084         109,200,852         18.7

William S. Fisher (4) (7)

     107,928,176         7,839         107,936,015         18.5

Marka V. Hansen (5)

     155,125         503,750         658,875         *   

Bob L. Martin

     41,195         32,450         73,645         *   

Jorge P. Montoya

     10,965         44,015         54,980         *   

Glenn K. Murphy

     151,261         1,600,000         1,751,261         *   

Arthur Peck

     161,581         487,500         649,081         *   

Mayo A. Shattuck III

     25,885         55,860         81,745         *   

Sabrina L. Simmons

     16,024         332,500         348,524         *   

Katherine Tsang

     0         7,090         7,090         *   

J. Tom Wyatt

     164,454         417,500         581,954         *   

Kneeland C. Youngblood

     11,427         17,450         28,877         *   

All directors and executive officers,

as a group (18 persons) (6)

     128,143,544         4,087,219         132,230,763         22.5

Certain Other Beneficial Holders

                 

Fisher Core Holdings L.P. (7)

     81,000,000         0         81,000,000         13.9

Doris F. Fisher (8)

     38,944,083         0         38,944,083         6.7

John J. Fisher (7) (9)

     119,072,140         0         119,072,140         20.4

AllianceBernstein L.P. (10)

     36,716,778         0         36,716,778         6.3

Blackrock, Inc. (11)

     37,324,826         0         37,324,826         6.4

ESL Group (12)

     34,970,601         0         34,970,601         6.0

Footnotes

 

(1)

  

Reflects stock options exercisable and stock units vesting within 60 days after March 21, 2011. Also includes the outstanding stock units earned but unpaid to non-employee directors, which are subject to a three-year deferral period but would be issued immediately upon the resignation or retirement of the non-employee director, as described on page 15.

(2)

  

“*” indicates ownership of less than 1% of the outstanding shares of our common stock.

(3)

  

Includes 2,639,502 shares held jointly by Robert J. Fisher and his spouse, 17,657,263 shares held by Robert J. Fisher as trustee under certain trusts for which voting and investment power is shared, 15,000 shares beneficially owned through limited partnerships over which Robert J. Fisher has sole dispositive and voting power, and 81,000,000 shares held by Fisher Core Holdings L.P., of which Robert J. Fisher is a general partner and over which he shares voting and investment power. Mr. Fisher disclaims individual beneficial ownership of shares owned by Fisher Core Holdings L.P. or its other general partners except to the extent of his actual ownership interest therein. Also see footnote 7 below and the note regarding various Fisher family holdings immediately following this table. Amounts shown do not include 121,855 shares owned by Mr. Fisher’s spouse, beneficial ownership of which is disclaimed as Mr. Fisher does not have voting or dispositive control over such shares. Robert J. Fisher’s address is One Maritime Plaza, Suite 1400, San Francisco, California 94111.

 

 

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Footnotes (continued)

   
(4)    Includes 647,709 shares held jointly by William S. Fisher and his spouse, 18,028,021 shares held by William S. Fisher as trustee under certain trusts including 17,661,007 shares for which voting and investment power is shared, 15,000 shares beneficially owned through limited partnerships over which William S. Fisher has sole dispositive and voting power, and 81,000,000 shares held by Fisher Core Holdings L.P., of which William S. Fisher is a general partner and over which he shares voting and investment power. Mr. Fisher disclaims individual beneficial ownership of shares owned by Fisher Core Holdings L.P. or its other general partners except to the extent of his actual ownership interest therein. Also see footnote 7 below and the note regarding various Fisher family holdings immediately following this table. Amounts shown do not include 160,659 shares owned by Mr. Fisher’s spouse, beneficial ownership of which is disclaimed as Mr. Fisher does not have voting or dispositive control over such shares. William S. Fisher’s address is One Maritime Plaza, Suite 1400, San Francisco, California 94111.
(5)    Ms. Hansen ceased to be an executive officer of the Company in February 2011.
(6)    Reflects the information above as well as information regarding our unnamed executive officers; provided however, that shares reflected more than once in the table above with respect to Robert J. Fisher and William S. Fisher are only reflected once in this line. See the note regarding various Fisher family holdings immediately following this table.
(7)    The address of Fisher Core Holdings L.P. is One Maritime Plaza, Suite 1400, San Francisco, California 94111. As general partners, Messrs. Robert J. Fisher, John J. Fisher, and William S. Fisher have shared power (by majority vote) to vote and dispose of or direct the vote and disposition of all of these shares.
(8)    Doris F. Fisher’s address is One Maritime Plaza, Suite 1400, San Francisco, California 94111. Amounts shown do not include shares held directly or indirectly by Mrs. Fisher’s three adult sons or their spouses, beneficial ownership of which is disclaimed because Mrs. Fisher does not have voting or dispositive control over such shares.
(9)    Includes 22,104,728 shares held by John J. Fisher as trustee under certain trusts including 17,662,714 shares for which voting and investment power is shared, 20,000 shares beneficially owned through limited partnerships over which John J. Fisher has sole dispositive and voting power, and 81,000,000 shares held by Fisher Core Holdings L.P., of which John J. Fisher is a general partner and over which he shares voting and investment power. Mr. Fisher disclaims individual beneficial ownership of shares owned by Fisher Core Holdings L.P. or its other general partners except to the extent of his actual ownership interest therein. Also see footnote 7 above and the note regarding various Fisher family holdings immediately following this table. Amounts shown do not include 40,450 shares owned by Mr. Fisher’s spouse, beneficial ownership of which is disclaimed as Mr. Fisher does not have voting or dispositive control over such shares. John J. Fisher’s address is One Maritime Plaza, Suite 1400, San Francisco, California 94111.
(10)    The Schedule 13G filed with the SEC by AllianceBernstein L.P. on February 9, 2011 indicates that, as of December 31, 2010, AllianceBernstein L.P. has sole power to direct the voting of 29,414,361 shares, and the sole power to direct the disposition of 36,688,852 shares. AllianceBernstein L.P. has shared power to dispose of or direct the disposition of 27,926 shares. The address of AllianceBernstein L.P., as reported in its Schedule 13G, is 1345 Avenue of the Americas, New York, New York, 10105.
(11)    The Schedule 13G filed with the SEC by Blackrock, Inc. on January 21, 2011 indicates that, as of December 31, 2010, Blackrock, Inc. has sole power to direct the voting of, and the sole power to direct the disposition of, 37,324,826 shares. The address of Blackrock, Inc., as reported in its Schedule 13G, is 40 East 52nd Street, New York, New York 10022.
(12)    The Schedule 13G filed with the SEC by ESL Partners, L.P., ESL Investors, L.L.C., Tynan, LLC, RBS Partners, L.P., ESL Investments, Inc., Edward S. Lampert and William C. Crowley (“ESL Group”) on February 14, 2011 indicates that, as of February 3, 2011, ESL Partners, L.P. has sole power to direct the voting of, and the disposition of, 20,457,406 shares, ESL Investors, L.L.C. has sole power to direct the voting of, and the disposition of, 6,612,310 shares, Tynan, LLC has the sole power to vote 40,934 shares, RBS Partners, L.P. has the sole power to direct the voting of, and the disposition of, 27,071,716 shares, ESL Investments, Inc. has the sole power to direct the voting of, and the disposition of, 27,071,716 shares, Edward S. Lampert has the sole power to direct the voting of 34,929,667 shares and the sole power to direct the disposition of 27,163,026 shares, and William C. Crowley has the sole power to vote 40,934 shares. The address of ESL Group, as reported in its Schedule 13G, is 200 Greenwich Avenue, Greenwich, Connecticut 06830.

Note Regarding Various Fisher Family Holdings: SEC rules require reporting of beneficial ownership of certain shares by multiple parties, resulting in the same shares being listed multiple times in the table above. The 81,000,000 shares held by Fisher Core Holdings L.P. (see footnote 7 above) are included three additional times in the above table under the names of Messrs. Robert J. Fisher, John J. Fisher, and William S. Fisher (that is, there are only 81,000,000 shares rather than 324,000,000 shares). In addition, the shares described in footnotes (3), (4) and (9) above for which voting and investment power is shared by Messrs. Robert J. Fisher, John J. Fisher, and William S. Fisher actually represent an aggregate of 26,490,492 shares, rather than 52,980,984 shares, as a result of that shared voting and investment power. For purposes of the above table, removing the shares counted multiple

 

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times (described above) results in an aggregate total ownership of 25.3% of outstanding shares for Messrs. John J. Fisher, Robert J. Fisher, William S. Fisher and Fisher Core Holdings L.P. The aggregate total ownership of Mrs. Doris F. Fisher and Messrs. John J. Fisher, Robert J. Fisher, William S. Fisher and Fisher Core Holdings L.P. is 32.0% of outstanding shares. Mrs. Doris F. Fisher, and Messrs. John J. Fisher, Robert J. Fisher, and William S. Fisher each disclaim beneficial ownership over shares owned by other members of the Fisher family and Fisher Core Holdings L.P., except as specifically disclosed in the footnotes above.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and holders of more than 10% of the Company’s common stock, to file with the SEC reports about their ownership of the Company’s common stock. Such directors, officers and 10% shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

SEC regulations require us to identify in this Proxy Statement anyone who filed a required report late during the most recent fiscal year. The Company notes that, due to an administrative error, Robert Fisher and Adrian Bellamy each reported a transaction seven days late on a Form 4. The transactions involved the issuance to each of Mr. Fisher and Mr. Bellamy, on May 10, 2010, of dividend equivalent rights representing 87 shares of our common stock. In addition, the Company notes that due to an administrative error, Robert Fisher reported a transaction seven days late on a Form 4. The transaction involved Mr. Fisher’s exercise of a stock option to purchase 1,189 shares of our common stock on January 28, 2011. These transactions did not result in any liability under Section 16(b) of the Exchange Act. Based on our review of forms we received, or written representations from reporting persons stating that they were not required to file these forms, we believe that during fiscal 2010 all other Section 16(a) filing requirements were satisfied on a timely basis.

