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The following is an excerpt from a DEF 14A SEC Filing, filed by DARDEN RESTAURANTS INC on 8/4/2008.
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DARDEN RESTAURANTS INC - DEF 14A - 20080804 - SECURITY_OWNERS

STOCK OWNERSHIP OF PRINCIPAL SHAREHOLDERS

This table shows all shareholders that we know to beneficially own more than five percent of our outstanding common shares as of June 30, 2008. As indicated in the footnotes, we have based this information on reports filed by these shareholders with us and with the SEC.

 

Name and Address of Beneficial Owner

   Amount and Nature of
Beneficial Ownership(1)
    Percent of
Class(2)
 

Darden Savings Plan

c/o Wachovia Bank, National Association(3)

1525 West W.T. Harris Boulevard

Charlotte, NC 28288-1176

   7,395,981 (3)   5.27 %

 

(1) “Beneficial ownership” is defined under the SEC rules to mean more than ownership in the usual sense. Under applicable rules, you beneficially own our common shares not only if you hold them directly but also if you indirectly (such as through a relationship, a position as a director or trustee, or a contract or understanding) have or share the power to vote, sell or acquire them within 60 days.

 

(2) The figure reported is a percentage of the total of 140,446,512 common shares outstanding on June 30, 2008, excluding treasury shares.

 

(3) Based on figures provided by Wachovia Bank, National Association. The common shares owned by the Darden Savings Plan are held in trust for the benefit of participants in the plan, for which Wachovia Bank, National Association is trustee, subject to the direction of the Darden Savings Plan’s Administrative Committee. Participants are entitled to instruct the Darden Savings Plan trustee how to vote all of our common shares allocated to their accounts (a total of 4,608,901 common shares as of June 30, 2008). All common shares allocated to participants for whom no voting instructions are received, and all unallocated common shares held by the plan (2,787,080 common shares as of June 30, 2008), will be voted by the trustee in the same proportion as it votes shares for which it did receive voting instructions.

 

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COMPENSATION DISCUSSION AND ANALYSIS

The Compensation Discussion and Analysis is based on the disclosure rules adopted by the SEC and is intended to provide shareholders more information about the Company’s compensation practices in a way that will make it easier to compare compensation earned by executives at other public companies. This Compensation Discussion and Analysis describes the material elements of compensation awarded to each of our executive officers who served as Named Executive Officers during the 2008 fiscal year. It should be read in conjunction with the Summary Compensation Table, related tables and the narrative disclosure under the heading “Executive Compensation.”

Overview of the Company’s Named Executive Officers

Representative of the industry expertise found throughout our Company, the following executive officers were the Named Executive Officers for fiscal 2008:

 

   

Clarence Otis, Jr., CEO since November 2004 and Chairman of the Board since November 2005, has been with Darden for 13 years, following 11 years of experience in the financial services industry;

 

   

Andrew H. Madsen, President and Chief Operating Officer since November 2004, has been with Darden for 10 years, following 17 years of consumer marketing and general management experience, including 13 years with General Mills, our former parent;

 

   

C. Bradford Richmond, Senior Vice President and Chief Financial Officer since December 2006, has been with Darden for 26 years;

 

   

David T. Pickens, President of Olive Garden since December 2004, has been with Darden for 35 years; and

 

   

Eugene I. Lee, Jr., former President and Chief Operating Officer for RARE Hospitality International, Inc. (“RARE”) joined Darden on October 1, 2007 when Darden acquired RARE. He was appointed President of Darden’s newly formed Specialty Restaurant Group which includes The Capital Grille, Bahama Breeze and Seasons 52 operating companies. He was with RARE for 11 years and has over 20 years of restaurant operating experience, including 11 years with General Mills, our former parent.

Total Reward Program Philosophy and Objectives

The Company’s Board of Directors has delegated to its Compensation Committee (the “Committee”) the responsibility for overseeing Darden’s Total Reward Program and the individual reward programs and plans that comprise it. The Committee reviews the Total Reward Program philosophy and objectives on a regular basis to ensure they are aligned with Darden’s strategic, organizational and cultural goals, as well as to maintain a competitive position within the marketplaces in which the Company competes for talent.

Total Reward Program Philosophy . The ultimate objective of Darden’s Total Reward Program is to help maximize Darden’s success, as determined by our guests, employees and shareholders. Continuity of executive talent who possess the appropriate combination of functional expertise, general management skills and strong people leadership capability is a key requirement in the achievement of the Company’s strategic goals. The Committee believes that the Total Reward Program is properly designed and implemented, and is critical to the Company’s ability to attract, retain and motivate the high level of executive leadership talent required for success.

Total Reward Program Objectives . The Company uses a combination of compensation and benefits (cash, stock-based compensation and health, welfare, retirement and savings benefits) to achieve four key objectives outlined by the Committee and management:

 

   

Pay for Performance. Rewards linked to performance are designed to maximize Darden’s success and encourage the long-term retention of high performing leaders. We accomplish this by offering rewards

 

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that are competitively superior when performance is competitively superior and by ensuring that reward opportunities are aligned with the business results closest to an employee’s area of focus. Darden rewards performance based on the following three key factors: financial performance, stock performance and individual performance. We measure success by comparing actual performance against pre-determined goals. These goals include, among others, financial goals such as sales, earnings per share and operating profit growth, and other business metrics that are important to Darden such as guest satisfaction, restaurant operations and brand management excellence, restaurant support and other business process excellence and talent management and diversity effectiveness. Based on targeted compensation levels, the Named Executive Officers excluding the Chief Executive Officer (“CEO”) had 78% of their cash and equity compensation linked to performance in fiscal 2008, and 82% of the CEO’s cash and equity compensation was linked to performance.

