Definitive Proxy Statement

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

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Williams-Sonoma, Inc.

 

 

(Name of Registrant as Specified In Its Charter)

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LOGO

 

3250 Van Ness Avenue

San Francisco, California 94109

www.williams-sonomainc.com

 

NOTICE OF 2011 ANNUAL MEETING OF SHAREHOLDERS

 

MEETING DATE:

   May 25, 2011

TIME:

   9:00 a.m. Central Daylight Time

PLACE:

  

Williams-Sonoma, Inc.

7755 Polk Lane

Olive Branch, Mississippi 38654

ITEMS OF BUSINESS:

  

1)      The election of our Board of Directors;

    

2)      Our reincorporation from California to Delaware by means of a merger with and into a wholly-owned Delaware subsidiary;

    

3)      The amendment and restatement of the Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan to increase the shares issuable under the plan by 7,300,000 shares, extend the term of the plan to 2021, and to approve the material terms of the plan so that we may continue to receive a federal income tax deduction for certain compensation paid under the 2001 Long-Term Incentive Plan;

    

4)      An advisory vote on executive compensation;

    

5)      An advisory vote on the frequency of holding an advisory vote on executive compensation;

    

6)      The ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending January 29, 2012; and

    

7)      Such other business as may properly come before the meeting or any adjournment or postponement of the meeting.

WHO CAN VOTE:

   You may vote if you were a shareholder of record as of March 28, 2011.

DATE OF MAILING:

   The Notice of Internet Availability of Proxy Materials or this notice, the Proxy Statement and the Annual Report are first being mailed to shareholders and posted on our website on or about April 7, 2011.

 

By Order of the Board of Directors

Seth R. Jaffe

Secretary

 

 

YOUR VOTE IS IMPORTANT

 

Instructions for submitting your proxy are provided in the Notice of Internet Availability of Proxy Materials, the Proxy Statement and on your proxy card. It is important that your shares be represented and voted at the Annual Meeting. Please submit your proxy through the Internet, by telephone, or mark, sign, date and promptly return the enclosed proxy card in the enclosed envelope. You may revoke your proxy at any time prior to its exercise at the Annual Meeting.

 


LOGO

 

3250 Van Ness Avenue

San Francisco, California 94109

www.williams-sonomainc.com

 

PROXY STATEMENT FOR THE 2011 ANNUAL MEETING OF SHAREHOLDERS

 


 

GENERAL INFORMATION

 

Our Board of Directors is soliciting your proxy to vote your shares at our 2011 Annual Meeting of Shareholders, to be held on Wednesday, May 25, 2011 at 9:00 a.m. Central Daylight Time, and for any adjournment or postponement of the meeting. Our Annual Meeting will be held at our national distribution center located at 7755 Polk Lane, Olive Branch, Mississippi 38654. Our Annual Report to Shareholders for the fiscal year ended January 30, 2011, or fiscal 2010, including our financial statements for fiscal 2010, is also included with printed copies of this Proxy Statement and posted on our website at www.williams-sonomainc.com/investors/annual-reports.html. These proxy materials are first being made available to shareholders and posted on our website on or about April 7, 2011.

 

What is the purpose of the Annual Meeting?

 

Shareholders will be asked to vote on the following matters:

 

  1) The election of our Board of Directors;

 

  2) Our reincorporation from California to Delaware by means of a merger with and into a wholly-owned Delaware subsidiary;

 

  3) The amendment and restatement of the Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan to increase the shares issuable under the plan by 7,300,000 shares, extend the term of the plan to 2021, and to approve the material terms of the plan so that we may continue to receive a federal income tax deduction for certain compensation paid under the 2001 Long-Term Incentive Plan;

 

  4) An advisory vote on executive compensation;

 

  5) An advisory vote on the frequency of holding an advisory vote on executive compensation;

 

  6) The ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending January 29, 2012; and

 

  7) Such other business as may properly come before the meeting or any adjournment or postponement of the meeting, including shareholder proposals. At this time, we do not know of any other matters to be brought before the Annual Meeting.

 

What is the Notice of Internet Availability of Proxy Materials?

 

In accordance with rules and regulations adopted by the U.S. Securities and Exchange Commission, or the SEC, instead of mailing a printed copy of our proxy materials to all shareholders entitled to vote at the Annual Meeting, we are furnishing the proxy materials to certain of our shareholders over the Internet. If you received a Notice of Internet Availability of Proxy Materials, or the Notice, by mail, you will not receive a printed copy of the proxy materials. Instead, the Notice will instruct you as to how you may access and review the proxy materials and submit your vote via the Internet or by telephone. If you received a Notice by mail and would like to receive a printed copy of the proxy materials, please follow the instructions for requesting such materials included in the Notice.

 

You may also choose to receive future proxy materials by e-mail by following the instructions provided on the website referred to in the Notice. Choosing to receive your future proxy materials by e-mail will save us the cost of printing and mailing documents to you and will reduce the impact of our Annual Meeting on the environment.

 

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If you choose to receive future proxy materials by e-mail, you will receive an e-mail next year with instructions containing a link to those materials and a link to the proxy voting site. Your election to receive proxy materials by e-mail will remain in effect until you terminate it.

 

On the date of mailing of the Notice, all shareholders will have the ability to access all of our proxy materials on a website referred to in the Notice. These proxy materials will be available free of charge.

 

Who may vote?

 

Only shareholders of record at the close of business on March 28, 2011, the record date, are entitled to receive notice of and to vote at the Annual Meeting. Each holder of our common stock will be entitled to one vote for each share of our common stock owned as of the record date. As of the record date, there were 104,980,876 shares of our common stock outstanding and entitled to vote, and there were 433 shareholders of record, which number does not include beneficial owners of shares held in the name of a bank or brokerage firm. We do not have any outstanding shares of preferred stock.

 

How do I vote?

 

You may vote in person at the Annual Meeting, electronically by submitting your proxy through the Internet, by telephone or by returning a hard copy of the proxy card before the Annual Meeting. Proxies properly executed, returned to us on a timely basis and not revoked will be voted in accordance with the instructions contained in the proxy. If any matter not described in this Proxy Statement is properly presented for action at the meeting, the persons named in the enclosed proxy will have discretionary authority to vote according to their best judgment.

 

How do I vote electronically or by telephone?

 

You may vote by submitting your proxy through the Internet or by telephone. The Internet and telephone voting procedures are designed to authenticate your identity as a Williams-Sonoma, Inc. shareholder, to allow you to vote your shares and to confirm that your instructions have been properly recorded. Specific instructions to be followed for voting through the Internet or by telephone are provided below in this Proxy Statement, in the Notice and on the proxy card.

 

Shares Registered Directly in the Name of the Shareholder

 

If your shares are registered directly in your name in our stock records maintained by our transfer agent, Wells Fargo Shareowner Services, then you may vote your shares:

 

   

on the Internet at www.eproxy.com/wsm; or

 

   

by calling Wells Fargo Shareowner Services from within the United States at 800-560-1965.

 

Proxies for shares registered directly in your name that are submitted through the Internet or by telephone must be received before noon Central Daylight Time on Tuesday, May 24, 2011.

 

Shares Registered in the Name of a Brokerage Firm or Bank

 

If your shares are held in an account at a brokerage firm or bank, you should follow the voting instructions on the Notice or the proxy card.

 

What if I return my proxy card directly to the company, but do not provide voting instructions?

 

If a signed proxy card is returned to us without any indication of how your shares should be voted, votes will be cast “FOR” the election of the directors named in this Proxy Statement, “FOR” the reincorporation from California to Delaware, “FOR” the amendment and restatement of our 2001 Long-Term Incentive Plan, “FOR” the approval, on an advisory basis, of the compensation of our named executive officers, “FOR” the option of once every one year as the frequency with which shareholders are provided an advisory vote on executive compensation, and “FOR” the ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending January 29, 2012.

 

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What are the directions to attend the Annual Meeting and vote in person?

 

The following are directions to attend the Annual Meeting from various locations around the Memphis Area:

 

From Memphis International Airport

 

Take Winchester Road Westbound (stay to the right at the fork)

Merge onto Jim McGhee Parkway/Plough Boulevard

Go approximately 1.4 miles

Merge onto I-240 East toward Nashville

Travel approximately 5.8 miles to exit 16 (on the right)

Merge onto TN-385 Eastbound/Bill Morris Parkway

Go approximately 6 miles to Hacks Cross Road exit

Take a right on Hacks Cross Road

Go approximately 2.9 miles

Take a left on State Line Road

Go 1 mile to stop sign

Take a right on Polk Lane

Go 1.4 miles to 7755 Polk Lane

Destination will be on the right

 

From Downtown Memphis

 

Take I-40 Eastbound toward Nashville

Take exit 1E to merge onto I-240 Southbound toward Jackson

Take exit 16 to merge onto TN-385 Eastbound/Bill Morris Parkway

Go approximately 6 miles to Hacks Cross Road exit

Take a right on Hacks Cross Road

Go approximately 2.9 miles

Take a left on State Line

Go 1 mile to stop sign

Take a right on Polk Lane

Go 1.4 miles to 7755 Polk Lane

Destination will be on the right

 

How many shares must be present to transact business at the Annual Meeting?

 

Shareholders holding a majority of our outstanding shares as of the record date must be present in person or by proxy at the Annual Meeting so that we may transact business. This is known as a quorum. Shares that are voted in person or through the Internet, telephone or signed proxy card, and abstentions and broker non-votes, will be included in the calculation of the number of shares considered to be present for purposes of determining whether there is a quorum at the Annual Meeting.

 

What is a broker non-vote?

 

The term broker non-vote refers to shares that are held of record by a broker for the benefit of the broker’s clients but that are not voted at the Annual Meeting on certain non-routine matters set forth in New York Stock Exchange, or NYSE, Rule 402.08(B) because the broker did not receive instructions from the broker’s clients on how to vote the shares and, therefore, was prohibited from voting the shares.

 

What is cumulative voting and when does it occur?

 

Cumulative voting is a system of shareholder voting to elect directors that allows a shareholder to cast all of the shareholder’s votes for a single director or multiple directors. If a shareholder requests that cumulative voting take place, then every shareholder entitled to vote may cumulate votes for director nominees, and you will be entitled to cast as many votes as are equal to the number of shares owned by you as of the record date multiplied by the number of directors to be elected. To engage in cumulative voting, a shareholder entitled to vote at the

 

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Annual Meeting must give notice of the shareholder’s intention to cumulate votes before voting begins. If that occurs, you may cumulate votes only with respect to the election of director nominees whose names were placed in nomination prior to the voting for directors. Cumulative votes may be cast for one director nominee or distributed among two or more director nominees. For example, if you owned 100 shares of our common stock as of the record date and eight directors were being elected, you would have 800 votes (100 shares multiplied by eight directors) to cast for one or more of the director nominees at the Annual Meeting.

 

A director elected by cumulative voting can only be removed without cause by the same cumulative voting standards.

 

As of the date of this Proxy Statement, we have not received notice that any shareholder has requested the ability to cumulate votes for directors.

 

How many votes are needed to elect directors?

 

Pursuant to a majority voting policy adopted by our Board of Directors and further described below and in our Corporate Governance Guidelines, the election of each of the eight director nominees requires the affirmative vote of a majority of the shares represented and voting at the Annual Meeting with respect to each nominee. The number of shares voted “for” a director nominee must exceed the number of votes “withheld” from that nominee for the nominee to be elected as a director to serve until the next annual meeting or until his or her successor has been duly elected and qualified. Your proxy will be voted in accordance with your instructions. If no instructions are given, the proxy holders will vote “FOR” each of the director nominees. If you hold your shares through a brokerage, bank or other nominee, or in “street name,” it is important to cast your vote if you want it to count in the election of directors. In the past, if you held your shares in street name and you did not indicate how you wanted your shares voted in the election of directors, your bank or broker was allowed to vote those shares on your behalf in the election of directors if they felt it was appropriate to do so. Changes in regulations were made to take away the ability of your bank or broker to vote your uninstructed shares in the election of directors on a discretionary basis. Thus, if you hold your shares in street name and you do not instruct your bank or broker how to vote your shares in the election of directors, no votes will be cast on your behalf. Broker non-votes and abstentions will have no effect on the outcome of the election.

 

Pursuant to the majority voting policy adopted by our Board of Directors, in an uncontested election, any nominee for director who does not receive the affirmative vote of a majority of the shares represented and voting in the election shall promptly tender his or her resignation to our Board of Directors following certification of the shareholder vote. The Nominations and Corporate Governance Committee will consider the resignation offer and recommend to our Board of Directors the action to be taken with respect to the offered resignation. In determining its recommendation, the Nominations and Corporate Governance Committee shall consider all factors it deems relevant. Our Board of Directors will act on the Nominations and Corporate Governance Committee’s recommendation within 90 days following certification of the shareholder vote and will publicly disclose its decision with respect to the director’s resignation offer (and the reasons for rejecting the resignation offer, if applicable).

 

Any director who tenders his or her resignation pursuant to the majority voting policy shall not participate in the Nominations and Corporate Governance Committee’s recommendation or Board action regarding whether to accept the resignation offer. If each member of the Nominations and Corporate Governance Committee is required to tender his or her resignation pursuant to the majority voting policy in the same election, then the independent directors of our Board of Directors who are not required to tender a resignation pursuant to the majority voting policy shall consider the resignation offers and make a recommendation to our Board of Directors.

 

To the extent that one or more directors’ resignations are accepted by our Board of Directors, our Board of Directors in its discretion may determine either to fill such vacancy or vacancies or to reduce the size of the Board within the authorized range.

 

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How many votes are needed to approve Proposals 2, 3, 4, 5 and 6?

 

Proposal 2, our reincorporation from Delaware to California, requires the affirmative vote of a majority of the outstanding shares of the company. Proxy cards marked “abstain” and broker non-votes will have the effect of a “NO” vote on Proposal 2.

 

Proposal 3, the amendment and restatement of our 2001 Long-Term Incentive Plan, requires the affirmative vote of (i) a majority of the shares represented and voting at the Annual Meeting and (ii) a majority of the quorum required to transact business at the Annual Meeting. Proxy cards marked “abstain” and broker non-votes will have the effect of a “NO” vote on Proposal 3 if the number of affirmative votes cast for the proposal is a majority of the votes cast but does not constitute a majority of the quorum required to transact business at the Annual Meeting.

 

Proposal 4, the approval of the compensation of our named executive officers, requires the affirmative vote of (i) a majority of the shares represented and voting at the Annual Meeting and (ii) a majority of the quorum required to transact business at the Annual Meeting. Proxy cards marked “abstain” and broker non-votes will have the effect of a “NO” vote on Proposal 4 if the number of affirmative votes cast for the proposal is a majority of the votes cast but does not constitute a majority of the quorum required to transact business at the Annual Meeting. Because your vote is advisory, it will not be binding on us or the Board. However, the Board will review the voting results and take them into consideration when making future decisions regarding executive compensation.

 

For Proposal 5, the frequency of the advisory vote on compensation of our named executive officers – every year, every two years or every three years – receiving the highest number of votes at the Annual Meeting will be the frequency recommended by the shareholders. Proxy cards marked “abstain” and broker non-votes will have no effect on the outcome of the vote. Because your vote is advisory, it will not be binding on us or the Board. However, the Board will review the voting results and take them into consideration when making future decisions regarding the frequency of the advisory vote on executive compensation.

 

Proposal 6, the ratification of the selection of our independent registered public accounting firm, requires the affirmative vote of (i) a majority of the shares represented and voting at the Annual Meeting and (ii) a majority of the quorum required to transact business at the Annual Meeting. Proxy cards marked “abstain” and broker non-votes will have the effect of a “NO” vote on Proposal 6 if the number of affirmative votes cast for the proposal is a majority of the votes cast but does not constitute a majority of the quorum required to transact business at the Annual Meeting.

 

Are there any shareholder proposals this year?

 

No shareholder proposals are included in this Proxy Statement nor have we received notice of any shareholder proposals to be raised at this year’s Annual Meeting.

 

What if I want to change my vote(s)?

 

You may revoke your proxy prior to the close of voting at the Annual Meeting by any of the following methods:

 

   

sending written notice of revocation to our Secretary;

 

   

sending a signed proxy card bearing a later date to our Secretary; or

 

   

attending the Annual Meeting, revoking your proxy and voting in person.

 

What is householding?

 

Householding is a cost-cutting procedure used by us and approved by the SEC. Under the householding procedure, we send only one Notice or Annual Report and Proxy Statement to shareholders of record who share

 

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the same address and last name, unless one of those shareholders notifies us that the shareholder would like a separate Notice or Annual Report and Proxy Statement. A separate proxy card is included in the materials for each shareholder of record. A shareholder may notify us that the shareholder would like a separate Notice or Annual Report and Proxy Statement by phone at 415-421-7900 or by mail at the following mailing address: Williams-Sonoma, Inc., Attention: Annual Report Administrator, 3250 Van Ness Avenue, San Francisco, California 94109. If we receive such notification that the shareholder wishes to receive a separate Notice or Annual Report and Proxy Statement, we will promptly deliver such Notice or Annual Report and Proxy Statement. If you wish to update your participation in householding, you may contact your broker or our mailing agent, Broadridge Investor Communications Solutions, at 800-542-1061.

 

What if I received more than one proxy card?

 

If you received more than one proxy card, it means that you have multiple accounts with brokers and/or our transfer agent. You must complete each proxy card in order to vote all of your shares. If you are interested in consolidating your accounts, you may contact your broker or our transfer agent, Wells Fargo Shareowner Services, at 800-468-9716.

 

Who pays the expenses incurred in connection with the solicitation of proxies?

 

We pay all of the expenses incurred in preparing, assembling and mailing the Notice or this Proxy Statement and the materials enclosed. We have retained Skinner & Company and MacKenzie Partners, Inc. to assist in the solicitation of proxies at an estimated cost to us of $3,500 and $12,500, respectively. Some of our officers or employees may solicit proxies personally or by telephone or other means. None of those officers or employees will receive special compensation for such services.

 

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PROPOSAL 1

 

ELECTION OF DIRECTORS

 

What is this proposal?

 

This is a proposal to elect our Board of Directors.

 

How many members are on our Board?

 

We currently have ten directors. Directors Richard T. Robertson and David B. Zenoff have decided not to stand for re-election. We thank them for their years of dedicated service to the company. Assuming each director nominee is elected, after the 2011 Annual Meeting, we will have eight directors.

 

Has the Board determined which directors are independent?

 

The Board has determined that Adrian D.P. Bellamy, Adrian T. Dillon, Anthony A. Greener, Ted W. Hall and Michael R. Lynch meet the independence requirements of our “Policy Regarding Director Independence,” which is part of our Corporate Governance Guidelines. Our Corporate Governance Guidelines are posted on our website at www.williams-sonomainc.com. Accordingly, the Board has determined that none of these director nominees has a material relationship with us and that each of these nominees are independent within the meaning of the NYSE and SEC director independence standards, as currently in effect. Further, our Board committees satisfy the independence requirements of the NYSE and SEC. The Board’s independence determination was based on information provided by our director nominees and discussions among our officers and directors.

 

How often did our Board meet in fiscal 2010?

 

During fiscal 2010, our Board held a total of 6 meetings. Each director who was a member of our Board during fiscal 2010 attended at least 75% of the aggregate of (i) the total number of meetings of the Board held during the period for which such director has been a director and (ii) the total number of meetings held by all committees of the Board on which such director served during the periods that such director served.

 

What is our policy for director attendance at the Annual Meeting?

 

Our policy is that directors who are nominated for election at our Annual Meeting should attend the Annual Meeting. Six of the seven incumbent directors who were nominated for election at our 2010 Annual Meeting attended the meeting.

 

How can shareholders and interested parties communicate with members of the Board?

 

Shareholders and all other interested parties may send written communications to the Board or to any of our directors individually, including non-management directors and the Chairman of the Board, at the following address: Williams-Sonoma, Inc., Attention: Corporate Secretary, 3250 Van Ness Avenue, San Francisco, California 94109. All communications will be compiled by our Corporate Secretary and submitted to the Board or an individual director, as appropriate, on a periodic basis.

 

What will happen if a nominee is unwilling or unable to serve prior to the Annual Meeting?

 

Our Board has no reason to believe that any of the nominees will be unwilling or unable to serve as a director. However, should a nominee become unwilling or unable to serve prior to the Annual Meeting, our Nominations and Corporate Governance Committee would recommend another person or persons to be nominated by our Board to stand for election, and your proxies would be voted for the person or persons selected by the committee and nominated by our Board.

 

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How are the directors compensated?

 

For fiscal 2010, non-employee directors received cash compensation and equity grants for their service on our Board and Board committees. Each non-employee director received cash compensation equal to 50% of their annual compensation, as identified in the following table, and equity grants equal to 50% of their annual compensation. During fiscal 2010, these equity grants were made in the form of restricted stock units. Directors received dividend equivalent payments with respect to outstanding restricted stock unit awards. These restricted stock units vest on the earlier of one year from the date of grant or the day before the next regularly scheduled annual meeting. The number of restricted stock units granted was determined by dividing the total monetary value of each award, equal to 50% of the annual compensation as identified in the following table, by the closing price of our common stock on the trading day prior to the grant date, rounding down to the nearest whole share.

 

     Value of Annual Compensation

 

Initial Election to the Board

   $ 184,000   

Annual Compensation for Board Service(1)

   $ 185,000   

Annual Compensation to Chairman of the Board(1)

   $ 300,000   

Annual Compensation to Chairperson of the Audit and Finance Committee(1)

   $ 41,000   

Annual Compensation to Chairperson of the Compensation Committee(1)

   $ 25,000   

Annual Compensation to Chairperson of the Nominations and Corporate Governance Committee(1)

   $ 16,500   

(1) Awarded on the date of the Annual Meeting so long as the non-employee director has been serving on the Board for at least three months.

 

In addition to the compensation described above, non-employee directors received cash attendance compensation in the amount of $2,000 for each minuted committee meeting they attended. Directors also received reimbursement for travel expenses related to attending our Board, committee or business meetings and discounts on our merchandise to all non-employee directors and their spouses.

 

The Board has approved a share ownership policy. Each non-employee director must hold, by the later of the 2012 Annual Meeting or the fifth anniversary of such director’s initial election to the Board, at least $400,000 worth of shares of company stock. In the event a director holds at least $400,000 worth of shares of company stock during the required time period, but the value of such director’s shares decreases below $400,000 due to a drop in the company’s stock price, the director shall be deemed to have complied with this policy so long as the director does not sell shares of company stock. If a director has not complied with this policy during the required time period, then the director may not sell any shares until such director holds at least $400,000 worth of shares of company stock.

 

Non-Employee Director Compensation During Fiscal 2010

 

The following table shows the compensation provided to our non-employee directors during fiscal 2010:

 

    Fees Earned
or Paid in
Cash ($)


    Stock
Awards ($)(1)


  Option Awards
($)


    Non-Stock
Incentive Plan
Compensation
($)


    Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings


    All Other
Compensation
($)


   Total ($)

 

Adrian D.P. Bellamy

  $ 203,250      $254,975(2)     —          —          —        $35,273(3)(4)    $ 493,498   

Adrian T. Dillon

  $ 98,750      $112,985(5)     —          —          —        $29,134(6)(7)    $ 240,869   

Anthony A. Greener

  $ 81,375      $  92,493(8)     —          —          —        $  4,856(9)(10)    $ 178,724   

Ted W. Hall

  $ 89,375      $  92,493(11)     —          —          —        $  5,825(12)(13)    $ 187,693   

Michael R. Lynch

  $ 95,563      $100,742(14)     —          —          —        $17,223(15)(16)    $ 213,528   

Richard T. Robertson

  $ 83,375      $  92,493(17)     —          —          —        $  8,709(18)(19)    $ 184,577   

David B. Zenoff

  $ 75,375      $  92,493(20)     —          —          —        $16,796(21)(22)    $ 184,664   

 

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(1) Based on the fair market value of the award granted in fiscal 2010, which is calculated by multiplying the closing price of our stock on the trading day prior to the grant date by the number of units granted. The number of restricted stock units granted is determined by dividing the total monetary value of each award, equal to 50% of the annual compensation as identified in the preceding table, by the closing price of our common stock on the trading day prior to the grant date, rounding down to the nearest whole share.

 

(2) Represents the fair market value associated with a restricted stock unit award of 8,747 shares of common stock made on May 26, 2010, with a fair value as of the grant date of $29.15 per share for an aggregate grant date fair value of $254,975.

 

(3) Includes taxable value of discount on merchandise of $18,097.

 

(4) Includes dividend equivalent payments made with respect to outstanding stock unit award of $17,176.

 

(5) Represents the fair market value associated with a restricted stock unit award of 3,876 shares of common stock made on May 26, 2010, with a fair value as of the grant date of $29.15 per share for an aggregate grant date fair value of $112,985.

 

(6) Includes taxable value of discount on merchandise of $23,344.

 

(7) Includes dividend equivalent payments made with respect to an outstanding restricted stock unit award of $5,790.

 

(8) Represents the fair market value associated with a restricted stock unit award of 3,173 shares of common stock made on May 26, 2010, with a fair value as of the grant date of $29.15 per share for an aggregate grant date fair value of $92,493.

 

(9) Includes taxable value of discount on merchandise of $176.

 

(10) Includes dividend equivalent payments made with respect to an outstanding restricted stock unit award of $4,680.

 

(11) Represents the fair market value associated with a restricted stock unit award of 3,173 shares of common stock made on May 26, 2010, with a fair value as of the grant date of $29.15 per share for an aggregate grant date fair value of $92,493.

 

(12) Includes taxable value of discount on merchandise of $1,145.

 

(13) Includes dividend equivalent payments made with respect to an outstanding restricted stock unit award of $4,680.

 

(14) Represents the fair market value associated with a restricted stock unit award of 3,456 shares of common stock made on May 26, 2010, with a fair value as of the grant date of $29.15 per share for an aggregate grant date fair value of $100,742.

 

(15) Includes taxable value of discount on merchandise of $2,509.

 

(16) Includes dividend equivalent payments made with respect to an outstanding restricted stock unit award of $14,714.

 

(17) Represents the fair market value associated with a restricted stock unit award of 3,173 shares of common stock made on May 26, 2010, with a fair value as of the grant date of $29.15 per share for an aggregate grant date fair value of $92,493.

 

(18) Includes taxable value of discount on merchandise of $4,029.

 

(19) Includes dividend equivalent payments made with respect to an outstanding restricted stock unit award of $4,680.

 

(20) Represents the fair market value associated with a restricted stock unit award of 3,173 shares of common stock made on May 26, 2010, with a fair value as of the grant date of $29.15 per share for an aggregate grant date fair value of $92,493.

 

(21) Includes taxable value of discount on merchandise of $3,377.

 

(22) Includes dividend equivalent payments made with respect to an outstanding restricted stock unit award of $13,419.

 

9


What is our Board leadership structure?

 

We currently separate the positions of Chief Executive Officer and Chairman of the Board. Since May 2010, Adrian D.P. Bellamy, one of our independent directors who previously served as our Lead Independent Director, has served as our Chairman of the Board. Our Corporate Governance Guidelines also provide that in the event that the Chairman of the Board is not an independent director, the Board shall elect a Lead Independent Director.

 

Separating the positions of Chief Executive Officer and Chairman of the Board maximizes the Board’s independence and aligns our leadership structure with current trends in corporate governance best practices. Our Chief Executive Officer is responsible for day-to-day leadership and for setting the strategic direction of the company, while the Chairman of the Board provides independent oversight and advice to our management team, as well as presides over Board meetings.

 

Do we have a Lead Independent Director?

 

No. On May 26, 2010 the Board appointed Adrian D.P. Bellamy, an independent director, as Chairman of the Board.

 

What is the Board’s role in overseeing the risk management of the company?

 

The Board actively manages the company’s risk oversight process and receives regular reports from management on areas of material risk to the company, including operational, financial, legal and regulatory risks. Our Board committees assist the Board in fulfilling its oversight responsibilities in certain areas of risk. The Audit and Finance Committee assists the Board with its oversight of the company’s major financial risk exposures. Additionally, in accordance with NYSE requirements, the Audit and Finance Committee reviews with management the company’s major financial risk exposures and the steps management has taken to monitor and control such exposures, including the company’s risk assessment and risk management policies. The Compensation Committee assists the Board with its oversight of risks arising from our compensation policies and programs. The Nominations and Corporate Governance Committee assists the Board with its oversight of risks associated with Board organization, Board independence, succession planning, and corporate governance. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board is regularly informed through committee reports about such risks.

 

Did the company evaluate risks relating to its executive and non-executive compensation programs? 

 

Our Compensation Committee is responsible for monitoring our compensation policies and practices relative to all our employees, including non-executive officers, for potential risks that are reasonably likely to have a material adverse effect on our company. In performing its duties, the Compensation Committee regularly reviews and discusses potential risks that could arise from our employee compensation plans and programs with our management and the Committee’s independent compensation consultant. The Compensation Committee is responsible for reporting to the Board any material risks associated with our compensation plans and programs, including recommended actions to mitigate such risks.

For fiscal 2010, the Compensation Committee retained its independent consultant, Frederic W. Cook & Co. or Cook & Co., to identify and assess the risk inherent in the company’s compensation programs and policies. Accordingly, Cook & Co. evaluated the company’s executive and non-executive compensation programs for such risk and the mechanisms in our programs designed to mitigate these risks. Among other things, Cook & Co. reviewed our pay philosophy, forms of incentives, performance metrics, balance of cash and equity compensation, balance of long-term and short-term incentive periods, compensation governance practices, and equity grant administration practices. Based on the assessment, Cook & Co. concluded that the company’s compensation programs and policies do not create risks that are reasonably likely to have a material adverse effect on our company.