 

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EXECUTIVE COMPENSATION AND RELATED INFORMATION

 

 

Compensation Discussion and Analysis

For Named Executive Officers (“Executives”)

Summary of Fiscal 2010

Fiscal 2010 was a challenging year for many parts of the global economy and for the consumers who comprise our customer base. Unemployment in our core North American market remained high and consumers continued to be focused on value and cautious about spending, which directly impacted our business. Having completed a strong year relative to our expectations in fiscal 2009, we entered fiscal 2010 seeing some improvement in the economic climate but facing significant uncertainty as to whether, when and to what extent conditions would improve further. While top-line performance for the year improved, delivering our first positive annual comparable store sales in 7 years, in most cases we did not achieve our incentive compensation earnings targets, which were set at a level that required meaningful improvement from fiscal 2009 levels. As a result, payouts under our incentive plans for fiscal 2010 performance were substantially lower than for fiscal 2009. Although we did not achieve these relatively aggressive goals in most cases, there were a number of noteworthy successes during the year:

 

   

We increased diluted earnings per share by 19% while making substantial investments in our growth initiatives.

 

   

We grew net sales by 3%.

 

   

We returned $2.2 billion to our shareholders in the form of dividends and share repurchases.

 

   

We made significant progress on our growth and other initiatives that are expected to lead to long-term value creation for shareholders, including the remodeling of a significant number of Old Navy stores, opening of our first stores in China and Italy, entry into four new markets with our franchise business, and the expansion of our online business globally.

In the first quarter of fiscal 2010, we made compensation decisions that were intended to (i) support continued motivation and retention of executives, (ii) recognize some improvement in the operating environment and strong fiscal 2009 performance while considering continued economic uncertainty, and (iii) drive improved performance in fiscal 2010 and beyond. These actions included:

 

   

Base salaries. The CEO’s base salary was restored to the 2008 level. Other than a modest increase granted to the CFO, we did not increase executive base salaries.

 

   

Annual bonuses. We set fiscal 2010 performance targets at a level that required meaningful improvement from fiscal 2009 levels. Our performance against these goals, with the exception of our Global Outlet organization, resulted in bonus payouts below target levels. In March 2010, the CEO was awarded a special bonus in light of extraordinary performance in fiscal 2009 and the impact that the fiscal 2009 voluntary base salary reduction had on his potential bonus.

 

   

Long-Term Incentives. We introduced the new Long-Term Growth Program (“LGP”) to replace our performance stock award program. In March 2010, we granted multi-year performance share grants to executives under the LGP and stock options to executives other than the CEO.

The performance shares that were granted under the LGP represent only an opportunity for the executive to earn actual shares of the company’s stock if they achieve certain performance goals over three years. Based on fiscal 2010 performance, if executives were to achieve target performance in years two and three of the three-year performance period (fiscal 2011 and 2012), actual awards earned would be below the target number of

 

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shares other than for the Global Outlet organization. For our CEO, realized compensation for fiscal 2010 was substantially lower than fiscal 2009 if the unrealized value of this performance share grant is excluded.

 

   

Stock Ownership Requirements. Increased stock ownership requirements were introduced at the beginning of fiscal 2010.

These actions are described more fully below.

Overall, we believe the executive compensation program met each of our compensation objectives. Gap Inc. compensation practices reflect our strong governance principles and commitment to shareholder value creation. For example:

 

   

Our compensation programs are heavily weighted toward performance with limited perquisites, no supplemental executive retirement plan (SERP), and conservative severance benefits.

 

   

We have no employment contracts of defined length with our executives and no multi-year guarantees for base salary increases, bonuses or equity compensation.

 

   

We have executive stock ownership requirements and an incentive compensation recoupment (“clawback”) policy covering our executives.

 

   

None of our executives are entitled to tax gross-up payments other than on relocation related payments that are also generally available to other employees.

 

   

We have not re-priced stock options nor do we intend to without seeking shareholder approval.

 

   

We have no incentive compensation arrangements for executives that create potential material risk for the Company, based on a risk assessment as described on page 10 of this proxy statement.

Compensation Objectives

Our compensation program is intended to align total compensation for executives with the short and long-term performance of the Company and to enable us to attract and retain executive talent. Specifically, the program is designed to:

 

   

Support a performance-oriented environment;

 

   

Support our business strategy by motivating and rewarding achievement of annual and long-term objectives, as well as individual contributions;

 

   

Attract and retain executive talent;

 

   

Link executive rewards to shareholder returns; and

 

   

Encourage executive stock ownership.

Our program rewards executives for achievement of corporate and divisional financial and operating objectives, for their individual contributions to these results, and for optimizing returns to long-term shareholders. The majority of each executive’s total compensation opportunity is weighted toward incentive compensation tied to the financial performance of the Company and the long-term return realized by shareholders. When we do not achieve targeted performance levels and/or our stock does not appreciate, compensation that can be realized by our executives is substantially reduced. When we exceed targeted performance levels and/or our stock price appreciates, compensation that can be realized by our executives is substantially increased. We believe that this is the most effective means of aligning executive incentives with our shareholders’ interests.

 

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Elements of Compensation

The main components of our executive compensation program are:

 

   

Base salary;

 

   

Annual cash incentive bonus; and

 

   

Long-term incentives.

We have chosen these elements because we believe each supports achievement of one or more of our compensation objectives, and that together they have been and will continue to be effective in this regard. We also provide our executives with benefits and limited perquisites that are available to a broader group of employees or intended to maximize productivity.

The use and weight of each compensation element is based on the judgment of the Compensation and Management Development Committee of the Board of Directors (the “Committee”) regarding the importance of each compensation objective in supporting the Company’s business and talent strategies, as well as the structure of these elements for executives at other companies. Base salary, benefits and perquisites represent less than half of each executive’s potential compensation at target performance levels, to emphasize the importance of performance-based compensation.

Compensation Analysis Framework

The Committee reviews executive compensation at least annually. The Committee’s review includes base salary, annual incentives, long-term incentives and the value of benefits and perquisites. Each element is considered individually and in total using “tally sheets”, which are intended to summarize all of the elements of total actual and potential compensation and wealth accumulation. The tally sheets present the dollar value of each compensation component, including accumulated vested and unvested long-term incentive gains and potential gains using stock price assumptions, vesting schedules for long-term incentive awards, accumulated deferred compensation and potential severance benefits.

The Committee also uses a summary of compensation data covering other companies to support its analysis. The Committee selected a broad spectrum of retail and consumer products companies for purposes of comparing market compensation levels (the “peer group”) because we have both recruited from and lost executive talent to these industries in the past and to ensure appropriate scope and complexity relative to the Company. Because the size of the peer group companies varies considerably, regression analysis is used where appropriate to adjust the compensation data for differences in company revenues.

 

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The peer group is reviewed by the Committee each year. The peer group used in 2010 was comprised of the companies listed below and largely retained peers from the prior year with a few changes to better align with Gap Inc.’s talent market. The result was the removal of Colgate-Palmolive, Johnson & Johnson, and Proctor & Gamble as they are less comparable and there has been little recent competition for executive talent with these companies. Ann Taylor, Liz Claiborne and Talbots were removed to maintain the balance between retail and consumer products companies, and Aeropostale was added. We believe these changes result in a better overall peer group with median revenue and other characteristics that are comparable to the Company’s.

 

Abercrombie & Fitch

Aeropostale

American Eagle Outfitters

Avon Products

Best Buy

Children’s Place Retail Stores

Coach

Coca-Cola

Costco Wholesale

Estee Lauder Companies

Disney

Fortune Brands

  

General Mills

J.C. Penney

J. Crew

Kellogg

Kimberly-Clark

Kohl’s

Levi Strauss

Limited Brands

Macy’s

McDonald’s

Nike

Nordstrom

  

PepsiCo

Polo Ralph Lauren

Ross Stores

Sears Holdings

Staples

Starbucks

Target

TJX Companies

Williams-Sonoma

YUM! Brands

The majority of peer group companies provide compensation data through surveys conducted by Towers Watson, an international consulting company. The surveys provide levels of base salary, annual incentives, and long-term incentive grant values in a summarized form, and we believe that this data provides a reasonable indicator of total compensation values for the peer group. This data is supplemented by information obtained through proxy statement disclosures and other public sources. The Committee uses the market survey data as a frame of reference, along with the tally sheet data, to inform compensation decisions but compensation is not set to meet specific benchmarks or percentiles.