 

   

Shareholder Alignment. This is best achieved through performance-based and equity-based compensation. Executive rewards are tied to both short-term and long-term business strategies and goals that, when achieved, deliver near-term results while building the platform for successful and sustainable long-term business results. Carefully selected performance measures and reward vehicles provide incentives for executive officers to focus on both short- and long-term performance. A significant portion of executive compensation is equity-based in order to link executive compensation to the long-term enhancement of shareholder value.

 

   

Enable the Business Strategy. Darden’s strategic goal is to create shareholder value by delivering sustainable and profitable sales growth that is competitively superior. Our business strategy is to create and maintain an integrated multi-brand growth company that is propelled by engaging and motivating core values, superior talent and strong business processes. Darden’s reward programs support and enable this strategy by holding leaders accountable for building and maintaining a strong, performance-oriented culture that motivates and rewards key talent to build successful careers at Darden.

 

   

Attract and Retain Leadership Talent. Darden strives to attract and retain talented executives who have the capability to lead a large, multi-brand and multi-dimensional restaurant company that is committed to delivering results to its shareholders, guests and employees. We do this by offering a comprehensive Total Reward Program that includes cash compensation, equity awards, benefits and perquisites that are typically offered by the restaurant chains and other large companies with which Darden competes for talent.

Total Reward Program Market Targets . Darden considers competitive market targets to ensure that its reward programs deliver the intended value. The Company’s Total Reward Program strategy includes the market targets described below.

 

 

 

Base salaries generally at the 50th percentile of the peer group (described under the heading “External Benchmarking” below), with established variances to provide flexibility to account for experience and critical skills. The 50th percentile provides a competitive base salary level, which is essential to recruiting and retaining executive talent.

 

   

Total cash compensation (base salary plus annual cash incentive) at the 75th percentile of the peer group when top quartile financial performance is achieved. The 75th percentile market target is intended to be achieved only in years when financial performance merits awards at this level. This target is aligned with our high performance and pay for performance culture and is essential in motivating our management team to achieve financial performance that is within the top quartile of our industry.

 

   

Long-term incentives (equity and equity-based awards) at the 60th percentile of the peer group at time of grant. Darden targets the 60th percentile as a strong incentive for executives to achieve desired long-term goals and to align their interests with those of our shareholders.

 

   

Benefits at the 50th percentile of the peer group, with some variance for selected programs that distinguish Darden as a “compelling place to work.” Our benefit programs are set at market median to

 

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be competitive with market practices and enable us to attract and retain talent. The Committee may decide to offer more, fewer or different benefits and perquisites as deemed appropriate to differentiate Darden in ways that maximize our potential for success.

 

   

Perquisites are set at competitive levels to the peer group and general industry to attract and retain key executives.

Compensation Decision-Making Process

The Compensation Committee’s Role . The Committee determines executive officer compensation. In the case of executive officers who also serve as directors, the Committee makes recommendations to the independent directors of the Board. Compensation decisions are designed to promote the achievement of the Company’s business objectives and strategy; therefore, the planning and evaluation of performance are continuous processes. The majority of the reward decisions for the executive officers are made annually during the June meetings of the Committee and the Board of Directors.

The Committee regularly reviews each element of Darden’s executive Total Reward Program, and the Program in total. As part of that decision-making process, the Committee annually reviews tally sheets that detail each executive officer’s compensation to ensure that the entire total reward package is considered. Based on these reviews, the Committee establishes targeted levels of base salary, annual incentive and long-term equity-based incentive compensation for each executive officer position relative to the peer group. All rewards are measured in the context of our Total Reward Program philosophy and objectives while also seeking to distinguish Darden as a compelling place to work, support our business strategy and achieve internal equity.

In addition, the Committee considers and approves total reward packages for new executive officers prior to hiring, and addresses other issues relating to total reward programs as they arise. For example, the Committee made reward decisions in connection with Darden’s acquisition of RARE in October 2007. These decisions are described in more detail below.

In developing its views, the Committee believes that it is advisable and prudent to obtain input from management and also from an independent consultant retained by the Committee (“Committee’s Consultant”). Currently, Towers Perrin has been retained and is acting as the Committee’s Consultant. While the recommendations of management and the Committee’s Consultant provide valuable insight and guidance, the Committee has final decision-making authority in carrying out its responsibilities for determining reward levels and structure. All members of the Committee are independent, non-employee directors.

The Chief Executive Officer’s Role . The CEO regularly attends the Compensation Committee meetings except as otherwise determined by the Committee. He provides the Committee with his assessment of the performance of the other Named Executive Officers and his perspective on the factors used to develop his reward recommendations. The Committee, with the CEO present, discusses each Named Executive Officer in detail, including how the CEO’s recommendations compare against the peer group, and how the compensation levels of the executives compare to each other’s and to the CEO’s. The Committee then approves or modifies the CEO’s recommendations. The CEO does not participate in Committee decision-making regarding his own compensation, and is excused from those portions of the meetings during which the CEO’s compensation is discussed.

Management’s Role . At the Committee’s request, the CEO and other members of management participate in Committee meetings to provide needed support and information that includes:

 

   

Background information regarding Darden’s strategic objectives;

 

   

Evaluation of the performance of executive officers;

 

   

Reward recommendations for executive officers;

 

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Recommendations on business performance targets and objectives; and

 

   

Recommendations on cash compensation levels and equity awards.

If reward programs require modification, management works with the Committee and the Committee’s Consultant to evaluate the changes and to determine the most appropriate course of action.

The Role of Advisors and Consultants . By the terms of its charter, only the Committee can retain or dismiss independent advisors and consultants and approve their compensation. These independent advisors and consultants report directly to the Committee. Darden is responsible for the cost of the Committee’s consultants and supports their work. Towers Perrin is authorized to communicate with members of management as necessary, but may not perform work directly for management without prior approval of the Committee. The primary requirements for the Committee’s Consultant are to:

 

   

Inform the Committee of current market trends;

 

   

Provide external benchmarking data on executive total reward levels and programs;

 

   

Advise the Committee of the appropriateness of executive rewards or actions under consideration; and

 

   

Advise the Committee of legal and regulatory requirements that may affect executive rewards and reward programs.