 

10


Does the Board hold executive sessions?

 

It is the Board’s policy to have a separate meeting time for independent directors, typically during the regularly scheduled Board meetings. During fiscal 2010, executive sessions were led by our Chairman of the Board, Mr. Bellamy.

 

Are there any family or other special relationships among the director nominees and our executive officers?

 

No. There are no family or special relationships between any director nominee or executive officer and any other director nominee or executive officer. There are no arrangements or understandings between any director nominee or executive officer and any other person pursuant to which he or she has been or will be selected as our director and/or executive officer.

 

Does the Chief Executive Officer serve on the board of directors of any other company? 

 

No, the Chief Executive Officer does not serve on the board of directors of any other company.

 

Were any incumbent directors not elected at the 2010 Annual Meeting?

 

No. All of the incumbent directors were elected at the 2010 Annual Meeting.

 

Are any incumbent directors not standing for re-election at the 2011 Annual Meeting?

 

Yes. Richard T. Robertson and David B. Zenoff will not be standing for re-election at the 2011 Annual Meeting.

 

11


Information Regarding the Director Nominees

 

The following table sets forth information, as of March 28, 2011, with respect to each director nominee. We have also included information about each nominee’s specific experience, qualifications, attributes and skills that led the Board to conclude that he or she should serve as a director of the company, in light of our business and structure, at the time we file this Proxy Statement. Each director nominee furnished the biographical information set forth in the table.

 

Executive Officers:

 

Nominee


   Director
Since


    

Position with the Company and
Recent Business Experience, including
Directorships Held During Past Five Years


  

Specific Experience,

Qualifications,
Attributes and Skills


Laura J. Alber

Age 42

     2010     

• Chief Executive Officer since 2010

• President since 2006

• President, Pottery Barn Brands, 2002 – 2006

• Executive Vice President, Pottery Barn, 2000 – 2002

• Senior Vice President, Pottery Barn Catalog and Pottery Barn Kids Retail, 1999 – 2000

  

• Extensive retail industry, merchandising and operational experience, including 16 years of experience with the company

• Implemented successful growth strategies, including Pottery Barn Kids, Pottery Barn Bed + Bath and PBteen, as well as the company’s international expansion

Patrick J. Connolly

Age 64

     1983      

• Executive Vice President, Chief Marketing Officer since 2000

• Executive Vice President, General Manager, Catalog, 1995 – 2000

• Director, CafePress.com since 2007

  

• Extensive marketing experience, including 32 years of experience with the company

• Directed the company’s direct-to-customer strategy, including the growth of its catalog business and the development and expansion of its e-commerce channel

Sharon L. McCollam

Age 48

     2010     

• Executive Vice President, Chief Operating and Chief Financial Officer since 2006

• Executive Vice President, Chief Financial Officer, 2003 – 2006

• Senior Vice President, Chief Financial Officer, 2000 – 2003

• Vice President, Finance, 2000

• Chief Financial Officer of Dole Fresh Vegetables, Inc. (food products), 1996 – 2000

• Director, Del Monte Foods Company (food products) 2007 – 2011

  

• Extensive financial, accounting, operational and investor relations experience, including 11 years of experience with the company

• Implemented successful major initiatives in the company’s finance, accounting, information technology, corporate procurement and facilities departments

 

12


Independent Directors:

 

Nominee


   Director
Since


    

Position with the Company and
Recent Business Experience, including
Directorships Held During Past Five Years


  

Specific Experience,
Qualifications,
Attributes and Skills


Adrian D.P. Bellamy

Age 69

     1997      

• Chairman of the Board

• Chairman of the Compensation Committee and member of the Nominations and Corporate Governance Committee

• Chairman and Director of Reckitt Benckiser plc (household, personal, health and food products) since 2003

• Director, The Gap, Inc. (clothing) since 1995

• Director, Labelux Group GmbH (luxury goods) since 2009

• Chairman and Director of The Body Shop International plc (personal care products), 2002 – 2008

• Chairman of Supervisory Board, Gucci Group NV (clothing), 1995 –2004

  

• Extensive experience as both an executive and director in the retail industry, including 12 years as Chairman and Chief Executive Officer of DFS Group Ltd.

• Broad perspective of the retail industry from current and past positions on the Boards of other retailers including The Gap, The Body Shop and Gucci

Adrian T. Dillon

Age 57

     2005      

• Chairman of the Audit and Finance Committee

• Chief Financial and Administrative Officer, Skype Limited (video and voice communications software), 2010 – 2011

• Executive Vice President, Finance and Administration, and Chief Financial Officer, Agilent Technologies, Inc. (technology testing and analysis solutions), 2001 – 2010

• Chief Financial Officer, Eaton Corporation (diversified power management), 1997 – 2001

  

• Extensive financial and accounting expertise as chief financial officer of two large public companies

• Deep understanding of accounting principles and financial reporting rules and regulations, including how internal controls are effectively managed within organizations

 

13


Nominee


   Director
Since


    

Position with the Company and
Recent Business Experience, including
Directorships Held During Past Five Years


  

Specific Experience,
Qualifications,
Attributes and Skills


Anthony A. Greener

Age 70

     2007      

• Member of the Compensation Committee and the Nominations and Corporate Governance Committee

• Chairman, The Minton Trust (charity) since 2006

• Director, WNS (Holdings) Limited (outsourcing services) since 2007

• Chairman, Qualifications and Curriculum Authority (education), 2002 – 2008

• Deputy Chairman, British Telecommunications plc (telecommunications), 2000 – 2006

• Chairman, Diageo plc (spirits, beer and wine), 1997 – 2000

• Chairman and Chief Executive Officer, Guinness plc (beer and spirits), 1992 – 1997

  

• Extensive experience as both an executive and director of companies with global brands

• Strong leadership skills with a variety of diverse businesses and organizations, including specialty retailers

Ted W. Hall

Age 62

     2007      

• Member of the Audit and Finance Committee and the Compensation Committee

• General Partner, Long Meadow Ranch and President, Long Meadow Ranch Winery (food and wine) since 1994

• Managing Director, Mayacamas Associates (consulting) since 2000

• Director, Dolby Laboratories, Inc. (entertainment products) since 2007

• Director, Peet’s Coffee & Tea, Inc. (coffee, tea and related products) since 2008

• Chairman, Tambourine, Inc. (specialty music production and distribution), 1998 – 2007

• Various leadership roles, McKinsey & Company (consulting), 1972 – 2000

• Member of Shareholder Committee (McKinsey’s board of directors), McKinsey & Company, 1988 – 2000

  

• Extensive operating and consulting experience, as well as experience as a director at public companies in the retail, consumer product and technology industries

• Strong insight into the specialty food industry through his leadership of Long Meadow Ranch

 

14


Nominee


   Director
Since


    

Position with the Company and
Recent Business Experience, including
Directorships Held During Past Five Years


  

Specific Experience,
Qualifications,
Attributes and Skills


Michael R. Lynch

Age 59

     2000      

• Chairman of the Nominations and Corporate Governance Committee and member of the Audit and Finance Committee

• Vice Chairman, Investment Banking, J.P. Morgan, since 2010

• Senior Managing Director, GSC Group (investment advisor), 2006 – 2009

• Advisory Board Member, GSC Group (investment advisor), 2005 – 2006

• Various roles, including Partner and Managing Director, Goldman, Sachs & Co. (investment banking), 1976 – 2005

  

• Extensive experience and relationships in the capital markets and investment banking sectors

• In-depth knowledge of the company’s business, having advised the company since its initial public offering in 1983

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF ALL OF THE DIRECTORS LISTED ABOVE.

 

15


What is our Director Emeritus program, and when was it initiated?

 

In 2003, we initiated our Director Emeritus program for directors who have, in the opinion of the Board, provided long and meritorious service as members of the Board. Individuals who accept appointment to the position of Director Emeritus agree to provide advisory and consulting services on such business matters as the Board may determine. By standing invitation from the Board, these individuals may attend meetings of the Board, but do not vote on Board matters.

 

Information regarding Directors Emeriti

 

The following table sets forth information, as of March 28, 2011, with respect to each Director Emeritus.

 

Director Emeritus


   Director
Emeritus
Since


    

Positions with the Company and Business Experience


Charles E. Williams

Age 95

     2003      

•Director, 1973 – 2003

•Vice Chairman, 1986 – 2003

•Founder

James A. McMahan

Age 88

     2003      

•Director, 1979 – 2003

•Chief Executive Officer of McMahan Furniture Stores (furniture), 1947 – 1999

 

What are the committees of our Board?

 

Our Board has the following committees, with the following members as of March 28, 2011:

 

Committee and Members


  

Functions of Committee


   Number of
Meetings in
Fiscal 2010


 

Audit and Finance:
Adrian T. Dillon, Chairman
Ted W. Hall
Michael R. Lynch
Richard T. Robertson

  

•Assists our Board in its oversight of the integrity of our financial statements; the qualifications, independence, retention and performance of our independent registered public accounting firm; the performance of our internal audit function; and our compliance with legal and regulatory requirements;

•Prepares the report that the SEC rules require to be included in our annual proxy statement; and

•Reviews the financial impact of selected strategic initiatives, and reviews and recommends for Board approval selected financing, dividend and stock repurchase policies and plans.

     11   

Compensation:
Adrian D.P. Bellamy, Chairman Anthony A. Greener
Ted W. Hall
Richard T. Robertson

  

•Reviews and determines our executive officers’ compensation;

•Reviews and determines our general compensation goals and guidelines for our employees;

•Administers certain of our compensation plans and provides assistance and recommendations with respect to other compensation plans; and

•Reviews the compensation discussion and analysis report that the SEC rules require to be included in our annual proxy statement.

     7   

 

16


Committee and Members


  

Functions of Committee


   Number of
Meetings in
Fiscal 2010


 

Nominations and Corporate

Governance:
Michael R. Lynch, Chairman Adrian D.P. Bellamy
Anthony A. Greener
David B. Zenoff

  

• Reviews and recommends corporate governance policies;

• Identifies and makes recommendations for nominees for director and considers criteria for selecting director candidates;

• Considers shareholders’ director nominations;

• Reviews and determines our compensation policy for our non-employee directors;

• Considers resignation offers of director nominees and recommends to the Board the action to be taken with respect to each such offered resignation; and

• Evaluates the performance of our Chief Executive Officer and oversees the evaluation of the performance of our management and our Board.

     7   

 

Will our Nominations and Corporate Governance Committee consider nominees recommended by shareholders?

 

Yes. Our Nominations and Corporate Governance Committee will consider nominees recommended by shareholders, provided that such nominees are submitted pursuant to the procedures and timelines described in the “Nominations and Corporate Governance Committee Report” and “Shareholder Proposals” sections of this Proxy Statement.

 

Are there any disclosures relating to Compensation Committee interlocks and insider participation?

 

In fiscal 2010, Messrs. Bellamy, Greener, Hall and Robertson served as members of the Compensation Committee. During fiscal 2010, none of our executive officers served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board or Compensation Committee.

 

17


PROPOSAL 2

 

REINCORPORATION OF THE COMPANY FROM CALIFORNIA TO DELAWARE

 

What is this proposal?

 

Our Board has unanimously approved a change in our state of incorporation from California to Delaware (the “Reincorporation”) pursuant to the terms of a merger agreement providing for us to merge into a newly formed wholly-owned subsidiary incorporated in the State of Delaware (“W-S Delaware”), subject to the approval of our shareholders and certain other conditions. The name of the company after the Reincorporation will remain Williams-Sonoma, Inc. For purposes of the discussion below, the company as it currently exists as a corporation organized under the laws of the State of California is sometimes referred to as “W-S California.”

 

The State of Delaware is recognized for adopting comprehensive, modern and flexible corporate laws that are periodically revised to respond to the changing legal and business needs of corporations. Consequently, the Delaware judiciary has become particularly familiar with corporate law matters and a substantial body of court decisions has developed construing Delaware law. Delaware corporate law, accordingly, has been, and is likely to continue to be, interpreted in many significant judicial decisions, a fact which may provide greater clarity and predictability with respect to our corporate legal affairs. For this reason, the majority of public corporations, including a majority of our peer companies, are incorporated in Delaware.

 

Our Board believes that the Reincorporation is in the best interests of the company and will help maximize shareholder value. The Board also believes that the Reincorporation in Delaware will allow us to take advantage of the certainty provided by extensive Delaware case law, provide us access to the specialized Delaware Chancery Court, and help in the recruitment and retention of outside directors due to the more tested exculpation and indemnification provisions permitted under Delaware law.

 

Shareholders are urged to read this proposal carefully, including all of the related exhibits referenced below and attached to this Proxy Statement, before voting on the Reincorporation. The following discussion summarizes material provisions of the Reincorporation. This summary is subject to and qualified in its entirety by the Agreement and Plan of Merger (the “Reincorporation Agreement”) that will be entered into by W-S California and W-S Delaware in substantially the form attached hereto as Exhibit A, the Amended and Restated Certificate of Incorporation of W-S Delaware to be effective immediately following the Reincorporation (the “Delaware Certificate”), in substantially the form attached hereto as Exhibit B, and the Amended and Restated Bylaws of W-S Delaware to be effective immediately following the Reincorporation (the “Delaware Bylaws”), in substantially the form attached hereto as Exhibit C. Copies of the Articles of Incorporation of W-S California filed in California, as amended to date (the “California Articles”), and the bylaws of W-S California, as amended to date (the “California Bylaws”), are filed publicly as exhibits to our periodic reports and are also available for inspection at our principal executive offices. Copies will be sent to shareholders free of charge upon written request to Williams-Sonoma, Inc., Attention: Corporate Secretary, 3250 Van Ness Avenue, San Francisco, California 94109.

 

What are the reasons for the Reincorporation?

 

Our Board and management believe that it is essential for us to be able to draw upon well-established principles of corporate governance in making legal and business decisions. The prominence and predictability of Delaware corporate law provide a reliable foundation on which our governance decisions can be based, and we believe that our shareholders will benefit from the responsiveness of Delaware corporate law to their needs and to those of the corporation they own. The principal factors the Board considered in electing to pursue the Reincorporation are summarized below:

 

   

highly developed and predictable corporate law in Delaware;

 

   

enhanced ability of the majority of shareholders to exercise control; and

 

   

enhanced ability to attract and retain directors and officers.

 

18


Highly Developed and Predictable Corporate Law. Delaware has adopted comprehensive and flexible corporate laws that are revised regularly to meet changing business circumstances. The Delaware legislature is particularly sensitive to issues regarding corporate law and is especially responsive to developments in modern corporate law. In addition, Delaware offers a system of specialized Chancery Courts to deal with corporate law questions, which have streamlined procedures and processes that help provide relatively quick decisions. These courts have developed considerable expertise in dealing with corporate issues, as well as a substantial and influential body of case law construing Delaware’s corporate law. In contrast, California does not have a similar specialized court established to hear only corporate law cases. Instead, disputes involving questions of California corporate law are either heard by the California Superior Court, the general trial court in California that hears all manner of cases, or, if federal jurisdiction exists, a federal district court. This lack of specialized courts in California has been known to result in lengthy delays in resolving cases and to produce outcomes that are inconsistent from court to court. In addition, the Delaware Secretary of State is particularly flexible, highly experienced and responsive in its administration of the filings required for mergers, acquisitions and other corporate transactions.

 

Delaware has become the preferred domicile for most major American corporations, and Delaware law and administrative practices have become comparatively well-known and widely understood. As a result of these factors, it is anticipated that Delaware law will provide greater efficiency, predictability and flexibility in our legal affairs than is presently available under California law. In addition, in general, Delaware case law provides a well-developed body of law defining the proper duties and decision making process expected of a board of directors in evaluating potential and proposed corporate takeover offers and business combinations. The Board believes that the Delaware law will help the Board to protect W-S Delaware’s strategic objectives, consider fully any proposed takeover and alternatives, and, if appropriate, negotiate terms that maximize the benefit to all of our shareholders.

 

Enhanced Ability of the Majority of Shareholders to Exercise Control. The majority of shareholders of a Delaware corporation would have greater ability to exercise control, because Delaware law does not require cumulative voting. Cumulative voting is often used when a minority shareholder (or shareholder group) is otherwise unable to persuade the majority to elect one or more nominees for the election of directors. Under cumulative voting, a shareholder may cast as many votes as shall equal the number of votes that such holder would be entitled to cast for the election of directors multiplied by the number of directors to be elected. The holder may cast all such votes for a single director or distribute the votes among two or more directors. Thus, minority shareholders are often able to use cumulative voting to elect one or more directors to the corporation’s board of directors. The Board believes that directors so elected by a minority shareholder who was unable or unwilling to persuade the majority of shareholders would then act to advance courses of action with respect to which the majority of shareholders was not persuaded. Oftentimes, such situations lead to impediment and frustration of the intentions of the majority of shareholders. The Board believes that each director should be elected by a majority vote of the shareholders, rather than a minority, and has included a majority vote provision in the Delaware Bylaws.

 

Enhanced Ability to Attract and Retain Directors and Officers. The Board believes that the Reincorporation will enhance our ability to attract and retain qualified directors and officers, as well as encourage directors and officers to continue to make independent decisions in good faith on behalf of the company. We are in a competitive industry and compete for talented individuals to serve on our management team and on our Board. The vast majority of public companies are incorporated in Delaware, including the majority of the companies included in the peer group used by the company to benchmark executive compensation. Not only is Delaware law more familiar to directors, it also offers greater certainty and stability from the perspective of those who serve as corporate officers and directors. The parameters of director and officer liability are more extensively addressed in Delaware court decisions and are therefore better defined and better understood than under California law. The Board believes that the Reincorporation will provide appropriate protection for shareholders from possible abuses by directors and officers, while enhancing our ability to recruit and retain directors and officers. In this regard, it should be noted that directors’ personal liability is not, and cannot be, eliminated under Delaware law for intentional misconduct, bad faith conduct or any transaction from which the director derives an

 

19


improper personal benefit. We believe that the better understood and comparatively stable corporate environment afforded by Delaware law will enable us to compete more effectively with other public companies in the recruitment of talented and experienced directors and officers.

 

How will the Reincorporation be effected?

 

The Reincorporation will be effected by the merger of W-S California with and into W-S Delaware, a wholly-owned subsidiary of the company that has been recently incorporated under the Delaware General Corporation Law (the “DGCL”) for purposes of the Reincorporation. The company as it currently exists as a California corporation will cease to exist as a result of the merger, and W-S Delaware will be the surviving corporation and will continue to operate our business as it existed prior to the Reincorporation. The existing holders of our common stock will own all of the outstanding shares of W-S Delaware common stock, and no change in ownership will result from the Reincorporation. Assuming approval by our shareholders, we currently intend to cause the Reincorporation to become effective as soon as reasonably practicable following the Annual Meeting, which is scheduled for May 25, 2011.

 

At the effective time of the Reincorporation (the “Effective Time”), we will be governed by the Delaware Certificate, the Delaware Bylaws and the DGCL. Although the Delaware Certificate and the Delaware Bylaws contain many provisions that are similar to the provisions of the California Articles and the California Bylaws, they do include certain provisions that are different from the provisions contained in the California Articles and the California Bylaws or under the California General Corporation Law as described in more detail below.

 

Will there be any changes to the business of the company as a result of the Reincorporation?

 

Other than the change in corporate domicile, the Reincorporation will not result in any change in the business, physical location, management, assets, liabilities or net worth of the company, nor will it result in any change in location of our current employees, including management. Upon consummation of the Reincorporation, our daily business operations will continue as they are presently conducted at our principal executive offices located at 3250 Van Ness Avenue, San Francisco, California 94109. The consolidated financial condition and results of operations of W-S Delaware immediately after consummation of the Reincorporation will be the same as those of W-S California immediately prior to the consummation of the Reincorporation. In addition, upon the effectiveness of the merger, the board of directors of W-S Delaware will consist of those persons elected to the board of directors of W-S California and will continue to serve for the term of their respective elections to our Board, and the individuals serving as executive officers of W-S California immediately prior to the Reincorporation will continue to serve as executive officers of W-S Delaware, without a change in title or responsibilities. Upon effectiveness of the Reincorporation, W-S Delaware will be the successor in interest to W-S California, and the shareholders will become stockholders of W-S Delaware.

 

If the Reincorporation is approved, each outstanding share of common stock of W-S California will automatically be converted into one share of common stock of W-S Delaware when the Reincorporation is effected. All of our employee benefit and incentive compensation plans immediately prior to the Reincorporation will be continued by W-S Delaware, and each outstanding option to purchase shares of W-S California’s common stock will be converted into an option to purchase an equivalent number of shares of W-S Delaware’s common stock on the same terms and subject to the same conditions. The registration statements of W-S California on file with the Securities and Exchange Commission immediately prior to the Reincorporation will be assumed by W-S Delaware, and the shares of W-S Delaware will continue to be listed on the New York Stock Exchange.

 

20


CERTIFICATES FOR SHARES IN W-S CALIFORNIA WILL AUTOMATICALLY REPRESENT SHARES IN W-S DELAWARE UPON COMPLETION OF THE MERGER, AND SHAREHOLDERS WILL NOT BE REQUIRED TO EXCHANGE STOCK CERTIFICATES AS A RESULT OF THE REINCORPORATION.

 

The Reincorporation Agreement provides that the Board may abandon the Reincorporation at any time prior to the Effective Time if the Board determines that the Reincorporation is inadvisable for any reason. For example, the DGCL or the California General Corporation Law may be changed to reduce the benefits that the company hopes to achieve through the Reincorporation, or the costs of operating as a Delaware corporation may be increased, although the company does not know of any such changes under consideration. The Reincorporation Agreement may be amended at any time prior to the Effective Time, either before or after the shareholders have voted to adopt the proposal, subject to applicable law. The company will re-solicit shareholder approval of the Reincorporation if the terms of the Reincorporation Agreement are changed in any material respect.

 

Are there any disadvantages to the Reincorporation?

 

Notwithstanding the belief of the Board as to the benefits to our shareholders of the Reincorporation, it should be noted that Delaware law has been criticized by some commentators and institutional shareholders on the grounds that it does not afford minority shareholders the same substantive rights and protections as are available in a number of other states, including California. In addition, the Delaware Certificate and the Delaware Bylaws, in comparison to the California Articles and the California Bylaws, contain or eliminate certain provisions that may have the effect of reducing the rights of minority shareholders. The Reincorporation may make it more difficult for minority shareholders to elect directors and influence our policies. It should also be noted that the interests of the Board, management and affiliated shareholders in voting on the Reincorporation proposal may not be the same as those of unaffiliated shareholders. In addition, franchise taxes payable by us in Delaware may be greater than in California.

 

The Board has considered the potential disadvantages of the Reincorporation and has concluded that the potential benefits outweigh the possible disadvantages.

 

21


What are the differences between the charters and bylaws of W-S California and W-S Delaware?

 

The following is a comparison of the provisions in the charters and bylaws of W-S California and W-S Delaware, as well as certain provisions of California law and Delaware law. The comparison summarizes the important differences, but is not intended to list all differences, and is qualified in its entirety by reference to such documents and to the respective General Corporation Laws of the States of California and Delaware. Shareholders are encouraged to read the Delaware Certificate, the Delaware Bylaws, the California Articles and the California Bylaws in their entirety. The Delaware Bylaws and Delaware Certificate are attached to this proxy statement, and the California Bylaws and California Articles are filed publicly as exhibits to our periodic reports.

 

Provision


  

W-S California


  

W-S Delaware


Authorized Shares

  

253,125,000 shares of Common Stock, par value $0.01 per share

7,500,000 shares of Preferred Stock, par value $0.01 per share

  

253,125,000 shares of Common Stock, par value $0.01 per share

7,500,000 shares of Preferred Stock, par value $0.01 per share

Restrictions on Transactions with Interested Shareholders    No restrictions   

Section 203 prohibits, subject to certain exceptions, a Delaware corporation from engaging in a business combination with an interested stockholder (i.e., a stockholder acquiring 15% or more of the outstanding voting stock) for three years following the date that such stockholder becomes an interested stockholder without Board approval. Section 203 makes certain types of unfriendly or hostile corporate takeovers, or other non-board approved transactions involving a corporation and one or more of its significant stockholders, more difficult.

 

Because Section 203 could be considered to have anti-takeover implications that could be construed as unfavorable to stockholder interests, the Board has elected to have W-S Delaware “opt-out” of Section 203, so it is not applicable to W-S Delaware.

Vote Required to Approve Merger or Sale of Company    The California Articles require the affirmative vote of not less than two-thirds of the outstanding shares to approve a merger of the company or a sale of substantially all the assets of the company.    The Delaware Certificate requires the affirmative vote of not less than two-thirds of the outstanding shares to approve a merger of the company or a sale of substantially all the assets of the company.

 

22


Provision


  

W-S California


  

W-S Delaware


50/90 Rule Restriction on Cash Mergers   

Under California law, a merger may not be consummated for cash if the purchaser owns more than 50% but less than 90% of the then outstanding shares unless either (i) all the shareholders consent, which is not practical for a public company, or (ii) the Commissioner of Corporations approves the merger.

 

The 50/90 rule, when combined with the requirement in the California Articles that holders of two-thirds of the outstanding shares must approve a merger transaction, may make it more difficult for an acquiror to make an all cash acquisition of the company which is opposed by the Board of W-S California. Specifically, the 50/90 rule encourages such an acquiror making an unsolicited tender offer to either tender for less than 50% of the outstanding shares or more than 90% of the outstanding shares. A purchase by such acquiror of less than 50% of the outstanding shares does not allow the acquiror to gain ownership of the two-thirds needed to approve a second step merger (which merger would be used to enable the acquiror to acquire 100% of the company’s equity) and, therefore, creates risk for such an acquiror that such a favorable vote will not be obtained. Yet, a tender offer conditioned upon receipt of tenders from at least 90% of the outstanding shares also creates risk for such an acquiror since it may be very difficult to receive tenders from holders of at least 90% of the outstanding shares. Consequently, it is possible that these risks would discourage some potential acquirors from pursuing an all cash acquisition of the company opposed by the Board of Directors of W-S California.

   Delaware law does not have a provision similar to the 50/90 rule in California.

 

23


Provision


  

W-S California


  

W-S Delaware


Bylaw Amendments

   The California Bylaws may be amended by shareholders entitled to exercise a majority of the voting power, or by the Board; provided, however, that a change in the size of the Board in certain circumstances will require the approval of shareholders.    The Delaware Bylaws may be amended by stockholders entitled to exercise a majority of the voting power, or by the Board; provided, however, that a change in the size of the Board in certain circumstances will require the approval of stockholders.
Shareholder Action by Written Consent   

The California Bylaws provide that any action that may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice if a consent in writing, setting forth the actions so taken, is signed by holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.

 

Under California law, directors may not be elected by written consent except by unanimous written consent of all outstanding shares entitled to vote for the election of directors.

  

The Delaware Certificate and the Delaware Bylaws provide that any action that may be taken at any annual or special meeting of stockholders may be taken without a meeting and without prior notice if a consent in writing, setting forth the actions so taken, is signed by holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Any stockholder of record seeking to have the stockholders take corporate action by written consent shall request the Board to fix a record date. The Board shall promptly, but in all events within ten days after the date on which such a request is received, adopt a resolution fixing the record date.

 

Consistent with the California Bylaws and California law, the Delaware Certificate and the Delaware Bylaws provide that directors may not be elected by written consent except by unanimous written consent of all outstanding shares entitled to vote for the election of directors.

 

24


Provision


  

W-S California


  

W-S Delaware


Shareholder Ability to Call Special Shareholders’ Meetings   

Under California law, a special meeting of shareholders may be called by the board of directors, the chairman of the Board, the president, the holders of shares entitled to cast not less than 10% of the votes at such meeting and such persons as are authorized by the articles of incorporation or bylaws.

 

Consistent with California law, the California Bylaws provide that a special meeting of shareholders may be called by the Board, the Chairman of the Board, the President, or holders of shares entitled to cast not less than 10% of the votes at such meeting.

  

Under the DGCL, a special meeting of stockholders may be called by the board of directors or by any person authorized to do so in the certificate of incorporation or the bylaws.

 

The Delaware Bylaws provide that a special meeting of stockholders may be called by the Board, the Chairman of the Board, the Chief Executive Officer, or holders of shares entitled to cast not less than 10% of the votes at such meeting, provided that such holders have held at least a 10% net long position in the company’s outstanding shares for at least one year. In the case of a special meeting called by the Secretary following receipt of a written demand or demands from stockholders entitled to call such meeting, the date of such special meeting, as fixed by the Board will be not fewer than 30 days nor more than 90 days after the date a demand or demands by such stockholders have been received by the Secretary of the company at the principal executive offices of the company.

Shareholder Proposal Notice Provisions    The California Bylaws provide that notice containing the name of any person to be nominated by any shareholder for election as a director of the company or of any shareholder proposal to be presented at the meeting shall generally be received by the Secretary of the company not less than 45 days nor more than the 75 days before the one-year anniversary date of the date on which the company first mailed its proxy materials for its immediately preceding annual meeting of shareholders.    The Delaware Bylaws provide that notice must generally be received by the Secretary of the company not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting.

 

25


Provision


  

W-S California


  

W-S Delaware


Change in Number of Directors   

Under the California General Corporation Law, although a change in the number of directors must generally be approved by shareholders, the board of directors may fix the exact number of directors within a stated range set forth in either the articles of incorporation or bylaws, if that stated range has been approved by the shareholders. Any change outside of the established range or a change in the established range must be approved by the shareholders.