In conducting its analysis and determining compensation, the Committee also considers these factors:

 

   

Business and talent strategies;

 

   

The nature of each executive’s role;

 

   

Individual performance (based on specific financial and operating objectives for each executive, as well as leadership behaviors);

 

   

Compensation history;

 

   

Future potential contributions by the executive;

 

   

Internal comparisons to other executives;

 

   

Comparisons of the value and nature of each compensation element to each other and in total;

 

   

Retention risk; and

 

   

Compensation at former employers, in the case of new hires.

The Committee also considers management’s recommendations and advice from the Committee’s independent compensation consultant. Significant weight is placed on the recommendations of the CEO for compensation other than his own. The Committee also reviews the

 

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accounting and tax implications of each compensation element, and shareholder dilution in the case of equity awards. While the factors outlined in this compensation analysis framework are considered during the Committee’s analysis, pay decisions are ultimately based on the judgment of the Committee.

Our performance against earnings goals during fiscal 2010 was below our expectations, and in most cases we did not meet targeted performance levels. Analysis for each compensation component and the decisions that were made are described below.

Role of the CEO and Compensation Consultant

The CEO evaluates each executive using the factors described under “Compensation Analysis Framework” above and makes recommendations to the Committee about the structure of the compensation program and individual arrangements. The CEO is generally present at Committee meetings when compensation, other than his own, is considered and approved. However, approval rests solely with the Committee.

The Committee has engaged Frederic W. Cook & Co. as its independent compensation consultant to advise the Committee periodically on the compensation program structure and individual compensation arrangements. The consultant was selected by the Committee and does not provide any other services to the Company. The consultant attends Committee meetings from time to time, presents an annual briefing on retail-industry compensation trends and developments, and also communicates with the Committee Chair outside of meetings as necessary. The consultant reports directly to the Committee, although the consultant meets with management from time to time to obtain information necessary to advising the Committee.

Base Salary

Base salaries are set at a level that the Committee believes will effectively attract and retain top talent, considering the factors described under “Compensation Analysis Framework” above. In addition, the Committee considers the impact of base salary changes on other compensation components where applicable. Potential deferred compensation accumulation and severance benefits are also impacted when base salaries are changed, but these effects are generally not considered when making base salary decisions. The Committee generally reviews base salaries for executives in the first fiscal quarter, and as needed in connection with promotions or other changes in responsibilities. The table below summarizes base salaries during fiscal 2010, and changes that occurred during the year.

 

Named Executive  

Base Salary

on 1/31/2010

   

Base Salary

on 1/29/2011

    Comments

Glenn Murphy

  $ 1,500,000         $ 1,500,000        

Mr. Murphy’s salary was restored to $1,500,000 for fiscal 2010 following a voluntary reduction to $1,275,000 for fiscal 2009 as part of our efforts to reduce costs.

 

Sabrina Simmons

  $ 675,000      $ 725,000     

Salary was increased in March 2010 as part of the annual review to position Ms. Simmons appropriately relative to other executives and peer group data.

 

Marka Hansen

  $ 900,000      $ 900,000     

Salary remained appropriate relative to peer group data and other executives.

 

Arthur Peck

  $ 750,000      $ 750,000     

Salary remained appropriate relative to peer group data and other executives.

 

J. Tom Wyatt

  $ 900,000      $ 900,000     

Salary remained appropriate relative to peer group data and other executives.

 

 

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Annual Incentive Bonus

Fiscal 2010 Annual Bonus

The Company established an annual cash incentive bonus program for executives to motivate and reward achievement of financial and individual objectives and to provide a competitive total compensation opportunity. Mr. Murphy’s annual incentive bonus was based exclusively on earnings performance given his role as CEO and direct accountability for operating results, and his target percentage of base salary was higher to ensure competitiveness and to recognize the impact of his role relative to other executives. For executives other than Mr. Murphy, the annual incentive bonus continued to be based on two components:

 

  1. The earnings performance of the Company or a division of the Company (75% weight, given the importance of accountability for operating results).

 

  2. Subjective individual objectives (25% weight, to recognize results outside of earnings).

In setting the fiscal 2010 annual bonus structure, the Committee considered the Company’s business priorities and the factors described under “Compensation Analysis Framework” above. The table below describes the target annual bonus and potential payout range for each executive.

 

Name  

Target

Percentage of

Base Salary

   

Potential

Payout

Range as a

Percentage of

Base Salary

 

Glenn Murphy

    150 %          0 – 300 %     

Sabrina Simmons

    75     0 – 150

Marka Hansen

    75     0 – 150

Arthur Peck

    75     0 – 150

J. Tom Wyatt

    75     0 – 150

Financial Performance Component

Bonus payments based on financial performance are generally made under the Executive Management Incentive Compensation Award Plan (“Executive MICAP”). The Committee approves threshold, target and maximum performance goals at the beginning of each performance period. Bonuses are paid under the financial performance component only if threshold goals are exceeded. The Committee may reduce (but not increase) earned bonuses under this component. Actual bonuses are generally paid in March.

Bonuses for financial performance for fiscal 2010 were based on earnings goals. Earnings before interest and taxes is used to measure both Company and division performance, in both cases subject to potential adjustment for certain items such as extraordinary and non-recurring items. The earnings measure was selected for fiscal 2010 because the Committee believed that earnings should continue to be the primary focus of executives and is a good measure of actual operating performance within their control and accountability. For fiscal 2010, we returned to annual performance measurement, instead of two six-month periods, in light of fiscal 2009 performance and some improvement in the economic environment and visibility for goal setting purposes.

 

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The table below shows the fiscal 2010 earnings goals expressed as a percentage of fiscal 2009 actual results (as reported) that were established by the Committee. Although our overall fiscal 2009 business performance was well ahead of our expectations, earnings goals for fiscal 2010 were set at levels that required improvement from these strong results for executives to earn target payouts given an improving business climate and our expected performance at the time goals were established. Also shown are the actual earnings percentages achieved. No adjustments to the results were made other than the use of budgeted foreign exchange rates for the year for division executives to eliminate currency fluctuations at the division level.

 

Name  

Company /

Division

 

Threshold

Earnings

Goal as a

Percentage

of Fiscal

2009

Actual

Earnings

 

Target

Earnings

Goal as a

Percentage

of Fiscal

2009

Actual

Earnings

 

Maximum

Earnings

Goal as a

Percentage

of Fiscal

2009

Actual

Earnings

 

Actual

Fiscal 2010

Earnings

Percentage

Achieved

After

Adjustments

Glenn Murphy

  Gap Inc.     99%   107%   124%   103%

Sabrina Simmons

  Gap Inc.     99%   107%   124%   103%

Marka Hansen

  Gap North America   105%   124%   136%   101%

Arthur Peck

  Global Outlet   101%   104%   115%   110%

J. Tom Wyatt

  Old Navy   103%   112%   123%     95%

Individual Objectives Component

Executives other than the CEO were eligible to receive bonuses based on individual and organizational objectives. At the beginning of the year, a set of over 30 objectives were established for each executive’s business unit or function(s). For fiscal 2010, these objectives consisted of initiatives centered on five key themes: (1) People, which included succession planning and employee engagement; (2) Product, which included pipeline speed, pricing and category management; (3) Stores, which included market share and product availability; (4) Leveraged Growth, which included global and innovation opportunities, and (5) Productivity and Cost Containment, which included expense management and productivity initiatives. In each case, there were additional specific subcategories of goals.

In addition to the organizational objectives listed above, each executive also had individual objectives specific to his or her role.

The extent to which these objectives were met, partially met, or exceeded was assessed qualitatively by the CEO at the end of the fiscal year. In this regard, while certain of the objectives had quantitative components, there was no formulaic link between the extent to which a particular objective was satisfied and the ultimate payout that an executive received. The CEO had the discretion to take only some of the goals into account, and could consider some of them more heavily than others. In addition, in judging each executive’s individual performance, the CEO took into account any additional initiatives and challenges that the executive faced over the course of the year. Payout amounts were then recommended to the Committee for consideration and approval.

 

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Actual Bonuses

For fiscal 2010, target earnings goals applicable to each executive were not achieved in most cases and, as a result, payouts under the financial performance component were below target amounts except for Mr. Peck, whose payout was above the target amount because the target earnings goal for the Global Outlet division was exceeded. The table below describes the actual achievement levels for each component and the actual award earned for fiscal 2010.