External Benchmarking . The Committee regularly reviews market reward levels to determine if the rewards for Darden’s executive officers remain at the targeted levels, and makes adjustments when appropriate. This assessment includes evaluation of base salary, short-term incentive opportunities and long-term equity-based incentive opportunities against a peer group of companies in similar hospitality and service industries with which we compete for executive talent. The peer group assessment is supplemented with industry-specific survey data for companies of comparable organization size to Darden (generally measured by annual revenues). The Committee assesses the data by reviewing positions with comparable complexity and scope of responsibility to the positions at Darden. In addition, the Committee assesses rewards such as health benefits, retirement programs and perquisites relative to the peer group. The Committee and management do not believe, however, that reward levels should be based exclusively on benchmarking.

Working with the Committee’s Consultant and management recommendations, the Committee periodically reviews the peer group companies to ensure that the selected companies remain appropriate for compensation and performance comparison purposes. The Committee’s goal is to assemble a group of companies that represents those we compete against for executive talent.

The selection criteria for a peer group company includes:

 

   

Comparable size to Darden (generally measured by annual revenues);

 

   

Similar geographic dispersion and workforce demographics;

 

   

Organizations from which Darden would seek to recruit executive talent; and

 

   

Culture and performance that Darden aspires to emulate.

In December 2007, the Committee reviewed a list from Towers Perrin of companies that met the selection criteria and identified a representative peer group. The peer group was used in the review of reward programs discussed below. The Committee removed several companies from the list presented in last year’s proxy due to business changes and company size, taking into account Darden’s acquisition of RARE in October 2007. These companies were replaced with other companies in the hospitality and retail industry that met the criteria stated above.

 

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During fiscal 2008, the Committee completed an in-depth review of Darden’s reward programs, including base salary, annual incentives, and long-term equity-based incentives, using the Committee-approved peer group. Additionally, at the Committee’s request, a study was completed by the Committee’s Consultant of the market practices and trends for post-employment related reward practices, including provisions that relate to retirement, disability and death. A separate market study of equity-based award practices, which included a review of the types of equity award vehicles being used, the mix of different types of equity vehicles and the level within the organization at which each type of equity vehicle is being used, was completed by the Committee’s Consultant in fiscal 2008. The peer group is used to evaluate the targeted reward levels and the type of reward programs offered to Named Executive Officers as well as to other executive officers. The Committee supplements the peer group data with other general survey data for a broader restaurant industry group as needed or deemed appropriate. The peer group and restaurant industry group and the surveys used by the Committee and its Consultant are described below.

 

   

Information from Towers Perrin. The peer group considered by the Committee is based on competitive market information provided by Towers Perrin. In fiscal 2008, the peer group consisted of the following companies:

 

Ann Taylor

Arby’s Restaurant Group

Blockbuster, Inc.

Bob Evans Farms

Burger King Holdings

Foot Locker, Inc.

Gap, Inc.

Hilton Hotels Corp

Host Hotels & Resorts, Inc.

Hyatt Hotels

  

InterContinental Hotels Group

J.C. Penney Company, Inc.

Jack-in-the-Box, Inc.

Kohl’s Corp.

Limited Brands, Inc.

Marriott International, Inc.

McDonald’s Corp.

Sports Authority

Staples, Inc.

Starbucks Corp.

    

Starwood Hotels & Resorts

Tiffany & Co.

Wendy’s International, Inc.

Whole Foods Market, Inc.

Williams-Sonoma, Inc.

Wyndham Worldwide Corp.

Yum! Brands, Inc.

Zale Corp.

 

   

CRCA Survey. The broader restaurant industry group considered by the Committee is based on a survey conducted by the Chain Restaurant Compensation Association. The survey provides base salary and short-term and long-term incentive information for restaurant companies. The Committee considers benchmark information for a restaurant industry group consisting of 185 restaurant concepts with average revenues of $355 million, giving higher consideration to the 15 restaurant concepts with revenues exceeding $2 billion that participate in the survey.

Elements of Compensation . Darden’s Total Reward Program includes the following elements of compensation:

 

   

Base salary;

 

   

Annual cash incentives, including special incentives when appropriate;

 

   

Long-term incentives consisting primarily of equity-based rewards;

 

   

Retirement and long-term savings benefits;

 

   

Health and welfare benefits;

 

   

Perquisites; and

 

   

Severance or change of control arrangements.

In keeping with Darden’s pay-for-performance objective and Total Reward Program philosophy, and because our Named Executive Officers are in positions that directly affect value creation for our shareholders, the Named Executive Officers have a significant portion of their compensation at risk through short-term and long-term incentive programs. In addition, to align executive officer compensation with long-term corporate

 

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success, a significant portion of the executive’s reward potential is delivered in the form of long-term equity-based awards.

Base Salary .

Purpose —The Committee believes that base salaries provide a foundation for our competitive reward package, and seeks to deliver market median base salaries to Named Executive Officers. Base salary is intended to provide an executive with a degree of financial certainty and funds for current expenses. Further, base salary is used to recognize an executive for the economic and competitive value to Darden of the competency, experience and expertise that the executive brings to a position.

Considerations —At a minimum, the Committee reviews base salaries for each Named Executive Officer on an annual basis. Approximately every three years (but more frequently if the Committee deems it necessary or appropriate), the Committee conducts an in-depth review of the peer group, and establishes a base salary target consistent with the median base salary of the peer group. In each of the other years, the Committee may elect to make adjustments based on general market trends.