 

The California Bylaws provide that the number of directors shall not be less than seven nor more than thirteen.

  

Under the DGCL, the number of directors shall be fixed by or in the manner provided in the bylaws, unless the certificate of incorporation fixes the number of directors.

 

Consistent with our California Bylaws, the Delaware Bylaws provide that the number of directors shall not be less than seven nor more than thirteen. Changes outside of these limits may be made only by amendment to the certificate of incorporation, which must be approved by at least a majority of the outstanding voting stock of W-S Delaware.

Classified Board    The California Articles do not provide for a classified board.    The Delaware Certificate does not provide for a classified board.
Filling Vacancies on the Board   

Under California law, any vacancy on the board of directors other than one created by removal of a director may be filled by the board. If the number of directors is less than a quorum, a vacancy may be filled by the unanimous written consent of the directors then in office, by the affirmative vote of a majority of the directors at a meeting held pursuant to notice or waivers of notice, or by a sole remaining director. A vacancy created by removal of a director may be filled by the board only if authorized by the articles of incorporation or a bylaw approved by the corporation’s shareholders.

 

The California Bylaws provide that all vacancies on the Board may be filled by a majority of the remaining directors or, if the number of directors then in office is less than a quorum, by the unanimous written consent of the directors then in office, the affirmative vote of a majority of the directors then in office or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote or consent of the holders of any percentage exceeding fifty percent of the outstanding shares of the company entitled to vote at a duly held meeting at which a quorum is present.

  

Under Delaware law, vacancies and newly created directorships may be filled by a majority of the directors then in office (even though less than a quorum) or by a sole remaining director, unless otherwise provided in the certificate of incorporation or bylaws.

 

The Delaware Certificate and the Delaware Bylaws follow Delaware law and provide that any vacancies and any newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office (even though less than a quorum) or by a sole remaining director.

 

26


Provision


  

W-S California


  

W-S Delaware


Cumulative Voting; Vote Required to Elect Directors   

California law provides that if any shareholder has given notice of his or her intention to cumulate votes for the election of directors, all other shareholders of the corporation are also entitled to cumulate their votes at such election. California law permits a corporation that is listed on a national securities exchange to amend its articles or bylaws to eliminate cumulative voting by approval of the board of directors and of the outstanding shares voting together as a single class.

 

The California Articles and the California Bylaws have not eliminated cumulative voting.

 

The Board of W-S California has adopted a majority voting policy in uncontested elections.

  

Under Delaware law, cumulative voting is not permitted unless a corporation provides for cumulative voting rights in its certificate of incorporation. Further, a corporation may adopt a policy that specifies the vote necessary for the election of directors, such as a majority.

 

The Board of W-S Delaware has adopted a majority voting bylaw in uncontested elections. As a result, we will not provide for cumulative voting in director elections following the Reincorporation. Most Delaware corporations have not adopted cumulative voting.

 

The Board believes that cumulative voting is incompatible with the objectives of a majority voting standard. Majority voting enables all stockholders to have a greater voice in director elections and facilitates the election of directors who most closely represent the interests of all stockholders. By contrast, cumulative voting gives stockholders the ability to vote all of their shares for a single nominee or to distribute the number of shares that they are entitled to vote among two or more nominees. Cumulative voting thus allows minority stockholders to elect a director, and the absence of cumulative voting would make it more difficult for a minority stockholder whose interests may be adverse to a majority of the stockholders to obtain representation on the Board.

 

27


Provision


  

W-S California


  

W-S Delaware


Indemnification   

California law requires indemnification when the indemnitee has defended the action successfully on the merits. Expenses incurred by an officer or director in defending an action may be paid in advance, if the director or officer undertakes to repay such amounts if it is ultimately determined that he or she is not entitled to indemnification. California law authorizes a corporation to purchase indemnity insurance for the benefit of its officers, directors, employees and agents whether or not the corporation would have the power to indemnify against the liability covered by the policy.

 

California law permits a corporation to provide rights to indemnification beyond those provided therein to the extent such additional indemnification is authorized in the corporation’s articles of incorporation. Thus, if so authorized, rights to indemnification may be provided pursuant to agreements or bylaw provisions which make mandatory the permissive indemnification provided by California law.

 

The California Articles authorize indemnification to the fullest extent permissible under California law.

  

Delaware law generally permits indemnification of expenses, including attorneys’ fees, actually and reasonably incurred in the defense or settlement of a derivative or third party action, provided there is a determination by a majority vote of a disinterested quorum of the directors, by independent legal counsel or by the stockholders that the person seeking indemnification acted in good faith and in a manner reasonably believed to be in the best interests of the corporation. Without court approval, however, no indemnification may be made in respect of any derivative action in which such person is adjudged liable for negligence or misconduct in the performance of his or her duty to the corporation. Expenses incurred by an officer or director in defending an action may be paid in advance, if the director or officer undertakes to repay such amounts if it is ultimately determined that he or she is not entitled to indemnification. Delaware law authorizes a corporation to purchase indemnity insurance for the benefit of its directors, officers, employees and agents whether or not the corporation would have the power to indemnify against the liability covered by the policy.

 

Delaware law permits a Delaware corporation to provide indemnification in excess of that provided by statute.

 

The Delaware Certificate authorizes indemnification to the fullest extent permissible under Delaware law.

 

28


Provision


  

W-S California


  

W-S Delaware


Elimination of Director Personal Liability for Monetary Damages   

California law permits a corporation to eliminate the personal liability of directors for monetary damages, except where such liability is based on:

 

• Intentional misconduct or knowing and culpable violation of law;

 

• Acts or omissions that a director believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director;

 

• Receipt of an improper personal benefit;

 

• Acts or omissions that show reckless disregard for the director’s duty to the corporation or its shareholders, where the director in the ordinary course of performing a director’s duties should be aware of a risk of serious injury to the corporation or its shareholders;

 

• Acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director’s duty to the corporation and its shareholders;

 

• Transactions between the corporation and a director who has a material financial interest in such transaction; or

 

• Liability for improper distributions, loans or guarantees.

 

The California Articles eliminate the liability of directors for monetary damages to the fullest extent permissible under California law.

  

The DGCL permits a corporation to eliminate the personal liability of directors for monetary damages, except where such liability is based on:

 

• Breaches of the director’s duty of loyalty to the corporation or its stockholders;

 

• Acts or omissions not in good faith or involving intentional misconduct or knowing violations of law;

 

• The payment of unlawful dividends or unlawful stock repurchases or redemption; or

 

• Transactions in which the director received an improper personal benefit.

 

Such a limitation of liability provision also may not limit a director’s liability for violation of, or otherwise relieve the company or directors from the necessity of complying with, federal or state securities laws, or affect the availability of non-monetary remedies such as injunctive relief or rescission.

 

The Delaware Certificate eliminates the liability of directors to the company for monetary damages to the fullest extent permissible under the DGCL. As a result, following the Reincorporation, directors of W-S Delaware cannot be held liable for monetary damages even for gross negligence or lack of due care in carrying out their fiduciary duties as directors, so long as that gross negligence or lack of due care does not involve bad faith or a breach of their duty of loyalty to the company.

 

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Provision


  

W-S California


  

W-S Delaware


Dividends and Repurchases of Shares   

Under California law, a corporation may not make any distribution to its shareholders unless either:

 

• The corporation’s retained earnings immediately prior to the proposed distribution equal or exceed the amount of the proposed distribution; or

 

• Immediately after giving effect to the distribution, the corporation’s assets (exclusive of goodwill, capitalized research and development expenses and deferred charges) would be at least equal to one and one fourth (1-1/4) times its liabilities (not including deferred taxes, deferred income and other deferred credits), and the corporation’s current assets would be at least equal to its current liabilities (or one and one fourth (1-1/4) times its current liabilities if the average pre-tax and pre-interest expense earnings for the preceding two fiscal years were less than the average interest expense for such years).

 

These tests are applied to California corporations on a consolidated basis.

   The DGCL is more flexible than California law with respect to payment of dividends and implementing share repurchase programs. The DGCL generally provides that a corporation may redeem or repurchase its shares out of its surplus. In addition, the DGCL generally provides that a corporation may declare and pay dividends out of surplus, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year. Surplus is defined as the excess of a corporation’s net assets (i.e., its total assets minus its total liabilities) over the capital associated with issuances of its common stock. Moreover, the DGCL permits a board of directors to reduce its capital and transfer such amount to its surplus.

 

What are the interests of the Company’s directors and executive officers in the Reincorporation?

 

In considering the recommendations of the Board, shareholders should be aware that certain of our directors and executive officers have interests in the transaction that are different from, or in addition to, the interests of the shareholders generally. For instance, the Reincorporation may be of benefit to our directors and officers by reducing their potential personal liability and increasing the scope of permitted indemnification, by strengthening directors’ ability to resist a takeover bid, and in other respects. The Board was aware of these interests and considered them, among other matters, in reaching its decision to approve the Reincorporation and to recommend that our shareholders vote in favor of this proposal.

 

Are there income tax considerations associated with the Reincorporation?

 

The following discussion summarizes the material U.S. federal income tax consequences of the Reincorporation to holders of our common stock. This summary is not exhaustive of all possible tax considerations. The discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), regulations promulgated under the Code by the U.S. Treasury Department (including proposed and temporary regulations), rulings, current administrative interpretations and official pronouncements of the Internal Revenue Service (the “IRS”), and judicial decisions, all as currently in effect and all of which are subject to differing interpretations or to change, possibly with retroactive effect. Such change could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described herein.

 

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This summary is for general information only and does not address all aspects of U.S. federal income taxation that may be important to a particular holder in light of its investment or tax circumstances or to holders subject to special tax rules, such as partnerships, subchapter S corporations or other pass-through entities, banks, financial institutions, tax-exempt entities, insurance companies, regulated investment companies, real estate investment trusts, trusts and estates, dealers in stocks, securities or currencies, traders in securities that have elected to use the mark-to-market method of accounting for their securities, persons holding our common stock as part of an integrated transaction, including a “straddle,” “hedge,” “constructive sale,” or “conversion transaction,” persons whose functional currency for tax purposes is not the U.S. dollar and persons subject to the alternative minimum tax provisions of the Code. This summary does not include any description of the tax laws of any state or local governments, or of any foreign government, that may be applicable to a particular holder.

 

This summary is directed solely to holders that hold our common stock as capital assets within the meaning of Section 1221 of the Code, which generally means as property held for investment. In addition, the following discussion only addresses “U.S. persons” for U.S. federal income tax purposes, generally defined as beneficial owners of our common stock who are:

 

   

individuals who are citizens or residents of the United States;

 

   

corporations (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or of any state of the United States or the District of Columbia;

 

   

estates the income of which is subject to U.S. federal income taxation regardless of its source;

 

   

trusts if a court within the United States is able to exercise primary supervision over the administration of any such trust and one or more U.S. persons have the authority to control all substantial decisions of such trust; or

 

   

trusts in existence on August 20, 1996 that have valid elections in effect under applicable Treasury regulations to be treated as U.S. persons.

 

If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our common stock, the U.S. federal income tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. A partner of a partnership holding our common stock should consult its own tax advisor regarding the U.S. federal income tax consequences to the partner of the Reincorporation.

 

This summary is not a comprehensive description of all of the U.S. federal tax consequences that may be relevant to holders. We urge you to consult your own tax advisor regarding your particular circumstances and the U.S. federal income and estate tax consequences to you of the Reincorporation, as well as any tax consequences arising under the laws of any state, local, foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.

 

We have not requested a ruling from the IRS or an opinion of counsel regarding the U.S. federal income tax consequences of the Reincorporation. However, we believe:

 

   

the Reincorporation will constitute a tax-free reorganization under Section 368(a) of the Code;

 

   

no gain or loss will be recognized by holders of W-S California common stock on receipt of W-S Delaware common stock pursuant to the Reincorporation;

 

   

the aggregate tax basis of the W-S Delaware common stock received by each holder will equal the aggregate tax basis of the W-S California common stock surrendered by such holder in exchange therefor; and

 

   

the holding period of the W-S Delaware common stock received by each holder will include the period during which such holder held the W-S California common stock surrendered in exchange therefor.

 

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Are there accounting consequences associated with the Reincorporation?

 

We believe that there will be no material accounting consequences to us resulting from the Reincorporation.

 

What vote is required to approve this proposal?

 

To approve this proposal, a majority of the outstanding shares of the company must vote “FOR” this proposal.

 

If approved, when would the Reincorporation become effective?

 

We expect that the Reincorporation, if approved, will become effective shortly after the shareholder approval.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE REINCORPORATION.

 

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PROPOSAL 3

 

AMENDMENT AND RESTATEMENT OF OUR 2001 LONG-TERM INCENTIVE PLAN

 

What is this proposal?

 

This is a proposal to approve the amendment and restatement of the Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan to increase the shares issuable under the plan by 7,300,000 shares and extend the term of the plan to 2021. We are also seeking shareholder approval of the material terms of the 2001 Long-Term Incentive Plan for purposes of complying with Section 162(m) of the Internal Revenue Code, or Section 162(m).

 

If shareholders approve amending and restating the 2001 Long-Term Incentive Plan, the amended and restated 2001 Long-Term Incentive Plan will replace the current version of the 2001 Long-Term Incentive Plan.

 

What changes are being made to the current plan?

 

The amended and restated plan will increase the number of authorized shares of our common stock available for grant by 7,300,000 shares. If the amended and restated plan is approved, the plan will remain in effect until March 8, 2021, unless sooner terminated by our Board or further extended. The changes will help us to continue to achieve our goal of attracting, retaining and motivating our talented employees. We are also seeking shareholder approval of the material terms of the 2001 Long-Term Incentive Plan for purposes of complying with Section 162(m) and updating the performance goals that can be used to determine the vesting of awards intended to qualify as “performance-based” for purposes of Section 162(m).

 

If our shareholders approve its material terms, our 2001 Long-Term Incentive Plan will continue to provide the company with the potential to continue to take tax deductions associated with certain executive compensation, particularly with respect to certain full-value awards subject to vesting based upon the attainment of specified objective performance criteria.

 

Awards granted under the amended and restated 2001 Long-Term Incentive Plan may be designed to qualify as “performance-based” compensation within the meaning of Section 162(m). Pursuant to Section 162(m), the company generally may not deduct for federal income tax purposes compensation paid to our Chief Executive Officer or our three other highest paid employees to the extent that any of these persons receive more than $1,000,000 in compensation in any single year. However, if the compensation qualifies as “performance-based” for Section 162(m) purposes, the company may deduct for federal income tax purposes the compensation paid even if such compensation exceeds $1,000,000 in a single year. For certain awards granted under the 2001 Long-Term Incentive Plan to qualify as “performance-based” compensation under Section 162(m), among other things, our shareholders must approve the material terms of the amended and restated 2001 Long-Term Incentive Plan at the 2011 Annual Meeting. A favorable vote for this proposal will allow us to continue to deduct certain executive compensation in excess of $1,000,000 and provide us with potentially significant future tax benefits and associated cash flows.

 

How many shares are available for issuance under the amended and restated plan?

 

The amended and restated plan will increase the number of shares reserved for issuance by 7,300,000 shares. In addition to this increase, and as currently permitted under the current plan as a result of prior shareholder approval in 2006, the number of authorized shares of our common stock available for issuance will continue to also include any shares subject to outstanding options under our 1993 Stock Option Plan and our 2000 Nonqualified Stock Option Plan that subsequently expire unexercised, up to a maximum of 754,160 shares. The maximum number of shares from expired options granted under the 1993 Stock Option Plan and our 2000 Nonqualified Stock Option Plan has been attained; as a result, no future option expirations under such plans will increase the shares available for issuance under the 2001 Long-term Incentive Plan. If this proposal is approved, then a total of 25,759,903 shares will have been authorized for grant under the amended and restated plan since its inception. As of March 28, 2011, before the addition of shares pursuant to this proposal, 6,471,341 of these

 

33


reserved shares were subject to outstanding awards and 3,905,007 of these reserved shares remained available for future grant. The 1993 Stock Option Plan and the 2000 Nonqualified Stock Option Plan are no longer used to grant awards. On March 28, 2011, the closing price of a share of our common stock on the New York Stock Exchange was $39.03.

 

Has our Board approved the amended and restated plan?

 

Yes. On March 8, 2011, our Board approved the amended and restated plan, subject to approval from our shareholders at the 2011 Annual Meeting. Our named executive officers and directors have an interest in this proposal because they are eligible to receive plan awards.

 

SUMMARY OF THE AMENDED AND RESTATED PLAN

 

The following questions and answers provide a summary of the principal features of the amended and restated plan and its operation. This summary is qualified in its entirety by the Amended and Restated 2001 Long-Term Incentive Plan attached as Exhibit D.

 

What types of awards are available under the plan?

 

We may grant the following types of incentive awards under the plan: (i) stock options; (ii) restricted stock; (iii) restricted stock units; (iv) stock appreciation rights that are settled in shares; (v) dividend equivalents; and (vi) deferred stock awards.

 

Who administers the plan?

 

A committee of at least two non-employee members of our Board administers the plan (the “committee”). To the extent the company wishes to qualify grants as exempt from Rule 16b-3 of the Securities Exchange Act, as amended, the members of the committee must qualify as “non-employee directors” under Rule 16b-3 of the Securities Exchange Act of 1934, as amended. Further, to make grants to our officers or directors, the members of the committee must qualify as “independent directors” under the applicable requirements and criteria of the New York Stock Exchange. Members of the committee must also qualify as “outside directors” under Section 162(m) to the extent the company wishes to receive a federal tax deduction for certain compensation paid under the plan to our Chief Executive Officer and the next three highest paid employees. The committee has delegated its authority under the plan to two members of the Board, but only with respect to grants to certain of our employees who are not “officers” for purposes of Section 16 of the Securities Exchange Act of 1934, as amended.

 

What are the powers of the committee?

 

Subject to the terms of the plan, the committee has the sole discretion to: (i) select the employees and non-employee directors who will receive awards; (ii) determine the terms and conditions of awards such as the exercise price and vesting schedule (see below for certain limitations); and (iii) interpret the provisions of the plan and outstanding awards. The committee may not reduce the exercise price of stock options or stock appreciation rights, nor may it allow employees to cancel an existing stock option or stock appreciation right in exchange for a new award, cash, or a combination of the two, without prior consent from our shareholders.

 

Who is eligible to receive awards?

 

The committee selects the employees and non-employee directors who will be granted awards under the plan (our non-employee directors receive awards under the plan as compensation for Board service). The actual number of employees and non-employee directors who will receive an award under the plan cannot be determined in advance because the committee has the discretion to select the participants. As of March 28, 2011, approximately 21,000 employees and seven non-employee directors were eligible to participate in the plan. However, of our employees, our current policy is to grant equity awards generally to employees at the level of director or above, as well as certain other company buyers; as of March 28, 2011, there were 462 such employees.

 

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What are the limits on the committee’s ability to vest and accelerate awards?

 

The committee generally has the sole discretion to determine and/or modify the vesting provisions of each award. However, awards of restricted stock, restricted stock units and deferred stock awards (together, these are called “full value awards”) typically are subject to certain “minimum vesting requirements” under the plan. The minimum vesting requirements generally require that grants of full value awards will vest in full no earlier than three years from the award grant date if the award will vest based solely on continued service to us, and no earlier than one year from the award grant date if the award will not vest based solely on continued service to us (or, for awards granted to non-employee directors, the earlier of one year from the date of grant or the day before the next regularly scheduled annual meeting).

 

Certain “Vesting Exceptions” to the minimum vesting requirements apply, however:

 

The committee may grant full value awards resulting in the issuance of shares of up to 5% of the maximum aggregate number of shares of stock authorized for issuance under the plan (the “5% Limit”) to employees or non-employee directors without respect to the minimum vesting requirements in the plan. Also, awards granted to non-employee directors pursuant to a formula approved by the Board do not count towards the 5% Limit and are not subject to the minimum vesting requirements.

 

In addition, the committee’s ability to discretionarily accelerate the vesting of full value awards, and the vesting in full of options and stock appreciation rights, is subject to the 5% Limit, except that the committee may discretionarily accelerate awards without regard to the 5% Limit: (i) in connection with a merger or similar transaction under the plan (including an additional or subsequent event, such as termination following such a transaction); (ii) a participant’s death or disability; or (iii) a participant’s retirement. The committee may accelerate the vesting of full value awards such that the minimum vesting requirements still must be met, without such vesting acceleration counting toward the 5% Limit.

 

The 5% Limit is considered one aggregate limit applying to the discretionary vesting acceleration of awards to the granting of full value awards to employees or non-employee directors without respect to the plan’s minimum vesting requirements.

 

What awards may non-employee directors receive?

 

Non-employee directors are eligible for any of the awards available under the plan. In addition, our non-employee directors will receive annual awards under the non-employee director award program portion of the plan in connection with their service on our Board. The plan provides that such annual awards may be of any type available under the plan as determined by the committee.

 

Pursuant to the non-employee director award program portion of the plan and by subsequent Board resolution, each new non-employee director will receive such awards as the committee determines, upon his or her election to the Board and annually thereafter on the date of our Annual Meeting, provided that he or she has then served as a non-employee director for at least three months. It is expected that in fiscal 2011, these awards will consist of restricted stock units; however, the fiscal 2011 grants to our non-employee directors have not yet been determined. Subject to the terms of the plan, the committee determines the other terms and conditions applicable to the awards. Please see “How are the directors compensated?” on page 8 for a description of awards granted to our non-employee directors for fiscal 2010.

 

What is a stock option?

 

A stock option is the right to acquire shares of our common stock at a fixed exercise price for a fixed period of time. Under the plan, the committee may grant nonqualified stock options and incentive stock options. Our practice has been to grant nonqualified stock options under the plan. The committee will determine the number of shares covered by each option, but the committee may not grant more than an aggregate of 1,000,000 shares covered by options or stock appreciation rights to any one person during any calendar year. The shares available for issuance under the plan will be reduced by one share for every share subject to an option granted under the

 

35


plan, and if the award expires or becomes unexercisable without having been exercised in full, the reserve of shares available for future awards will be replenished by one share for every one share subject to the expired or forfeited portion of the award.

 

What is the exercise price of an option?

 

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 fair market value of shares covered by an option is calculated as the closing price of our stock on the trading day prior to the grant date. With respect to an incentive stock option granted to a shareholder who holds more than 10% of the combined voting power of all classes of stock of the company or any parent or subsidiary, the exercise price cannot be less than 110% of the fair market value on the date of grant.

 

When can an option be exercised?

 

An option granted under the plan generally cannot be exercised until it vests. The committee establishes the vesting schedule of each option at the time of grant. Options granted under the amended and restated plan expire at the times established by the committee, but not later than seven years after the grant date (and not later than five years after the grant date in the case of an incentive stock option granted to an optionee who is a shareholder who holds more than 10% of the combined voting power of all classes of stock of the company or any parent or subsidiary). Except as the committee may otherwise provide, stock options generally may be exercised, to the extent vested, at any time prior to the earlier of the expiration date of the option or 90 days from the date the optionee ceases to provide services to us for any reason other than death or disability. If the optionee ceases to provide services to us as a result of his or her death or disability, or the optionee dies within 30 days after the optionee ceases to be an employee, the option generally may be exercised, to the extent vested, at any time prior to the earlier of the expiration date of the option or 180 days from the optionee’s death or date of termination as a result of disability.

 

How can optionees pay us for the exercise price of an option?

 

The exercise price of each option granted under the plan may be paid by any of the methods included in a participant’s option agreement. Such methods may include payment by (i) cash, (ii) certified or bank check, (iii) through the tender of shares that are already owned by the participant, (iv) through a cashless exercise, or (v) through a net exercise. The participant must pay any taxes we are required to withhold at the time of exercise. If permitted by the committee, such taxes may be paid through the withholding of shares issued as a result of an award’s exercise.

 

What is restricted stock?

 

Restricted stock awards are shares of our common stock granted to participants subject to vesting in accordance with the terms and conditions established by the committee. Awards of restricted stock may be granted at no cost to the participant. The committee will determine the number of shares of restricted stock granted to any participant, but no participant may be granted more than an aggregate of 400,000 shares covered by awards of restricted stock, restricted stock units or deferred stock awards during any calendar year.

 

How does restricted stock vest?

 

Vesting of restricted stock awards may be based on the achievement of performance goals established by the committee and/or on continued service to us. The shares available for issuance under the plan will be reduced by one and nine-tenths shares for every one share issued subject to a restricted stock award that is granted with a purchase or exercise price of less than 100% of fair market value, and if such an award is forfeited, canceled or otherwise terminated without vesting, the reserve of shares available for future awards will be replenished by one and nine-tenths shares for every one share subject to the forfeited, canceled or terminated portion of the award.

 

The committee determines the vesting schedule of restricted stock awards, subject to the minimum vesting requirements and the permitted Vesting Exceptions described above. Subject to these requirements, the committee generally has the authority to accelerate the vesting of any award.

 

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What is a restricted stock unit?

 

Restricted stock units are essentially the same as awards of restricted stock, except that instead of the shares being issued immediately and then being subject to forfeiture or repurchase until vested, the shares or other payments for the award are not actually issued unless and until the award vests. Awards of restricted stock units may be granted at no cost to the participant, as determined by the committee in its discretion. The committee will determine the number of restricted stock units granted to any participant, but no participant may be granted more than an aggregate of 400,000 shares covered by awards of restricted stock units, restricted stock or deferred stock awards during any calendar year. Upon the grant of an award of restricted stock units, the recipient will receive an award agreement that specifies the terms and conditions of the award, including the number of restricted stock units granted and the terms, conditions and restrictions related to the award.

 

How do restricted stock units vest?

 

Vesting of restricted stock unit awards may be based on the achievement of performance goals established by the committee and/or on continued service to us. The shares available for issuance under the plan will be reduced by one and nine-tenths shares for every one share issued subject to a restricted stock unit award that is granted with a purchase or exercise price of less than 100% of fair market value, and if such an award is forfeited, canceled or otherwise terminated without vesting, the reserve of shares available for future awards will be replenished by one and nine-tenths shares for every one share subject to the forfeited, canceled or terminated portion of the award.

 

The committee determines the vesting schedule of restricted stock unit awards, subject to the minimum vesting requirements and the permitted Vesting Exceptions described above. Subject to these requirements, the committee generally has the authority to accelerate the vesting of any award.

 

What is a stock-settled stock appreciation right?

 

A stock-settled stock appreciation right is an award that allows the recipient to receive the appreciation in fair market value between the date of the grant and the exercise date for the number of shares as to which the right is exercised, which is payable only in shares of our common stock. Thus, a stock appreciation right will have value only if the shares increase in value after the date of grant. The increased appreciation will be paid with shares of our common stock of equivalent value. The committee determines the terms of the stock appreciation right, including when the right becomes exercisable. The same expiration rules that apply to options generally also apply to stock appreciation rights. The committee will determine the number of shares covered by each stock appreciation right, but the committee may not grant more than an aggregate of 1,000,000 shares covered by stock appreciation rights or options to any one person during any calendar year. The shares available for issuance under the plan will be reduced by one share for every share subject to a stock appreciation right granted under the plan, regardless of the number of shares used to settle the award upon exercise, and if the award expires or becomes unexercisable without having been exercised in full, the reserve of shares available for future awards will be replenished by one share for every one share subject to the expired or forfeited portion of the award.

 

A stock appreciation right granted under the plan generally cannot be exercised until it vests. The committee establishes the vesting schedule of each stock appreciation right at the time of grant. Stock appreciation rights granted under the amended and restated plan expire at the times established by the committee, but not later than seven years after the grant date.

 

Upon the grant of an award of stock appreciation rights, the recipient will receive an award agreement that specifies the terms and conditions of the award, including the number of shares subject to the stock appreciation right and the terms, conditions and restrictions related to the award.

 

What is the exercise price of a stock appreciation right?

 

The exercise price of the shares subject to each stock appreciation right 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 stock appreciation right. The fair market value of shares covered by a stock appreciation right is calculated as the closing price of our stock on the trading day prior to the grant date.

 

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What is a dividend equivalent right?

 

Dividend equivalent rights are credits, payable in cash and granted at the discretion of the committee, to the account of a participant. The credit is payable in an amount equal to the cash dividends paid on one share for each share represented by an award held by the participant.

 

What is a deferred stock award?

 

A deferred stock award is the right to receive shares of common stock at the end of a specified deferral period determined by the committee or elected by the participant pursuant to rules set by the committee. The committee may determine that the right to the award vests based on continued service to us and/or on the achievement of specific performance goals established by the committee. The committee determines the vesting schedule of deferred stock awards, subject to the minimum vesting requirements and the permitted Vesting Exceptions described above. Subject to these requirements, the committee generally has the authority to accelerate the vesting of any award.

 

The participant may defer receipt of the shares beyond vesting (for instance, until termination of employment or other specified time). Deferred stock awards may allow participants to defer income tax until the receipt of the shares. Refer to the questions and answers below dealing with tax consequences of deferred stock awards.

 

The shares available for issuance under the plan will be reduced by one and nine-tenths shares for every share issued subject to a deferred stock award granted on or after the date of shareholder approval of the 2006 amendment and restatement, and if the award is forfeited, canceled or otherwise terminated, the reserve of shares available for future awards will be replenished by one and nine-tenths shares for every one share subject to the forfeited, canceled or terminated portion of the award.

 

The committee will determine the number of shares of deferred stock awards granted to any participant, but no participant may be granted more than an aggregate of 400,000 shares covered by awards of deferred stock awards, restricted stock or restricted stock units during any calendar year.

