Compensation Matters

Compensation Matters

A Letter From Our Compensation Committee

April 26, 2017

Dear Fellow Stockholders,

We want to thank you for your continued support of Salesforce and share with you the Committee’s perspective on our business, our leadership team, our approach to executive compensation, and our recent compensation decisions.

Innovation and a unique culture have been core to our extraordinary growth. When our CEO Marc Benioff founded the Company in 1999, he had a vision that businesses would move to the cloud and subscription-based services. Salesforce has grown into something far beyond that initial vision, exceeding anyone’s expectations and continuing, even as a large public company, to stand for growth and innovation today. Salesforce’s focus on innovation recently earned it recognition as “Innovator of the Decade” by Forbes Magazine, and innovation was a key factor contributing to its recent ranking by Fortune Magazine as the 20th “Most Admired Company in the World.”

The financial results Salesforce delivered this past year were exceptional and continue to reflect our executive team’s commitment to excellence and innovation.

  • Revenue for fiscal 2017 was nearly $8.4 billion, up 26% year-over-year, with Salesforce achieving that milestone faster than any other enterprise software company
  • We also improved non-GAAP operating margin and grew operating cash flow by 29% year-over-year

None of these achievements would be possible without the vision and leadership of an extremely talented executive management team, led by a visionary CEO, who together with Salesforce’s more than 25,000 dedicated employees, have fostered a unique culture. That culture not only drives Company success, it also includes a core belief that a company can do well, while also doing good in the world. This has contributed to Fortune Magazine recently ranking Salesforce 8th place in the “100 Best Companies to Work For” and the #1 “Workplace for Giving Back.”

In short, Salesforce is growing and achieving great financial results, and its formula for success is unique.

We are committed to representing the best interests of our stockholders. As directors and Compensation Committee members, we represent our stockholders, and we take this responsibility very seriously. When making compensation decisions, we carefully balance many considerations, factors and perspectives to determine what we believe is the right decision. Our overarching compensation philosophy is to provide compensation that is competitive and motivating in a highly competitive industry while also being highly performance-based to ensure that our management team is closely aligned with our business goals and the interests of our stockholders.

Stockholder feedback shaped our recent compensation program changes. Following low support for our executive pay program in 2015, we sought our stockholders’ perspectives on our pay program and factored that feedback into our fiscal 2016 compensation decisions. Those decisions included, despite strong performance under the leadership of our CEO, a decrease in overall CEO pay in fiscal 2016 by 16%, and the introduction of an additional performance-based element (performance-based restricted stock units, or PRSUs) into the CEO pay mix. While these changes were well-received by our stockholders, support for our pay program in 2016 still was not the level that we, or our CEO, had hoped for.

As a result, after the 2016 meeting, we sought additional feedback from our stockholders. The two main themes we heard were that, notwithstanding recognition of the enormous contributions and leadership provided by our CEO, the overall magnitude of CEO pay remained high, and that it would be beneficial to expand the use of PRSUs to our other senior executives.

We listened to our stockholders, and taking their input into account, we reduced overall CEO pay in fiscal 2017 by 60%, while expanding the use of PRSUs to our other senior executives. We believe these changes are consistent with our compensation philosophy and have directly addressed the concerns underlying our 2015 and 2016 Say on Pay results.

We ask for your support. We hope this letter provides useful context as you review the details of our executive compensation program in the Compensation Discussion & Analysis below. We hope that we can count on your support of our pay program this year, and we look forward to all of your continued support of this incredibly unique organization that is Salesforce.

Sincerely,

John V. Roos, Compensation Committee
Chair Craig Conway, Compensation Committee Member
Maynard Webb, Compensation Committee Member

Compensation Discussion and Analysis

This Compensation Discussion and Analysis describes the material elements of our executive compensation program, providing an overview of our executive compensation philosophy, policies, practices and the corresponding pay decisions for our “Named Executive Officers” (“NEOs”). Specifically, it describes how and why the Compensation Committee of the Board (the “Compensation Committee” or “Committee”) arrived at the specific executive compensation decisions for and during fiscal 2017 (February 1, 2016 – January 31, 2017) and the key factors the Committee considered in making those decisions.

Named Executive Officers

For fiscal 2017, our NEOs included our principal executive officer, our principal financial officer and the three next most highly-compensated executive officers, who were:

  • Marc Benioff, our Chairman of the Board and Chief Executive Officer (“CEO”);
  • Mark Hawkins, our Chief Financial Officer (“CFO”);
  • Keith Block, our Vice Chairman, President and Chief Operating Officer;
  • Parker Harris, our Co-Founder and Chief Technology Officer; and
  • Alexandre Dayon, our President and Chief Product Officer.

 

Executive Summary

Business Overview and Fiscal 2017 Performance Highlights

Salesforce is a leading provider of enterprise software, delivered through the cloud, with a focus on customer relationship management, or CRM. We introduced our first CRM solution in 2000, and we have since expanded our service offerings into new areas and industries with new editions, features and platform capabilities. Our core mission is to empower our customers to connect with their customers in entirely new ways through cloud, mobile, social, Internet of Things (“IoT”) and artificial intelligence technologies.

