THE GAP, INC.
EXECUTIVE LONG-TERM CASH AWARD PERFORMANCE PLAN
(January 26, 1999 Restatement, as amended March 28, 2000)
1. Purpose of the Plan
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The purpose of the Executive Long-Term Cash Award Performance Plan is to
provide financial incentives for certain of the Company's officers to meet and
exceed the Company's multi-year financial goals. The Plan is intended to qualify
as 'performance-based compensation' under Code Section 162(m).
2. Definitions
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2.1 'Affiliated Company' means any company controlling, controlled by or
under common control with the Company.
2.2 'Award' means a cash award pursuant to the provisions of the Plan.
2.3 'Capital Control' means adherence to the capital budget approved by the
Company's Board of Directors as part of the annual budgeting process. Such
budget shall be inclusive of the costs of new, enlarged, and relocated stores,
remodels, lease rights, divisional capital, and other associated costs.
2.4 'Code' means the Internal Revenue Code of 1986, as amended. Reference
to a specific section of the Code shall include such section, any valid
regulation promulgated thereunder, and any comparable provision of any further
legislation or regulation amending, supplementing or superseding such section or
regulation.
2.5 'Committee' means the Compensation and Stock Option Committee of the
Company's Board of Directors, or any other Committee appointed by the Board
pursuant to Section 3 of the Plan.
2.6 'Company' means The Gap, Inc., a Delaware corporation.
2.7 'Comparable Store Sales' means the Company's or a division's same store
net sales growth for the Fiscal Year in excess of the prior year.
2.8 'Determination Date' means as to a Performance Cycle, the latest date
possible that will not jeopardize the Plan's qualification as 'performance-based
compensation' under Code section 162(m).
2.9 'Earnings' means either (a) operating income of the Company or one of
its divisions for a given Performance Cycle less certain allocated expenses
(e.g., headquarters, distribution centers, etc.), or (b) income before interest
and taxes of the Company or one of its divisions; determined in accordance with
Generally Accepted Accounting Principles, provided that prior to the
Determination Date the Committee shall determine (1) whether Earnings will be
measured under clause (a) or (b), and (2) whether
any significant adjustments should be made to the calculation (e.g., exclusions
for non-recurring items or unusual costs, etc.).
2.10 'Economic Value Added' means the Company's or a division's Net
Operating Profit After Tax (NOPAT) for a specific performance period less
charges for use of capital assets (Capital Charges). NOPAT for a division
includes not only the division-specific revenues and directly controllable
expenses, but also may include shared costs for applicable Information
Technology, Distribution, and other Headquarters-related expenses, as determined
by the Committee (prior to the Determination Date). Prior to applying taxes,
operating profits are adjusted for interest expense on the present value of
operating leases. Capital Charges means the Company's or a Division's Average
Capital Balances multiplied by the Weighted Average Cost of Capital. Divisional
Average Capital Balances is defined as an average of both directly controllable
assets (Inventory, Property Plant and Equipment, Net Lease Rights, and the
present value of operating leases), but also can include shared assets for
applicable Information Technology, Distribution, other Headquarters-related
capital balances, and a working capital allocation, as determined by the
Committee (prior to the Determination Date). Total Company Average Capital
Balances includes all assets except cash in excess of that attributable to day-
to-day operations, and tax-related net assets, plus the present value of
operating leases less all non-interest bearing liabilities.
2.11 'Fiscal Year' means the 1999 fiscal year of the Company and each
succeeding fiscal year of the Company.
2.12 'Officer' means an officer (whether or not a member of the Company's
Board of Directors) employed by the Company or any Affiliated Company.
2.13 'Participant' means as to any Performance Cycle, an Officer who has
been selected by the Committee for participation in the Plan for such
Performance Cycle.
2.14 'Performance Cycle' means any fiscal period of not less than two
consecutive Fiscal Years nor more than five consecutive Fiscal Years, as
determined by the Committee in its sole discretion.
2.15 'Performance Goals' means the goal(s) (or combined goals(s))
determined by the Committee (in its sole discretion) to be applicable to a
Participant for a Performance Cycle. As determined by the Committee, the
Performance Goals applicable to each Participant shall provide for a targeted
level or levels of achievement using one or more of the following measures: (a)
Capital Control, (b) Comparable Store Sales; (c) Earnings; (d) Economic Value
Added, (d) Return on Equity; (e) Return on Invested Capital; (f) Return on Net
Assets; (g) Sales Volume; (h) Spread, and (i) Total Sales. As determined in the
discretion of the Committee, the Performance Goals for any Performance Cycle
may: (a) differ among Participants, (b) relate to performance on a Company-wide
or divisional basis, and/or (c) provide for a comparison of actual performance
by the Company or a division to actual performance by a group of competitors
determined in the discretion of the Committee. For each Performance Cycle, the
Performance Goals applicable to each Participant shall be set forth in writing
on or prior to the Determination Date.