 

May a participant elect to further defer shares covered by a deferred stock award?

 

If the committee permits it, a participant may elect to further defer receipt of the shares payable under a deferred stock award for an additional specified period or until a specified event, if the election is made in accordance with the requirements of Section 409A of the Internal Revenue Code.

 

What are performance goals?

 

We have designed the plan so that it permits us to pay compensation that qualifies as performance-based under Section 162(m). This allows the committee to set performance goals applicable to a participant with respect to an award. If the committee intends for an award to qualify as performance-based compensation, then, at the committee’s discretion, one or more of the following performance goals may apply: (i) revenue (on an absolute basis or adjusted for currency effects); (ii) cash flow (including operating cash flow or free cash flow); (iii) cash position; (iv) earnings (which may include earnings before interest and taxes, earnings before taxes, net earnings or earnings before interest, taxes, depreciation and amortization); (v) earnings per share; (vi) gross margin; (vii) net income; (viii) operating expenses or operating expenses as a percentage of revenue; (ix) operating income or net operating income; (x) return on assets or net assets; (xi) return on equity; (xii) return on sales; (xiii) total shareholder return; (xiv) stock price; (xv) growth in shareholder value relative to the moving average of the S&P 500 Index, or another index; (xvi) return on capital; (xvii) return on investment; (xviii) economic value added; (xix) operating margin; (xx) market share; (xxi) overhead or other expense reduction; (xxii) credit rating; (xxiii) objective customer indicators; (xxiv) improvements in productivity; (xxv) attainment of objective operating goals; (xxvi) objective employee metrics; (xxvii) return ratios; (xxviii) profit; (xxix) objective qualitative milestones; or (xxx) other objective financial or other metrics relating to the progress of the company or to a subsidiary, division or department thereof.

 

These performance goals may apply to either the company as a whole or, except with respect to shareholder return metrics, to a region, business unit, affiliate or business segment. The goals may be measured on an

 

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absolute basis, a per-share basis or relative to a pre-established target, to a previous period’s results or to a designated comparison group, in each case as specified by the committee. The performance goals may differ from participant to participant and from award to award. Financial performance measures may be determined in accordance with United States Generally Accepted Accounting Principles (“GAAP”), in accordance with accounting standards established by the International Accounting Standards Board (“IASB Standards”) or may be adjusted by our committee when established to exclude or include any items otherwise includable or excludable, respectively, under GAAP or under IASB Standards. The committee may choose other performance goals for awards that are not intended to qualify as performance-based compensation under Section 162(m).

 

What happens to awards that expire or are forfeited?

 

If an award expires or is canceled or otherwise terminated without having been fully exercised or vested, the unvested, expired, forfeited, canceled or otherwise terminated shares generally will be returned to the available pool of shares reserved for issuance under the plan. However, the available pool of shares reserved for issuance under the plan will be reduced by one and nine-tenths shares for every share issued subject to an award of restricted stock, restricted stock units or deferred stock granted on or after the date of shareholder approval of the 2006 amendment and restatement, so if such an award expires or is canceled or otherwise terminated without vesting, the reserve of shares available for future awards will be replenished by one and nine-tenths shares for every one share subject to the expired, canceled or terminated portion of the award. Shares used to pay the exercise price of an option or stock-settled stock appreciation right will not be returned to the available pool of shares reserved for issuance under the plan.

 

Any payout of dividend equivalents will not reduce the number of shares available for issuance under the plan, because such awards are payable in cash. Similarly, the forfeiture of dividend equivalents will not increase the number of shares available for issuance under the plan.

 

What happens if our capital structure changes as a result of a stock split or other similar event?

 

If we experience a change in our capital structure as a result of a stock dividend, reorganization, merger, consolidation, sale of all or substantially all of our assets, recapitalization, reclassification, stock split, reverse stock split, stock dividend or other similar transaction, the committee will make an appropriate or proportionate adjustment to (i) the maximum number of shares available for issuance under the plan, (ii) the per person limits on awards, (iii) the number and kind of shares subject to outstanding awards, and (iv) the exercise price of outstanding stock option or stock appreciation right awards, as appropriate to reflect the change to our capital structure.

 

What happens in the event of a merger or similar transaction?

 

In the event that we (i) consummate a merger or consolidation with another corporation, (ii) sell all or substantially all of our assets, (iii) reorganize, (iv) liquidate, or (v) dissolve, the Board may, in its discretion, provide that outstanding awards will be assumed or substituted for by the successor corporation or provide that all outstanding awards will accelerate vesting and terminate immediately prior to the consummation of the transaction. In the event of the acceleration and termination of awards in lieu of assumption or substitution, awards other than options and stock appreciation rights will be settled in kind in an amount determined by the committee after taking into consideration the amount per share received by shareholders in the transaction (that is, the transaction price). Under such circumstances, options and stock appreciation rights will be settled in kind in an amount per share equal to the transaction price minus the aggregate exercise price of such options or stock appreciation rights.

 

Can awards be transferred by the participant?

 

Incentive stock options are not transferable, other than by will or by the applicable laws of descent and distribution. Unless otherwise determined by the committee, other awards (including nonqualified stock options) granted under the plan will not be transferable other than by will or by the applicable laws of descent and distribution.

 

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What are the federal tax consequences to participants as a result of receiving an award under the plan?

 

The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers resulting from awards granted under the plan. Tax consequences for any particular individual may be different.

 

Nonqualified Stock Options

 

No taxable income generally is reportable when a nonqualified stock option is granted to a participant. Upon exercise, the participant generally will recognize ordinary income in an amount equal to the difference between the fair market value of the purchased shares on the exercise date and the exercise price of the option. Any additional gain or loss recognized upon any later disposition of the shares would be a capital gain or loss. As a result of Section 409A of the Internal Revenue Code, or Section 409A, however, nonqualified stock options granted with an exercise price below the fair market value of the underlying stock may be taxable to participants before exercise of an award, and may be subject to additional taxes under Section 409A and comparable state laws.

 

Incentive Stock Options

 

No taxable income is reportable when an incentive stock option is granted or exercised, unless the alternative minimum tax, or AMT, rules apply, in which case AMT taxation will occur in the year of exercise. If the participant exercises the option and then later sells or otherwise disposes of the 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 a capital gain or loss. If the participant exercises the option and then later sells or otherwise disposes of the shares before the end of the two or one year holding periods described above, the participant generally will have ordinary income at the time of the sale equal to the difference between the fair market value of the shares on the exercise date, or the sale price, if less, and the exercise price of the option. Any additional gain or loss generally will be taxable at long-term or short-term capital gain rates, depending on whether the participant has held the shares for more than one year.

 

Restricted Stock

 

A participant will not recognize taxable income upon the grant of restricted stock unless the participant elects to be taxed at that time. Instead, a participant generally will recognize ordinary income at the time of vesting equal to the difference between the fair market value of the shares on the vesting date and the amount, if any, paid for the shares. However, the recipient of a restricted stock award may elect, through a filing with the Internal Revenue Service, to recognize income at the time he or she receives the award in an amount equal to the fair market value of the shares underlying the award (less any cash paid for the shares) on the date the award is granted.

 

Restricted Stock Units

 

A participant generally will not recognize taxable income upon grant of restricted stock units. Instead, the participant generally will recognize ordinary income at the time of vesting equal to the fair market value of the shares on the vesting date less the amount, if any, paid for the shares.

 

Stock Appreciation Rights

 

A participant generally will not recognize taxable income upon the grant of a stock appreciation right. Upon exercise, the participant generally will recognize ordinary income in an amount equal to the fair market value of any shares received. Any additional gain or loss recognized upon any later disposition of the shares would be a capital gain or loss. As a result of Section 409A, however, stock appreciation rights granted with an exercise price below the fair market value of the underlying stock may be taxable to the participant before exercise of an award, and may be subject to additional taxes under Section 409A and comparable state laws.

 

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Dividend Equivalents

 

A participant generally will recognize ordinary income each time a dividend is paid pursuant to the dividend equivalent in an amount equal to the fair market value of the dividend received. If the dividends are deferred, additional requirements must be met to ensure that the dividend is taxable upon actual delivery of the shares, instead of the grant of the dividend.

 

Deferred Stock Awards

 

A participant generally will not have taxable income upon the grant of a deferred stock award. Instead, a participant generally will recognize ordinary income at the time of the receipt of the shares subject to the award equal to the difference between the fair market value of the shares at the time of receipt and the amount, if any, paid for the shares. However, an employee participant will be subject to employment taxes (FICA and, where applicable, state disability insurance taxes) at the time a deferred stock award vests, even if the participant has not yet received the shares subject to the award. We do not guarantee the federal or state income tax treatment of the deferred amounts. If the Internal Revenue Service successfully asserts that the deferral was ineffective, the recipient could be liable for taxes, interest and penalties. In addition, the recipient could be liable for additional taxes, penalties and interest as a result of Section 409A and/or comparable state laws.

 

What are the tax effects to us as a result of grants of awards under the plan?

 

We generally will be entitled to a tax deduction in connection with an award under the plan in an amount equal to the ordinary income realized by a participant at the time the participant recognizes such income, such as when a participant exercises a nonqualified stock option. Special rules limit the deductibility of compensation paid to our Chief Executive Officer and to each of our next three most highly compensated executive officers. Under Section 162(m), the annual compensation paid to any of these specified executives will be deductible only to the extent that it does not exceed $1,000,000. However, we can preserve the deductibility of certain compensation in excess of $1,000,000 if the conditions of Section 162(m) are met. These conditions include: (i) shareholder approval of the material terms of the plan; (ii) setting limits on the number of awards that any individual may receive; and (iii) for awards other than certain stock options and stock appreciation rights, establishing performance criteria that must be met before the award actually will vest or be paid. The plan has been designed to permit the committee to grant awards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m), thereby permitting us to continue to receive a federal income tax deduction in connection with such awards.

 

How can we amend or terminate the plan?

 

The Board generally may amend or terminate the plan at any time and for any reason. Amendments will be contingent on shareholder approval if required by applicable law, stock exchange listing requirements or if so determined by the Board. By its terms, the amended and restated plan will automatically terminate on March 8, 2021, unless its term is extended or it is earlier terminated by the Board. In addition, as mentioned above, the committee may not reduce the exercise price of stock options or stock appreciation rights, nor may it allow employees to cancel an existing award in exchange for a new award, cash, or a combination of the two, without prior consent from our shareholders.

 

What specific benefits will be granted under the amended and restated plan?

 

The amount and timing of awards granted under the plan are determined in the sole discretion of the committee and therefore cannot be determined in advance. Except for the automatic grants to non-employee directors, described above, the future awards that would be received under the plan by executive officers and other employees are discretionary and are therefore not determinable at this time. If the proposed amendment of the plan had been in effect for our fiscal year ended January 30, 2011, we do not expect that the number of shares granted to participants under the plan during that year would have been materially different than the number of shares granted set forth in the table below. The only changes to the amended and restated plan that will be made pursuant to this proposal include an increase to the shares issuable under the plan by 7,300,000 shares and to extend the term of the plan to 2021. We also are asking shareholders to approve the material terms of the plan. Specific benefits granted under the amended and restated plan will not change as a result of this proposal.

 

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The following table sets forth information as of January 30, 2011 with respect to awards granted during fiscal 2010 under the 2001 Long-Term Incentive Plan to the named executive officers, all current executive officers as a group and all employees and consultants (including all current executive officers who are not named executive officers) as a group under the plan.

 

Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan

 

    Options

    Stock Appreciation Rights

    Restricted Stock or
Restricted Stock Units


 

Name and Position


  # of Shares
Subject to
Options
Granted (#)


    Average
Exercise
Price ($)


    # of Shares
Subject to
SARs
Granted (#)


    Average
Exercise Price
($)


    # of
Shares/Units
Granted (#)


    Dollar
Value ($)(1)


 

Named Executive Officers:

                                               

Laura J. Alber

    —          —          200,000     $ 27.72       280,000     $ 9,055,200  

W. Howard Lester(2)

    —          —          —          —          125,000     $ 4,042,500  

Sharon L. McCollam

    —          —          150,000     $ 27.72       210,000     $ 6,791,400  

Patrick J. Connolly

    —          —          9,375     $ 27.72       11,250     $ 363,825  

Richard Harvey

    —          —          —          —          25,000     $ 808,500  

Seth R. Jaffe

    —          —          —          —          10,750     $ 347,655  

All current executive officers as a group (five persons)

    —          —          359,375      $ 27.72        537,000      $ 17,366,580  

All current non-employee directors as a group (seven persons)

    —          —          —          —          28,771     $ 930,454  

Each other person who has received more than 5% of the options, warrants or other rights under the plan

    —          —          —          —          —          —     

All employees, including all current officers who are not executive officers or directors, as a group 106 persons)

    —          —          10,000     $ 30.70       652,987      $ 21,117,600   

TOTAL:

    —          —          369,375     $ 27.80       1,343,758      $ 43,457,134   

(1) Value is based on a stock price of $32.34, the closing price of our common stock on January 28, 2011, the last business day of fiscal 2010.

 

(2) Mr. Lester was granted an award to receive restricted stock units and cash units on May 26, 2010, in exchange for consulting services provided by Mr. Lester pursuant to the Retirement and Consulting Agreement entered into in connection with his retirement. Each unit of the award entitled Mr. Lester to receive one share of the company’s common stock and a cash payment equal to the fair market value of one share of the company’s common stock on the applicable vesting date. The units vested in monthly installments throughout the period over which Mr. Lester provided such consulting services. The Retirement and Consulting Agreement provided for the cash to be paid and the shares underlying such award to be issued on December 31 of each year. Upon Mr. Lester’s death in November 2010, a total of 20,835 restricted stock and cash units had vested, which entitled Mr. Lester’s estate to receive (i) 20,835 shares, with a fair market value on the date prior to issuance of $751,518, and (ii) a cash payment equal to $592,839, which represents the fair market value of each vested share on the applicable vesting date. The remainder of such award was automatically forfeited upon Mr. Lester’s death. Please see the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements” beginning on page 56 for further discussion about this award.

 

Why do we recommend that the 2001 Long-Term Incentive Plan be amended and restated and its material terms approved?

 

We believe that the amended and restated plan and the approval of its material terms are essential to our continued success. Our employees are our most valuable asset. Equity awards such as those provided under the

 

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plan will substantially assist us in continuing to attract and retain employees and non-employee directors in the extremely competitive labor markets in which we compete. Such awards also are crucial to our ability to motivate employees to achieve our goals. We will benefit from increased stock ownership by selected executives, other employees and non-employee directors. The increase in the reserve of common stock available under the plan will enable us to continue to grant such awards to executives, other eligible employees and our non-employee directors.

 

What vote is required to approve this proposal?

 

To approve this proposal, a majority of the shares represented and voting at the Annual Meeting and a majority of the quorum required to transact business at the Annual Meeting must vote “FOR” this proposal.

 

If approved, when would the amended and restated plan become effective?

 

The amended and restated plan would become effective upon shareholder approval at the Annual Meeting.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE AMENDMENT AND RESTATEMENT OF THE 2001 LONG-TERM INCENTIVE PLAN.

 

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PROPOSAL 4

 

ADVISORY VOTE ON EXECUTIVE COMPENSATION

 

What is this proposal?

 

This is a proposal asking shareholders to approve, on an advisory basis, the compensation of our named executive officers as disclosed in this Proxy Statement in accordance with the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the “Dodd-Frank Act,” and the applicable SEC rules. This proposal is commonly known as a “say-on-pay” proposal, and gives our shareholders the opportunity to express their views on the compensation of our named executive officers.

 

Compensation Program and Philosophy

 

As described in detail under the headings “Information Concerning Executive Officers” and “Compensation Discussion and Analysis,” our executive officer compensation program is designed to attract, retain and motivate highly qualified personnel who are critical to our success while maintaining strong and direct links between executive pay, individual performance, the company’s financial performance and shareholder returns. The Compensation Committee believes that the company’s executive compensation programs should support the company’s objective of creating value for its shareholders.

 

Accordingly, the Compensation Committee believes that executive officers should have a significant interest in the company’s stock performance, and compensation programs should link executive compensation to shareholder value. One of the ways that the company has sought to accomplish these goals is by making a significant portion of individual compensation directly dependent on the company’s achievement of financial goals which in turn enhances long-term shareholder return while encouraging executives to build an equity interest in the company.

 

Fiscal 2010 Compensation

 

To align our executive compensation packages with our executive compensation philosophy, the following compensation actions were approved by the Compensation Committee for fiscal 2010:

 

Adjustments to Base Salary and Bonus Target Amounts: The base salaries and bonus targets as a percentage of base salary of our named executive officers, other than W. Howard Lester, our former Chairman of the Board and Chief Executive Officer, were increased for fiscal 2010 to bring target total cash compensation for our named executive officers from generally below the 50th percentile to generally between the 50th percentile and the 75th percentiles compared to the company’s proxy peer group and relevant market data as described under “Compensation Discussion and Analysis” in this Proxy Statement. In addition, a special bonus of $350,000 was awarded to the company’s President and Chief Executive Officer, Laura Alber, in recognition of her outstanding performance and the company’s results for fiscal 2010.

 

Performance-Based Cash Bonus: Performance-based cash bonuses were paid for performance in fiscal 2010 as a result of the achievement of positive net cash by operating activities, exceeding earnings per share goals set by the Compensation Committee for fiscal 2010 and outstanding leadership and individual performance by our named executive officers in fiscal 2010.

 

Performance- and Time-Based Equity: The company granted our named executive officers (other than Mr. Lester) a mixture of performance-based and time-based equity awards in fiscal 2010. Restricted stock units that vest on the fourth anniversary of the grant date only if positive net cash by operating activities is achieved provide both retention value and incentives to achieve the company’s financial goals, while stock appreciation rights that vest in equal installments over four years also encourage our named executive officers to stay with the company and to increase shareholder value by increasing our stock price.

 

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Executive Employment and Retention: In connection with the transition in leadership that occurred upon the retirement of Mr. Lester and the appointment of Laura J. Alber as our new Chief Executive Officer, the Compensation Committee consulted with Frederic W. Cook & Co., Inc., or Cook & Co., its independent compensation consultant, to consider appropriate compensation arrangements for Ms. Alber and our other named executive officers. The Compensation Committee wanted to create total executive compensation packages that are competitive with our proxy peer group and which help assure the continued dedication of our named executive officers and align their interests with those of our shareholders. After consulting with Cook & Co., the company entered into a new employment agreement with Ms. Alber and management retention agreements with Ms. Alber and the other named executive officers.

 

Mr. Lester retired as the company’s Chairman of the Board and Chief Executive Officer on May 26, 2010, the date of the company’s 2010 shareholder’s meeting. Mr. Lester provided consulting and advisory services to the company to assist in the transition to the new Chief Executive Officer. Following his retirement, Mr. Lester served as Chairman Emeritus. During fiscal 2010, Mr. Lester received compensation pursuant to the terms of his Retirement and Consulting Agreement.

 

In addition to the above summary, shareholders are urged to read the “Compensation Discussion and Analysis” section of this Proxy Statement for detail about our executive compensation programs, including information about the fiscal 2010 compensation of our named executive officers.

 

We are asking our shareholders to indicate their support for our named executive officer compensation as described in this Proxy Statement. This vote is not intended to address any specific item of compensation, but rather the overall compensation of our named executive officers and the philosophy, policies and practices described in this Proxy Statement. Accordingly, we ask our shareholders to vote “FOR” the following resolution at the 2011 Annual Meeting:

 

“RESOLVED, that the company’s shareholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed in the company’s Proxy Statement for the 2011 Annual Meeting of Shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the tabular disclosure regarding such compensation and the accompanying narrative disclosure.”

 

What vote is required to approve this proposal?

 

To approve this proposal, a majority of the shares represented and voting at the Annual Meeting and a majority of the quorum required to transact business at the Annual Meeting must vote “FOR” this proposal.

 

What will happen if shareholders vote against this proposal?

 

The say-on-pay vote is advisory, and therefore not binding on the company, the Compensation Committee or our Board. Our Board and our Compensation Committee value the opinions of our shareholders and to the extent there is any significant vote against the named executive officer compensation as disclosed in this Proxy Statement, we will consider our shareholders’ concerns and the Compensation Committee will evaluate whether any actions are necessary to address those concerns.

 

Under the rules of the NYSE, brokers are prohibited from giving proxies to vote on executive compensation matters unless the beneficial owner of such shares has given voting instructions on the matter. This means that if your broker is the record holder of your shares, you must give voting instructions to your broker with respect to Proposal 4 if you want your broker to vote your shares on the matter.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS, AS DESCRIBED IN THIS PROXY STATEMENT PURSUANT TO THE COMPENSATION DISCLOSURE RULES OF THE SEC.

 

45


PROPOSAL 5

 

ADVISORY VOTE ON THE FREQUENCY OF AN ADVISORY VOTE ON EXECUTIVE COMPENSATION

 

What is this proposal?

 

This is a proposal asking shareholders to indicate, on an advisory basis, how frequently we should seek an advisory vote on the compensation of our named executive officers in accordance with the Dodd-Frank Act, as disclosed pursuant to the applicable proposed SEC compensation disclosure rules, such as Proposal 4 included on page 44 of this Proxy Statement. By voting on this Proposal 5, shareholders may indicate whether they would prefer an advisory vote on named executive officer compensation once every year, two years or three years.

 

After careful consideration of this proposal, our Board has determined that an advisory vote on executive compensation that occurs annually is the most appropriate alternative for the company, and therefore our Board recommends that you vote for a one-year interval for the advisory vote on executive compensation.

 

In formulating its recommendation, our Board considered that an annual advisory vote on executive compensation will allow us to obtain information on shareholders’ views of the compensation of our named executive officers on a consistent basis, by allowing our shareholders to provide us with direct input on our compensation philosophy, policies and practices as disclosed in the proxy statement every year. Since the compensation of our named executive officers is evaluated, adjusted and approved on an annual basis, an annual advisory vote will provide the Board and Compensation Committee with the best opportunity to take shareholder sentiment into consideration in making decisions with respect to executive compensation. Finally, we believe an annual advisory vote on the compensation of our named executive officers aligns more closely with our objective to engage in regular dialogue with our shareholders on corporate governance matters, including our executive compensation philosophy, policies and programs. We understand that our shareholders may have different views as to what is the best approach for the company, and we look forward to hearing from our shareholders on this proposal.

 

You may cast your vote on your preferred voting frequency by choosing the option of one year, two years or three years or abstain from voting when you vote in response to the resolution set forth below.

 

“RESOLVED, that the option of once every one year, two years or three years that receives the highest number of votes cast for this resolution will be determined to be the preferred frequency with which the company is to hold an advisory shareholder vote to approve the compensation of the named executive officers, as disclosed pursuant to the Securities and Exchange Commission’s compensation disclosure rules, including the Compensation Discussion and Analysis, the tabular disclosure regarding such compensation and the accompanying narrative disclosure.”

 

What will be the frequency for the advisory vote on executive compensation selected by shareholders?

 

The option of one year, two years or three years that receives the highest number of votes cast by shareholders will be the frequency for the advisory vote on executive compensation that has been selected by shareholders.

 

What will happen as a result of the shareholder vote on this proposal?

 

This frequency vote is advisory and therefore not binding on the Board or the company in any way, and therefore the Board may decide that it is in the best interests of our shareholders and the company to hold an advisory vote on executive compensation more or less frequently than the option approved by our shareholders.

 

Under the rules of the NYSE, brokers are prohibited from giving proxies to vote on executive compensation matters unless the beneficial owner of such shares has given voting instructions on the matter. This means that if your broker is the record holder of your shares, you must give voting instructions to your broker with respect to Proposal 5 if you want your broker to vote your shares on the matter.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE OPTION OF ONCE EVERY ONE YEAR AS THE FREQUENCY WITH WHICH SHAREHOLDERS ARE PROVIDED AN ADVISORY VOTE ON EXECUTIVE COMPENSATION, AS DISCLOSED PURSUANT TO THE COMPENSATION DISCLOSURE RULES OF THE SEC.

 

46


PROPOSAL 6

 

RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

What is this proposal?

 

This is a proposal to ratify the selection of Deloitte & Touche LLP, or Deloitte, as our independent registered public accounting firm for the fiscal year ending January 29, 2012. The Audit and Finance Committee selected Deloitte as our independent registered public accounting firm for the fiscal year ending January 29, 2012, subject to ratification by our shareholders. Although shareholder ratification of our independent registered public accounting firm is not required by law, as a matter of corporate governance, we are requesting that our shareholders ratify such selection.

 

What relationship does Deloitte currently have with us?

 

Deloitte has audited our financial statements for the last thirty-one years. Based in part upon information provided by Deloitte, the Audit and Finance Committee determined that Deloitte is independent under applicable independence standards.

 

Will a Deloitte representative be present at the Annual Meeting?

 

A Deloitte representative will be present at the Annual Meeting and will have the opportunity to make a statement. Deloitte’s representative will be available to respond to appropriate questions.

 

What services did Deloitte provide in fiscal 2010?

 

Deloitte’s services for fiscal 2010 included:

 

   

The issuance of an opinion on (i) our annual consolidated financial statements and the effectiveness of our internal control over financial reporting, (ii) our 401(k) plan and (iii) our Puerto Rico division;

 

   

Review of our quarterly condensed consolidated financial statements;

 

   

Audit services related to periodic filings made with the SEC; and

 

   

Tax return review services.

 

In fiscal 2010, Deloitte also performed certain audit-related and other tax services, and discussed certain matters with our Audit and Finance Committee, each of which is more fully described in the Audit and Finance Committee Report and the Audit and Related Fees section of this Proxy Statement.

 

What vote is required to approve this proposal?

 

To approve this proposal, a majority of the shares represented and voting at the Annual Meeting and a majority of the quorum required to transact business at the Annual Meeting must vote “FOR” this proposal.

 

What will happen if shareholders vote against this proposal?

 

If shareholders vote against this proposal, we will consider interviewing other independent registered public accounting firms. There can be no assurance, however, that we will choose to appoint another independent registered public accounting firm if this proposal is not approved.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE RATIFICATION OF THE SELECTION OF DELOITTE & TOUCHE LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING JANUARY 29, 2012.

 

47


INFORMATION CONCERNING EXECUTIVE OFFICERS

 

The following table provides certain information about our executive officers as of March 28, 2011. Our executive officers are appointed by our Board and serve at the pleasure of our Board, subject to rights, if any, under employment contracts.

 

Name


  

Position with the Company and Business Experience


Laura J. Alber

Age 42

  

  *

Sharon L. McCollam

Age 48

  

  *

Patrick J. Connolly

Age 64

  

  *

Richard Harvey

Age 48

  

•    President, Williams-Sonoma Brand since 2008

•    Executive Vice President, Williams-Sonoma Brand, 2006 – 2008

•    Senior Vice President and GMM, Williams-Sonoma Brand, 2001 – 2006

•    Vice President, Williams-Sonoma Catalog, 1997 – 2001

Seth R. Jaffe

Age 54

  

•    Senior Vice President, General Counsel and Secretary since 2003

•    Vice President, Deputy General Counsel, 2002 – 2003

•    Senior Vice President and General Counsel of CareThere, Inc. (healthcare technology), 2000 – 2001

•    Chief Counsel, Levi Strauss & Co. (apparel), 1992 – 1999


* Biographical information can be found in the table under the section titled “Information Regarding the Director Nominees” beginning on page 12 of this Proxy Statement.

 

48


Executive Compensation

 

This table sets forth the annual and long-term compensation earned by our Chief Executive Officer, former Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers during fiscal 2010. These individuals are collectively known as our named executive officers.

 

Summary Compensation Table for Fiscal 2010, Fiscal 2009 and Fiscal 2008

 

Name and
Principal Position


  Fiscal
Year


    Salary
($)


    Bonus
($)


    Stock
Awards
($)(1)


    Option
Awards
($)(2)


    Non-Equity
Incentive Plan
Compensation
($)

    Change in
Pension Value

and
Nonqualified

Deferred
Compensation

Earnings

    All Other
Compensation

($)(3)

    Total ($)

 

Laura J. Alber

    2010      $ 948,077      $ 350,000 (4)    $ 7,761,600     $ 2,032,940      $ 2,400,000        —        $ 62,795      $ 13,555,412   

Director, President

and Chief Executive

Officer (PEO)

    2009      $ 800,000        —          —          —        $ 1,500,000        —        $ 84,506      $ 2,384,506   
    2008      $ 800,000        —        $ 2,053,942 (5)(6)    $ 722,729        —          —        $ 88,078      $ 3,664,749   
                                                                       

W. Howard Lester(7)

    2010      $ 348,750        —        $ 7,287,500 (8)      —          —        $ (3,638 )(9)   $ 716,846      $ 8,349,458   

Former Chairman

of the Board and Chief

Executive Officer

    2009      $ 975,000        —        $ 5,705,308 (10)    $ 3,584,403 (11)    $ 2,000,000      $ 84,256 (12)    $ 484,026      $ 12,832,993   
    2008      $ 975,000        —        $ 1,277,227 (13)    $ 1,335,478        —        $ (238,669 )(14)   $ 700,874      $ 4,049,910   
                                                                       

Sharon L. McCollam

    2010      $ 830,770        —        $ 5,821,200     $ 1,524,705      $ 1,600,000       —        $ 63,005      $ 9,839,680   

Director and

Executive Vice

President, Chief Operating and Chief Financial Officer (PFO)

    2009      $ 725,000        —          —          —        $ 1,500,000        —        $ 84,755      $ 2,309,755   
    2008      $ 725,000        —        $ 2,053,942 (5)(6)    $ 864,133        —          —        $ 88,330      $ 3,731,405   
                                                                       
                                                                       
                                                                       

Patrick J. Connolly

    2010      $ 579,646        —        $ 311,850     $ 95,294      $ 800,000       —        $ 14,897      $ 1,801,687   

Director and

Executive Vice

President, Chief

Marketing Officer

    2009      $ 570,000        —          —          —        $ 500,000        —        $ 14,897      $ 1,084,897   
    2008      $ 570,000        —        $ 510,890 (15)    $ 502,768        —          —        $ 19,222      $ 1,602,880   
                                                                       
                                                                       

Richard Harvey

    2010      $ 588,462        —        $ 693,000       —        $ 700,000        —        $ 26,155      $ 2,007,617   

President,

Williams-Sonoma

Brand

    2009      $ 524,994        —          —  (16)      —        $ 600,000        —        $ 31,955      $ 1,156,949   
    2008      $ 476,538        —        $ 283,482      $ 314,230        —          —        $ 33,686      $ 1,107,936   
                                                                       

Seth R. Jaffe

    2010      $ 381,346        —        $ 297,990       —        $ 300,000       —        $ 16,391      $ 995,727   

Senior Vice President,

General Counsel and

Secretary

    2009      $ 375,000        —          —  (16)      —        $ 270,000        —        $ 17,825      $ 662,825   
    2008      $ 369,615        —        $ 149,984     $ 251,384        —          —        $ 22,081      $ 793,064   
                                                                       

(1) Based on the fair market value of awards granted in fiscal 2010, fiscal 2009, and fiscal 2008. The fair market value is calculated as the closing price of our stock on the day prior to the grant date multiplied by the number of units granted.