 

Name  

Actual

Percentage

Achieved:

Financial

Component

 

Actual

Percentage

Achieved:

Individual

Objectives

Component

 

Actual

Award

 

Glenn Murphy

    76%   N/A   $ 1,719,140   

Sabrina Simmons

    76%   146%     504,654   

Marka Hansen

      0%     81%     136,688   

Arthur Peck

  164%   168%     926,593   

J. Tom Wyatt

      0%   113%     190,350   

Special Bonus — CEO

In March 2010, the Committee discussed Mr. Murphy’s performance in 2009, noting that the Company’s financial performance was well above expectations, particularly in light of the severe economic downturn, and that the Company had made significant progress on strategic objectives over the course of the year. The Committee also noted that Mr. Murphy voluntarily reduced his salary for fiscal 2009 given a highly uncertain business environment and that this reduced his potential bonus for the year. Based on these considerations, the Committee awarded Mr. Murphy a special bonus of $635,000 in March 2010 in recognition of his extraordinary performance in fiscal 2009.

Long-Term Incentives

Stock-based long-term incentives create a direct link between executive compensation and shareholder returns by linking a significant portion of total compensation to the performance of the Company’s stock. Unlike some of the members of our peer group, the Company does not have a pension plan, and we rely on long-term incentives to provide a substantial percentage of each executive’s potential retirement savings. Stock-based awards are granted under our 2006 Long-Term Incentive Plan, which has been approved by our shareholders. On February 17, 2011, the Plan was amended, restated, and renamed the 2011 Long-Term Incentive Plan (the “Plan”), subject to shareholder approval at the Annual Meeting. A description of the Plan is located on page 20 of this Proxy Statement.

Long-term incentives are typically granted annually to executives (or, in the case of new executives, at the time they join the Company). However, there may also be grants in connection with promotions, to promote retention, and/or to create focus on specific performance objectives. Annual long-term incentive awards have typically consisted of stock options and, based on achievement of performance goals, stock units. From time to time, the Committee also grants stock units that vest based on continued service with the Company specifically to promote retention.

In determining the long-term incentive structure and award amounts, the Committee considered the factors described under “Compensation Analysis Framework” above, including a review of each individual’s accumulated vested and unvested awards, the current value and potential value over time using stock appreciation assumptions, vesting schedules, comparison of individual awards between executives and in relation to other compensation elements, shareholder dilution and accounting expense.

 

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Stock Options

We believe stock options focus executives on managing the Company from the long-term perspective of an owner. Stock options provide value to the recipient only if the price of our stock increases. Because of this inherent linkage to increased shareholder returns, we believe stock options are an important component of executive long-term incentive compensation, but that this component as a percentage of total long-term incentive value before consideration of any special grants should typically be weighted at less than 50% so that the majority of long-term incentive value at grant is placed on full-value awards subject to achievement of performance goals. Consistent with prior grant practice, the Committee approved grants of stock options in the first quarter of fiscal 2010 to executives other than the CEO. Awards made to Division Presidents and the CFO were of a similar size to each other and were larger than those made to other leadership team members based on their role in the organization and competitive practice.

2007 CEO New Hire Stock Options

When Mr. Murphy joined the Company in 2007, he was granted a combination of market and premium-priced stock options, each with long-term vesting schedules. Stock options were chosen based on the reasons described above, with half of the stock options granted at $18.91 per share, which represented a 15% premium to the stock price on the grant date, so that Mr. Murphy could recognize no value from this portion of the grants until shareholders had a 15% return. In determining the size of the awards, the Committee decided that granting equity-based awards of significant size at the beginning of Mr. Murphy’s employment with long-term vesting schedules would create a powerful performance incentive and help ensure sustainability of results. In light of this, no stock options were granted to Mr. Murphy in fiscal years 2008 to 2010.

Stock Units

A portion of long-term incentives is delivered in units representing full-value shares of our stock to drive performance, promote retention and foster a long-term ownership perspective. Unlike stock options, full-value share awards, in combination with stock ownership requirements, subject executives to the same downside risk experienced by shareholders but still encourage retention if our stock price does not appreciate, and help to focus executives on sustaining the value of the Company. In general, we believe the grant or vesting of a significant percentage of full-value shares for executives should be based on performance against annual or long-term objectives unless they are made to offset compensation from prior employment in the case of new hires. However, to balance the Company’s performance, retention, and ownership objectives, in the past we have granted stock units or other full-value shares that vest only for continued service with the Company and we may do so in the future.

Prior to 2010, executives (other than the CEO) were eligible to earn stock units payable in Company shares based on achievement of annual performance goals (“performance stock awards”). However, beginning in 2010, performance stock awards were replaced by the performance shares that are described below. The last performance stock awards were earned for fiscal 2009 and granted in March 2010.

Performance Shares

2007 CEO New Hire Performance Shares

When Mr. Murphy joined the Company in 2007, in addition to a combination of market and premium priced stock options as described above, he was granted performance shares. Performance shares were chosen to focus Mr. Murphy directly on sustained improvements in financial performance,

 

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and to further link his compensation to shareholder returns and sustaining the value of the Company. Cumulative net earnings was selected as the performance measure for the performance shares, because net earnings is widely followed as a performance indicator by investors, is straightforward and simple, and cumulative performance against this metric is generally correlated to long-term shareholder returns.

Mr. Murphy’s performance shares are based on the achievement of cumulative reported net earnings goals for fiscal years 2008 through 2011 described below, subject to adjustment for certain extraordinary items and other non-recurring events. Cumulative net earnings through fiscal 2010 prior to any adjustments was $3.3 billion.

 

Potential CEO Performance Shares  
   
Cumulative net earnings for fiscal 2008 through 2011    Award  
Less than $4.164 billion      None   
Equal to or greater than $4.164 billion but less than $4.467 billion      500,000 shares   
Equal to or greater than $4.467 billion but less than $5.011 billion      1,000,000 shares   
Equal to or greater than $5.011 billion but less than $5.860 billion      1,500,000 shares   
Equal to or greater than $5.860 billion      2,000,000 shares   

Long-Term Growth Program

During 2009, the Committee reviewed the long-term incentive structure for the executive leadership team with the objective of better promoting sustained improvement in financial performance and long-term value creation for shareholders, while taking into account the inherent difficulty in setting long-term performance goals in the volatile retail industry, particularly at a division level. After considering the factors described under “Compensation Analysis Framework” above and the Company’s compensation objectives, the Committee approved a new Long-Term Growth Program (the “LGP”), which replaced the annual performance stock awards (for executives other than the CEO, who was not eligible for this program) for future performance periods beginning in 2010. The Committee determined that it was important for the CEO to participate in the LGP with other executives to ensure strategic alignment of incentives, in light of his strong performance, and to promote long-term retention. The key features of the program are described below:

 

   

Each executive is eligible to receive an annual performance share award. Performance shares give the executive the right (subject to Committee discretion to reduce but not increase awards) to receive a number of shares of our stock based on achievement against performance goals during a specified performance period. Actual shares earned, if any, will vary based on achievement of the performance goals.

 

   

The number of actual shares earned is based on two performance metrics: 1) average attainment of separate annual earnings goals (determined at the beginning of each fiscal year) over a three-year period, measured at the division level for Division Presidents and the corporate level for those with company-wide responsibilities, and 2) attainment of cumulative company earnings goals set at the beginning of the same three-year period. The potential payout range as a percentage of the target award based on average annual earnings attainment is 0% to 250%. The award is modified up or down by up to 20% (for a maximum opportunity of 300%) based on the level of attainment of the cumulative company earnings goal.

 

   

If earned, 50% of the award is payable at the end of the three-year performance period, and the remaining 50% is subject to a one-year vesting schedule based on continued service with the Company.

 

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The strategic rationale for selecting performance shares was to link the executives’ compensation to changes in our stock price and returns to our shareholders over an extended period, helping to balance risks and potential rewards. The use of average attainment of annual earnings goals over a three-year period, coupled with the use of a cumulative earnings measure at the Company level over this time frame, maintains our ability to set realistic goals at the division level while creating focus on results over a longer time horizon and a stronger linkage to overall long-term company results for all executives. The maximum potential award was increased to create a greater incentive to improve results over the long term, as well as to retain executives by creating a stronger financial opportunity for superior performance over a sustained period.

The Committee believes that the LGP strikes an appropriate balance between meeting our compensation objectives and establishing performance goals over a timeframe that is realistic, and will appropriately reward executives for superior financial performance and shareholder returns over the long-term.

The table below describes the potential payout range as a percentage of the target award for the fiscal 2010-2012 performance period. The target number of shares was determined using our closing stock price on the date of grant and a percentage of base salary for each executive, with the exception of Mr. Murphy, whose award was based on a review of his current vested and unvested long-term incentives, including potential scenarios for what would be earned under previously granted performance shares, and the Committee’s judgment on the amount required to continue to motivate and retain him. The performance share grants represent only an opportunity to earn actual shares of the Company’s stock based on achievement of performance goals over three years. The associated amount listed in the Summary Compensation Table under Stock Awards is the grant date fair value for accounting purposes, which is the required disclosure under SEC rules, not the compensation actually realized by each executive. For example, based on 2010 performance, the actual award Mr. Murphy would earn would be below the target number of shares, even if target performance in years two and three of the three-year performance period were achieved. The same threshold, target, and maximum earnings goals described above under “Fiscal 2010 Annual Bonus” applied to the first year of performance. All payments are in shares at vesting and dividends are not paid or accrued on unvested shares.