The Committee assigns to each executive officer a salary range based on similar positions in the peer group or restaurant industry group. Many factors are considered by the Committee when setting the base salary of an executive officer, including individual performance and experience. In addition, the Committee may identify certain positions as critical to Darden’s business, and may set base salaries for these positions higher than at the median for the peer group or restaurant industry group. The performance goals that the executive is measured against are aligned to create shareholder value and are established at the beginning of each fiscal year. While these goals may be adjusted during the year, this is not done absent a significant and unanticipated change in circumstances. For example, when Darden acquired RARE, the Committee established some new goals for the CEO and for the Chief Operating Officer (“COO”) and also modified some of the existing goals to reflect new focus on the RARE acquisition and integration.

The Committee approves any base salary adjustments for executive officers other than the CEO and the COO, who are also members of the Company’s Board of Directors. In the case of the CEO and COO, the Committee makes recommendations to the other independent directors of the Board who, together with the Committee, approve the base salary increases for these individuals.

Decisions made in fiscal 2008 —In fiscal 2008, the Committee evaluated base salaries based on an in-depth market review conducted by Towers Perrin that reflected the Committee’s approved peer group. The Committee evaluated the salary ranges for each Named Executive Officer, and increased the ranges for the CEO and CFO positions as they were below the market median for these positions at companies in our peer group and companies of comparable size in the restaurant industry group.

The Committee then reviewed actual salary levels for each Named Executive Officer against these new salary target ranges and determined the fiscal 2009 base salary increases as outlined below. In determining these salary adjustments, the Committee considered where each Named Executive Officer’s salary fell within his respective base salary target range and his individual performance rating based on recommendations from the CEO (except in the case of the CEO, where the Committee determined the performance rating). The year over year increase percents below include an adjustment to Mr. Pickens’ base salary, effective October 1, 2007, at the time of the closing of the RARE acquisition.

 

   

Mr. Otis—6.0%

 

   

Mr. Madsen—4.5%

 

   

Mr. Richmond—6.0%

 

   

Mr. Pickens—15.9%

 

   

Mr. Lee—2.9%

 

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Annual Cash Incentive .

Purpose —The annual cash incentive provides a significant link to near-term business performance by aligning Darden’s management team of over 300 employees, including the Named Executive Officers, around common enterprise-wide goals. Darden’s annual incentive plan, the Management and Professional Incentive Plan (“MIP”), is designed to reward employees based on performance measured against both corporate and/or business unit goals and also personal or individual goals. The MIP provides significant variability in cash compensation based on this measured performance. The Committee and management believe that the opportunity to earn meaningful cash rewards based on the attainment of annual business and individual goals and objectives support shareholder value creation.

Considerations —When establishing annual incentive opportunities, both internal and external equity are considered, as well as analysis of historical incentive payouts. Within Darden, the MIP is designed to provide employees who have the most impact on business results with the most significant incentive opportunities. Externally, the MIP is designed to deliver top quartile total cash compensation (base salary plus annual cash incentive) when top quartile performance is achieved. The Committee evaluates these objectives annually when setting annual goals and making awards. The Committee then determines whether the earnings per share and sales growth achieved by the Company is likely, based upon the Company’s cash flow-based value forecasting model, to yield a total shareholder return within the top quartile of the S&P 500 group of companies for that year. The Committee also considers prior annual incentive payouts to provide insight into the historical level of difficulty of the targets established.

The annual incentive award is determined by three factors:

 

   

The targeted award for the employee, measured by actual salary earned and applying a normal incentive percentage, which varies by position and level, to the actual salary;

 

   

The overall rating for the operating company(ies) most closely aligned with the employee’s responsibilities; and

 

   

An individual rating which reflects the employee’s performance during the fiscal year.

The individual rating for Named Executive Officers is recommended by the employee’s manager and approved by the Committee; in the case of the CEO and the COO (who are members of the Board of Directors), the Committee determines, and the independent directors approve, the individual rating. The operating company ratings are determined by performance against goals for sales and operating profit or, in the case of corporate employees, earnings per share, which are established by the Committee at the beginning of the fiscal year. For operating companies still in a development stage, the quality of operations is assessed using factors critical in building a successful new business. The incentive plan for operating company Presidents is based on their respective operating company results and on overall Darden results. As a result, 80% of each of the operating company President’s annual incentive is based on the performance of his or her operating company and 20% is based on Darden’s overall performance. Of the Named Executive Officers, only Mr. Pickens and Mr. Lee receive annual incentive payments that are largely based on their respective operating companies. Payments are awarded based on the degree of achievement against the specific performance goals following the end of the fiscal year.

 

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Fiscal 2008 Review —The Committee established MIP performance goals for fiscal 2008 at the Committee meeting held in June 2007. The MIP performance goals for Mr. Lee were established in October 2007 in connection with his joining Darden on October 1, 2007 after the acquisition of RARE. These performance goals were based on the fiscal 2008 operating plan and budget reviewed by Darden’s Board of Directors. The target, minimum and maximum opportunities for each Named Executive Officer, expressed as a percentage of annual base salary earned in the fiscal year, were as follows:

 

Named Executive Officer

   Target     Minimum     Maximum  

Mr. Otis

   127 %   0 %   210 %

Mr. Madsen

   118 %   0 %   195 %

Mr. Richmond

   109 %   0 %   180 %

Mr. Pickens

   109 %   0 %   180 %

Mr. Lee

   109 %   60 %   180 %

The fiscal 2008 corporate and operating company performance metrics and weightings for the MIP program were as follows:

 

Performance Metric

   Weighting  

Corporate (Restaurant Support Center)

  

•     Diluted Net Earnings Per Share

   70 %

•     Sales Growth

   30 %

Operating company—Olive Garden

  