 

(2) Based on the fair market value of awards granted in fiscal 2010, fiscal 2009, and fiscal 2008. The fair market value assumptions used in the calculation of these amounts are included in Note H to our Consolidated Financial Statements, which is included in our Annual Report on Form 10-K for the fiscal year ended January 30, 2011.

 

(3) Details are provided in the “Other Annual Compensation from Summary Compensation” table on page 51.

 

(4) Represents a special, discretionary bonus of $350,000 that was awarded to Ms. Alber in recognition of her outstanding performance and the company’s results for fiscal 2010.

 

(5) Represents the fair value of an award granted on May 2, 2008, plus the incremental fair value resulting from the subsequent modification of the award on October 28, 2008 to remove a performance-based vesting criterion. The total fiscal 2008 fair value is calculated as the sum of (i) $471,996, the grant date fair value of the award as of May 2, 2008, and (ii) $165,946, the incremental fair value of the modified award, computed as of October 28, 2008, the modification date.

 

(6) Represents the incremental fair value resulting from the modification of an award granted on January 6, 2006 and subsequently modified on October 28, 2008 to remove a performance-based vesting criterion. The total fiscal 2008 incremental fair value is $1,416,000, computed as of October 28, 2008, the modification date.

 

(7) Mr. Lester served as our Chief Executive Officer until Ms. Alber became our Chief Executive Officer on May 26, 2010.

 

(8)

Represents the grant date fair value of an award to receive restricted stock units and cash units made on May 26, 2010, in exchange for consulting services provided by Mr. Lester pursuant to the Retirement and Consulting Agreement entered into in connection with his retirement. Each unit of the award entitled Mr. Lester to receive one share of the company’s common stock and a cash payment equal to the fair market value of one share of the company’s common stock on the applicable vesting date. The units vested in monthly installments throughout the period over which Mr. Lester provided such consulting services. The Retirement and Consulting Agreement

 

49


 

provided for the cash to be paid and the shares underlying such award to be issued on December 31 of each year. Upon Mr. Lester’s death in November 2010, a total of 20,835 restricted stock and cash units had vested, which entitled Mr. Lester’s estate to receive (i) 20,835 shares, with a fair market value on the date prior to issuance of $751,518, and (ii) a cash payment equal to $592,839, which represents the fair market value of each vested share on the applicable vesting date. The remainder of such award was automatically forfeited upon Mr. Lester’s death. Please see the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements” beginning on page 56 for further discussion about this award.

 

(9) An aggregate loss of $3,638 was incurred during fiscal 2010 under the Executive Deferral Plan described in footnote (1) to the “Nonqualified Deferred Compensation” table on page 55.

 

(10) Represents the sum of (i) $5,000,000, the grant date fair value of an award made on January 25, 2010 with respect to fiscal 2009 performance, and (ii) $705,308, the total incremental fair value of an award granted on May 2, 2008, subsequently modified on October 28, 2008 to remove the performance criteria associated with this award (see footnote (12) below), and subsequently modified on January 25, 2010 to provide for the acceleration of vesting in connection with Mr. Lester’s retirement. The incremental fair value of the modified award in fiscal 2009 is computed as of January 25, 2010, the modification date. Please see the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements” beginning on page 56 for further discussion about awards and modifications of awards made in connection with Mr. Lester’s retirement.

 

(11) Represents the sum of the incremental fair values of two unvested awards modified on January 25, 2010 to provide for the acceleration of vesting in connection with Mr. Lester’s retirement: (i) $251 represents the incremental fair value of an option award granted on May 27, 2005 and subsequently modified on January 25, 2010, and (ii) $3,584,152 represents the incremental fair value of a SSAR award granted on November 7, 2008 and subsequently modified on January 25, 2010. The incremental fair value of each of the modified awards is computed as of January 25, 2010, the modification date. Please see the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements” beginning on page 56 for further discussion about modifications of awards made in connection with Mr. Lester’s retirement.

 

(12) Represents aggregate earrings of $84,256 during fiscal 2009 under the Executive Deferral Plan described in footnote (1) to the “Nonqualified Deferred Compensation” table on page 55.

 

(13) Represents the fair value of an award granted on May 2, 2008, plus the incremental fair value resulting from the subsequent modification of the award on October 28, 2008 to remove a performance-based vesting criterion. The total fiscal 2008 fair value is calculated as the sum of (i) $944,986, the grant date fair value of the award as of May 2, 2008, and (ii) $332,241, the incremental fair value of the modified award, computed as of October 28, 2008, the modification date.

 

(14) An aggregate loss of $238,669 was incurred during fiscal 2008 under the Executive Deferral Plan described in footnote (1) to the “Nonqualified Deferred Compensation” table on page 55.

 

(15) Represents the fair value of an award granted on May 2, 2008, plus the incremental fair value resulting from the subsequent modification of the award on October 28, 2008 to remove a performance-based vesting criterion. The total fiscal 2008 fair value is calculated as the sum of (i) $377,994, the grant date fair value of the award as of May 2, 2008, and (ii) $132,896, the incremental fair value of the modified award, computed as of October 28, 2008, the modification date.

 

(16) Restricted stock units were granted as part of the Williams-Sonoma, Inc. Equity Award Exchange, which was approved by shareholders at the 2008 Annual Meeting and was completed during fiscal 2009. Mr. Harvey and Mr. Jaffe were not named executive officers at the time that the exchange program began and, accordingly, they were eligible to participate in the exchange program. The restricted stock units granted pursuant to the exchange had a fair value equal to or less than the fair value of the exchanged eligible awards they replaced. As a result, no incremental compensation cost was recognized in fiscal 2009 with respect to the grant of such restricted stock units, and no incremental fair value is reportable in this table. Please see the “Grants of Plan-Based Awards” table on page 52 for further discussion about these restricted stock unit grants.

 

50


Other Annual Compensation from Summary Compensation Table

 

The following table sets forth the compensation and benefits included under “All Other Compensation” in the Summary Compensation table above.

 

    Year

    Life
Insurance
Premiums(1)


    Matching
Contribution
to the
401(k) Plan(2)


    Car
Allowance


    Executive
Medical
Supplement(3)


    Parking(4)

    Dividend
Equivalent
Payments


    Other

    Total

 

Laura J. Alber

    2010      $ 420      $ 6,125      $ 6,000                    $ 50,250             $ 62,795   
      2009      $ 381      $ 6,125      $ 6,000                    $ 72,000             $ 84,506   
      2008      $ 378      $ 5,750      $ 6,000      $ 2,500      $ 2,200      $ 71,250             $ 88,078   

W. Howard Lester

    2010      $ 2,995      $ 6,125      $ 2,000                    $ 246,365 (5)    $ 459,361 (6)    $ 716,846   
      2009      $ 8,652      $ 6,125      $ 6,000                           $ 463,249 (7)    $ 484,026   
      2008      $ 8,652      $ 5,750      $ 6,000      $ 2,500      $ 2,200             $ 675,772 (7)    $ 700,874   

Sharon L. McCollam

    2010      $ 630      $ 6,125      $ 6,000                    $ 50,250             $ 63,005   
      2009      $ 630      $ 6,125      $ 6,000                    $ 72,000             $ 84,755   
      2008      $ 630      $ 5,750      $ 6,000      $ 2,500      $ 2,200      $ 71,250             $ 88,330   

Patrick J. Connolly

    2010      $ 2,772      $ 6,125      $ 6,000                                  $ 14,897   
      2009      $ 2,772      $ 6,125      $ 6,000                                  $ 14,897   
      2008      $ 2,772      $ 5,750      $ 6,000      $ 2,500      $ 2,200                    $ 19,222   

Richard Harvey

    2010      $ 630      $ 6,125      $ 6,000                    $ 13,400             $ 26,155   
      2009      $ 630      $ 6,125      $ 6,000                    $ 19,200             $ 31,955   
      2008      $ 436      $ 5,750      $ 6,000      $ 2,500             $ 19,000             $ 33,686   

Seth R. Jaffe

    2010      $ 916      $ 6,125      $ 6,000                    $ 3,350             $ 16,391   
      2009      $ 900      $ 6,125      $ 6,000                    $ 4,800             $ 17,825   
      2008      $ 881      $ 5,750      $ 6,000        $2,500        $2,200      $ 4,750             $ 22,081   

(1) Premiums paid by us for term life insurance in excess of $50,000 for each fiscal year.

 

(2) Represents the maximum company matching contribution to the 401(k) plan for each fiscal year.

 

(3) Represents the maximum executive medical supplement payable by the company. Effective January 1, 2009, the company eliminated the executive medical supplement.

 

(4) Represents the value of parking provided by the company, based on current estimated market rates. Effective January 1, 2009, the company eliminated the parking subsidy. Individual executives are now personally responsible for paying for parking on site.

 

(5) Represents the following: (i) dividend equivalent payments on awards received by Mr. Lester prior to his retirement equal to $171,365 and (ii) dividend equivalent payments on awards received by Mr. Lester pursuant to the Retirement and Consulting Agreement equal to $75,000. Accrued dividends vested and became payable upon the same terms and at the same time as the awards to which they relate. Please see the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements” beginning on page 56 for further discussion about the terms of the Retirement and Consulting Agreement.

 

(6) Represents the following: (i) a lump sum payment of $175,000 received upon retirement, (ii) payment of $234,498 for consulting fees pursuant to the Retirement and Consulting Agreement, (iii) reimbursement of legal fees in the amount of $31,468 pursuant to the Retirement and Consulting Agreement, (iv) administrative support valued at approximately $2,711, based on the amount of time spent on administrative matters for Mr. Lester pursuant to the Retirement and Consulting Agreement, and (v) $15,684 for personal use of our corporate aircraft, the value of which is calculated as described in footnote (7) to this table. There were no tax gross-ups on any imputed income relating to any benefits or perquisites. Please see the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements” beginning on page 56 for further discussion about the terms of the Retirement and Consulting Agreement.

 

(7) For personal use of our corporate aircraft. The value of personal aircraft usage reported above for each fiscal year is the aggregate incremental cost to the company (including fuel, maintenance and certain fees and expenses) as determined and published from time to time by Conklin & de Decker Associates, Inc. for each particular aircraft type utilized by the company, as well as a related foregone corporate tax deduction.

 

51


Grants of Plan-Based Awards

 

This table sets forth certain information regarding all grants of plan-based awards made to the named executive officers during fiscal 2010.

 

    Grant
Date


    Estimated Future
Payouts Under
Non-Equity Incentive
Plan  Awards


    Estimated Future
Payouts Under
Equity Incentive
Plan Awards


  All
Other
Stock
Awards;
Number
of Shares
of Stock
or  Units
(#)(4)


    All Other
Option
Awards;
Number of
Securities
Underlying
Options
(#)(5)


    Exercise
or Base
Price of
Option
Awards
($/Sh)


    Grant Date
Fair Value
of Stock and
Option
Awards ($)


 
      Threshold
($)


    Target
($)(1)(2)


    Maximum
($)(2)(3)


    Threshold
($)


  Target
($)


  Maximum
($)


       

Laura J. Alber

                $ 1,462,500      $ 2,400,000                                   —     
      3/25/2010                                   280,000                    $ 7,761,600   
      3/25/2010                                          200,000      $ 27.72      $ 2,032,940   

W. Howard Lester

    5/26/2010                                   125,000 (6)                  $ 7,287,500 (7) 

Sharon L. McCollam

                $ 1,062,500      $ 2,175,000                                   —     
      3/25/2010                                   210,000                    $ 5,821,200   
      3/25/2010                                          150,000      $ 27.72      $ 1,524,705   

Patrick J. Connolly

                $ 436,050      $ 1,710,000                                   —     
      3/25/2010                                   11,250                    $ 311,850   
      3/25/2010                                          9,375      $ 27.72      $ 95,294   

Richard Harvey

                $ 450,000      $ 1,575,000                                   —     
      3/25/2010                                   25,000                    $ 693,000   

Seth R. Jaffe

                $ 229,500      $ 1,125,000                                   —     
      3/25/2010                                   10,750                    $ 297,990   

(1) Target potential payment for each eligible executive pursuant to our established incentive targets.

 

(2) To ensure deductibility under our shareholder-approved 2001 Incentive Bonus Plan (intended to qualify as performance-based compensation under Internal Revenue Code Section 162(m)), the Compensation Committee specified a primary performance goal. For fiscal 2010, the Compensation Committee established the primary performance goal for the 2001 Incentive Bonus Plan as positive net cash provided by operating activities (excluding any non-recurring charges) as provided on the company’s consolidated statements of cash flows. The Compensation Committee also set a secondary performance goal to guide its use of negative discretion; the Compensation Committee typically expects to pay bonuses at target levels only if the secondary performance goal is fully met. For fiscal 2010, the Compensation Committee set the secondary performance goal as an earnings per share target of $1.24 (excluding store impairments and other extraordinary non-recurring charges, and including any amounts payable to covered employees under the 2001 Incentive Bonus Plan). As further described in the Compensation Discussion and Analysis beginning on page 64, in the first quarter of fiscal 2011, the Compensation Committee determined that the 2001 Incentive Bonus Plan’s primary and secondary performance goals were achieved, but the Committee elected to apply negative discretion in determining the actual amount to be paid to the eligible executive officers, other than with respect to the bonus awarded to Ms. Alber, our Chief Executive Officer and President, under the 2001 Incentive Bonus Plan.

 

(3) Maximum potential payment pursuant to our 2001 Incentive Bonus Plan is equal to three times the eligible executive’s base salary as of February 1, 2010, the first day of fiscal 2010.

 

(4) Grants of restricted stock units.

 

(5) Grants of stock-settled stock appreciation rights.

 

(6) Represents an award to receive restricted stock units and cash units made on May 26, 2010, in exchange for consulting services provided by Mr. Lester pursuant to the Retirement and Consulting Agreement entered into in connection with his retirement.

 

(7) Represents the grant date fair value of an award to receive restricted stock units and cash units made on May 26, 2010, in exchange for consulting services provided by Mr. Lester pursuant to the Retirement and Consulting Agreement entered into in connection with his retirement. Each unit of the award entitled Mr. Lester to receive one share of the company’s common stock and a cash payment equal to the fair market value of one share of the company’s common stock on the applicable vesting date. The units vested in monthly installments throughout the period over which Mr. Lester provided such consulting services. The Retirement and Consulting Agreement provided for the cash to be paid and the shares underlying such award to be issued on December 31 of each year. Upon Mr. Lester’s death in November 2010, a total of 20,835 restricted stock and cash units had vested, which entitled Mr. Lester’s estate to receive (i) 20,835 shares, with a fair market value on the date prior to issuance of $751,518, and (ii) a cash payment equal to $592,839, which represents the fair market value of each vested share on the applicable vesting date. The remainder of such award was automatically forfeited upon Mr. Lester’s death. Please see the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements” beginning on page 56 for further discussion about this award.

 

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Outstanding Equity Awards at Fiscal Year-End

 

The following tables set forth information regarding equity awards held by our named executive officers at January 30, 2011:

 

    Option Awards(1)

 
    Number of Securities
Underlying
Unexercised Options
(#) Exercisable


    Number of Securities
Underlying
Unexercised Options
(#) Unexercisable


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


    Option
Exercise Price
($)


    Option Expiration
Date


 

Laura J. Alber

    —           200,000(2)        —        $ 27.72        3/25/2020   
      115,000        115,000(3)        —        $ 8.56        11/7/2018   
      30,000        20,000(4)        —        $ 34.89        3/27/2017   
      32,000        8,000(5)        —        $ 30.34        9/12/2016   
      60,000        —              —        $ 38.84        5/27/2015   
      50,000        —              —        $ 32.39        6/30/2014   
      30,000        —              —        $ 21.80        4/1/2013   

W. Howard Lester

    —           —              —          —          —     

Sharon L. McCollam

    —           150,000(2)        —        $ 27.72        3/25/2020   
      137,500        137,500(3)        —        $ 8.56        11/7/2018   
      30,000        20,000(4)        —        $ 34.89        3/27/2017   
      32,000        8,000(5)        —        $ 30.34        9/12/2016   
      50,000        —              —        $ 38.84        5/27/2015   
      50,000        —              —        $ 32.39        6/30/2014   
      85,000        —              —        $ 21.80        4/1/2013   

Patrick J. Connolly

    —           9,375(2)        —        $ 27.72        3/25/2020   
      80,000        80,000(3)        —        $ 8.56        11/7/2018   
      40,000        10,000(6)        —        $ 40.44        3/15/2016   
      40,000        —              —        $ 38.84        5/27/2015   
      50,000        —              —        $ 32.39        6/30/2014   
      20,000        —              —        $ 21.80        4/1/2013   

Richard Harvey

    —           50,000(3)        —        $ 8.56        11/7/2018   

Seth R. Jaffe

    10,000        40,000(3)        —        $ 8.56        11/7/2018   

(1) Includes grants of options and stock-settled stock appreciation rights.

 

(2) Stock-settled stock appreciation rights vest at the rate of 25% of the total number of shares subject to the stock-settled stock appreciation rights per year, with remaining vesting dates of March 25, 2011, March 25, 2012, March 25, 2013 and March 25, 2014.

 

(3) Stock-settled stock appreciation rights vest at the rate of 25% of the total number of shares subject to the stock-settled stock appreciation rights per year, with remaining vesting dates of November 7, 2011 and November 7, 2012.

 

(4) Stock-settled stock appreciation rights vest at the rate of 20% of the total number of shares subject to the stock-settled stock appreciation rights per year, with remaining vesting dates of March 27, 2011 and March 27, 2012.

 

(5) Stock-settled stock appreciation rights vest at the rate of 20% of the total number of shares subject to the stock-settled stock appreciation rights per year, with a remaining vesting date of September 12, 2011.

 

(6) Stock-settled stock appreciation rights vest at the rate of 20% of the total number of shares subject to the stock-settled stock appreciation rights per year, with a remaining vesting date of March 15, 2011.

 

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     Stock Awards

 
     Number of Shares or
Units of Stock that
have not Vested (#)


    Market Value of
Shares or Units of
Stock that have
not Vested ($)(1)


    Equity Incentive Plan
Awards: Number of
Unearned Shares, Units or
Other Rights that have
not Vested (#)


    Equity Incentive
Plan Awards:
Market or Payout Value of
Unearned Shares, Units
or Other Rights that have
not Vested ($)


 

Laura J. Alber

     17,579 (2)    $ 568,505                 
       280,000 (3)    $ 9,055,200                 

W. Howard Lester

                            

Sharon L. McCollam

     17,579 (2)    $ 568,505                 
       210,000 (3)    $ 6,791,400                 

Patrick J. Connolly

     14,078 (2)    $ 455,283                 
       11,250 (3)    $ 363,825                 

Richard Harvey

     10,558 (2)    $ 341,446                 
       6,839 (4)    $ 221,173                 
       25,000 (3)    $ 808,500                 

Seth R. Jaffe

     5,586 (2)    $ 180,651                 
       11,907 (5)    $ 385,072                 
       10,750 (3)    $ 347,655                 

(1) Based on a stock price of $32.34, the closing price of our common stock on January 28, 2011, the last business day of fiscal 2010.

 

(2) Represents restricted stock units granted on May 2, 2008. The restricted stock units vest in full four years following the date of grant on May 2, 2012 subject to continued service. In addition, upon vesting, the executive receives a cash payment equal to dividends declared between the grant date and the vesting date.

 

(3) Represents restricted stock units granted on March 25, 2010. The restricted stock units vest in full four years following the date of grant on March 25, 2014 subject to continued service and a performance criterion of positive net cash provided by operating activities (excluding any non-recurring charges) for fiscal 2010 as provided on the company’s consolidated statements of cash flows. In addition, upon vesting, the executive receives a cash payment equal to dividends declared between the grant date and the vesting date.

 

(4) Represents restricted stock units granted on April 10, 2009 in connection with the Williams-Sonoma, Inc. Equity Award Exchange. Mr. Harvey was not a named executive officer at the time that the exchange program began and accordingly he was eligible to participate in the exchange program. The restricted stock units vest as follows: (i) 4,151 units vest on April 10, 2011 and (ii) 2,688 units vest on April 10, 2012.

 

(5) Represents restricted stock units granted on April 10, 2009 in connection with the Williams-Sonoma, Inc. Equity Award Exchange. Mr. Jaffe was not a named executive officer at the time that the exchange program began and accordingly he was eligible to participate in the exchange program. The restricted stock units vest as follows: (i) 9,756 units vest on April 10, 2011 and (ii) 2,151 units vest on April 10, 2012.

 

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Option Exercises and Stock Vested

 

The following table sets forth information regarding exercises and vesting of equity awards held by our named executive officers during fiscal 2010:

 

     Option Awards

     Stock Awards

 
     Number of Shares
Acquired on Exercise (#)


    Value Realized on
Exercise ($)


     Number of Shares
Acquired on Vesting (#)


    Value Realized on
Vesting ($)(1)


 

Laura J. Alber

     146,600      $ 2,006,822         75,000      $ 2,425,500   

W. Howard Lester

     854,500 (2)    $ 14,153,479         305,531 (3)    $ 8,891,727   

Sharon L. McCollam

     30,000      $ 434,472         75,000      $ 2,425,500   

Patrick J. Connolly

     40,000      $ 818,433                  

Richard Harvey

     33,800      $ 709,140         25,685      $ 814,110   

Seth R. Jaffe

     42,800      $ 692,839         22,531      $ 677,637   

(1) The value realized upon vesting is calculated as the closing price of our stock on the day prior to the vesting date multiplied by the number of units vested.

 

(2) Includes 318,750 shares acquired on exercise of option awards that received accelerated vesting upon Mr. Lester’s retirement on May 26, 2010.

 

(3) Includes (i) 249,501 shares that vested upon Mr. Lester’s retirement on May 26, 2010 and were delivered on December 31, 2010, with an aggregate value realized on such delivery of $8,999,501, (ii) an aggregate of 20,835 shares, of which 4,167 shares vested on each of June 30, 2010, July 31, 2010, August 31, 2010, September 30, 2010 and October 31, 2010, and all of which were delivered on December 31, 2010, with an aggregate value realized on such delivery of $751,518, and (iii) 35,195 shares acquired on vesting of stock awards for which the vesting accelerated upon Mr. Lester’s retirement on May 26, 2010.

 

Pension Benefits

 

None of our named executive officers received any pension benefits during fiscal 2010.

 

Nonqualified Deferred Compensation

 

The following table describes nonqualified deferred compensation to our named executive officers during fiscal 2010:

 

     Executive
Contributions in
Fiscal 2010 ($)


     Registrant
Contributions in
Fiscal 2010 ($)


   Aggregate
Earnings (Loss)
in Fiscal 2010 ($)


     Aggregate
Withdrawals/
Distributions ($)


    Aggregate Balance at
January 30, 2011 ($)


Laura J. Alber

                            

W. Howard Lester(1)

   $ 7,865,793(2)          $ 1,881,588(3)       $ 385,491(4)     

Sharon L. McCollam

                            

Patrick J. Connolly

                            

Richard Harvey

                            

Seth R. Jaffe

                            

(1)

Executive Deferral Plan. Participation in the plan is limited to a group of select management and highly compensated employees. In fiscal 2009, participants were able to defer up to 75% of their base salary and up to 100% of their bonus, net of applicable employment and withholding taxes and subject to a minimum deferral requirement (5% of salary). As of January 1, 2010, we indefinitely suspended employee salary and bonus deferrals into the plan. We will continue to evaluate this benefit program in the future to ensure that it is providing the best value to our employees and the company. Participant accounts are not put aside in trust or any other funding vehicle, and the obligations of the company to pay are simply an unsecured promise to pay in the future. Although no investments actually are held in the plan, participant accounts track investment funds chosen by the participant from a specified list, and accounts are adjusted for earnings that the investments would have accrued had the investment fund actually been held by such participant accounts. Accounts are generally distributed at termination of employment, although a participant can make an election at the time of deferral to have the distribution occur at an earlier or later date. A choice of

 

55


 

quarterly installments over 5, 10 or 15 years, or a single lump sum, is available for terminations due to retirement or disability, as defined in the plan, if the account is over $25,000. All other distributions are paid as a single lump sum. The commencement of payments can be postponed, subject to advance election and minimum deferral requirements. At death, the plan may provide a death benefit funded by a life insurance policy, in addition to payment of the participant’s account.

 

(2) Represents the value realized on each vesting date of the following: (i) 249,501 shares that vested upon Mr. Lester’s retirement on May 26, 2010 (the “Retirement Shares”), with a value realized on such vesting of $7,272,954, and (ii) an aggregate of 20,835 shares, of which 4,167 shares vested on each of June 30, 2010, July 31, 2010, August 31, 3010, September 30, 2010 and October 31, 2010 (collectively, the “Consulting Shares”), with an aggregate value realized on such vesting dates of $592,839. The Retirement Shares were deferred pursuant to the terms of the equity award. The Consulting Shares were deferred pursuant to the terms of the Retirement and Consulting Agreement.

 

(3) Represents the following: (i) the aggregate loss of $3,638 incurred during fiscal 2010 under the Executive Deferral Plan, (ii) $1,726,547, which represents the difference between the value realized on the vesting of the Retirement Shares and the value realized on December 31, 2010, when such shares were delivered, and (ii) $158,679, which represents the difference between the aggregate value realized on the vesting of the Consulting Shares and the aggregate value realized on December 31, 2010, when such shares were delivered.

 

(4) Following Mr. Lester’s retirement, he received a distribution under the Executive Deferral Plan of $294,572 and elected to receive the remaining balance in quarterly installments over 15 years. A quarterly payment of $1,259 was made on October 20, 2010, and upon Mr. Lester’s death, the remaining balance of $89,660 was distributed to his estate.

 

Employment Contracts and Termination of Employment and Change-of-Control Arrangements

 

We have entered into a management retention agreement with each of Ms. Alber, Ms. McCollam, Mr. Connolly, Mr. Harvey and Mr. Jaffe. Each retention agreement has an initial two-year term and will be automatically extended for one-year following the initial term unless either party provides notice of non-extension. If we enter into a definitive agreement with a third party providing for a “change of control,” each retention agreement will be automatically extended for 18 months following the change of control. If within 18 months following a change of control, an executive’s employment is terminated by us without “cause,” or by the executive for “good reason,” (i) 100% of such executive’s outstanding equity awards, including full value awards, with performance-based vesting where the payout is a set number or zero depending on whether the performance metric is obtained, will immediately become fully vested, except that if a full value award has performance-based vesting and the performance period has not been completed and the number of shares that can be earned is variable based on the performance level, a pro-rata portion of such executive’s outstanding equity awards will immediately become fully vested at the target performance level, and (ii) in lieu of continued employment benefits (other than as required by law), such executive will be entitled to receive payments of $3,000 per month for 12 months.

 

In addition, if, within 18 months following a change of control, Ms. Alber’s, Ms. McCollam’s, Mr. Connolly’s or Mr. Harvey’s employment is terminated by us without “cause,” or by the executive for “good reason,” such executive will be entitled to receive (i) severance equal to 200% of such executive’s base salary as in effect immediately prior to the change of control or such executive’s termination, whichever is greater, with such severance to be paid over 24 months, and (ii) if such termination occurs in 2010, an amount equal to 200% of the annual bonus received in the last 12 months, if such termination occurs in 2011, an amount equal to 200% of the average annual bonus received in the last 24 months, or if such termination occurs in 2012 or later, an amount equal to 200% of the average annual bonus received in the last 36 months, with such severance to be paid over 24 months. If, within 18 months following a change of control, Mr. Jaffe’s employment is terminated by us without “cause,” or by Mr. Jaffe for “good reason,” he will be entitled to receive (i) severance equal to 100% of his base salary as in effect immediately prior to the change of control or his termination, whichever is greater, with such

 

56


severance to be paid over 12 months, and (ii) if such termination occurs in 2010, an amount equal to 100% of the annual bonus received in the last 12 months, if such termination occurs in 2011, an amount equal to 100% of the average annual bonus received in the last 24 months, or if such termination occurs in 2012 or later, an amount equal to 100% of the average annual bonus received in the last 36 months, with such severance to be paid over 12 months. If the executive’s employment is terminated for any reason, either prior to a change of control or more than 18 months following the change of control, then the executive will be entitled to receive severance benefits only as provided under the company’s then existing severance and benefits plans or pursuant to other written agreements with the company.