Salesforce is unique as both a high growth and top 10 software company. In fact, based on our fiscal 2017 revenues, we are the fastest-growing top five enterprise software company in the world. We are a member of the Fortune 500, have been recognized as the “Innovator of the Decade” by Forbes Magazine and as one of the top 10 “100 Best Companies to Work For” by Fortune Magazine.

In fiscal 2017, the Company delivered significant growth and strong financial performance, including:

  • Revenue. Fiscal 2017 revenue grew by 26% year-over-year.
  • Operating Cash Flow. Fiscal 2017 operating cash flow grew by 29% year-over-year.
  • Deferred and Unbilled Deferred Revenue. Fiscal 2017 deferred revenue grew by 29%, and unbilled deferred revenue (representing business that is contracted but unbilled and off the balance sheet) grew by 27%.

revenuedeferred-rev

Return to Stockholders

We have delivered significant long-term TSR, outperforming both the broader market and the technology sector as reflected by the Nasdaq Computer & Data Processing Index. The following chart shows how a $100 investment in Salesforce on January 31, 2012 would have grown to $271 on January 31, 2017. The chart also compares the TSR on an investment in our common stock to the same investment in the S&P 500 Index and the Nasdaq Computer & Data Processing Index over the last five fiscal years.

ctr

s&p500

Data for the Standard & Poor’s 500 Index and the Nasdaq Computer & Data Processing Index assume reinvestment of dividends. The comparisons in the graph above are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.

Stockholder Responsiveness

Our Board and Compensation Committee value the perspectives of our stockholders and take stockholder feedback seriously. Over the past several years, the Compensation Committee and management have conducted extensive stockholder outreach on executive compensation and related governance topics. Over this period, the Compensation Committee, together with its independent compensation consultant, also conducted a broad review of our executive compensation program.

After meaningfully reducing CEO pay and making other changes in fiscal 2016, in fiscal 2017, the Compensation Committee made substantial additional reductions to CEO pay and implemented a number of significant executive compensation program changes. These changes, summarized below, reflect our responsiveness to our stockholders and our goal of further enhancing the alignment of our executive compensation program with our long-term strategy.

These compensation changes occurred in the context of consistently strong Company performance under our CEO’s leadership, and a stock price that has appreciated very well over the past five years. For example, our stock price on February 1, 2012 was $29.83 (as adjusted for our stock split) and our stock price on February 1, 2017 was $78.58, representing a gain of approximately 163%. The chart below illustrates the recent reductions to CEO pay in the context of the Company’s stock price performance.

center

ceo-total-comp

Significant Fiscal 2017 Compensation Actions

In fiscal 2017, our Compensation Committee took the following key actions:

  • Reduced CEO Total Compensation by 60%. We reduced our CEO’s total compensation by 60% year-over-year, after having reduced his total compensation in fiscal 2016 by 16%. These substantial reductions were made notwithstanding the very strong performance of both the CEO and the Company.
  • Extended Performance-Based Equity to All NEOs. We added performance-based restricted stock units, or PRSUs, to the compensation mix for all of our NEOs, after having introduced PRSUs for our CEO in fiscal 2016. Approximately 75% of our non-CEO NEOs’ fiscal 2017 equity compensation, and 100% of our CEO’s fiscal 2017 equity compensation, was delivered through PRSUs and stock options.
  • Maintained CEO Target Total Cash Compensation at Fiscal 2016 Level. We kept the CEO’s base salary and target bonus for fiscal 2017 at fiscal 2016 levels.
  • Maintained Target Total Cash Compensation for All NEOs, Including the CEO, at Fiscal 2017 Levels for Fiscal 2018. We determined to maintain fiscal 2018 base salary and target bonus for the CEO, as well as all other NEOs, at fiscal 2017 levels.
  • Continued a Highly Performance-Based CEO Pay Mix. We maintained our commitment to significant reliance on at-risk, performance-based CEO compensation. For fiscal 2017, approximately 78% of our CEO’s total compensation was through at-risk awards (PRSUs, stock options and annual cash incentive) where amounts realizable were tied to Company performance.
  • Eliminated Company-Paid CEO Personal Security Expense for Fiscal 2018. Commencing in fiscal 2018, our CEO will pay directly, or reimburse the Company for, security services that are provided outside of work hours or business-related travel.

 

Stockholder Outreach and Board Responsiveness

2016 Say-on-Pay Vote and Stockholder Outreach

Our Board and Compensation Committee value our stockholders’ views on our executive compensation program, as communicated through our outreach and engagement efforts and through our stockholders’ voting decisions. We take seriously, and believe it is important to respond to, the voting results on our annual stockholder advisory vote to approve our executive compensation, which were supported by approximately 60% and 52% of the shares voting at our 2016 and 2015 Annual Meetings. Following our 2015 Annual Meeting, we conducted extensive engagement with stockholders and made several significant changes to the executive compensation program ahead of our 2016 Annual Meeting, after which the Compensation Committee recognized the need for additional dialogue with our stockholders and the advisability of further review of the executive compensation program. Therefore, following our 2016 Annual Meeting, we engaged with investors representing more than 50% of our outstanding shares.