•     Operating Profit

   70 %

•     Sales Growth

   30 %

During its regular June 2008 meeting, and as required by the MIP, the Committee evaluated Company performance for fiscal 2008 and approved corporate and operating company ratings. The MIP requires that the Committee determine whether the Company had consolidated net earnings for the fiscal year; assuming it did, the Committee, in its discretion, may adjust the incentive awards (or any of the elements used to determine incentive awards), subject to certain limitations. The maximum awards payable with respect to any plan year to any participant in the MIP may not exceed two tenths of one percent (0.2%) of Darden’s annual sales for such year. The Committee determines awards after considering such matters as it deems relevant. In general, the Committee has evaluated Darden’s performance on the basis of continuing operations, and discontinued operations are not included when the Committee establishes corporate goals. As such, for fiscal 2008, the Committee excluded the effect of the impairment and closing of certain Smokey Bones, Rocky River Grillhouse and Bahama Breeze restaurants from the calculation, as well as the impact of certain unusual costs associated with the acquisition of RARE. The corporate rating, excluding the effect of these items, was calculated and based upon diluted net earnings per share growth and sales growth for fiscal 2008 compared to the targets approved by the Committee at the beginning of the fiscal year. As the Company’s performance was below target, the Company rating for the year was also below target. Because Mr. Pickens is the operating company President for Olive Garden, 80% of his annual incentive award was based on the actual operating profit and sales growth for Olive Garden, against previously established targets. Since fiscal 2008 results for Olive Garden were below expectations, its rating was also below target.

At the time of the acquisition of RARE, the Committee determined that Mr. Lee’s bonus incentive for the partial year from December 31, 2007 through the end of fiscal 2008 would be determined by using the corporate Darden rating. In addition, to recognize the uncertainty and limited influence Mr. Lee would have by electing to join the Darden executive team mid-year, the Committee also approved minimum Company and individual ratings of 1.0, which did not affect Mr. Lee’s bonus award because his business unit and individual ratings exceeded the minimum. The calculated amount of Mr. Lee’s MIP bonus award reflected only the portion of fiscal 2008 during which he was employed by Darden.

 

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These determinations contributed to the cash bonus payments for fiscal 2008 listed in the Summary Compensation Table for the Chief Executive Officer and other Named Executive Officers. The other factor, individual performance ratings, was recommended by the current Named Executive Officer’s manager and approved by the Committee or, in the case of the CEO and COO, the rating was recommended by the Committee and approved by the independent Directors of the Board. As a result of the corporate and Olive Garden ratings and the individual performance ratings, the cash incentive awards for the Named Executive Officers for fiscal 2008 ranged from a low of 86% to a high of 95% of target levels.

The target MIP percentages established by the Committee for fiscal 2008 assumed the achievement of financial and individual performance at levels that were considered challenging, competitively superior and aligned with our performance orientation. As noted above, the Committee considers not only internal and external factors but also historical payouts when establishing annual incentive targets. Since the Company’s performance in fiscal 2008 was below target, the Company rating for the year also was below target. Similarly, the corporate rating for fiscal 2007 was based on diluted net earnings per share and sales growth compared to targets previously approved by the Committee. As Company performance was below target, the Company rating for fiscal 2007 also was below target. For Olive Garden, the rating for fiscal 2007, as in fiscal 2008, was based upon operating profit and sales growth compared to the previously established targets. Fiscal 2007 results for Olive Garden were below expectations, and therefore the operating company rating was below target. As a result, the cash incentive award for the Named Executive Officers for fiscal 2007 (excluding Mr. Lee who was not yet employed by the Company) ranged from a low of 72% to a high of 76% of target levels. The Committee believes that this historical data and other past experience with particular targets suggests it is approving high performance targets with an appropriate level of difficulty and not targets that are merely modest where achievement is relatively assured.

The Committee set the MIP business targets for fiscal 2009 at its regular meeting in June 2008. The targets are based on achieving a total shareholder return, indicated by the Company’s cash flow-based value forecasting model, that is likely to put the Company in the top quartile of the S&P 500 group of companies. This objective is a key element in our strategy of delivering top quartile total cash compensation for top quartile performance.

As part of the market study conducted by Towers Perrin, the Committee evaluated the annual incentive opportunities for the Named Executive Officers for the next performance year (fiscal 2009) and determined that, with the exception of the CEO, they were in line with Darden’s stated target. As a result of the evaluation, the annual cash incentive target opportunity (expressed as a percentage of annual base salary earned in the fiscal year) for the CEO was increased for fiscal 2009 to a target of 146%, minimum of 0% and maximum of 240%, and remained the same for each other Named Executive Officer.

In the event that circumstances warrant special incentives, the Committee may design plans to reward specific business results or the retention of key employees. In the unique situation that a special incentive includes a Named Executive Officer, the Committee reviews, approves and monitors the performance elements associated with the special incentive. In fiscal 2008, no Named Executive Officer received a special cash reward outside of the MIP.

As with base salary, executive officers may defer some or all of the annual cash incentive under the FlexComp Plan as discussed below. In addition, to encourage executive investment in Darden, executive officers may exchange part of their annual cash incentive compensation for additional stock options through the Bonus Replacement Option Plan. The number of options that can be granted equals the dollar amount of the incentive payout being exchanged divided by a set percentage of the fair market value of the Company’s common stock on the grant date. Executive officers may exchange a maximum of 50% of their annual cash incentive compensation. In fiscal 2008, no Named Executive Officers elected to exchange any portion of their annual incentive for stock options.

 

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Long-Term Incentives .

Purpose —The Committee believes that long-term incentives, particularly equity-based awards, provide the strongest alignment between the interests of shareholders and executive officers. A significant portion of an executive officer’s total reward package is provided in the form of equity-based awards. Some vehicles, such as stock options, are specifically designed to provide value to the executive based on stock price appreciation, while others, such as performance stock units, deliver value based upon generating long-term shareholder returns through business building efforts.