 

Each executive’s receipt of the severance benefits discussed above is contingent on such executive signing and not revoking a release of claims against us, such executive’s continued compliance with our Corporate Code of Conduct (including its provisions relating to confidential information and non-solicitation), such executive not accepting employment with one of our competitors, and such executive’s continued non-disparagement of us. In the event that the severance payments and other benefits payable to an executive under a retention agreement constitute a “parachute payment” under Section 280G of the U.S. tax code and would be subject to the applicable excise tax, then the executive’s severance payments and other benefits will be either (i) delivered in full or (ii) delivered to a lesser extent such that no portion of the benefits are subject to the excise tax, whichever results in the receipt by such executive on an after-tax basis of the greatest amount of benefits.

 

For purposes of the management retention agreement, cause means: (i) an act of dishonesty made by the executive in connection with his or her responsibilities as an employee; (ii) the executive’s conviction of or plea of nolo contendere to, a felony or any crime involving fraud, embezzlement or any other act of moral turpitude; (iii) the executive’s gross misconduct; (iv) the executive’s unauthorized use or disclosure of any proprietary information or trade secrets of the company or any other party to whom the executive owes an obligation of nondisclosure as a result of the executive’s relationship with the company; (v) the executive’s willful breach of any obligations under any written agreement or covenant with the company or breach of the company’s Corporate Code of Conduct; or (vi) the executive’s continued failure to perform his or her employment duties after he or she has received a written demand of performance which specifically sets forth the factual basis for the belief that the executive has not substantially performed his or her duties and has failed to cure such non-performance within 30 days after receiving such notice.

 

For purposes of the management retention agreement, change of control means the occurrence of any of the following events: (i) a change in the ownership of the company which occurs on the date that any one person, or more than one person acting as a group, (“Person”) acquires ownership of the stock of the company that, together with the stock held by such Person, constitutes more than 50% of the total voting power of the stock of the company; provided, however, that for purposes of this subsection (i), the acquisition of additional stock by any one Person, who is considered to own more than 50% of the total voting power of the stock of the company will not be considered a change of control; or (ii) a change in the effective control of the company which occurs on the date that a majority of members of the Board of Directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board of Directors prior to the date of the appointment or election; provided, however, that for purposes of this clause (ii), if any Person is considered to effectively control the company, the acquisition of additional control of the company by the same Person will not be considered a change of control; or (iii) a change in the ownership of a substantial portion of the company’s assets which occurs on the date that any Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the company that have a total gross fair market value equal to or more than 50% of the total gross fair market value of all of the assets of the company immediately prior to such acquisition or acquisitions; provided, however, that for purposes of this subsection (iii), the following will not constitute a change in the ownership of a substantial portion of the company’s assets: (A) a transfer to an entity that is controlled by the company’s shareholders immediately after the transfer, or (B) a transfer of assets by the company to: (1) a shareholder of the company (immediately before the asset transfer) in exchange for or with respect to the company’s stock, (2) an entity, 50% or more of the total value or voting power of which is owned, directly or indirectly, by the company, (3) a

 

57


Person, that owns, directly or indirectly, 50% or more of the total value or voting power of all the outstanding stock of the company, or (4) an entity, at least 50% of the total value or voting power of which is owned, directly or indirectly, by a Person. For purposes of this subsection (iii), gross fair market value means the value of the assets of the company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. For purposes of this definition, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the company. Notwithstanding the foregoing, a transaction shall not be deemed a change of control unless the transaction qualifies as a change in the ownership of the company, change in the effective control of the company or a change in the ownership of a substantial portion of the company’s assets, each within the meaning of Section 409A.

 

For purposes of the management retention agreement “good reason” means, without the executive’s consent, (i) a reduction in his or her annual base salary (except pursuant to a reduction generally applicable to senior executives of the company), (ii) a material diminution of his or her authority or responsibilities, (iii) a reduction of the executive’s title, (iv) the executive ceasing to report directly to a specified individual or the Board of the company or the entity holding all or substantially all of the company’s assets following a change of control, or (v) relocation of the executive to a location more than 50 miles from the company’s San Francisco, California main office location. In addition, upon any such voluntary termination for good reason the executive must provide written notice to the company of the existence of one or more of the above conditions within 90 days of its initial existence and the company must be provided with at least 30 days to remedy the condition.

 

Laura J. Alber

 

We entered into an employment agreement with Laura J. Alber, effective as of May 26, 2010. The employment agreement has an initial three-year term and will be automatically extended for one-year following the initial term unless either party provides notice of non-extension. If we terminate Ms. Alber’s employment without “cause,” if she terminates her employment with us for “good reason,” or her employment is terminated due to her death or “disability,” she will be entitled to receive (i) continuation of her base salary at the time of termination for up to two years, (ii) if such termination occurs in 2010, an amount equal to 200% of the annual bonus received in the last 12 months, if such termination occurs in 2011, an amount equal to 200% of the average annual bonus received in the last 24 months, or if such termination occurs in 2012 or later, an amount equal to 200% of the average annual bonus received in the last 36 months, (iii) in lieu of continued employment benefits (other than as required by law), payments of $3,000 per month for 18 months and (iv) accelerated vesting of her then-outstanding equity awards that vest solely based upon Ms. Alber’s continued service by up to an additional 18 months’ of vesting credit, and if the awards were subject to cliff-vesting of more than one-year, the cliff-vesting provision will be lifted and vesting credit given as if the award had been subject to monthly vesting, and equity awards subject to performance based vesting will remain outstanding through the date upon which the achievement of the applicable performance milestones are certified with such awards paid out, subject to the attainment of the applicable performance milestones, to the same extent and at the same time as if Ms. Alber had remained employed through the 18-month anniversary of her termination date. Ms. Alber’s receipt of the severance benefits discussed above is contingent on her signing and not revoking a release of claims against us, her continued compliance with our Corporate Code of Conduct (including its provisions relating to confidential information and non-solicitation), her not accepting employment with one of our competitors, and her continued non-disparagement of us.

 

For purposes of the employment agreement with Ms. Alber, “cause” is defined as (i) an act of dishonesty made by her in connection with her responsibilities as an employee, (ii) Ms. Alber’s conviction of or plea of nolo contendere to, a felony or any crime involving fraud, embezzlement or any other act of moral turpitude, (iii) Ms. Alber’s gross misconduct, (iv) Ms. Alber’s unauthorized use or disclosure of any proprietary information or trade secrets of the company or any other party to whom she owes an obligation of nondisclosure as a result of her relationship with the company, (v) Ms. Alber’s willful breach of any obligations under any written agreement or covenant with the company or breach of the company’s Corporate Code of Conduct, or

 

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(vi) Ms. Alber’s continued failure to perform her employment duties after she has received a written demand of performance from the Board which specifically sets forth the factual basis for the Board’s belief that she has not substantially performed her duties and has failed to cure such non-performance to the company’s satisfaction within 30 days after receiving such notice.

 

For purposes of the employment agreement with Ms. Alber, “disability” means Ms. Alber (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering company employees.

 

For purposes of the employment agreement with Ms. Alber, “good reason” is defined as, without Ms. Alber’s consent, (i) a reduction in her base salary (except pursuant to a reduction generally applicable to senior executives of the company), (ii) a material diminution of her authority or responsibilities, (iii) a reduction of Ms. Alber’s title, (iv) Ms. Alber ceasing to report directly to the Board of Directors, or (v) the Board of Directors failing to re-nominate Ms. Alber for Board membership when her Board term expires while she is employed by the company. In addition, upon any such voluntary termination for good reason, Ms. Alber must provide written notice to the company of the existence of one or more of the above conditions within 90 days of its initial existence and the company must be provided with at least 30 days to remedy the condition.

 

The following table describes the payments and/or benefits which would have been owed by us to Ms. Alber as of January 30, 2011 if her employment had been terminated in various situations.

 

Compensation and Benefits


   For Good
Reason


     Involuntary
Without Cause


     Change-in-
Control


     Death

     Disability

 

Base Salary(1)

   $ 1,950,000           $ 1,950,000           $ 1,950,000           $ 1,950,000(2)       $ 1,950,000(2)   

Bonus Payment(3)

   $ 1,500,000           $ 1,500,000           $ 1,500,000           $ 1,500,000(2)       $ 1,500,000(2)   

Equity Awards

   $ 7,695,753(4)       $ 7,695,753(4)       $ 13,298,405(5)       $ 7,695,753(4)       $ 7,695,753(4)   

Health Care Benefits(6)

   $ 54,000           $ 54,000           $ 36,000           $ 54,000           $ 54,000       

(1) Based on Ms. Alber’s base salary as of January 30, 2011.

 

(2) Will be reduced by the amount of any payments Ms. Alber receives through company-paid insurance policies.

 

(3) Represents 200% of the average annual bonus received by Ms. Alber in the 24 month period prior to January 30, 2011.

 

(4) Represents the sum of (i) $5,850,403 for acceleration of vesting of 180,903 restricted stock units and (ii) $1,845,350 for acceleration of vesting of 185,500 shares underlying outstanding option awards. Value is based on a stock price of $32.34, the closing price of our common stock on January 28, 2011, the last business day of fiscal 2010.

 

(5) Represents the sum of (i) $9,623,705 for acceleration of vesting of 297,579 restricted stock units and (ii) $3,674,700 for acceleration of vesting of 343,000 shares underlying outstanding option awards. Value is based on a stock price of $32.34, the closing price of our common stock on January 28, 2011, the last business day of fiscal 2010.

 

(6) Based on a monthly payment of $3,000 to be paid by the company for 18 months or 12 months, as applicable, in lieu of continued employment benefits.

 

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Sharon L. McCollam

 

We entered into an employment agreement with Sharon L. McCollam, effective as of December 28, 2002 and amended as of November 11, 2008. She is currently our Executive Vice President, Chief Operating and Chief Financial Officer. The initial term of Ms. McCollam’s agreement expired December 28, 2005, and, per its terms, automatically extends for one-year terms until Ms. McCollam’s employment is terminated by her or by us. If we terminate Ms. McCollam’s employment without “cause,” or if Ms. McCollam terminates her employment with us for “good reason,” she will be entitled to receive (i) continuation of her base salary at the time of termination for a period of one year plus an additional lump sum amount equal to 80% of Ms. McCollam’s base salary and (ii) outplacement services at a level commensurate with her position at no cost to her. In addition, we will pay the premiums for health care coverage under COBRA for Ms. McCollam and her dependents for up to 18 months or, if earlier, until she either commences new employment or she and her dependents are no longer eligible for COBRA coverage.

 

For purposes of the employment agreement with Ms. McCollam, “cause” means the conviction (or plea of guilty or nolo contendere) of Ms. McCollam of any felony, or of any crime involving fraud, dishonesty or misappropriation, or moral turpitude or, if any of the foregoing involves the company or any subsidiary or affiliate companies (collectively the “Control Group”), the commission of any of the foregoing (other than good faith disputes involving expense account items or de minimus issues); (ii) Ms. McCollam’s (X) continued willful neglect of her duties and responsibilities in her role with the company, (Y) grossly negligent conduct in connection with her duties and responsibilities in her role with the company; or (Z) gross negligence in connection with her handling of the assets of the Control Group; (iii) Ms. McCollam’s willful misconduct with regard to the Control Group; (iv) Ms. McCollam’s willful failure to comply with the covenants in her employment agreement; or (v) material breach of any of the provisions of the employment agreement by Ms. McCollam.

 

For purposes of the employment agreement with Ms. McCollam, “good reason” means in the event that the company shall (i) fail to continue the appointment of Ms. McCollam in her role with the company, (ii) reduce Ms. McCollam’s annual salary below her current base salary, (iii) locate Ms. McCollam other than at the company’s principal executive offices, (iv) relocate the company’s principal executive offices outside the San Francisco metropolitan area, (v) substantially change the responsibilities assigned to Ms. McCollam’s position, or (vi) breach any material provision of the employment agreement (each of the foregoing hereinafter referred to as a “Triggering Event”), then Ms. McCollam may give notice to the company of her election to terminate her employment with the company pursuant to this provision, effective 30 days from the date of such notice, unless the company shall have cured within such 30-day period the default giving rise to her notice of election to terminate. Such notice from Ms. McCollam shall state the Triggering Event which provides the grounds for her termination, and such notice must be given, if at all, within 90 days of the date Ms. McCollam obtains knowledge of the Triggering Event referred to as providing such grounds for termination. Within the 30 day period specified in her notice to the company, the company shall have the opportunity to cure the default involved in the Triggering Event specified by Ms. McCollam. If Ms. McCollam’s employment is terminated pursuant to this provision, the company shall have no liability or further obligation hereunder except as provided in the agreement. If Ms. McCollam does not give notice to the company of her election to terminate within 90 days following the occurrence of a Triggering Event, then she shall be deemed to have waived her right to terminate her employment based on such Triggering Event, but such waiver shall not prejudice her right to terminate pursuant to this provision based on the occurrence of another Triggering Event occurring subsequent in time, whether of the same or a different type.

 

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The following table describes the payments and/or benefits which would have been owed by us to Ms. McCollam as of January 30, 2011, if her employment had been terminated in various situations.

 

Compensation and Benefits


   For Good
Reason


     Involuntary
Without Cause


     Change-in-
Control


     Death

     Disability

 

Base Salary(1)

   $ 850,000           $ 850,000           $ 1,700,000             Through date of death       $ 212,500(2)   

Lump Sum Payment

   $ 680,000           $ 680,000                               

Bonus Payment(3)

                   $ 1,500,000                       

Equity Awards(4)

                   $ 11,338,655                       

Health Care Benefits

   $ 8,010(5)       $ 8,010(5)       $ 36,000(6)                   

Other Perquisites

   $ 150,000(7)       $ 150,000(7)                           

(1) Based on Ms. McCollam’s base salary as of January 30, 2011.

 

(2) Payment of 13 weeks of salary.

 

(3) Represents 200% of the average annual bonus received by Ms. McCollam in the 24 month period prior to January 30, 2011.

 

(4) Represents the sum of (i) $7,359,905 for acceleration of vesting of 227,579 restricted stock units and (ii) $3,978,750 for acceleration of vesting of 315,500 shares underlying outstanding option awards. Value is based on a stock price of $32.34, the closing price of our common stock on January 28, 2011, the last business day of fiscal 2010.

 

(5) Based on a monthly health insurance premium of $445 to be paid by the company for 18 months, which is the period provided under COBRA.

 

(6) Based on a monthly payment of $3,000 to be paid by the company for 12 months in lieu of continued employment benefits.

 

(7) Value of outplacement services based on current estimate of costs for these services.

 

Patrick J. Connolly

 

The following table describes the payments and/or benefits which would have been owed by us to Mr. Connolly as of January 30, 2011 if his employment had been terminated in various situations.

 

Compensation and Benefits


   For Good
Reason


     Involuntary
Without Cause


     Change-in-
Control


     Death

     Disability

 

Base Salary(1)

                   $ 1,162,800                   

Bonus Payment(2)

                   $ 500,000                   

Equity Awards(3)

                   $ 2,764,821                   

Health Care Benefits(4)

                   $ 36,000                   

(1) Based on Mr. Connolly’s base salary as of January 30, 2011.

 

(2) Represents 200% of the average annual bonus received by Mr. Connolly in the 24 month period prior to January 30, 2011.

 

(3) Represents the sum of (i) $819,108 for acceleration of vesting of 25,328 restricted stock units and (ii) $1,945,713 for acceleration of vesting of 99,375 shares underlying outstanding option awards. Value is based on a stock price of $32.34, the closing price of our common stock on January 28, 2011, the last business day of fiscal 2010.

 

(4) Based on a monthly payment of $3,000 to be paid by the company for 12 months in lieu of continued employment benefits.

 

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Richard Harvey

 

The following table describes the payments and/or benefits which would have been owed by us to Mr. Harvey as of January 30, 2011 if his employment had been terminated in various situations.

 

Compensation and Benefits


   For Good
Reason


     Involuntary
Without Cause


     Change-in-
Control


     Death

     Disability

 

Base Salary(1)

                   $ 1,200,000                   

Bonus Payment(2)

                   $ 600,000                   

Equity Awards(3)

                   $ 2,560,119                   

Health Care Benefits(4)

                   $ 36,000                   

(1) Based on Mr. Harvey’s base salary as of January 30, 2011.

 

(2) Represents 200% of the average annual bonus received by Mr. Harvey in the 24 month period prior to January 30, 2011.

 

(3) Represents the sum of (i) $1,371,119 for acceleration of vesting of 42,397 restricted stock units and (ii) $1,189,000 for acceleration of vesting of 50,000 shares underlying outstanding option awards. Value is based on a stock price of $32.34, the closing price of our common stock on January 28, 2011, the last business day of fiscal 2010.

 

(4) Based on a monthly payment of $3,000 to be paid by the company for 12 months in lieu of continued employment benefits.

 

Seth R. Jaffe

 

The following table describes the payments and/or benefits which would have been owed by us to Mr. Jaffe as of January 30, 2011 if his employment had been terminated in various situations.

 

Compensation and Benefits


   For Good
Reason


     Involuntary
Without Cause


     Change-in-
Control


     Death

     Disability

 

Base Salary(1)

                   $ 382,500                   

Bonus Payment(2)

                   $ 135,000                   

Equity Awards(3)

                   $ 1,864,579                   

Health Care Benefits(4)

                   $ 36,000                   

(1) Based on Mr. Jaffe’s base salary as of January 30, 2011.

 

(2) Represents 100% of the average annual bonus received by Mr. Jaffe in the 24 month period prior to January 30, 2011.

 

(3) Represents the sum of (i) $913,379 for acceleration of vesting of 28,243 restricted stock units and (ii) $951,200 for acceleration of vesting of 40,000 shares underlying outstanding option awards. Value is based on a stock price of $32.34, the closing price of our common stock on January 28, 2011, the last business day of fiscal 2010.

 

(4) Based on a monthly payment of $3,000 to be paid by the company for 12 months in lieu of continued employment benefits.

 

W. Howard Lester

 

On January 25, 2010, we entered into a Retirement and Consulting Agreement (the “Retirement and Consulting Agreement”) with W. Howard Lester, our former Chairman and Chief Executive Officer. Pursuant to the terms of the Retirement and Consulting Agreement, Mr. Lester retired as Chairman of the Board and Chief Executive Officer on May 26, 2010, the date of the 2010 Annual Meeting.

 

Pursuant to the terms of the Retirement and Consulting Agreement, Mr. Lester provided consulting services from his retirement until his death in November 2010 and, during this consulting period, he received payments equal

 

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to $234,498. He also received a one-time award representing the right to receive 125,000 restricted stock units, and cash payments representing the value of 125,000 shares of our common stock (including dividend equivalent rights that were payable at the same time that the shares subject to the related restricted stock units were delivered), in each case which vested monthly over the consulting period. The Retirement and Consulting Agreement was terminated in November 2010 upon Mr. Lester’s death, and any unvested portion of the restricted stock units or cash payments were forfeited. As of the termination of the Retirement and Consulting Agreement, Mr. Lester’s estate received (i) 20,835 restricted stock units that had vested, with a fair market value of $751,518, and the associated accrued dividend equivalent payment of $37,500, and (ii) a cash payment of $592,839, which represents the fair market value of each vested share on the applicable vesting date, and the associated accrued dividend equivalent payment of $37,500.

 

In recognition of his retirement and his contributions to the company, and in exchange for a general release of claims against the company, Mr. Lester received accelerated vesting of his then-outstanding stock options, stock appreciation rights and restricted stock units upon his retirement. He also received (i) a lump sum cash payment of $175,000 (representing estimated costs of health benefits through December 2012), (ii) reimbursement of legal fees in the amount of $31,468, (iii) administrative support services valued at approximately $2,711 and (iv) continued lifetime employee discount privileges. As disclosed in further detail below in this Proxy Statement, we have an aircraft lease agreement with a management company that was owned by Mr. Lester, which will continue pursuant to its current economic terms through May 2011. Please see the section titled “Certain Relationships and Related Transactions” beginning on page 86 for further discussion about this lease.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Our Compensation Discussion and Analysis addresses:

 

   

The members and role of our Compensation Committee;

 

   

Our process for determining executive compensation;

 

   

Our executive compensation philosophy and policies;

 

   

Our fiscal 2010 named executive officer compensation decisions; and

 

   

The underlying rationale for these decisions.

 

Who serves on the Compensation Committee?

 

The Compensation Committee consisted of Adrian D.P. Bellamy, Richard T. Robertson, Anthony A. Greener and Ted W. Hall during fiscal 2010. Mr. Bellamy serves as Chairman of the Compensation Committee. The Board determined that, in fiscal 2010, each member of the Compensation Committee was independent under the NYSE rules as currently in effect, was an outside director as such term is defined with respect to Section 162(m) of the Internal Revenue Code and was a non-employee director under Section 16(b) of the Securities Exchange Act of 1934. None of the committee members has ever served as an officer of the company.

 

How many times did the Compensation Committee meet during fiscal 2010?

 

The Compensation Committee held a total of seven meetings during fiscal 2010, one of which was a telephonic meeting. The Compensation Committee met in executive session without management present at each meeting in fiscal 2010 other than the telephonic meeting held on March 16, 2010.

 

What is the role of the Compensation Committee with respect to executive compensation?

 

The Compensation Committee administers the company’s compensation programs, including compensation arrangements and equity plans. The Compensation Committee’s role is detailed in the Compensation Committee Charter, which was amended and restated by the Board on September 9, 2010. The Compensation Committee Charter is available on the company’s website at www.williams-sonomainc.com and is attached to this Proxy Statement as Exhibit E. The Compensation Committee Charter is also available in print to any shareholder who requests it. Specifically, the Compensation Committee:

 

   

Reviews and approves corporate goals and objectives relevant to the compensation of the Chief Executive Officer, evaluates the Chief Executive Officer’s performance in light of those goals and objectives, and reviews and approves the level of compensation after soliciting input from the other independent directors on the Board, including base salary, bonus, equity compensation and any other benefits or perquisites to be provided to the Chief Executive Officer based on this evaluation;

 

   

Reviews, makes recommendations to the Board regarding, and approves, as appropriate, compensation for named executive officers, other than the Chief Executive Officer, and other senior executives. Each of the named executive officers during fiscal 2010 is listed in the Summary Compensation Table appearing in this Proxy Statement on page 49;

 

   

Reviews, makes recommendations to the Board regarding, and approves, as appropriate, general compensation goals and guidelines for the company’s employees;

 

   

Approves and authorizes amendments to the company’s incentive compensation and other equity-based plans, the company’s 401(k) plan and other benefit programs to the extent such amending authority has been delegated to it by the Board; and

 

   

Administers the company’s incentive compensation and other equity-based plans.

 

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Does the Compensation Committee delegate any of its authority?

 

Pursuant to its charter, the Compensation Committee may form and delegate authority to subcommittees. The Compensation Committee does not delegate any of its authority with respect to executive officers and non-employee directors of the company. However, the Compensation Committee has appointed an Incentive Award Committee consisting of two of the company’s directors. In fiscal 2010, the Compensation Committee reappointed W. Howard Lester and Patrick J. Connolly as members of the Incentive Award Committee until May 26, 2010. Laura Alber and Sharon L. McCollam were named as the successor members of the Incentive Award Committee as of May 26, 2010. The Compensation Committee had delegated to the Incentive Award Committee the ability to grant equity awards under the company’s 2001 Long-Term Incentive Plan to non-executive officer employees with a corporate rank at or below Senior Vice President and equity awards or cash awards to those employees with a corporate rank at or below Director, but at its November 10, 2010 meeting, the Compensation Committee approved a proposal to replace all cash awards under the 2001 Long-Term Incentive Plan with restricted stock units, and the Incentive Award Committee’s delegated authority was changed to reflect this. The Compensation Committee approved this change at the recommendation of the Chief Executive Officer because she and the Compensation Committee believe it was important to provide our associates with long-term incentive vehicles that are directly linked to shareholder return. Granting equity-based incentives rather than cash awards places more of the individual’s compensation at-risk, thereby aligning the interests of our associates with those of our shareholders and reinforcing the company’s pay-for-performance strategy. This delegation is reviewed annually and certain limitations including the number of shares subject to the grants (both on an individual basis and in the aggregate), the maximum size of cash awards (prior to November 10, 2010) (both on an individual basis and in the aggregate) and which individuals may receive grants are placed on the Incentive Award Committee’s authority. Reports of equity, and prior to November 10, 2010, cash grants made by the Incentive Award Committee are included in the materials presented at the Compensation Committee’s regularly scheduled meetings.

 

What is management’s role in the compensation-setting process?

 

Although the Compensation Committee generally does not delegate any of its authority with respect to executive officers and non-employee directors of the company, management does play a significant role in the compensation-setting process for executive officers other than the Chief Executive Officer. In particular, management assists the Compensation Committee with the following:

 

   

Evaluating individual executive performance against established revenue and profitability targets for the fiscal year, including business unit achievement of budget targets;

 

   

Recommending appropriate business performance targets and objectives for the upcoming fiscal year; and

 

   

Recommending salary and cash bonus levels and equity awards based on performance evaluations and a review of peer group data. Management considers the respective responsibilities of the executive officers, the current combination of pay elements for each executive and whether that combination is appropriate to provide incentives to achieve the desired results for the company. Management considers the proportion of base salary to cash bonus levels and believes that a significant portion of each executive’s total cash compensation should be at risk and payable only if the company achieves certain levels of performance. In addition, management recognizes the Compensation Committee’s view that equity awards should reflect each executive’s performance for the year and align the executive’s financial reward with shareholder return. After considering these factors, management may recommend to the Compensation Committee changes in the amount and type of each element of total compensation.

 

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Management prepares meeting information for each Compensation Committee meeting and works with the Committee Chairperson to establish meeting agendas. Materials are provided to the Compensation Committee members several days in advance of each meeting. The Compensation Committee considers, but is not bound to and does not always accept, management proposals. The Chief Executive Officer also participates in Compensation Committee meetings at the invitation of the Compensation Committee to provide:

 

   

Background information regarding the company’s strategic objectives;

 

   

Evaluations of the performance of senior executive officers; and

 

   

Compensation recommendations as to senior executive officers (other than the Chief Executive Officer).

 

At certain of these meetings during fiscal 2010, the then-current Chief Executive Officer made recommendations with respect to the compensation arrangements for other executives and with respect to the structure and terms of those officers’ target bonuses and equity-based compensation. However, in fiscal 2010 the Chief Executive Officer did not participate in the portions of the meetings during which his or her own compensation was considered and established. This structure is expected to remain the same with respect to Ms. Alber, our Chief Executive Officer.

 

Does the Compensation Committee have outside advisors?

 

The Compensation Committee Charter grants the Compensation Committee the sole authority to hire outside advisors and compensation consultants. Although the company pays their fees, these advisors report directly to the Compensation Committee. Frederic W. Cook & Co., Inc., or Cook & Co., has been engaged as the independent executive compensation consulting firm to assist the Compensation Committee in discharging its responsibilities from time to time. During fiscal 2010, Cook & Co. provided the Compensation Committee with peer group proxy and other publicly disclosed data related to named executive officers and director compensation. Cook & Co. also provided certain services on behalf of the Compensation Committee primarily related to compiling market data and advice regarding general compensation trends in the retail industry and among similarly situated companies. The Compensation Committee may request that Cook & Co. attend its meetings and advise the Compensation Committee either in person or by telephone. Cook & Co. provided counsel to the Compensation Committee at the November 10, 2010 Compensation Committee meeting at the request of the Chairman, Adrian Bellamy.

 

In fiscal 2010, Cook & Co. did not provide services to the company relating to non-executive compensation other than advising on issues relating to our proposed share increase to our equity plan in 2010.

 

What is the Compensation Committee’s philosophy of executive compensation?

 

The Compensation Committee believes that the company’s executive compensation programs should support the company’s objective of creating value for its shareholders. Accordingly, the Compensation Committee believes that executive officers and other key employees should have a significant interest in the company’s stock performance, and compensation programs should link executive compensation to shareholder value. For this reason, the Compensation Committee strives to ensure that the company’s executive officer compensation programs are designed to enable the company to attract, retain, motivate and reward highly qualified executive officers while maintaining strong and direct links between executive pay, individual performance, the company’s financial performance and shareholder returns.

 

One of the ways that the Compensation Committee has sought to accomplish these goals is by making a significant portion of individual compensation directly dependent on the company’s achievement of financial goals, and by providing significant rewards for exceeding those goals. The Compensation Committee believes that strong financial performance, on a sustained basis, is an effective means of enhancing long-term shareholder return. There is no pre-established policy or target for the allocation between cash and non-cash compensation and short-term and long-term compensation. Rather, the appropriate level and mix of compensation to meet these philosophical goals was reviewed and determined on an ongoing basis, and at least annually.

 

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How is the Compensation Committee currently implementing this philosophy given recent conditions in the retail industry?

 

The Compensation Committee remains committed to its pay-for-performance philosophy and for that reason, a significant portion of executive compensation is tied directly to our company’s financial and operating performance.

 

The Compensation Committee set performance goals at the beginning of fiscal 2010 and believed that these goals, as applicable to named executive officers’ compensation, were achievable with significant effort even given the volatile economic conditions impacting the retailing industry.