2.16 'Plan' means the Executive Long-Term Cash Award Performance Plan, as
set forth in this document and as hereafter amended from time to time.
2.17 'Return on Equity' means the Company's or a division's Earnings for
the Performance Cycle, expressed as a percentage of the Company's or a
division's average shareholders' equity over the Performance Cycle.
2.18 'Return on Invested Capital' (or 'ROIC') means the Company's or a
division's Net Operating Profit After Tax (NOPAT) divided by their respective
Average Capital Balances over the same period of time. For a division, NOPAT
includes not only the division-specific revenues and directly controllable
expenses, but also may include shared costs for applicable Information
Technology, Distribution, and other Headquarters-related expenses. Prior to
applying taxes, operating profits are adjusted for interest expense on the
present value of operating leases. Divisional Average Capital Balances is
defined as an average of both directly controlled assets (Inventory, Property
Plant and Equipment, Net Lease Rights and the present value of operating leases)
as well as any applicable shared assets for related Information Technology,
Distribution, other Headquarters-related capital balances, and a working capital
allocation. For the Company, NOPAT means after tax earnings, adjusted for
interest on the present value of operating leases but excluding interest expense
or income on debt and cash. Total Company Average Capital Balances includes all
assets except cash in excess of that attributable to day-to-day operations, and
tax-related net assets, plus the present value of operating leases less non-
interest bearing liabilities.
2.19 'Return on Net Assets' means the Company's or division's Earnings for
the Performance Cycle, expressed as a percentage of the Company's or a
division's average assets for Performance Cycle.
2.20 'Sales Volume' means the total sales volume per store of the Company
or one of its divisions for the Performance Cycle.
2.21 'Spread' means the difference between the Company's or a division's
ROIC for a Performance Cycle and the Weighted Average Cost of Capital. In
practice, it can be used as an alternative method of calculating Economic Value
Added, by simply multiplying the calculated spread by the Average Capital
figures.
2.22 'Termination of Employment' means the time when the employee-employer
relationship between the Participant and the Company and its Affiliated
Companies is terminated for any reason, including, but not limited to, a
termination by resignation, discharge, death, permanent disability, retirement,
or the disaffiliation of an Affiliated Company, but excluding any such
termination where there is a simultaneous reemployment by either the Company or
one of its Affiliated Companies.
2.23 'Total Sales' means the Company's or a division's net sales for the
Performance Cycle.
2.24 'Weighted Average Cost of Capital' (or 'WACC') means the weighted
average of the Company's cost of debt and cost of capital. The weighting is
determined by comparing the balance of the Company's debt (acquired debt plus
capitalized leases)
to the balance of the Company's equity based upon market value (rather than book
value).
3. Administration of the Plan
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3.1 The Plan shall be administered by the Committee, which shall consist of
no fewer than two members of the Company's Board of Directors, who shall be
appointed and serve at the pleasure of the Company's Board of Directors. No
member of the Company's Board of Directors who is not an 'outside director'
under Code section 162(m) shall serve on the Committee.
3.2 Subject to the provisions of the Plan, the Committee shall have
exclusive authority to select the Participants, and to determine the target
Award levels, the times when Awards will be granted, and the Performance Goals
which must be achieved prior to payment of any Awards. For each Performance
Cycle, all actions by the Committee shall be taken by the Determination Date.
3.3 The Committee shall have all discretion and authority necessary or
appropriate to administer the Plan, including, but not limited to, the power to
interpret the Plan, to prescribe, amend and rescind rules and regulations
relating to it, and to make all other determinations necessary or advisable in
the administration of the Plan, and all such determinations shall be final and
binding upon all persons having and interest in the Plan.
3.4 A majority of the Committee shall constitute a quorum, and the acts of
a majority of the members present at a meeting at which the quorum is present or
any action taken without a meeting by a writing executed by a majority of the
Committee shall constitute the act of the Committee.
3.5 All expenses and liabilities incurred by the Committee in the
administration of the Plan shall be borne by the Company. The Committee may
employ attorneys, consultants, accountants, or other persons. The Committee, the
Company and its officers and directors shall be entitled to rely upon the
advice, opinion, or valuations of any such persons. No member of the Committee
shall be personally liable for any action, determination, or interpretation
taken or made with respect to the Plan, unless such action, determination, or
interpretation constitutes criminal misconduct, willful negligence or
demonstrates bad faith and all members of the Committee shall be fully protected
by the Company in respect to any such action, determination or interpretation.