Considerations —Darden’s long-term incentives are evaluated both independently and in the context of Darden’s Total Reward Program. The Committee has established target equity levels (60th percentile of market based on the Committee-approved peer group), expressed in dollars, for each position, reflecting the position’s value and expected contribution to business results. Actual awards may vary and range from 85% to 115% of the target. Actual equity grants are based on three primary factors:

 

   

The executive officer’s individual contribution—These grants reflect the executive officer’s potential impact on future business results, including the executive officer’s level of responsibility in the organization and the executive officer’s performance (as measured by past and anticipated performance levels).

 

   

The criticality of the position to Darden’s long-term success—These grants reflect the value of the position with respect to Darden’s future success.

 

   

The executive officer’s potential for career advancement—These grants reflect the executive officer’s potential to move into other senior leadership positions and are used to support Darden’s succession planning goals.

Although equity awards of more than 115% of an executive officer’s target can be made, these are awarded only for significant contribution to Darden’s business extending beyond that contemplated in the normal annual equity-based awards. Darden’s plans authorize the use of several types of equity-based vehicles as outlined below, and the Committee carefully selects the vehicles that are most effective and efficient in motivating, retaining and rewarding executive officers who deliver results and create shareholder value.

Equity Vehicles —Long-term incentives as authorized under the 2002 Stock Incentive Plan and the RARE 2002 Amended and Restated Long-Term Incentive Plan may include:

 

   

Stock options, which include both incentive stock options and non-qualified stock options;

 

   

Restricted stock;

 

   

Restricted stock units;

 

   

Stock appreciation rights;

 

   

Dividend equivalents;

 

   

Stock awards;

 

   

Stock units; and

 

   

Other equity-based awards.

With the exception of Mr. Lee, awards in fiscal 2008 to the Named Executive Officers were made from the 2002 Stock Incentive Plan. With the exception of a restricted stock award for 15,493 shares which was made from the 2002 Stock Incentive Plan, awards to Mr. Lee were made from the RARE 2002 Amended and Restated Long-Term Incentive Plan. Darden acquired RARE in October 2007.

 

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In fiscal 2008, the Committee approved awards to executive officers which were delivered for two-thirds of the award value as non-qualified stock options, and for the remaining one-third of the award value as performance stock units (stock units that vest and may be settled in cash or shares of Darden stock if certain performance hurdles are met). The Committee believes this approach to long-term incentive compensation supports its pay-for-performance objective and provides a balanced focus on stock price appreciation and the achievement of financial metrics that are key drivers of long-term shareholder value creation. Executive officers, including the Named Executive Officers, may also hold restricted stock and restricted stock units from prior awards.

The performance stock units approved by the Committee vest in installments of Darden stock or cash on the first five anniversaries of the grant date only if certain performance hurdles are achieved. The number of performance stock units that vest, if any, following the end of the applicable performance period is targeted at 100% and determined pursuant to a formula. The formula includes as performance measures total annual sales growth and return on gross investment for new and relocated restaurants. The maximum vesting percentage for any annual performance period is 150% of the performance stock units in a given year.

Fiscal 2008 Review —In 2008, the Committee evaluated Darden’s current mix of equity vehicles used at various levels, including the mix provided to Named Executive Officers. The Committee determined that the current award mix of non-qualified stock options for two-thirds of the award value and performance stock units for one-third of the award value is appropriate to support alignment with long-term shareholder value creation, as well as business-building performance and retention.

The Towers Perrin market study indicated that Darden’s target equity award levels for the CEO and the Chief Financial Officer (“CFO”) positions were significantly below market for similar positions; therefore, the value of fiscal 2009 equity awards, approved in June 2008, were adjusted upward for the CEO and the CFO to better align with the market. The study also indicated that Darden’s target equity award levels for the other Named Executive Officers were in line with the market for similar positions; therefore, these values were not changed for the fiscal 2009 equity-based awards, approved in June 2008.

Under the performance stock units awarded by the Committee, when performance exceeds targeted results, additional performance stock units vest; conversely, when performance is below targeted levels, fewer performance stock units vest. For performance stock units awarded in 2006 and 2007, fiscal 2008 results were below target, and therefore the amount of the outstanding performance stock units that vested for fiscal 2008 was 80% and 75% of the target level, respectively. In June 2008, the Committee amended the formula for these outstanding performance stock units awarded in 2006 and 2007 so that the total annual sales growth figure that will be calculated for fiscal 2009 better reflects market conditions. The performance stock units approved by the Committee in June 2008 include the same adjustment to the calculation of total annual sales growth for fiscal 2009.

In June 2007, the Committee reviewed and approved all equity awards made to executive officers in fiscal 2008 and, where appropriate, recommended approval to independent directors of the full Board. This included the awards for Named Executive Officers, as reflected in the Grants of Plan-Based Awards table.

In conjunction with Darden’s acquisition of RARE and in exchange for the officers relinquishing certain rights under previous employment agreements (as described below in the section entitled “Employment Agreement”), the Committee approved grants of restricted stock as part of employment offers to several officers at RARE, including Mr. Lee, to provide an incentive for them to become employed with Darden. These shares of restricted stock vest on the fourth anniversary of the grant date as long as Darden achieves positive earnings (calculated before interest and taxes) during fiscal 2009.

 

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Timing of Equity Awards— Darden’s Board of Directors has previously approved an equity awards granting policy which includes the following provisions:

 

   

Annual incentive equity grants to employees, including stock option grants, will be made once per year effective on the last Wednesday in the Company’s fiscal month of July;

 

   

New hire equity awards or grants to promoted employees, including stock option grants, are made effective the date of employment or promotion, respectively;

 

   

Other interim or ad hoc equity awards such as retention awards, including stock option grants, are made effective on such date as the Committee, Board or authorized individual approving the award may determine;

 

   

Stock option grants under Darden’s Bonus Option Replacement Program, pursuant to which employees may elect to receive stock options in lieu of a portion of their annual or quarterly bonus, will be made, in the case of executive officers, other officers and manager- and director-level participants, effective the last Wednesday in fiscal July of each year, and in the case of directors of operations, effective on the last day of each fiscal quarter on which the New York Stock Exchange is open for trading;

 

   

The grant date for equity awards, including stock options, is always the date of approval of the grants, or a specified later date, but never a date prior to approval; and

 

   

The exercise price of stock options granted shall be the fair market value of Darden stock on the date of the grant as measured by the closing sales price of Darden common stock on the New York Stock Exchange.