 

Name   Percentage of
Base Salary
   

Target

Number of
Performance Shares

   

Potential

Payout

Range as

Percentage

of Target

Shares

 

Glenn Murphy

    N/A        250,000           0 – 300 %     

Sabrina Simmons

    100 %          31,426        0 – 300

Marka Hansen

    100     39,011        0 – 300

Arthur Peck

    100     32,509        0 – 300

J. Tom Wyatt

    100     39,011        0 – 300

In February 2011, Ms. Hansen ceased to be an executive officer of the Company. As a result, the performance shares in the table above were cancelled.

Long-Term Incentive Grant Practices

It has been our practice to grant long-term incentives to executives on an annual basis, usually in the first quarter of each fiscal year. This timing was selected because it follows the release of our annual financial results and completion of annual performance reviews. We also grant long-term incentives on other dates to newly hired executives and periodically in connection with promotions or for special recognition and retention. Grants are typically approved by the Committee at a meeting and are effective on the meeting date or, if approved by unanimous written consent, the date of the last signature on the

 

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consent. However, the effective date for new hires is no earlier than the first day of employment. Grants to employees below the Vice President level are approved by the CEO or Committee Chair on a monthly basis using authority delegated by the Committee, typically for new employees hired in the prior month.

All stock options granted to employees during fiscal 2010 had an exercise price equal to the closing price of our stock on the date of grant.

Stock options typically vest based on continued service at a rate of 25% annually beginning one year from the grant date, which we have determined helps meet our retention objectives. We have also used other vesting schedules to align with timing of compensation being forfeited at a prior employer or to align with critical retention periods. Executives generally must be employed on the vesting date to exercise stock options. Stock options are typically granted for a maximum term of ten years and vested options are exercisable for three months following employment termination. Vesting is generally accelerated upon death or retirement if the stock options are held for at least one year.

Stock units that are granted to executives other than the CEO have in most cases been scheduled to vest over three years, but the schedule may differ based on critical retention or performance periods, or the vesting of compensation being forfeited at a prior employer. Executives generally must be employed on the vesting date or awards are forfeited. Vesting is generally accelerated upon death or retirement if the awards are held for at least one year and any performance conditions have been previously satisfied.

Stock Ownership Requirements for the Executive Leadership Team

In 2004, we adopted minimum stock ownership requirements for certain executive positions to more closely link executive and shareholder interests, to balance potential rewards and risks, and to encourage a long-term perspective in managing the company. Each covered executive had five years from December 1, 2004 (or from the first day named as a covered executive, if later) to reach the requirement.

During 2009, the Committee reviewed the stock ownership requirements and, based on a review of peer group practices and to further link executives to shareholder returns and sustaining the long-term health of the Company, made the following changes, effective January 31, 2010. As of January 29, 2011, all covered executives had either met the new shares requirement in the table below or had remaining time to do so.

 

     Previous
Requirements
(shares)
  New
Requirements
(shares)
     

CEO

  150,000   300,000
     

Division President

    50,000     75,000
     

Corporate Executive Vice President

    25,000     40,000

In addition, the Committee also (1) instituted a requirement for other members of the executive leadership team to own 20,000 shares, (2) eliminated unearned, performance-based stock incentives as a qualifying form of ownership, and (3) implemented a provision requiring executives not meeting the requirement to retain 50% of after-tax shares acquired through stock compensation programs until the requirement is reached.

A complete description of the requirements, including accepted forms of ownership, is located at www.gapinc.com (follow the Investors, Governance, Executive Stock Ownership links). The Company’s insider trading policy applicable to executives prohibits speculation in the Company’s stock, including

 

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prohibiting short sales and prohibiting executives subject to the ownership requirements from entering into transactions intended to hedge their ownership interest, up to the amount of the ownership requirement.

Benefits and Perquisites

Medical, dental, life and disability insurance and other benefits that are available to all full-time headquarter employees are available to executives. The following additional benefits and limited perquisites are also available to executives, with no related tax gross-ups for any associated taxable income:

 

   

Financial planning services of approximately $13,500 to $21,500 per year based on when the executive initiated use of the services and cost to the Company. These services are provided because executives typically have more complex financial planning requirements and we have determined that this is an effective attraction and retention tool (more limited financial counseling services are available generally to employees at lower levels).

 

   

Employees at the Director level and above, including executive officers, are provided life insurance coverage while actively employed of three times base salary up to a maximum of $2 million.

 

   

Highly compensated employees are eligible to participate in the Gap Inc. Deferred Compensation Plan. The Deferred Compensation Plan allows participants to defer a percentage of their base salaries and bonuses on a pre-tax basis. The Company does not make matching contributions to participant deferrals other than a 100% match for base salary deferrals, limited to an amount up to 4% of the excess base pay over the amount that can be taken into account under the Company’s 401(k) plan. This match is intended to provide the same proportionate level of benefit received by participants not impacted by the limit. The Deferred Compensation Plan was implemented for participants to help meet retirement savings goals given our lack of a defined benefit pension plan, and to assist in efficient tax planning. No above-market or preferential interest rates are available on deferred compensation.

 

   

Under the Company’s Gift Match Program, available to all employees, contributions to eligible nonprofit organizations are matched by the Company, up to certain annual limits. For fiscal 2010, the limit for our named executive officers was $15,000, with the exception of Mr. Murphy who had an annual matching limit of $100,000.

 

   

Mr. Murphy was provided limited personal use of a Company airplane at an amount not to exceed $200,000 per year based on the incremental cost to the Company (the cost in 2010 was $105,313). The Committee approved this perquisite as both a competitive attraction and retention tool and to provide an efficient way to minimize travel time commitments.

Accounting and Tax Considerations

Accounting, tax and related financial implications to the Company and executives are considered during the analysis of our compensation and benefits program and individual elements. Overall, the Committee seeks to balance attainment of our compensation objectives with the need to maximize current tax deductibility of compensation that may impact earnings and other measures of importance to shareholders. The Committee determined that the accounting and tax impacts described below were reasonable in light of our objectives.

 

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In general, base salary, annual cash incentive bonus payments, and the costs related to benefits and perquisites are recognized as compensation expense at the time they are earned or provided. Share-based compensation expense is recognized in our consolidated statements of income for stock options, stock units, and performance shares.

Subject to the exceptions and limits below, we deduct for federal income tax purposes all payments of compensation and other benefits to executives. We do not deduct deferred compensation until the year that the deferred compensation is paid to an executive.

Section 162(m) of the Internal Revenue Code generally does not allow a tax deduction to public companies for compensation over $1,000,000 paid to the principal executive officer or any of the three most highly compensated executive officers (other than the principal executive officer or principal financial officer) unless the compensation is based on attainment of pre-established objective performance goals and certain other requirements are met. It is the Company’s preference to qualify executive compensation under Section 162(m) where we determine it is consistent with the Company’s interests and compensation objectives. Our compensation plans have generally been designed to permit awards that qualify under Section 162(m). However, the individual objectives component of the annual incentive bonus is qualitative in nature and is subject to the deduction limits of Section 162(m). In addition, stock units, other than performance stock awards, that have vesting based only on continued service are also subject to the deduction limits of Section 162(m). Amounts deferred under the Deferred Compensation Plan are not subject to the Section 162(m) deduction limitation in the year of deferral.

Section 4999 and Section 280G of the Internal Revenue Code provide that executives could be subject to additional taxes if they receive payments or benefits that exceed certain limits in connection with a change in control of the Company and that the Company could lose an income tax deduction for such payments. We have not provided any executive with tax gross ups or other reimbursement for tax amounts the executive might be required to pay under Section 4999.

Section 409A of the Internal Revenue Code imposes additional taxes and interest on underpayments in the event an executive defers compensation under a plan that does not meet the requirements of Section 409A. We believe we are operating in compliance with Section 409A and have structured our compensation and benefits programs and individual arrangements in a manner intended to comply with the requirements of IRS regulations.

Recovery and Adjustments to Awards

Subject to the approval of the Board, the Company will require reimbursement and/or cancellation of any bonus or other incentive compensation, including stock-based compensation, awarded to an executive officer or other member of the Company’s executive leadership team after April 1, 2007 where all of the following factors are present: (a) the award was predicated upon the achievement of certain financial results that were subsequently the subject of a restatement, (b) in the Board’s view, the executive engaged in fraud or intentional misconduct that was a substantial contributing cause to the need for the restatement, and (c) a lower award would have been made to the executive based upon the restated financial results. In each such instance, the Company will seek to recover the individual executive’s entire annual bonus or award for the relevant period, plus a reasonable rate of interest.