 

At the February 12, 2010 Compensation Committee meeting, the Compensation Committee began a review of the base salaries and bonus targets for its named executive officers. At the March 22, 2010 Compensation Committee meeting, the Compensation Committee approved increases to the base salaries and bonus targets for its named executive officers for fiscal 2010 for the reasons discussed below under the questions “How are base salaries determined?” and “What were the target bonus amounts established for fiscal 2010?

 

What are the components of executive compensation?

 

The Compensation Committee considers three major elements of “direct” pay in the executive compensation program:

 

   

Base salary;

 

   

Annual incentive opportunities; and

 

   

Long-term incentives.

 

The Compensation Committee believes that offering the executive team a total compensation package with a strong at-risk, pay-for-performance component helps achieve the company’s objective of creating value for its shareholders. Each of the three major elements in the executive compensation program is discussed in detail below, but in general, this means:

 

   

Base salaries are competitive with comparable public retail companies with respect to similar positions, to create an incentive for executives to join and remain with the company;

 

   

Annual incentive opportunities are based principally on the company’s overall corporate performance and the executive’s attainment of individual goals. This results in the company’s strongest performers receiving greater compensatory rewards and lesser performers receiving lower compensatory rewards. We believe the structure of our annual incentive opportunities fosters a performance-driven, pay-for-performance culture; and

 

   

Long-term incentives, such as equity compensation awards, are structured to encourage our executive team to work toward long-term sustained growth and success from the perspective of owners of the company, to reward executives and other key employees for maximizing long-term shareholder value and to provide incentives to remain with the company.

 

The named executive officers also receive certain retirement and other benefits, as well as perquisites and other personal benefits as described below. We consider these perquisites, described below, in addition to the major elements of compensation, in determining if total compensation is reasonable and not excessive.

 

Does the Compensation Committee compare the company’s compensation practices to those of other companies?

 

Yes, the compensation practices of other companies within the retail industry are relevant to establishing the company’s compensation programs and executive compensation for each year so that we can attract and retain qualified executive and managerial talent in a competitive marketplace.

 

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The Compensation Committee strives to ensure that the company’s total compensation packages and executive compensation are aligned with market pay levels and practices. In order to achieve such goals, the Compensation Committee takes into account the relationships among base salary, short-term incentive compensation and long-term equity compensation at other companies considered to be comparable each year, collectively referred to as “comparable companies” or our “proxy peer group.”

 

Our proxy peer group consists of other retail companies that are comparable to our company in one or more significant ways: they may be specialty retailers, they may be of similar revenue size and market-capitalization value, or they may compete with us for executive talent in our geographic markets. Historically, the comparable group of companies has not changed significantly. For fiscal 2010 our peer group was identical to our fiscal 2009 peer group and the group of comparable companies consisted of 15 public companies: Abercrombie & Fitch, American Eagle Outfitters, AnnTaylor Stores, Barnes & Noble, Bed Bath & Beyond, Foot Locker, The Gap, Gymboree, Limited Brands, Men’s Wearhouse, Nordstrom, Pier 1 Imports, Ross Stores, Saks and Tiffany & Co.

 

This proxy peer group was determined originally for fiscal 2009 by the Compensation Committee considering the following criteria, which reflects the company’s profile currently and at the time it was selected:

 

  1. Company Classification in the Global Sub-Industry Classification System (GICS) in one of the following:

 

   

Home Furnishing Retail

 

   

Apparel Retail

 

   

Department Stores

 

  2. Revenues between $1 billion and $12 billion

 

  3. Market capitalization greater than $1 billion

 

  4. More than 15,000 employees

 

The following table, which is based on publicly available information as of January 31, 2011 as provided by Cook & Co., provides a financial overview of the comparable companies to illustrate their revenues, income and market capitalization as a group relative to the company. The Compensation Committee may review additional benchmarking surveys and proxy data providing summarized data levels of base salary, target annual cash incentives, and equity-based and other long-term incentives to assess market competitiveness of our compensation programs for our named executive officers.

 

     Annual
Net Revenue
(in millions)


     Annual
Net Income
(in millions)


     Market Capitalization
(in millions)
(as of 1/31/2011)


 

75th Percentile

   $ 8,340       $ 594       $ 8,705   

Average

   $ 5,631       $ 356       $ 5,306   

Median

   $ 4,259       $ 160       $ 3,628   

25th Percentile

   $ 2,831       $ 74       $ 1,510   

Williams-Sonoma, Inc.

   $ 3,103       $ 77       $ 3,395   

 

The Compensation Committee did not change the proxy peer group for fiscal 2010.

 

How are base salaries determined?

 

Base salaries are paid to provide executives and other employees with a minimum fixed level of cash compensation each year. The Compensation Committee believes that executive officers’ base salaries must be sufficiently competitive to attract and retain key executives, and believes targeting base salaries at or near the median among the proxy peer group is generally appropriate to meet these objectives. Accordingly, base pay and annual increases are determined by analyzing each individual’s salary and total target compensation relative to total salary and target compensation for similar positions at comparable companies and through a subjective recommendation made by the Chief Executive Officer based on each executive’s experience and past and anticipated contributions to the company’s success. In determining executive base salaries, the Compensation

 

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Committee also considers overall company performance and performance relative to peer companies generally and the home furnishings industry specifically. For fiscal 2010, the Compensation Committee considered the appropriate pay mix, but there was no formalized policy.

 

The Compensation Committee reviews the base salaries of its named executive officers against, and sets the base salaries of its named executive officers relative to, the salaries of the executives in its proxy peer group. At the beginning of fiscal 2010, the then-current Chief Executive Officer, Mr. Lester, reviewed the performance of the named executive officers (other than himself), assessing individual and business unit performance against the expectations set at the beginning of fiscal 2009. The Chief Executive Officer also reviewed proxy peer group data provided by Cook & Co. on behalf of the Compensation Committee and additional market survey data provided to management by the Hay Group, Hewitt Consultants and Towers Perrin, which was reviewed on behalf of the Compensation Committee by Cook & Co. At the time, peer group data had not yet been reported for fiscal 2009 so the review was based on actual 2008 proxy peer group information, except for Mr. Harvey (for whom the review was based on current market data for Brand Presidents) and Mr. Jaffe (for whom the review was based on current market data for General Counsels). The Chief Executive Officer believed that the named executive officers were performing very well, and that the company’s positive results were directly related to the efforts of his executive team. He believed that their adherence to and execution of the strategic initiatives set out in fiscal 2009 led to the company’s ability to gain market share and increased earnings over initial estimates for each quarter.

 

After a review of the base salaries of the named executive officers relative to proxy peer group and market survey data, the Chief Executive Officer proposed changes to the base salaries of all of the named executive officers, including for Mr. Jaffe, who was not a named executive officer at that time, along with increases to their respective bonus targets. The Chief Executive Officer proposed these changes so that the base salaries and bonus targets of the named executive officers would bring the executives to at or above the 50th percentile for target total cash compensation compared to the company’s proxy peer group and relevant market data as described above. The adjustments to Ms. McCollam’s base salary and Mr. Harvey’s base salary were made to reflect increased responsibility within the company. As Mr. Connolly’s and Mr. Jaffe’s responsibilities were not increased, they received an increase of 2%, equivalent to the increase provided to the company’s associates in the general course of the company’s annual focal review process. These changes were informed by the impending changes to the executive management team, including Ms. Alber’s anticipated appointment as the company’s Chief Executive Officer (discussed below).

 

Following Mr. Lester’s recommendations, the Compensation Committee approved the following base salaries of the named executive officers (other than for Mr. Lester) for fiscal 2010 at the Compensation Committee meeting held on March 22, 2010:

 

Named Executive Officer


   Fiscal 2009 Base Salary

     Fiscal 2010 Base Salary

 

Laura J. Alber

   $ 800,000       $ 975,000   

Sharon L. McCollam

   $ 725,000       $ 850,000   

Patrick J. Connolly

   $ 570,000       $ 581,400   

Richard Harvey

   $ 525,000       $ 600,000   

Seth R. Jaffe

   $ 375,000       $ 382,500   

 

In accordance with the terms of his Retirement and Consulting Agreement, which had been entered into on January 25, 2010, Mr. Lester’s base salary for fiscal 2010 (through his retirement date) did not change from his fiscal 2009 base salary.

 

Were annual incentive bonuses awarded to named executive officers for fiscal 2010?

 

Yes. Annual incentive bonuses were awarded to our named executive officers for fiscal 2010 under the company’s 2001 Incentive Bonus Plan (the “Bonus Plan”). In addition, the Compensation Committee awarded a special bonus of $350,000 to Ms. Alber, in recognition of her outstanding performance and the company’s results for fiscal 2010. This bonus was made outside of the Bonus Plan.

 

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How are the parameters for annual incentive bonuses determined under the Bonus Plan?

 

Annual incentives are set based on a variety of factors tailored to assist the company in driving financial and operating performance as well as retention.

 

The company promotes strong performance by rewarding executive officers, including the named executive officers, for achieving specific performance objectives with an annual cash bonus paid through the Bonus Plan or, in some cases, through discretionary bonuses outside of the Bonus Plan. The company pays bonuses under the Bonus Plan only when the company meets or exceeds specific objectives and goals established by the Compensation Committee.

 

The shareholder-approved Bonus Plan is intended to qualify annual incentives paid under the Bonus Plan as deductible performance-based compensation under Internal Revenue Code Section 162(m), which otherwise restricts our ability to deduct executive compensation in excess of $1,000,000 per executive per year. In accordance with Internal Revenue Code rules, the Bonus Plan payout criteria are specified by the Compensation Committee in the first quarter of each fiscal year. For fiscal 2010, the Bonus Plan limited the maximum payout to each executive to the lower of three times the executive’s base salary as of February 1, 2010, the first day of the performance period or $3,000,000. The Compensation Committee has historically set target incentive levels (“target bonuses”) for each executive below this level.

 

Under the Bonus Plan, the Compensation Committee generally sets a primary, critical performance goal. If this goal is not met, no bonuses are payable under the Bonus Plan. If this performance goal is met, maximum bonuses become available under the Bonus Plan for each named executive officer. For fiscal 2010, the Compensation Committee established the primary performance goal for the Bonus Plan as positive net cash provided by operating activities (excluding any non-recurring charges) as provided on the company’s consolidated statements of cash flows, with adjustments to any evaluation to exclude (i) any extraordinary non-recurring items and/or in management’s discussion and analysis of financial condition and results of operations appearing in the company’s annual report to shareholders for the applicable year, or (ii) the effect of any changes in accounting principles affecting the company’s or a business unit’s reported activities. The Compensation Committee felt this goal was appropriate for the reasons discussed below. Although maximum bonuses would be available if this goal was met, the Compensation Committee did not expect to pay maximum bonuses or even target bonuses if only this goal was met. The Compensation Committee is permitted, and fully expected, to apply negative discretion in determining the actual amount, if any, to be paid to any named executive officer. See below for a discussion of if and how the Compensation Committee applies negative discretion.

 

Why did the Compensation Committee choose positive net cash provided by operating activities as the primary performance goal under the Bonus Plan?

 

The Compensation Committee chose positive net cash flow provided by operating activities as the primary performance goal for fiscal 2010 because it believed that maintaining strong positive net cash flow was critical to the success of the company in fiscal 2010. The achievability of the goal was deemed substantially uncertain for purposes of Internal Revenue Code Section 162(m) because it was based on positive net cash flow. When the positive net cash objective for fiscal 2010 was first established, it was thought to be reasonably attainable based upon the company’s history of achieving positive net cash flow and expected levels of net cash flow.

 

Did the company achieve positive net cash by operating activities for fiscal 2010?

 

Yes, for fiscal 2010, the company achieved positive net cash by operating activities as described above. Since this primary, critical performance goal was achieved, maximum bonuses became available under the Bonus Plan for fiscal 2010 for each named executive officer. As described below, the Compensation Committee used its negative discretion available to decrease bonuses actually awarded under the Bonus Plan to below the maximum available levels for all named executive officers other than our Chief Executive Officer.

 

How does the Compensation Committee decide if and how to apply negative discretion under the Bonus Plan?

 

If the primary performance goal is achieved, as it was in fiscal 2010, then the Compensation Committee decides if (and how) to apply its negative discretion to reduce bonuses from the maximum available under the Bonus

 

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Plan. In doing so, the Compensation Committee evaluates company performance against the business plan approved by the Board in the first fiscal quarter and individual performance. The Compensation Committee also establishes secondary performance goals to assist in guiding its use of negative discretion, which, if achieved at target levels, are expected to result in payment of target bonuses, although the Compensation Committee may also take other factors into consideration in determining if and how to apply this negative discretion. The Compensation Committee expected to pay bonuses under the Bonus Plan at target levels only if the secondary goal was fully met. For fiscal 2010, this secondary goal was an earnings per share target of $1.24 (excluding store impairments and other extraordinary non-recurring charges, and including any amounts payable to covered employees under the Bonus Plan), which would impact the level of funding of the company-wide bonus pool for fiscal 2010 under the Company’s broad-based FY 2010 Management Bonus Plan (the “Management Bonus Plan”) that had an anticipated maximum funding at earnings per share of $1.44. This secondary goal was achieved for fiscal 2010, as the company achieved earnings per share of $1.95 (excluding store impairments and other extraordinary non-recurring charges, and including any amounts payable to covered employees under the Bonus Plan) for fiscal 2010. The Compensation Committee may deviate from the guidelines, but may never increase bonuses under the Bonus Plan above the maximum payout amounts that become available as a result of the achievement of the primary performance goal.

 

Individual performance also is taken into account in applying negative discretion. Individual performance (for positions other than his or her own) is assessed by the Chief Executive Officer and takes into account achievement of individual goals and objectives. Achievement of objectives that increase shareholder return or that are determined by the Chief Executive Officer (for positions other than his or her own) to significantly impact future shareholder return are significant factors in the Chief Executive Officer’s subjective performance assessment. The Chief Executive Officer believed that his or her well-tenured team performed at a very high level, and, to reward this achievement, recommended bonus awards commensurate with the results achieved.

 

The Compensation Committee believes that achieving individual goals and objectives is important to the overall success of the company and will adjust bonuses paid to reflect performance in these areas. For example, if the company or the executive officer fails to fully meet some or all of the company or individual objectives, the award may be significantly reduced or even eliminated. Conversely, if the objectives are overachieved, awards may be subject to less or no reduction from the maximum available awards.

 

For example, the Compensation Committee evaluated the fiscal 2010 performance of the Chief Executive Officer and determined that her performance and leadership of the company were outstanding, and therefore the Compensation Committee determined not to apply any negative discretion with respect to Ms. Alber’s fiscal 2010 bonus under the Bonus Plan, as discussed below.

 

In determining final bonus amounts, if any, the Compensation Committee verifies the company’s actual performance for each performance period, reviews management’s recommendation for the resulting aggregate bonus awards and approves an aggregate award amount. The Compensation Committee also reviews and approves the individual bonuses payable, if any, to each of the company’s named executive officers under the Bonus Plan. The Compensation Committee decides the bonus amount, if any, for the Chief Executive Officer in an executive session.

 

Why did the Compensation Committee choose earnings per share as the secondary performance goal under the Bonus Plan?

 

The Compensation Committee chose earnings per share as the secondary performance goal for fiscal 2010 because it believes that earnings per share is a significant measure of performance and is the measure most closely aligned to long-term shareholder value.

 

What were the target bonus amounts established for fiscal 2010?

 

At its March 22, 2010 meeting, the Compensation Committee established the incentive targets under the Bonus Plan for each named executive officer for fiscal 2010. The target bonuses under the Bonus Plan were set after a review of the respective responsibilities of the named executive officers, the bonus targets set by our comparable

 

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companies, the current combinations of pay elements for each named executive officer and whether such combinations were appropriate to provide incentives for achievement of desired results for the company. In fiscal 2009, as a result of the then-current economic climate, including the continued weakness of the retail industry, the Compensation Committee recommended funding the Bonus Plan and using Bonus Plan targets at fiscal 2007 levels. As a result of this decision, the majority of the company’s named executive officers fell on average below the 50th percentile compared to the company’s proxy peer group and relevant market data as described above in target total cash compensation (as defined below). After considering market data for comparable companies and a review of the respective responsibilities of the named executive officers, the current combinations of pay elements for each named executive officer and whether such combinations were appropriate to create incentives to achieve desired results for the company, the Compensation Committee determined that target bonuses as a percentage of base salary should be increased for the named executive officers, including our then-incoming Chief Executive Officer, Laura J. Alber, in fiscal 2010 (please see the chart below for fiscal 2009 and 2010 target bonus amounts as a percentage of base salary).

 

The adjustments in Ms. Alber’s base salary and target bonus level (together, “target total cash compensation”) followed an assessment of our proxy peer group data for chief executive officers. The adjustments result in target total cash compensation for Ms. Alber slightly above the 50th percentile. For the remaining named executive officers, the increases in base salaries as well as increases in the target bonus levels result in target total cash compensation for fiscal 2010 increasing from generally below the 50th percentile to between the 50th percentile and the 75th percentile compared to the company’s proxy peer group and relevant market data as described above. However, Ms. McCollam’s target total cash compensation is significantly over the 75th percentile given the importance of her role and her performance to the company. The Compensation Committee believes that delivering a greater percentage of total cash compensation through incentive compensation reinforces the company’s pay-for-performance strategy and aligns executive pay with shareholder interests by limiting the growth of fixed base salaries and increasing at-risk pay.

 

The target bonuses under the Bonus Plan for fiscal 2009 and 2010 are listed below for each named executive officer:

 

Named Executive Officer


   Fiscal 2009
Target Bonus
(as a Percentage
of Base Salary)


    Fiscal 2010
Target Bonus
(as a Percentage
of Base Salary)


 

Laura J. Alber

     50     150

W. Howard Lester

     100    
—  

Sharon L. McCollam

     50     125

Patrick J. Connolly

     50     75

Richard Harvey

     50     75

Seth R. Jaffe

     40     60

* Pursuant to his Retirement and Consulting Agreement, Mr. Lester was not eligible to receive any bonus for fiscal 2010.

 

What were the results for fiscal 2010 under the Bonus Plan?

 

Under the shareholder-approved Bonus Plan, no amounts were payable for fiscal 2010 unless the primary performance goal was achieved. As mentioned above, during fiscal 2010, the company saw significant improvements in both sales and earnings and did achieve the primary performance goal of positive net cash provided by operating activities.

 

Since the Compensation Committee certified that the Bonus Plan’s fiscal 2010 primary performance goal was achieved, it had discretion to award bonuses to the named executive officers under the plan in amounts up to three times each executive’s base salary as of the beginning of the fiscal year.

 

In making its decision regarding bonuses, the Compensation Committee evaluated company performance and the individual performance of the named executive officers. The Chief Executive Officer made recommendations to the Compensation Committee based on her subjective assessment of each executive’s performance relative to their roles and areas of responsibility. In fiscal 2010, achievement of the secondary performance goal of earnings

 

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per share exceeded $1.44 per share, which would have funded the Management Bonus Plan at maximum levels. However, capping funding of the pool and using negative discretion to correspondingly reduce bonuses to the named executive officers would have resulted in bonuses which did not adequately reflect their outstanding performance. In light of the outstanding executive performance, the Chief Executive Officer recommended that the Compensation Committee deviate from the secondary performance goal guidelines and apply less negative discretion in its reduction of the maximum available awards. The Compensation Committee discussed the Chief Executive Officer’s recommendations at the meeting and concurred that the results for fiscal 2010 were significantly better than expected and performance of the named executive officers was outstanding. Therefore, the Compensation Committee accepted the recommendation to deviate from the guidelines, but nonetheless used its negative discretion to award bonuses under the Bonus Plan to named executive officers other than the Chief Executive Officer that were less than the maximum potential payout and awarded these named executive officers bonuses as described below. Similarly, the Compensation Committee felt that any use of negative discretion in deciding the Chief Executive Officer’s bonus under the Bonus Plan would not have adequately reflected her contribution to the company during fiscal 2010. Therefore, in recognition of her outstanding individual performance and leadership, and strong company performance, the Compensation Committee decided that it would apply no negative discretion and awarded Ms. Alber the maximum payout amount available as a result of the achievement of the primary performance goal. The actual fiscal 2010 bonus amounts awarded to the named executive officers under the Bonus Plan were:

 

Named Executive Officer


   Fiscal 2010
Bonus
Amount


    Fiscal 2010
Bonus
(as a Percentage
of Base Salary)


 

Laura J. Alber

   $  2,400,000        246 %

W. Howard Lester

             —  *        —  

Sharon L. McCollam

   $  1,600,000        188 %

Patrick J. Connolly

   $  800,000        138 %

Richard Harvey

   $  700,000        117 %

Seth R. Jaffe

   $  300,000        78 %

* Pursuant to his Retirement and Consulting Agreement, Mr. Lester was not eligible to receive any bonus for fiscal 2010.

 

Were any bonuses granted outside of the Bonus Plan for fiscal 2010?

 

Yes. In recognition of Ms. Alber’s outstanding performance and the company’s results for fiscal 2010, the Compensation Committee decided to grant a special, discretionary bonus of $350,000 to Ms. Alber, which was awarded outside of the Bonus Plan.

 

How is long-term incentive compensation determined in general?

 

The third primary component of the company’s executive compensation program consists of long-term equity compensation awards. The Compensation Committee continues to believe that equity compensation awards are important for motivating executive officers and other employees to increase shareholder value over the long term.

 

The equity awards granted to named executive officers are designed to deliver target total direct compensation

(base salary, target bonus and equity awards) that is competitive with that offered by comparable companies for each named executive officer’s job level, e.g., between the 50th and 75th percentile of our company’s proxy peer group and relevant market data as described above, to reflect the Chief Executive Officer and Compensation Committee’s assessment of such executive’s ongoing contributions to the company, to create an incentive for such executives to remain with the company, and to provide a long-term incentive to help the company achieve its financial and strategic objectives.

 

Historically, the Compensation Committee has granted restricted stock units and stock-settled stock appreciation rights to its named executive officers. The Compensation Committee believes restricted stock units are effective

 

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for retention and also result in less dilution than options and stock-settled stock appreciation rights. At the same time, the Compensation Committee believes that stock-settled stock appreciation rights provide valuable incentives to increase shareholder value.

 

In determining the type and number of equity awards granted to an individual executive, the Compensation Committee considered such factors as:

 

   

The individual’s performance and contribution to the profitability of the company;

 

   

The type and number of awards previously granted to an individual;

 

   

An individual’s outstanding awards;

 

   

The vesting schedule of the individual’s outstanding awards;

 

   

The relative value of awards offered by comparable companies to executives in comparable positions to fairly benchmark awards of different sizes and equity instruments;

 

   

Internal equitability between positions within the company;

 

   

The appropriate mix between long-term incentive awards, and other types of compensation, such as base salary and bonus; and

 

   

Additional factors, including succession planning and retention of the company’s high-level potential executives.

 

The Compensation Committee believes that each of these factors influences the type and number of shares appropriate for each individual and that no one factor is determinative.

 

In determining whether to make restricted stock unit and stock-settled stock appreciation right grants for named executive officers, the Compensation Committee took into account the Chief Executive Officer’s assessment of the performance of the company and the adequacy of compensation levels of named executive officers.

 

What equity grants were made in fiscal 2010?

 

At its March 2010 meeting, the Compensation Committee approved equity grants to the named executive officers consisting of restricted stock units and stock-settled stock appreciation rights. In determining the number and type of equity grants to be made to the named executive officers, the Compensation Committee considered both the retention value of granting restricted stock units that provide named executive officers with immediate value because they have no purchase price (but are subject to vesting) and the benefits to our shareholders of granting stock-settled stock appreciation rights with value that is tied to sustained long-term stock price performance. The Compensation Committee continued to target a range between the 50th and 75th percentile of target total direct compensation of our comparable companies and relied on other factors as discussed above when determining the size of the equity grants, including the fact that no focal incentive grants were made in fiscal 2009 (other than to our then-current Chief Executive Officer, Mr. Lester) and virtually all outstanding equity or incentive cash awards held by our named executive officers are scheduled to be fully vested in 2012. In addition, when determining the size of the equity awards granted to Ms. Alber and Ms. McCollam, the Compensation Committee took into account Ms. Alber’s and Ms. McCollam’s anticipated increased roles and responsibilities with the company following Mr. Lester’s planned retirement from the company (discussed in further detail below). As a result of the Compensation Committee’s assessment of their importance to the company, and in consideration of their ascension to new leadership roles in the company, both Ms. Alber and Ms. McCollam received awards that resulted in equity compensation significantly above the 75th percentile of similarly situated executives in the company’s proxy peer group. In determining these equity grants, the Compensation Committee also took into account its strong belief that it was critical to ensure that Ms. Alber and Ms. McCollam remain with the company following Mr. Lester’s planned retirement. The remaining named executive officers received equity grants that brought their target total direct compensation to approximately the 50th percentile compared to the company’s proxy peer group and relevant market data as described above.

 

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The equity grants approved at the March 2010 meeting are as follows:

 

Named Executive Officer


   Number of
Restricted
Stock
Units


     Number of Stock-
Settled Stock
Appreciation
Rights


 

Laura J. Alber

     280,000         200,000   

Sharon L. McCollam

     210,000         150,000   

Patrick J. Connolly

     11,250         9,375   

Richard Harvey

     25,000         0   

Seth R. Jaffe

     10,750         0   

 

The restricted stock units granted to the named executive officers vest on the fourth anniversary of the award’s grant date, subject to the company achieving positive net cash provided by operating activities in fiscal 2010 (excluding any non-recurring charges) as provided on our consolidated statements of cash flow, with adjustments to any evaluation of performance to exclude (i) any extraordinary non-recurring items, or (ii) the effect of any changes in accounting principles affecting the company’s or a business unit’s reported results and subject to the named executive officer’s continued service to the company through such date. The stock-settled stock appreciation rights granted to the named executive officers (including those granted to Ms. Alber and Ms. McCollam) vest in equal annual installments over the four-year period from the date of grant, subject to the named executive officer’s continued service with the company.

 

As described in our proxy for fiscal 2009, Mr. Lester had received a grant of restricted stock units at the end of fiscal 2009, in January 2010, when he entered into his Retirement and Consulting Agreement. In addition, please see below for a summary of the compensation Mr. Lester received as compensation for his consulting services to the company.

 

Grants of stock-settled stock appreciation rights and restricted stock units made in fiscal 2010 to company associates, including its named executive officers (other than Mr. Lester’s May 2010 grant), include an acceleration feature which provides for the full acceleration of vesting of such awards in the event of a qualifying retirement, which is defined as leaving the company’s employment at age 70 or later, with at least fifteen years of service, because management and the Compensation Committee believe it is important to provide a mechanism for vesting for its long-service associates who are reaching an age upon which they might want to retire from their employment from the company as a reward for their long and valued service.

 

When are equity awards made to named executive officers?

 

In general, equity awards to named executive officers are only approved at scheduled Compensation Committee meetings. Executives do not have any role in selecting the grant date of equity awards. The grant date of equity awards may be a date set in advance by the Compensation Committee or the date of the Compensation Committee’s approval. The exercise price of stock options or stock-settled stock appreciation rights is always the closing price of the company’s common stock on the trading day prior to the grant date.

 

In general, equity awards to named executive officers are made during the Compensation Committee’s March meeting in which the Compensation Committee reviews company performance over the past fiscal year and determines base salaries and bonuses for named executive officers. The Compensation Committee also makes equity awards at other times during the year in connection with promotions, assumptions of additional responsibilities and other considerations, such as special retention or incentive concerns. The restricted stock unit and cash award granted to Mr. Lester was made by the Compensation Committee effective in May 2010 immediately prior to his retirement date, in accordance with the terms of his Retirement and Consulting Agreement described below. Grants made by the Incentive Award Committee are made in the first week of each open trading window on an as-needed basis. The Compensation Committee does not time equity grants to take advantage of anticipated or actual changes in the price of our common stock prior to or following the release of material information regarding the company.

 

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Does the company have a stock ownership policy for its executive officers?

 

We do not currently have a stock ownership policy for our executive officers. However, all of our named executive officers own shares of the company’s common stock or vested, but unexercised, equity awards. Management is considering recommending a stock ownership policy for our executive officers in fiscal 2011. We currently expect the Compensation Committee to consider any such recommendation at a future Compensation Committee meeting.

 

Does the company have a policy regarding recovery of past awards or payments in the event of a financial restatement?

 

Although we do not currently have a formal policy regarding recovery of past awards or payments in the event of a financial restatement, we support the review of performance-based compensation following a restatement that impacts the achievement of performance targets relating to that compensation, followed by appropriate action. These actions may include recoupment of cash or other incentives, as well as employment actions including termination. Further, we will implement any recovery policies required by applicable law.

 

What leadership changes occurred in fiscal 2010?

 

Howard Lester retired as Chairman and Chief Executive Officer on May 26, 2010, the date of the company’s 2010 Annual Meeting. Following his retirement, Mr. Lester provided consulting and advisory services to assist with the transition to a new Chief Executive Officer until his death in November 2010.

 

Upon Mr. Lester’s retirement, the company’s Board appointed Laura J. Alber as the company’s President and Chief Executive Officer.

 

How was Mr. Lester compensated?