All equity awards granted during fiscal 2008 were consistent with this equity awards granting policy. Except for the equity award granting policy described above, the Company does not have any other program, plan or practice to time equity grants to executive officers in coordination with the release of material non-public information.

Retirement and Long-Term Savings Benefits.

Purpose —Our retirement and long-term savings programs are intended to position Darden as a compelling place to work while providing a competitive, yet cost-efficient, Total Reward Program. These retirement and long-term savings programs are specifically designed to reward service and performance while an active employee, and provide incentives for employees to build long-term careers at Darden.

Considerations —When evaluating Darden’s retirement and long-term savings programs and their effectiveness, the Committee and management consider prevalence survey data, best practices from our peer group and restaurant industry group, and cost efficiency.

Qualified Retirement and Long-Term Savings Plans —Darden’s executive officers are not eligible to be active participants in qualified retirement and long-term savings plans sponsored by Darden. However, prior to January 1, 1995, Mr. Pickens and Mr. Richmond participated in a qualified defined benefit pension plan maintained by one of Darden’s predecessors, General Mills, Inc. or one of its subsidiaries. They will receive benefits under those plans upon retirement, as reported in the Pension Benefits Table.

Non-Qualified Retirement and Long-Term Savings Plans —Darden’s executive officers, along with approximately 500 other employees who are ineligible to participate in Darden’s qualified plans, participate in the non-qualified FlexComp Plan (“Plan”). The Plan permits participants, including the executive officers, to defer receipt of up to 25% of their base salaries and up to 100% of their annual incentive compensation. Amounts deferred under the Plan are payable in cash on the date or dates selected by the participant in accordance with the terms of the Plan or on such other dates specified by the Plan. Participant accounts are credited with market rates of return based on the performance of several “deemed” investment alternatives selected by the participant, which mirror the investment alternatives available and returns credited in the Darden Savings Plan.

 

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Darden also makes contributions to the executive officers’ accounts under the Plan which are designed to provide benefits in lieu of the qualified retirement and long-term savings plans maintained by Darden or by Darden’s former parent, General Mills, Inc. Darden’s contributions to the Plan for this purpose consist of two components. The first component is similar to the matching contribution in a qualified 401(k) plan and ranges from 1.5% to 7.2% of the executive officer’s eligible annual earnings based on Darden’s performance. The second component is similar to a qualified pension plan contribution. For executive officers hired on or before June 25, 2000, except Mr. Otis (in fiscal 2006, the Committee set this component at 4% for the CEO position), which includes Mr. Madsen, Mr. Richmond, and Mr. Pickens, this contribution is calculated to provide similar value to the formula that was in effect when executive officers were part of a qualified pension plan maintained by Darden, or by its predecessor as a subsidiary of General Mills, Inc. This contribution ranges from 2% to 20% of the executive officer’s eligible annual earnings based on age and years of service. Executive officers hired after June 25, 2000, which includes Mr. Lee, receive an annual contribution for this component of 4% of the executive officer’s eligible annual earnings.

For fiscal 2008, for all Named Executive Officers, “eligible annual earnings” was computed as the sum of base salary and annual cash incentive earned in a fiscal year. Darden’s contributions are deferred in accordance with participants’ elections and the terms of the Plan or, if not deferred, are paid in cash as soon as practicable following the end of each Plan year. Effective for Company contributions made in fiscal 2008, executive officers must defer these Company contributions, which are then paid in accordance with participants’ elections and the Plan terms. Deferred contributions are credited with market rates of return based on the performance of several “deemed” investment alternatives, which mirror the returns credited in the qualified savings plan. The Plan does not have a guaranteed rate of return or guaranteed retirement benefit. The annual contributions made by Darden for the accounts of the Named Executive Officers in fiscal 2008 are shown in the “All Other Compensation” column of the Summary Compensation Table.

Decisions Made in Fiscal 2008 —During fiscal 2008, there were no significant changes made to any retirement and long-term savings plans that impacted executive officers, including the Named Executive Officers.

Health and Welfare Benefits.

Purpose —The Committee believes that Darden’s health and welfare benefits represent an important element of a competitive Total Reward Program. The health and welfare benefits offered to Darden employees, including the Named Executive Officers, are designed to provide a level of safety, security and protection that allows the executives to focus their efforts on running the business effectively.

Considerations —The Committee and management have elected to offer benefits to all Darden employees, including the Named Executive Officers. These benefits include medical coverage (including prescription drugs), dental coverage, life insurance, disability coverage and a variety of other health and welfare related benefits.

Decisions Made in Fiscal 2008 —Aside from the annual recalibration of benefit costs and the associated premium changes that impact all participants, no significant changes were made to Darden’s health and welfare benefits during fiscal 2008.

Perquisites .

Purpose —The Committee believes that Darden’s perquisite programs are intended to position Darden as a compelling place to work while providing a competitive, yet cost-effective, Total Reward Program. Darden’s perquisite programs are not intended to be broad-based benefit programs and are created to minimize the external distractions to existing executive officers and enhance Darden’s ability to attract and retain key leadership talent. These perquisites may vary slightly based on job level. Executive officers, including the Named Executive Officers, receive certain perquisites that may not be available to other employees. These perquisites include an

 

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automobile allowance, a financial planning allowance to assist them with financial and estate planning, and an annual executive physical examination, as described under the supplemental All Other Compensation Table.