 

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Post-Termination Arrangements

CEO

The terms of Mr. Murphy’s post-termination severance benefits were determined through the course of arms-length negotiations of his employment agreement. As part of these negotiations, the Committee considered competitive practice at selected peer group companies and general industry, accounting and tax implications, and the potential benefits that could be received at multiple future points in time using a wealth accumulation analysis. We entered into the termination of employment provisions in order to address competitive concerns when Mr. Murphy was recruited by providing fixed compensation amounts that would offset the potential risk of joining the Company and foregoing other opportunities. Enhanced benefits in the case of a change of control of the Company were also included for the same reasons and to help ensure retention of Mr. Murphy and continuity in the case of a potential or actual change of control. The Committee determined based on its analysis that the benefits and structure were well within normal competitive practice, reasonable and appropriate for the circumstances, and were necessary to attract Mr. Murphy to the Company. The provisions are described in more detail on page 58. In addition, while compensation decisions affect potential payouts under severance arrangements, this generally did not affect decisions on other compensation elements as these severance provisions may never come into effect.

Executives Other Than the CEO

We have historically evaluated severance benefits for executives on a case by case basis, with no formal plan in which all executives participate. Severance arrangements are intended to provide income security in case of an involuntary termination other than for cause. Severance typically includes base salary continuation, payments in lieu of health and welfare benefits continuation, outplacement services and continued financial planning services. Severance payments typically stop or are reduced if the executive secures other employment. The Company may also grant severance benefits as part of a negotiated termination of employment in exchange for a release of claims against the Company and other agreements in the Company’s interests.

In 2008, the Committee approved the severance benefits described on page 59 for certain executives in the case of an involuntary termination other than for cause prior to February 12, 2012. As part of its review, the Committee analyzed the same factors described above for the CEO and used its judgment in determining the level of benefits that would provide reasonable income security. These arrangements provide no tax gross up or enhanced benefits in the case of a change of control of the Company. The Committee believes that, based on its analysis, the benefits are appropriate and conservative relative to peer group practices. In addition, while compensation decisions affect potential payouts under severance arrangements, this generally did not affect decisions on other compensation elements as these severance provisions may never come into effect.

Compensation Committee Report

The Compensation and Management Development Committee (the “Committee”) has reviewed and discussed this Compensation Discussion and Analysis with management. Based on the review and discussions, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s annual report on Form 10-K for the fiscal year ended January 29, 2011 and the Proxy Statement for the 2011 Annual Meeting of Shareholders.

Adrian D.P. Bellamy (Chair)

Bob L. Martin

Domenico De Sole

 

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Summary Compensation Table

The following table shows compensation information for fiscal 2010, which ended January 29, 2011, for our CEO, CFO and the three other most highly compensated executive officers at year-end, as required under SEC rules (“named executive officers”). The table also shows compensation information for fiscal 2009 and fiscal 2008, which ended January 30, 2010 and January 31, 2009, respectively, for those named executive officers who also were named executive officers in either of those years.

 

Name and Principal Position  

Fiscal

Year

    Salary     Bonus    

Stock

Awards

   

Option

Awards

   

Non-Equity

Incentive Plan

Compensation

   

Change in

Pension Value

and

Nonqualified

Deferred

Compensation

Earnings

   

All Other

Compensation

    Total  
    ($) (1)     ($) (2)     ($) (3)     ($) (4)     ($) (5)     ($) (6)     ($) (7)     ($)  

Glenn Murphy

    2010         $ 1,500,000         $ 635,000         $ 1,810,833         $ 0         $ 1,719,140         $ 0         $ 280,937         $ 5,945,910      

Chairman and CEO

    2009        1,275,000        0        0        0        3,598,908        0        163,382        5,037,290   
      2008        1,500,000        0        0        0        3,016,397        0        834,434        5,350,831   
                   

Sabrina Simmons

    2010        718,269        0        1,444,411        559,910        504,654        0        59,889        3,287,133   

EVP and CFO

    2009        675,000        0        2,007,301        712,890        923,191        0        59,623        4,378,005   
      2008        675,000        0        331,059        902,355        698,861        0        36,566        2,643,841   
                   

Marka Hansen

    2010        900,000        0        602,870        503,919        136,688        0        59,474        2,202,951   

Former President, Gap NA

    2009        900,000        0        1,959,682        594,075        331,452        0        58,382        3,843,591   
      2008        900,000        0        862,610        1,052,748        1,265,625        0        70,012        4,150,995   
                   

Arthur Peck

    2010        750,000        0        1,435,133        559,910        926,593        0        55,975        3,727,611   

President, Gap NA

    2009        750,000        0        1,561,027        594,075        943,490        0        57,506        3,906,098   
      2008        702,060        0        2,773,378        601,570        822,453        0        58,993        4,958,454   
                   

J. Tom Wyatt

    2010        900,000        0        2,006,883        671,892        190,350        0        97,575        3,866,700   

President, Old Navy

    2009        900,000        0        660,460        712,890        1,318,444        0        125,889        3,717,683   
      2008        790,110        0        1,573,880        902,355        984,375        0        113,394        4,364,114   
Footnotes
   
(1)   

For fiscal 2009, Mr. Murphy volunteered to reduce his salary by 15 percent, to $1,275,000, which also reduced the amount he was eligible to receive under the Company’s annual bonus program. For fiscal 2010, Mr. Murphy’s salary returned to $1,500,000.

 

Effective March 21, 2010, Ms. Simmons’ annual salary was increased from $675,000 to $725,000. The amount in this column reflects the prorated payment of her new salary.

   
(2)    Based on Mr. Murphy’s performance and voluntary salary reduction in fiscal 2009, the Compensation and Management Development Committee awarded Mr. Murphy a special bonus of $635,000 in March 2010, as further described on page 41 of the Compensation Discussion and Analysis section.
   
(3)   

This column reflects the aggregate grant date fair value for awards of stock during fiscal 2010, 2009 and 2008, computed in accordance with FASB ASC 718. These amounts reflect the grant date fair value, and do not represent the actual value that may be realized by the named executive officers. For 2010, this column includes the grant date fair value of the target number of shares that may be earned under the Company’s Long-Term Growth Program (described on page 43 of the Compensation Discussion and Analysis section) with respect to year 1 (fiscal 2010) of a three-year performance period. The total grant date fair value of these Long-Term Growth Program awards if maximum performance conditions are achieved over the entire three-year performance period is as follows: Mr. Murphy ($16,297,500), Ms. Simmons ($2,048,661), Mr. Peck ($2,119,262) and Mr. Wyatt ($2,543,127). Ms. Hansen is not entitled to earn any shares under the Long-Term Growth Program following the termination of her service as an executive officer in February of 2011. Please refer to Note 8, “Share-Based Compensation,” in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K filed on March 28, 2011 for the relevant assumptions used to determine the compensation cost of our stock and option awards. Please refer to the Grants of Plan-Based Awards table in this Proxy Statement and in our 2010 and 2009 Proxy Statements for information on awards actually granted in fiscal 2010, 2009 and 2008.

 

 

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Footnotes (continued)

 

   
(4)    This column reflects the aggregate grant date fair value for awards of stock options during fiscal 2010, 2009 and 2008, computed in accordance with FASB ASC 718. These amounts reflect the grant date fair value, and do not represent the actual value that may be realized by the named executive officers. Please refer to Note 8, “Share-Based Compensation,” in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K filed on March 28, 2011 for the relevant assumptions used to determine the compensation cost of our stock and option awards. Please refer to the Grants of Plan-Based Awards table in this Proxy Statement and in our 2010 and 2009 Proxy Statements for information on awards actually granted in fiscal 2010, 2009 and 2008.
   
(5)    The amounts in this column reflect the non-equity amounts earned by the named executive officers under the Company’s annual incentive bonus plan.
   
(6)    No above-market or preferential interest rate options are available under our deferred compensation programs. Please refer to the Nonqualified Deferred Compensation table for additional information on deferred compensation earnings.
   
(7)   

The amounts shown in the All Other Compensation column are detailed in the following table.