 

On January 25, 2010, the company and Mr. Lester entered into a Retirement and Consulting Agreement. Pursuant to the terms of the Retirement and Consulting Agreement, Mr. Lester retired as the company’s Chairman of the Board and Chief Executive Officer on May 26, 2010, the date of the company’s 2010 shareholder’s meeting. Mr. Lester provided consulting and advisory services to the company to assist in the transition to the new Chief Executive Officer and, following his retirement, Mr. Lester had the title of Chairman Emeritus. When approving Mr. Lester’s Retirement and Consulting Agreement, the Compensation Committee and the independent members of the company’s Board considered the value of the services that Mr. Lester was expected to provide during the consulting period and the fact that his more than 30 years of experience with our company enabled him to provide unique services for which the independent directors believed the compensation under the Retirement and Consulting Agreement was reasonable and appropriate. For example, the directors envisioned that Mr. Lester was able to provide valuable and unique services in negotiating and working with major real estate lessors, particularly since a significant number of our real estate leases were scheduled to expire in the next year. In addition, Mr. Lester received benefits in connection with his retirement, which are described under “Employment Contracts and Termination of Employment and Change-of-Control Arrangements” beginning on page 56 and were approved in recognition of his retirement and his significant contributions to the company.

 

As compensation for the consulting services Mr. Lester provided to the company, he received an annual fee of $500,000, plus a one-time award representing the right to receive 125,000 restricted stock units, and cash payments representing the value of 125,000 shares of our common stock (including dividend equivalent rights that were payable at the same time that the shares subject to the related restricted stock units were delivered), in each case which vested monthly over the consulting period. Mr. Lester also received a lump sum payment of $175,000 (which represented the estimated costs of health benefits through the end of his Retirement and Consulting Agreement) and continued lifetime employee discount privileges. Upon his death in November 2010, the Retirement and Consulting Agreement ended and his grants ceased vesting.

 

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The company has an aircraft lease agreement with a management company owned by Mr. Lester’s estate, and the company agreed to continue the agreement on its current economic terms through May 2011. Under the Retirement and Consulting Agreement, Mr. Lester agreed to give the company an option to purchase this aircraft at its estimated fair market value at the time we entered into the Retirement and Consulting Agreement. On January 3, 2011, as required by the lease agreement, the company provided the lessor with notice of its intent to exercise the option to purchase the aircraft at the end of the lease term. However, on or prior to the end of the lease term, the company instead expects to enter into an agreement to lease the aircraft from a third party on terms no less favorable than those in the current lease.

 

How is the Chief Executive Officer compensated?

 

Ms. Alber was named the company’s Chief Executive Officer on May 26, 2010. Ms. Alber’s fiscal 2010 compensation package was based on:

 

   

A review of the compensation paid to chief executive officers of comparable companies (based on the process described above);

 

   

Company performance; and

 

   

Our general compensation philosophy as described above.

 

The Compensation Committee reviewed Ms. Alber’s base salary at its meeting in March 2010. After a discussion and a review of Ms. Alber’s total compensation and that of other Chief Executive Officers in our proxy peer group, the Compensation Committee adjusted her 2010 target total cash compensation to fall slightly above the 50th percentile of our proxy peer group. Ms. Alber’s actual bonus payouts for fiscal 2010 are discussed above. In addition to receiving the maximum bonus permitted under the Bonus Plan upon achievement of the primary performance goal, the Compensation Committee awarded Ms. Alber a special bonus of $350,000, granted outside of the Bonus Plan, in recognition of her outstanding performance and the company’s results for fiscal 2010.

 

In connection with Ms. Alber being named the company’s Chief Executive Officer, the company entered into an employment agreement with Ms. Alber to document the material terms and conditions of her employment. The Compensation Committee consulted with Cook & Co., which provided various suggestions regarding the potential terms of Ms. Alber’s Employment Agreement based on competitive market data from our proxy peer group. When deciding the terms of Ms. Alber’s employment agreement, including provisions for severance, the Compensation Committee recognized that concerns about potential job loss can create uncertainty that may unduly affect performance. We believe that the terms of Ms. Alber’s employment agreement help to ensure her continued attention and dedication to her assigned duties, and, thus, help ensure that she acts in the best interests of our shareholders. Ms. Alber’s employment agreement also helps to mitigate her risk of a potential job loss, as well as provide additional incentives to Ms. Alber to remain employed with the company. A summary of Ms. Alber’s employment agreement can be found in the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements” on page 56.

 

Are there any other benefits considerations?

 

The company believes that benefits should provide our employees with protection and security through health and welfare, retirement, disability insurance and life insurance programs. The named executive officers do not, in general, receive benefits in excess of those provided to other employees. However, the Compensation Committee may recommend additional benefits for certain individuals from time to time if the Compensation Committee determines that the category and amount of such benefits are reasonable and necessary to provide additional incentives to attract or retain key executives.

 

Do the named executive officers have change of control arrangements?

 

On May 25, 2010, the company approved a Management Retention Agreement with each of Patrick Connolly, Richard Harvey and Seth Jaffe. As noted in the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements” beginning on page 56, if within 18 months following the change of control any of Messrs. Connolly, Harvey and Jaffe’s employment is terminated without cause or he

 

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voluntarily terminates his employment for good reason, he will be entitled to certain severance benefits. On June 11, 2010, the company entered into a Management Retention Agreement with each of Ms. Alber and Ms. McCollam. As noted in the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements” beginning on page 56, if within 18 months following the change of control either Ms. Alber or Ms. McCollam is terminated without cause or voluntarily terminates her employment for good reason, she will be entitled to certain severance benefits.

 

The Compensation Committee approved the Management Retention Agreements that were entered into with the named executive officers so that it can mitigate the risk of not being able to retain our named executive officers notwithstanding the possibility of an acquisition of the company. The Compensation Committee believes these arrangements are necessary to ensure that each named executive officers is focused on the company’s goals and objectives, as well as the best interests of shareholders, rather than potential personal economic exposure under these particular circumstances. Additionally, the Compensation Committee believes that these agreements will provide a smooth transition should the company undergo such an event.

 

When deciding on the terms of the Management Retention Agreements, the Compensation Committee consulted with Cook & Co., who provided various suggestions regarding the potential terms of a Management Retention Agreement based on competitive market data from our proxy peer group. In considering these potential terms, the Compensation Committee’s objectives were to: (1) assure we would have the continued dedication and objectivity of our named executive officers, notwithstanding the possibility of a change of control of the company, thereby aligning the interests of the named executive officers with those of the shareholders in connection with potentially advantageous offers to acquire the company; and (2) create a total executive compensation plan that is competitive with our proxy peer group.

 

None of the executive officers is provided with any type of golden parachute excise tax gross-up. In addition, our equity compensation plans do not otherwise provide for automatic “single trigger” vesting acceleration upon or following a change of control. We have considered the total potential cost of the change of control protection afforded to our executive officers and have determined that it is reasonable and not excessive given the importance of the objectives described above.

 

Do our executive officers have severance protection?

 

As noted in the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements” beginning on page 56, if either Ms. Alber or Ms. McCollam is terminated without cause or voluntarily terminates her employment for good reason, she will be entitled to certain severance benefits. The Compensation Committee believes these arrangements are necessary to ensure that these two senior executives are focused on the company’s goals and objectives, as well as the best interests of shareholders, rather than potential personal economic exposure under these particular circumstances.

 

Grants of stock-settled stock appreciation rights and restricted stock units made in fiscal 2010 to company employees, including its named executive officers (other than Mr. Lester’s May 2010 grant), include an acceleration feature which provides for the full acceleration of vesting of such awards in the event of a qualifying retirement, which is defined as leaving the company’s employment at age 70 or later, with at least fifteen years of service. The Compensation Committee believes these conditions to be prevalent in the retention award agreements of similarly situated executives.

 

Mr. Lester’s retirement arrangements are described above in the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements” beginning on page 56.

 

Otherwise, except as described above, the named executive officers do not have arrangements that provide them with specific benefits upon their termination. The Compensation Committee has considered the total potential cost of the severance benefits to the executive officers and determined them to be reasonable and not excessive.

 

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Do we provide perquisites to the executive officers?

 

The company provides executive officers, including the named executive officers, with perquisites and other personal benefits that the company and the Compensation Committee believe are reasonable and enable the company to attract and retain superior employees for key positions. The company provides certain perquisites to its named executive officers, including premiums for term life insurance in excess of $50,000, a matching contribution for investments in our 401(k) plan and a $500 monthly car allowance. Some of these perquisites are also provided to other employees. In addition, Mr. Lester occasionally made personal use of the corporate aircraft. The value of all of these benefits to each of the named executive officers is detailed in the “Other Annual Compensation from Summary Compensation” table on page 51. The Compensation Committee believes these perquisites to be customary for comparable professionals in our industry with comparable management and retail industry experience. There are no tax gross-ups to named executive officers on any imputed income relating to any non-business related benefits or perquisites.

 

The named executive officers who contribute to our 401(k) plan received matching contributions from the company. In fiscal 2010, these matching contributions were limited to $6,125 for the named executive officers and for all participating employees earning over $245,000. The company suspended deferrals into the nonqualified deferred compensation plan for all associates beginning in January 2010 and will continue to evaluate the benefit program in the future to ensure that it is providing the best value to associates and the company.

 

How does the Compensation Committee address Internal Revenue Code Section 162(m)?

 

Under Section 162(m) of the Internal Revenue Code of 1986, as amended, and regulations adopted under it by the Internal Revenue Service, publicly held companies may be precluded from deducting certain compensation paid to certain executive officers in excess of $1,000,000 in a year. The regulations exclude from this limit various forms of performance-based compensation, stock-settled stock appreciation rights and stock options, provided certain requirements, such as shareholder approval, are satisfied. The company believes that awards granted under the company’s equity incentive plans qualify as performance-based compensation and can therefore be excluded from the $1,000,000 limit, with the exception of restricted stock units that vest solely based on continued service. The company believes that bonuses awarded to date under the Bonus Plan also qualify as performance-based compensation and are excluded from calculating the limit. Bonuses awarded outside of the Bonus Plan, such as the special bonus awarded to Ms. Alber for fiscal 2010, do not qualify as performance-based compensation for purposes of Section 162(m) and therefore count toward the $1,000,000 limit. While the Compensation Committee cannot predict how the deductibility limit may impact its compensation program in future years, the Compensation Committee intends to maintain an approach to executive compensation that strongly links pay to performance.

 

COMMITTEE REPORTS

 

The sections indicated below by an asterisk (*) shall not be deemed to be (i) “soliciting material,” (ii) “filed” with the SEC, (iii) subject to Regulations 14A or 14C of the Securities Exchange Act of 1934, as amended, or (iv) subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference into any of our other filings under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, except to the extent we specifically incorporate them by reference into such filing.

 

Compensation Committee Report *

 

Who serves on the Compensation Committee?

 

The Compensation Committee consisted of Adrian D.P. Bellamy, Richard T. Robertson, Anthony A. Greener and Ted W. Hall during fiscal 2010. Mr. Bellamy serves as Chairman of the Compensation Committee. The Board for fiscal 2010 determined that each member of the Compensation Committee was independent under the NYSE rules as currently in effect, was an outside director as such term is defined with respect to Section 162(m) of the

 

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Internal Revenue Code and was a non-employee director under Section 16(b) of the Securities Exchange Act of 1934. None of the committee members has ever served as an officer of the company.

 

The Compensation Committee has reviewed and discussed the above Compensation Discussion and Analysis with management. Based on our review and discussion with management, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and in the company’s Annual Report on Form 10-K for fiscal 2010.

 

Who prepared this Compensation Committee Report?

 

Members of the Compensation Committee, Adrian D.P. Bellamy, Richard T. Robertson, Anthony A. Greener and Ted W. Hall, prepared the Compensation Committee Report after reviewing the Compensation Discussion and Analysis, which was prepared by management and is a management report.

 

Nominations and Corporate Governance Committee Report

 

Who serves on the Nominations and Corporate Governance Committee?

 

The Nominations and Corporate Governance Committee consisted of Michael R. Lynch, Adrian D.P. Bellamy, Anthony A. Greener and David B. Zenoff during fiscal 2010. Mr. Lynch serves as Chairman of the Nominations and Corporate Governance Committee. The Board has determined that each current member of the Nominations and Corporate Governance Committee is independent under the NYSE rules, as currently in effect. Each current member of the Nominations and Corporate Governance Committee is a non-employee director.

 

What is the role of the Nominations and Corporate Governance Committee?

 

Our role is detailed in the Nominations and Corporate Governance Committee Charter, which was amended and restated by the Board on January 27, 2011. The Nominations and Corporate Governance Committee Charter is available on the company’s website at www.williams-sonomainc.com and is attached to this Proxy Statement as Exhibit F. The Nominations and Corporate Governance Committee Charter is also available in print to any shareholder who requests it. Specifically, we:

 

   

Periodically review and recommend to the Board suitable revisions to the corporate governance guidelines applicable to the company and the categorical standards of independence applicable to the company’s outside directors;

 

   

Annually consider and review with the Board criteria for selecting new director candidates, identify individuals qualified to become Board members and periodically assist in screening and evaluating director candidates;

 

   

Consider director nominations from shareholders;

 

   

Review, make recommendations to the Board regarding, and approve, as appropriate, the compensation policy for non-employee directors of the company;

 

   

Consider the resignation offer of any nominee for director who, in an uncontested election, receives a majority of withheld votes, and recommend to the Board the action it deems appropriate to be taken with respect to each such offered resignation in accordance with the company’s majority voting policy; and

 

   

Annually evaluate the performance of the company’s Chief Executive Officer and oversee the evaluation of the performance of the company’s management and the Board.

 

Does the Nominations and Corporate Governance Committee have a policy with regard to the consideration of director candidates recommended by shareholders?

 

We adopted a Shareholder Recommendations Policy on March 16, 2004. It is our policy to consider recommendations for candidates to the Board from shareholders holding no fewer than 500 shares of the company’s common stock continuously for at least six months prior to the date of the submission of the recommendation.

 

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What are the procedures to be followed by shareholders in submitting recommendations of director candidates to the Nominations and Corporate Governance Committee?

 

The Nominations and Corporate Governance Committee will consider suggestions from shareholders regarding possible director candidates for election at next year’s Annual Meeting. A shareholder that desires to recommend a candidate for election to the Board shall direct the recommendation in writing to Williams-Sonoma, Inc., Attention: Corporate Secretary, 3250 Van Ness Avenue, San Francisco, California 94109. The recommendation must include: (i) the candidate’s name, home and business contact information; (ii) detailed biographical data and qualifications of the candidate; (iii) information regarding any relationships between the candidate and the company within the last three years; (iv) evidence of the recommending person’s ownership of company common stock; (v) a statement from the recommending shareholder in support of the candidate; and (vi) a written indication by the candidate of his or her willingness to serve if elected. A shareholder that desires to recommend a person directly for election to the Board at the company’s Annual Meeting must also meet the deadlines and other requirements set forth in Rule 14a-8 of the Securities Exchange Act of 1934 and the company’s Restated Bylaws or Delaware Bylaws, as applicable, each of which are described in the “Shareholder Proposals” section of this Proxy Statement.

 

Each director nominated in this Proxy Statement was recommended for election to the Board by the Nominations and Corporate Governance Committee. The Board did not receive any notice of a director nominee recommendation from any shareholder in connection with this Proxy Statement.

 

What are the criteria and process of the Nominations and Corporate Governance Committee for identifying and evaluating nominees for the Board?

 

Our criteria and process for evaluating and identifying the candidates that we select, or recommend to the Board for selection, as director nominees are as follows:

 

   

We regularly review the current composition and size of the Board;

 

   

We evaluate the performance of the Board as a whole and evaluate the performance and qualifications of individual members of the Board eligible for re-election at the Annual Meeting;

 

   

We review the qualifications of any candidates who have been properly recommended by shareholders, as well as those candidates who have been identified by management, individual members of the Board or, if we deem appropriate, a search firm. Such review may, in our discretion, include a review solely of information provided to us or also may include discussions with persons familiar with the candidate, an interview with the candidate or other actions that we deem proper;

 

   

In evaluating the qualifications of candidates for the Board, we consider many factors, including issues of character, judgment, independence, financial expertise, industry experience, range of experience, other commitments and the like. We value diversity, but do not assign any particular weight or priority to any particular factor. We consider each individual candidate in the context of the current perceived needs of the Board as a whole. While we have not established specific minimum qualifications for director candidates, we believe that candidates and nominees must be suitable for a Board that is comprised of directors (i) a majority of whom are independent; (ii) who are of high integrity; (iii) who have qualifications that will increase the overall effectiveness of the Board; and (iv) who meet the requirements of all applicable rules, such as financial literacy or financial expertise with respect to Audit and Finance Committee members;

 

   

In evaluating and identifying candidates, we have the sole authority to retain and terminate any third party search firm that is used to identify director candidates and the sole authority to approve the fees and retention terms of any search firm;

 

   

After such review and consideration, we recommend to the Board the slate of director nominees; and

 

   

We endeavor to notify, or cause to be notified, all director candidates of the decision as to whether to nominate such individual for election to the Board.

 

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There are no differences in the manner in which the Nominations and Corporate Governance Committee evaluates nominees for director based on whether the nominee is recommended by a shareholder, management or a search firm.

 

How did we perform our responsibilities in fiscal 2010?

 

The Nominations and Corporate Governance Committee held a total of seven meetings during fiscal 2010, and we took the following actions, among other things:

 

   

Evaluated the current composition of the Board, and considered desired skill sets, qualities and experience for potential future Board members, as well as potential candidates;

 

   

Engaged Spencer Stuart, a third party search firm, to identify qualified director candidates to further increase the diversity and independence of the Board;

 

   

Evaluated the composition of, and recommended assignments for, the committees of the Board;

 

   

Considered and recommended to the Board the submission to shareholders of the director nominees described in the company’s 2010 Proxy Statement;

 

   

Reviewed and evaluated the performance of the company’s Chief Executive Officer;

 

   

Reviewed and updated the company’s Corporate Governance Guidelines; and

 

   

Considered and recommended to the Board the adoption of a majority voting policy applicable in uncontested director elections.

 

Who prepared this report?

 

Members of the Nominations and Corporate Governance Committee, namely Michael R. Lynch, Adrian D.P. Bellamy, Anthony A. Greener and David B. Zenoff, prepared this report.

 

Audit and Finance Committee Report

 

Who serves on the Audit and Finance Committee?

 

The Audit and Finance Committee consisted of Adrian T. Dillon, Ted W. Hall, Michael R. Lynch and Richard T. Robertson during fiscal 2010. The Board has determined that Mr. Dillon, who served as Chairman of the Audit and Finance Committee during fiscal 2010, is a “financial expert” under the SEC rules. The Board has determined that each member of the Audit and Finance Committee is independent under the NYSE rules, as currently in effect, and Rule 10A-3 of the Securities Exchange Act of 1934, as amended. The Board has also determined that each Audit and Finance Committee member is “financially literate,” as described in the NYSE rules.

 

What is the role of the Audit and Finance Committee?

 

Our role is detailed in the Audit and Finance Committee Charter, which was amended and restated by the Board on March 20, 2009. The Audit and Finance Committee Charter is available on the company’s website at www.williams-sonomainc.com and is attached to this Proxy Statement as Exhibit G. The Audit and Finance Committee Charter is also available in print to any shareholder who requests it. Specifically, we:

 

   

Oversee the integrity of the company’s financial statements; the qualifications, independence, performance and retention of the company’s independent registered public accounting firm; the performance of the company’s internal audit function; and compliance by the company with legal and regulatory requirements;

 

   

Prepare the report that the SEC rules require to be included in the company’s annual proxy statement; and

 

   

Oversee the financial impact of selected strategic initiatives of the company and review selected financing, dividend and stock repurchase policies and plans.

 

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How do we meet our responsibilities?

 

We perform the following functions:

 

   

Monitor the integrity of the company’s financial reports, earnings, sales and guidance press releases, and other company financial information;

 

   

Appoint and/or replace the independent registered public accounting firm, pre-approve all audit and non-audit services of the independent registered public accounting firm, and assess its qualifications and independence;

 

   

Review the performance of the company’s internal audit function, the company’s auditing, accounting and financial reporting procedures, and the company’s independent registered public accounting firm;

 

   

Monitor the company’s compliance with legal and regulatory requirements;

 

   

Monitor the company’s system of internal controls and internal control over financial reporting;

 

   

Retain independent legal, accounting or other advisors when necessary and appropriate; and

 

   

Review the financial impact on the company of selected strategic initiatives and selected financing plans, and develop and recommend policies related to dividend and stock repurchase programs.

 

How did we perform our responsibilities in fiscal 2010?

 

The Audit and Finance Committee held a total of eleven meetings during fiscal 2010, and we took the following actions, among other things:

 

   

Reviewed and discussed the company’s audited financial statements for fiscal 2009 and unaudited quarterly condensed consolidated financial statements for fiscal 2010 with management and Deloitte;

 

   

Reviewed and discussed the company’s periodic filings on Forms 10-K and 10-Q with management;

 

   

Reviewed and discussed all company earnings, sales and guidance press releases with management;

 

   

Reviewed and discussed the company’s internal control over financial reporting with management and Deloitte;

 

   

Reviewed and discussed with the company’s internal audit department, the company’s internal audit plans, the significant internal audit reports issued to management and management’s responses;

 

   

Met with Deloitte, with and without management present, to discuss the overall quality of the internal and external audit process and the financial reporting process; and

 

   

Discussed with Deloitte its independence from the company based on the following: (i) our confirmation that no member of Deloitte’s current or former audit team is or has been employed by the company in a financial reporting oversight role; (ii) our review of audit and non-audit fees; and (iii) the written communications from Deloitte as required by PCAOB requirements.

 

What other matters did we discuss with Deloitte?

 

During fiscal 2010, we discussed the following other matters, among other things, with Deloitte:

 

   

Deloitte’s responsibilities in connection with the audit of the company’s financial statements and matters relating to Deloitte’s independence;

 

   

Deloitte’s annual letter describing internal quality control procedures;

 

   

The company’s internal control over financial reporting;

 

   

Any significant issues arising during the audit and any other matters relating to the conduct of the audit of the company’s financial statements; and

 

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Matters required to be discussed pursuant to relevant PCAOB and SEC requirements, including the quality of the company’s accounting principles, the soundness of significant judgments and the clarity of disclosures in the company’s financial statements.

 

Did we review the fees billed by Deloitte for fiscal 2010?

 

Yes. We reviewed and discussed the fees billed by Deloitte for services in fiscal 2010, which are described in detail below. We determined that the provision of non-audit services was compatible with Deloitte’s independence.

 

Did we review the company’s audited financial statements for fiscal 2010?

 

Yes. We reviewed and discussed the company’s audited financial statements for fiscal 2010 with management and Deloitte, and based on this review, we recommended to the Board that the company’s audited financial statements be included in the company’s Annual Report on Form 10-K for fiscal 2010 for filing with the SEC.

 

Who prepared this report?

 

Members of the Audit and Finance Committee, Adrian T. Dillon, Ted W. Hall, Michael R. Lynch and Richard T. Robertson, prepared this report.

 

The Audit and Finance Committee hereby reports as follows:*

 

(1) The Audit and Finance Committee has reviewed and discussed the company’s audited financial statements with management and Deloitte;

 

(2) The Audit and Finance Committee has discussed with Deloitte the matters required by AICPA, Professional Standards, Vo. 1. AU section 380, as adopted by the Public Company Accounting Oversight Board (PCAOB) in Rule 3200T;

 

(3) The Audit and Finance Committee has received the written disclosures and the letter from Deloitte required by the applicable requirements of the PCAOB regarding Deloitte’s communications with the Audit and Finance Committee concerning independence and has discussed with Deloitte its independence; and

 

Based on the review and discussions referred to in items (1) through (3) above, the Audit and Finance Committee recommended to the Board that the audited financial statements be included in the company’s Annual Report on Form 10-K for fiscal 2010 for filing with the SEC.

 

AUDIT AND FINANCE COMMITTEE OF THE BOARD OF DIRECTORS

 

Adrian T. Dillon

Ted W. Hall

Michael R. Lynch

Richard T. Robertson

 

AUDIT AND RELATED FEES

 

During fiscal 2010 and 2009, Deloitte did not perform any prohibited non-audit services for us.

 

Audit Fees

 

Deloitte billed approximately $1,152,000 for fiscal 2010 and $1,148,000 for fiscal 2009 for professional services to audit our consolidated financial statements included in our Annual Report on Form 10-K and to review our condensed consolidated financial statements included in our quarterly reports on Form 10-Q. Fees for audit services billed also consisted of fees for the assessment of the company’s internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002.

 

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Audit-Related Fees

 

Deloitte billed approximately $76,000 for fiscal 2010 and $87,000 for fiscal 2009 for audit-related services. Audit-related services included: (i) the audit of our 401(k) plan; (ii) the audit of the statutory report in Puerto Rico; and (iii) the review of our Form S-8.

 

Tax Fees

 

Deloitte billed a total of approximately $105,000 for fiscal 2010 and $107,000 for fiscal 2009 for tax services. Tax services included approximately: (i) $64,000 for fiscal 2010 and $97,000 for fiscal 2009 for tax compliance services, which included consultation for the preparation of our federal, state and local tax returns; and (ii) $41,000 for fiscal 2010 and $10,000 for fiscal 2009 for tax consulting services.

 

All Other Fees

 

Deloitte billed a total of $2,000 for each of fiscal 2010 and 2009 for all other fees. All other fees consisted of license fees related to the use of Deloitte’s on-line accounting research tool.

 

What is our policy regarding pre-approval of audit and non-audit services performed by Deloitte?

 

All services performed by Deloitte, whether audit or non-audit services, must be pre-approved by us or a designated member of the Audit and Finance Committee, whose decisions must be reported to us at our next meeting. Pre-approval must be obtained before Deloitte performs the services but cannot be obtained more than one year before performance begins. Approval can be for general classes of permitted services such as annual audit services or tax consulting services. The permitted services, the dates of the engagement and the estimated fees for such services, must be approved by the Audit and Finance Committee in accordance with these procedures before performance begins.

 

CORPORATE GOVERNANCE GUIDELINES AND CORPORATE CODE OF CONDUCT

 

Our Corporate Governance Guidelines and our Corporate Code of Conduct, which applies to all of our employees, including our Chief Executive Officer, Chief Operating and Chief Financial Officer and Controller, are available on our website at www.williams-sonomainc.com. Copies of our Corporate Governance Guidelines and our Corporate Code of Conduct are also available upon written request and without charge to any shareholder by writing to: Williams-Sonoma, Inc., Attention: Corporate Secretary, 3250 Van Ness Avenue, San Francisco, California 94109. To date, there have been no waivers that apply to our Chief Executive Officer, Chief Operating and Chief Financial Officer, Controller or persons performing similar functions under our Corporate Code of Conduct. We intend to disclose any amendment to, or waivers of, the provisions of our Corporate Code of Conduct that affect our Chief Executive Officer, Chief Operating and Chief Financial Officer, Controller or persons performing similar functions by posting such information on our website at www.williams-sonomainc.com.

 

CERTIFICATIONS

 

The certification of our Chief Executive Officer required by the NYSE Listing Standards, Section 303A.12(a), relating to our compliance with the NYSE Corporate Governance Listing Standards, was submitted to the NYSE on June 10, 2010. The certifications of our Chief Executive Officer and Chief Financial Officer required by the SEC in connection with our Annual Report on Form 10-K for the year ended January 30, 2011 were submitted to the SEC on March 31, 2011 with our Annual Report on Form 10-K.

 

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

We have in place policies in our Corporate Code of Conduct that provide that associates must not engage in any transaction when an associate may face a real or perceived conflict of interest with the company. Our Corporate Code of Conduct is distributed to all employees on an annual basis and made available throughout the year in our internal document database. It is also available on our website and in print to any shareholder who requests it. In addition, we have in place policies and procedures with respect to related person transactions that provide that our executive officers, directors, director nominees and principal shareholders, as well as their immediate family members and affiliates, are not permitted to enter into a related party transaction with us unless (i) the transaction is approved or ratified by our Audit and Finance Committee or the disinterested members of our Board or (ii) the transaction involves the service of one of our executive officers or directors or any related compensation, is reportable under Item 402 of Regulation S-K and is approved by our Compensation Committee.

 

For the purposes of our related party transaction policy, “related party transaction” means any transaction in which the amount involved exceeds $120,000 in any calendar year and in which any of our executive officers, directors, director nominees and principal shareholders, as well as their immediate family members and affiliates, had, has or will have a direct or indirect material interest, other than transactions available to all of our employees.

 

It is our policy to approve related party transactions only when it has been determined that such transaction is in, or is not inconsistent with, our best interests and those of our shareholders, including situations where we may obtain products or services of a nature, quantity or quality, or on other terms, that are not readily available from alternative sources or when the transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party.

 

Memphis-Based Distribution Facilities

 

Our Memphis-based distribution facilities include an operating lease entered into in July 1983 for a distribution facility in Memphis, Tennessee. The lessor is a general partnership (“Partnership 1”) comprised of the estate of W. Howard Lester, our former Chairman of the Board of Directors and Chief Executive Officer, and James A. McMahan, a Director Emeritus and a significant shareholder. Partnership 1 does not have operations separate from the leasing of this distribution facility and does not have lease agreements with any unrelated third parties.

 

Partnership 1 financed the construction of this distribution facility through the sale of a total of $9,200,000 of industrial development bonds in 1983 and 1985. As of January 30, 2011, the bonds had been repaid in full and no amounts were outstanding.

 

We made annual rental payments in fiscal 2010, fiscal 2009 and fiscal 2008 of approximately $618,000, plus interest on the bonds (through December 2010) calculated at a variable rate determined monthly, applicable taxes, insurance and maintenance expenses. The terms of the lease automatically renewed until the bonds were fully repaid in December 2010. We are currently operating the distribution center on a month-to-month lease and expect to enter into a short term lease agreement on the distribution center in fiscal 2011.