Considerations —When establishing perquisite programs, the Committee and management consider prevalence data from the peer group and from companies in the restaurant industry group, rewards that are most valued by Darden’s employees, cost efficiency and internal equity.

Decisions Made in Fiscal 2008 —There were no significant changes to Darden’s perquisite programs in fiscal 2008.

Severance and Change of Control Provisions .

Purpose —Darden’s severance practices, including change of control provisions, are designed to ensure that executive officers remain focused on Darden’s business during certain transition periods associated with a change of control or other business events where business continuity is critical. Management and the Committee believe that this is accomplished in a manner that balances shareholder interests and those of Darden’s executives.

Considerations —Darden has no formal severance agreements with its Named Executive Officers except as follows. Darden has Management Continuity Agreements with each of our Named Executive Officers, which are described under “Executive Compensation—Potential Payments Upon Termination or Change of Control.” None of Darden’s Named Executive Officers have any other employment agreements with the Company, except for Mr. Lee, who has an employment agreement described below under “Employment Agreement.” When establishing Darden’s change of control provisions, the Committee aimed to provide executive officers with adequate financial security so that they could focus on achieving successful business continuity. For additional information concerning payments upon termination, retirement, death, disability, or change of control, see “Executive Compensation—Potential Payments Upon Termination or Change of Control,” including the tables showing the payments for each Named Executive Officer.

Decisions Made in Fiscal 2008 —There were no significant changes to Darden’s severance or change in control provisions in fiscal 2008.

Employment Agreement

Apart from the Management Continuity Agreements discussed above under “Severance and Change of Control Provisions,” Darden has not entered into any employment agreements with the Named Executive Officers, except Mr. Lee. Darden entered into an offer letter agreement with Mr. Lee dated August 13, 2007 in connection with the acquisition of RARE on October 1, 2007. The agreement extinguished most of Mr. Lee’s rights under his previous employment agreement with RARE, including the change in control provisions, but continued some provisions and also confirmed the terms of his employment with Darden. Certain terms of Mr. Lee’s agreement have been incorporated into the foregoing discussion of Darden’s compensation decision-making process as it applies to Mr. Lee, but the following summarizes the material terms of the agreement. The agreement provides Mr. Lee with an annual base salary of $500,000, and an annual bonus opportunity under Darden’s MIP equal to 60% of his base salary. Mr. Lee’s fiscal 2008 bonus was prorated to reflect the partial year of participation in the MIP from the closing of the RARE acquisition, but was guaranteed at not less than a threshold target. He was eligible for Company-paid benefits under Darden’s Relocation and Real Estate Assistance Program. In addition, the agreement provided Mr. Lee with a sign-on bonus of $150,000, and an initial equity compensation grant of stock options to acquire shares of Darden common stock and restricted shares of Darden common stock with a grant date value of $2,861,400. Two-thirds of the initial equity compensation grant, by value, would consist of stock options and the remaining one-third would consist of restricted shares. All of the restricted stock will cliff vest on the fourth anniversary of the date of grant, subject to Mr. Lee’s continued employment through such date and as long as Darden achieves positive earnings (calculated

 

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before taxes and interest) for fiscal 2009. One-half of the options will vest on each of the third and fourth anniversaries of the date of grant, subject to his continued employment through such date. If his employment is terminated by Darden without “cause” during the three-year period following the RARE acquisition, Mr. Lee will be provided with 18 months of salary continuation, continued access to group life and health benefits and continued vesting in stock options and restricted stock. “Cause” means a violation of Company policy or a state or federal law. In consideration for these benefits, Mr. Lee relinquished his rights under his existing employment agreement with RARE; however, the non-competition, non-solicitation of employees, non-hire of employees and confidentiality covenants of his RARE agreement will continue to apply to him during his employment with Darden and for specified periods thereafter. Specifically, he will be subject to: a non-solicitation of employees covenant and a confidentiality covenant during his employment with Darden and for 24 months thereafter; a non-competition covenant during his employment with Darden and for 18 months thereafter; and a non-hire of employees covenant during his employment with Darden and for 24 months thereafter.

Share Ownership Guidelines

In 1997 the Committee adopted share ownership guidelines for Darden’s executive officers. In June 2003, the Committee increased the guidelines by 50% so that executive officers are required to own common shares or their equivalent, valued at a multiple of their salaries ranging from three-fourths of base salary to four and one-half times base salary, depending on the executive officer’s level of responsibility in the organization. The CEO is required to own a multiple of six times his base salary. All executive officers, including the CEO, generally must meet these levels within seven years of attaining their position, subject to a transition period to allow the executive officer adequate time to achieve his or her ownership level. Shown below is the time allotted to meet the goal:

 

Year

   Percent of Stock
Ownership Goal
 

1

   10 %

2

   20 %

3

   30 %

4

   40 %

5

   60 %

6

   80 %

7

   100 %

The forms of equity included in the determination of an executive officer’s ownership level are: registered shares, restricted stock, performance stock units, the value of vested stock options, and Darden stock or equivalents held under Darden’s retirement plans. The Committee reviews executive officer ownership levels annually. At this time, all Named Executive Officers are meeting or exceeding their share ownership guidelines.

Tax and Accounting Considerations

Section 162(m) of the Internal Revenue Code prohibits Darden from deducting, for federal income tax purposes, certain compensation in excess of $1 million per year paid to certain persons named in the Summary Compensation Table unless the compensation meets particular criteria. One criterion is that the compensation be paid only upon the achievement of objective, pre-established performance goals and in accordance with certain procedural requirements. The Committee and management believe that Darden meets all requirements for deductibility of executive compensation, and regularly monitor to determine whether Darden’s plans require amendment to continue to meet the deductibility requirements of the tax law without compromising the flexibility needed to meet Darden’s executive compensation goals.

 

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