 

Name

 

Fiscal

Year

   

Personal

Use of

Airplane

(a)

   

Financial

Counseling

(b)

   

Tax

Payments

(c)

   

Deferred

Compensation

Plan Match

(d)

   

401(k)

Plan

Match

(e)

   

Disability

Plan

(f)

   

Life

Insurance

(g)

   

Relocation

(h)

   

Gift

Matching

(i)

   

Other

(j)

    Total  

Glenn Murphy

    2010         $ 105,313         $ 13,542         $ 0         $ 49,161         $ 10,298         $ 1,255         $ 1,368         $ 0         $ 100,000         $ 0         $ 280,937      
      2009        91,894        13,500        0        42,238        9,302        1,255        1,368        0        3,825        0        163,382   
      2008        211,244        17,075        88,782        16,185        12,523        1,255        1,026        477,044        9,300        0        834,434   
                         

Sabrina Simmons

    2010        0        13,542        0        18,700        10,024        1,255        1,368        0        15,000        0        59,889   
      2009        0        16,000        0        17,200        9,800        1,255        1,368        0        14,000        0        59,623   
      2008        0        14,000        0        0        10,828        1,255        1,083        0        9,400        0        36,566   
                         

Marka Hansen

    2010        0        13,542        0        26,200        9,449        1,255        1,368        0        7,660        0        59,474   
      2009        0        13,500        0        26,200        9,449        1,255        1,368        0        6,610        0        58,382   
      2008        0        13,500        0        26,800        10,079        1,255        1,368        0        17,010        0        70,012   
                         

Arthur Peck

    2010        0        13,542        0        20,200        9,610        1,255        1,368        0        10,000        0        55,975   
      2009        0        13,500        0        20,200        9,783        1,255        1,368        0        11,400        0        57,506   
      2008        0        13,500        0        18,304        9,581        1,255        1,353        0        15,000        0        58,993   
                         

J. Tom Wyatt

    2010        0        13,542        326        26,200        9,800        1,255        1,368        22,284        22,800        0        97,575   
      2009        0        13,500        1,810        26,200        9,800        1,255        1,368        46,496        25,460        0        125,889   
      2008        0        13,500        4,026        21,477        11,029        1,255        1,368        42,109        18,630        0        113,394   
 
Footnotes
   
(a)    The Compensation and Management Development Committee determined that it was appropriate to provide Mr. Murphy use of a Company airplane for limited personal use (not to exceed $200,000 for fiscal 2010 and 2009, and $400,000 for fiscal 2008 in incremental cost to the Company). As required by SEC rules, the amounts shown are the incremental cost to the Company of personal use of a Company airplane and are calculated based on the variable operating costs to the Company, including fuel costs, mileage, trip-related maintenance, and other miscellaneous variable costs. Since the Company airplane is primarily used for business travel, fixed costs which do not change based on usage, such as the pilot’s salary and maintenance costs unrelated to the trip, are excluded.
   
(b)    We provide executive officers access to financial counseling services, which may include tax preparation and estate planning services. We value this benefit based on the actual cost for those services.
   
(c)    For Mr. Murphy, reflects tax reimbursement payments related to personal use of the Company airplane ($20,605 in fiscal 2008) and tax reimbursement related to relocation expenses paid for him in connection with his and his family’s moves from Canada to California ($68,177 in fiscal 2008). After fiscal 2008, Mr. Murphy was no longer eligible for tax reimbursement related to his personal use of the Company’s airplane.
   
    

For Mr. Wyatt, reflects tax reimbursement related to payments to him under the Company’s mortgage subsidy program in connection with his relocation from Alabama to California when he joined the Company in 2006.

 

 

50


Table of Contents
Footnotes (continued)

 

   
(d)    These amounts reflect Company matching contributions under the Company’s nonqualified Deferred Compensation Plan for base salary deferrals representing the excess of the participant’s base pay over the current IRS qualified plan limit ($245,000 for calendar year 2010), which are matched at up to 4% of base pay, the same rate as is in effect under the Company’s 401(k) plan.
   
(e)    These amounts reflect Company matching contributions under the Company’s 401(k) Plan.
   
(f)    These amounts reflect premium payments for executive supplemental long-term disability insurance, which increases income replacement to 50% of base salary up to a maximum payment of $25,000 per month. On July 1, 2008, this plan was terminated and executives were only eligible to receive the same benefits available to benefits-eligible employees generally.
   
(g)    These amounts reflect premiums paid for life insurance provided to employees at the Director level and above, which provides coverage of three times base salary up to a maximum of $2 million.
   
(h)    For Mr. Murphy, these amounts reflect reimbursements paid for Company housing and relocation expenses related to his and his family’s moves from Canada to California.
   
     For Mr. Wyatt, the amounts reflect payments made to him under the Company’s mortgage subsidy program in connection with his relocation from Alabama to California when he joined the Company in 2006. Under the program, the amount of the subsidy and time period during which payments will be made are determined by a formula that takes into account the relative difference in housing costs between the two locations. In Mr. Wyatt’s case, payments will be made for 5 years following his start date with the Company.
   
(i)    These amounts reflect Company matching contributions under the Company’s Gift Match Program, available to all employees, under which contributions to eligible nonprofit organizations are matched by the Company, up to certain annual limits. In fiscal 2010, the limit for the named executive officers was $15,000, with the exception of Mr. Murphy who had an annual matching limit of $100,000. These amounts also reflect payments made pursuant to our Board Service Program that matches nonprofit board service by Senior Director or above level employees with contributions to eligible nonprofit organizations, up to an annual limit of $10,000. The annual gift match eligibility limits are based on the executive’s original donation date; however, in some cases the Company does not process the executive’s match request until the next fiscal year. To ensure that all gift match amounts are reported, the reported amounts are based upon the date that the executive requests a match from the Company. As a result, in some cases the reported amount appears higher than the gift match eligibility.

 

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Table of Contents

Grants of Plan-Based Awards

The following table shows all plan-based awards granted to the named executive officers during fiscal 2010, which ended on January 29, 2011. The option awards and the unvested portion of the stock awards identified in the table below are also reported in the Outstanding Equity Awards at Fiscal Year-End table.

 

                   Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards (1)
    Estimated Future Payouts
Under Equity Incentive Plan
Awards (2)
   

All

Other
Stock
Awards:
Number of
Shares of
Stock or

Units

(#)

   

All Other
Option
Awards:
Number of
Securities
Underlying

Options

(#)

   

Exercise
or Base
Price of
Option

Awards

($)

   

Grant

Date Fair
Value of
Stock and
Option

Awards

($) (3)

 
Name  

Grant

Date

    Approval
Date
   

Threshold

($)

   

Target

($)

   

Maximum

($)

   

Threshold

(#)

   

Target

(#)

   

Maximum

(#)

         

Glenn Murphy

    N/A                    $ 2,250,000      $ 4,500,000                                                    
      3/15/10        3/15/10                             37,500        83,333        250,000                           $ 1,810,826   

Sabrina Simmons

    3/15/10         3/15/10                                                                               100,000         $ 23.07           559,910      
      3/15/10        3/15/10                                                  55,058                      1,216,782   
      N/A             $ 134,675        538,702        1,077,404                                                    
      3/15/10        3/15/10                             4,713        10,475        31,426                             227,622   

Marka Hansen

    3/15/10        3/15/10                                                    90,000        23.07        503,919   
      3/15/10        3/15/10                                                  14,493                      320,295   
      N/A               168,750        675,000        1,350,000                                                    
      3/15/10        3/15/10                             5,851        13,004        39,011                             282,577   

Arthur Peck

    3/15/10        3/15/10                                                   100,000        23.07        559,910   
      3/15/10        3/15/10                                                  54,283                      1,199,654   
      N/A               140,625        562,500        1,125,000                                                    
      3/15/10        3/15/10                             4,876        10,836        32,509                             235,466   

J. Tom Wyatt

    3/15/10        3/15/10                                                         120,000        23.07        671,892   
      3/15/10        3/15/10                                                  78,023                      1,724,308   
      N/A               168,750        675,000        1,350,000                                                    
      3/15/10        3/15/10                             5,851        13,004        39,011                             282,577   

 

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Table of Contents
Footnotes
   
(1)            The amounts shown in these columns reflect the estimated potential payment levels for the fiscal 2010 performance period under the Company’s annual incentive bonus
plan, further described on page 39 of the Compensation Discussion and Analysis section. The potential payouts were performance-based and, therefore, were completely
at risk. The potential target and maximum payment amounts assume achievement of 100% and 200%, respectively, of the individual objectives component of the annual
incentive bonus plan, described on page 40. The potential threshold payment amount assumes 0% achievement of the individual objectives component. Each named
executive officer received a bonus under the annual incentive bonus plan, which is reported in the Summary Compensation Table under the column entitled “Non-Equity
Incentive Plan Compensation.”
   
(2)           The amounts shown in these columns reflect, in shares, the threshold, target and maximum amounts for year 1 (fiscal 2010) of a three-year performance period under the
Company’s Long-Term Growth Program, further described on page 43 of the Compensation Discussion and Analysis section. Potential payouts are based on the applicable
interpolated award values between the threshold, target, and maximum payout levels. The potential awards are performance-based and, therefore, completely at risk. The
total number of shares that could be earned if the target performance conditions are achieved over the entire three-year performance period for each named executive is
as follows: Mr. Murphy (250,000), Ms. Simmons (31,426), Mr. Peck (32,509) and Mr. Wyatt (39,011). Ms. Hansen is not entitled to earn any shares under the Long-Term
Growth Program following the termination of her service as an Executive Officer in February 2011.
   