4. Eligibility and Participation
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The Plan is designed for Officers whose responsibilities significantly
influence Company results. Participants shall be selected by the Committee prior
to or on the Determination Date. Participation in the Plan is on a Performance
Cycle basis and in the sole discretion of the Committee. Thus, an Officer who is
selected for participation in a given Performance Cycle is in no way guaranteed
to be selected for participation in any subsequent Performance Cycle or
Performance Cycles.
5. Determination of Awards
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5.1 Prior to or on the Determination Date, the Committee, in its sole
discretion shall assign each Participant a target Award expressed as a
percentage of the Participant's average annual base salary during the
Performance Cycle.
5.2 On or prior to the Determination Date, the Committee, in its sole
discretion, shall establish a formula for purposes of determining the actual
Award (if any) payable to each Participant. Each formula shall: (a) be in
writing; (b) be based on a comparison of actual performance to the Performance
Goals; (c) provide for the payment of a Participant's target Award if the
Performance Goals for the Performance Cycle are achieved; and (d) provide for an
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actual Award greater than or less than the Participant's target Award, depending
upon the extent to which actual performance exceeds or falls below the
Performance Goals.
5.3 After the end of the each Performance Cycle, the Committee shall
certify in writing the extent to which the Performance Goals applicable to each
Participant for the Performance Cycle were achieved or exceeded. The actual
Award for each Participant shall be determined by applying the formula
established pursuant to Section 5.2 of the Plan to the level of actual
performance that has been certified by the Committee. However, each
Participant's actual Award (if any) shall be subject to the maximum provided in
Section 6.
5.4 No Awards shall be paid to a Participant for a Performance Cycle unless
the minimum actual performance for the Performance Cycle specified by the
Committee pursuant to Section 5.2 of the Plan is achieved.
5.5 The Committee, in its sole discretion, may eliminate any Participant's
Award, or reduce it below that which otherwise would be payable in accordance
with the Plan.
6. Maximum Award Payable
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For any Performance Cycle, the maximum Award payable to any Participant
under the Plan shall be $8,000,000.
7. Payment of Award
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7.1 Except as provided in Section 7.2 of the Plan or as otherwise
determined by the Committee, payment of Awards (if any) for a Performance Cycle
will be made in cash or its equivalent on or about the first April 1 following
the end of the Performance Cycle. If the Committee (in its discretion) so
determines, payment of all or part of an Award to one or more Participants may
be deferred for a period not to exceed five years after the date when payment
otherwise would have been made. Any such deferral shall be subject to such rules
and procedures as the Committee (in its discretion) shall determine. For example
(but not by way of limitation), the Committee may determine that a deferred
Award shall be forfeited unless the Participant remains an Officer through the
scheduled payment date.
7.2 Unless otherwise specifically determined by the Committee, a
Participant actually will be entitled to payment of an Award only if the
Participant is an Officer on the date of payment (and except to the limited
extent provided in the following sentence). If, after the completion of a
Performance Cycle, a Participant incurs a Termination of Employment due to death
or permanent disability, the Participant still shall be entitled to the payment
of any Award for such Performance Cycle otherwise payable to the Participant. In
the event an Award is payable to a Participant subsequent to the Participant's
death, such payment shall be made to the Participant's estate.
7.3 The Company shall withhold all applicable income and other taxes from
any Award payment to any Participant, including any federal, FICA, state and
local taxes.
7.4 Each Award shall be payable solely from the general assets of the
Company. Each Participant's right to payment of an Award (if any) shall be
solely as an unsecured general creditor of the Company.
8. Employment Rights
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Nothing in the Plan shall confer upon any Participant the right to continue
in the employ of the Company or its Affiliated Companies or shall interfere with
or restrict in any way the rights of the Participant's employer to discharge or
change the terms of employment of any Participant at any time for any reason
whatsoever, with or without cause.
9. Effect on Other Plans
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The adoption of the Plan shall not affect any other equity or other
compensation or incentive plan in effect for the Company or any Affiliated
Company, and the Plan shall not preclude the Company's Board of Directors from
establishing any other forms of incentive compensation for Officers.
10. Amendment or Termination of the Plan
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The Board, in its sole discretion, may alter, amend, or terminate the Plan
or any part thereof at any time and for any reason; provided, however, that to
the extent required to ensure the Plan's qualification under Code section 162(m)
as 'performance-based compensation', any such amendment shall be subject to
stockholder approval.
11. Effective Date
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The Plan originally was effective as of January 23, 1996. This amended and
restated Plan is effective as of January 26, 1999, subject to the approval of
the Plan by a majority of the shares of the common stock of the Company that are
present in person or by proxy and entitled to vote at the 1999 Annual Meeting of
Stockholders.
Executive Long-Term Cash Award Performance Plan - The Gap Inc.
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