(3)           The value of a stock award or option award is based on the fair value as of the grant date of such award determined pursuant to FASB ASC 718. Please refer to Note 8,
“Share-Based Compensation,” in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K filed on March 28, 2011 for the relevant
assumptions used to determine the valuation of our stock and option awards. For fiscal 2010, the grant date fair value of the Equity Incentive Plan Awards is based on the
closing price of a share of our stock on the date that the awards were granted less future expected dividends during the vesting period ($21.73), multiplied by the target
number of shares that may be earned with respect to year 1 (fiscal 2010) of a three-year performance period. The value of shares that could be earned if the maximum
performance conditions are achieved over the entire three-year performance period for each named executive (based on the $21.73 price noted above) is as follows:
Mr. Murphy ($16,297,500), Ms. Simmons ($2,048,661), Mr. Peck ($2,119,262) and Mr. Wyatt ($2,543,127). Ms. Hansen is not entitled to earn any shares under the Long-Term
Growth Program following the termination of her service as an Executive Officer in February 2011.

 

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Table of Contents

Outstanding Equity Awards at Fiscal Year-End

The following table shows all outstanding equity awards held by the named executive officers at the end of fiscal 2010, which ended on January 29, 2011.

 

Name   Option Awards     Stock Awards  
 

Number of
Securities
Underlying
Unexercised
Options

(#)

Exercisable

   

Number of
Securities
Underlying
Unexercised
Options

(#)

Unexercisable (1)

   

Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised 
Unearned
Options

(#)

   

Option
Exercise
Price

($) (2)

    Option
Expiration
Date
   

Number of
Shares or
Units of Stock
That Have
Not Vested

(#) (3)

   

Market
Value of
Shares or
Units of
Stock That
Have Not
Vested

($) (4)

   

Equity
Incentive Plan
Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested

(#) (5)

   

Equity
Incentive
Plan Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested

($) (6)

 

Glenn Murphy

    800,000        1,200,000  (A)             $ 16.44         8/3/2017                                
      800,000         1,200,000  (A            18.91        8/3/2017                               
                                                       500,000  (A)      $ 9,600,000    
                                                       37,500  (B)     720,000   

Sabrina Simmons

    55,000                      21.55        3/8/2014                               
      35,000                      22.42        3/11/2015                               
      30,000                      17.84        3/13/2016                               
      75,000        75,000  (B            19.68        3/17/2018                               
      37,500        112,500  (C            11.77        3/16/2019                               
             100,000  (D            23.07        3/15/2020                               
                                         8,776  (A)      $ 168,499                 
                                         150,000  (B     2,880,000                 
                                         30,753  (C     590,458                 
                                         55,058  (D     1,057,114                 
                                                       4,713  (B     90,490   

Marka Hansen

    2,500                      17.62        4/2/2011                               
      124,500                      14.27        10/19/2011                               
      50,000                      15.42        4/8/2012                               
      30,000                      12.87        3/7/2013                               
      375,000                      17.46        6/3/2013                               
      200,000                      20.48        3/23/2014                               
      20,000                      22.42        3/11/2015                               
      130,000                      22.42        3/11/2015                               
      130,000                      17.84        3/13/2016                               
      87,500        87,500  (E            19.68        3/17/2018                               
             93,750  (F            11.77        3/16/2019                               
             90,000  (G            23.07        3/15/2020                               
                                         22,866  (E     439,027                 
                                         100,000  (F     1,920,000                 
                                         76,465  (G     1,468,128                 
                                         14,493  (H     278,266                 
                                                       5,851  (B     112,339   

 

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Table of Contents
Name   Option Awards     Stock Awards  
 

Number of
Securities
Underlying
Unexercised
Options

(#)

Exercisable

   

Number of
Securities
Underlying
Unexercised
Options

(#)

Unexercisable (1)

   

Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised 
Unearned
Options

(#)

   

Option
Exercise
Price

($) (2)

    Option
Expiration
Date
   

Number of
Shares or
Units of Stock
That Have
Not Vested

(#) (3)

   

Market
Value of
Shares or
Units of
Stock That
Have Not
Vested

($) (4)

   

Equity
Incentive Plan
Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested

(#) (5)

   

Equity
Incentive
Plan Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested

($) (6)

 

Arthur Peck

    200,000                           21.38          5/2/2015                                     
      125,000                      17.84        3/13/2016                               
      50,000        50,000  (h)             19.68        3/17/2018                               
      31,250        93,750  (i)             11.77        3/16/2019                               
             100,000  (j)            23.07        3/15/2020                               
                                         25,000  (i)      480,000                    
                                         12,327  (j)      236,678                 
                                         37,500  (k)      720,000                 
                                         100,000  (l)      1,920,000                 
                                         40,567  (m)      778,886                 
                                         54,283  (n)      1,042,234                 
                                                       4,876  (b)    $ 93,619   

J. Tom Wyatt

    200,000                      18.26        3/20/2016                               
      75,000        75,000  (k)             19.68        3/17/2018                               
      37,500        112,500  (l)             11.77        3/16/2019                               
             120,000  (m)             23.07        3/15/2020                               
                                         8,146  (o)     156,403                 
                                         62,500  (p)      1,200,000                 
                                         59,473  (q)      1,141,882                 
                                         78,023  (r)      1,498,042                 
                                                       5,851  (b)    $ 112,339   
Footnotes

(1)

   The following footnotes set forth the vest dates for the outstanding option awards (vesting generally depends upon continued employment):
     (a)  

Options vest 400,000 on 8/3/2011, 400,000 on 8/3/2012 and 400,000 on 8/3/2013.

 

     (b)  

Options vest on 37,500 on 3/17/2011 and 37,500 on 3/17/2012.

 

     (c)  

Options vest 37,500 on 3/16/2011, 37,500 on 3/16/2012 and 37,500 on 3/16/2013.

 

     (d)  

Options vest 25,000 on 3/15/2011, 25,000 on 3/15/2012, 25,000 on 3/15/2013 and 25,000 on 3/15/2014.

 

     (e)  

Options vest 43,750 on 3/17/2011 and 43,750 on 3/17/2012.

 

     (f)  

Options vest 31,250 on 3/16/2011, 31,250 on 3/16/2012 and 31,250 on 3/16/2013

 

     (g)  

Options vest 22,500 on 3/15/2011, 22,500 on 3/15/2012, 22,500 on 3/15/2013 and 22,500 on 3/15/2014.

 

     (h)  

Options vest 25,000 on 3/17/2011 and 25,000 on 3/17/2012.

 

     (i)  

Options vest 31,250 on 3/16/2011, 31,250 on 3/16/2012 and 31,250 on 3/16/2013.

 

     (j)  

Options vest 25,000 on 3/15/2011, 25,000 on 3/15/2012, 25,000 on 3/15/2013 and 25,000 on 3/15/2014.

 

     (k)  

Options vest 37,500 on 3/17/2011 and 37,500 on 3/17/2012.

 

     (l)  

Options vest 37,500 on 3/16/2011, 37,500 on 3/16/2012 and 37,500 on 3/16/2013.

 

 

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Table of Contents
Footnotes (continued)
     (m)   

Options vest 30,000 on 3/15/2011, 30,000 on 3/15/2012, 30,000 on 3/15/2013 and 30,000 on 3/15/2014.

 

(2)

   The exercise price of the options granted prior to fiscal 2007 was equal to the average of the high and low stock prices for our common stock as reported in New York Stock Exchange (NYSE) –Composite Transactions for the date of grant. Beginning in fiscal 2007, the exercise price was determined using the closing price of the Company’s stock on the effective date of the grant.

 

(3)

   The following footnotes set forth the vest dates for the outstanding stock awards (vesting generally depends upon continued employment):

 

     (a)   

Award vests 8,776 on 3/17/2011.

 

     (b)   

Award vests 75,000 on 3/16/2011 and 75,000 on 3/16/2012.

 

     (c)   

Award vests 15,376 on 3/16/2011 and 15,377 on 3/16/2012.

 

     (d)   

Award vests 27,529 on 3/15/2012 and 27,529 on 3/15/2013.

 

     (e)   

Award vests 22,866 on 3/17/2011.

 

     (f)   

Award vests 50,000 on 3/16/2011 and 50,000 on 3/16/2012.

 

     (g)   

Award vests 38,232 on 3/16/2011 and 38,233 on 3/16/2012.

 

     (h)   

Award vests 7,246 on 3/15/2012 and 7,247 on 3/15/2013.

 

     (i)   

Award vests 25,000 on 3/17/2011.

 

     (j)   

Award vests 12,327 on 3/17/2011.

 

     (k)   

Award vests 37,500 on 8/20/2011.

 

     (l)   

Award vests 50,000 on 3/16/2011 and 50,000 on 3/16/2012.

 

     (m)   

Award vests 20,283 on 3/16/2011 and 20,284 on 3/16/2012.

 

     (n)   

Award vests 27,141 on 3/15/2012 and 27,142 on 3/15/2013.

 

     (o)   

Award vests 8,146 on 3/17/2011.

 

     (p)   

Award vests 62,500 on 11/18/2011.

 

     (q)   

Award vests 29,736 on 3/16/2011 and 29,737 on 3/16/2012.