Following extensive dialogue with our stockholders and thoughtful Compensation Committee review of our compensation program, and taking into account extensive data and analysis from the Compensation Committee’s independent compensation consultant, the Compensation Committee made significant changes for fiscal 2017, in addition to those made for fiscal 2016. To illustrate the evolution of our compensation program over the past two years, the table below summarizes the year-over year changes we have made.

Summary of Fiscal 2016 and Fiscal 2017 Compensation Program Changes Responsive to Stockholder Feedback

Feedback We HeardChanges We Made in Fiscal 2016Changes We Made in Fiscal 2017/2018
Concerns regarding CEO pay magnitudeDecreased total CEO compensation by 16%Decreased total CEO compensation by an additional 60% ($33M to ~$13M)
Froze CEO salary from FY16 to FY17Froze CEO salary from FY17 to FY18
Preference for greater proportion of performance-based equity compensationIntroduced performance-based RSUs to our CEO compensation
– Comprised 64% of target long-term compensation
– Comprised 52% of the total direct compensation
Expanded performance-based RSUs to all NEOs
Concerns regarding CEO’s personal security costsFor FY18, we will eliminate company-funded personal security expenses for the CEO
Ensure that performance metrics are sufficiently rigorous and challengingContinued to set rigorous performance targets for our fiscal 2016 cash incentive plan, which exceeded both guidance and prior year’s target and actual resultsContinued to maintain rigorous performance goals for both our fiscal 2017 cash incentive plan and performance-based RSUs for all NEOs that require above-median relative TSR performance for target payouts
Ensure that incentives are appropriately aligned with stockholder interestsIntroduced performance-based RSUs for our CEO, as set forth aboveIntroduced performance-based RSUs for our NEOs, as set forth above
Increased share ownership requirements for the Board and executives

We believe that the changes that we have made over the past two years are highly responsive to the feedback we have received from our stockholders. We believe these changes will serve to advance our compensation practices and governance in a manner that both benefits stockholders and continues to align with our strategy and pay philosophy.

Impact of Executive Compensation Program Changes on CEO Pay for Fiscal 2017

The Compensation Committee has approved significant year-over-year reductions in CEO total direct compensation since 2015, in response to stockholder perspectives regarding magnitude of CEO pay. This has resulted in a cumulative 67% decrease in CEO pay since fiscal 2015, including a 60% reduction for fiscal 2017. Over fiscal years 2015-2017, the Company delivered Total Stockholder Return (“TSR”) of 40% (16% for fiscal 2017 and 21% for fiscal 2016).

15-17-CEO-Comp

Structural Changes and Pay Mix for Fiscal 2017

As described above, our Compensation Committee has approved a number of changes to our pay mix since fiscal 2015 to more tightly link NEO pay with performance. These changes include the introduction of performance-based RSUs (PRSUs) to CEO compensation in fiscal 2016, taking into account our stockholders’ preference for a greater proportion of our long-term incentive to be delivered in the form of performance-based equity. Following positive feedback on this change, the use of PRSUs was extended to all NEO’s for fiscal 2017. As illustrated below, a substantial majority of our NEOs’ compensation is directly tied to Company and stock price performance.

pay-mix

Compensation Philosophy and Practices

Compensation Philosophy, Objectives and Challenges

Philosophy and Objectives. Our compensation philosophy is driven by our objective to attract and retain the premier talent needed to lead our Company in a dynamic, innovative and extremely competitive environment and to strongly align the interests of our executives with those of our stockholders for the long term. To accomplish this, we use compensation structures directly tied to the performance of our common stock, as well as key drivers of Company performance, including revenue, operating cash flow and non-GAAP income from operations. Our executive compensation is aligned with our overall business strategies, with a focus on driving growth and long-term value for our stockholders.

Our executive compensation program is structured to use a mix of base salary, annual performance-based cash incentive awards and long-term equity compensation awards to incentivize and reward those individuals who make the greatest contributions to our performance and creation of stockholder value over time. Within this mix, by far the largest portion is in the form of long-term equity awards and the majority is variable, utilizing an appropriate balance of short and long-term incentives.

Challenges. We operate in a highly competitive market and industry and we face challenges in hiring and retaining executives due to a number of factors, including:

  • Highly Competitive Cloud Computing Industry — We are a pioneer in the innovative and highly competitive enterprise cloud computing market. We are, however, an established, large public company, and some prospective executives may believe there is less opportunity to realize significant appreciation through equity compensation at an established public company of our size, as compared with a privately-held start-up or early stage public company. Further, some of our competitors are much larger than we are and may be able to offer higher compensation.
  • Fiercely Competitive Employee Retention Environment— In the technology industry, there is substantial and continuous competition for executive officers with the experience and aptitude to motivate and lead engineers in designing, developing and managing software and Internet-related services, as well as qualified sales and operations personnel familiar with the technology industry. Our headquarters are located in the San Francisco Bay Area, where competition for executive talent is particularly fierce. Further, our success has made our employees and executives more attractive as candidates for employment with other companies, and they are subject to significant ongoing recruiting efforts by other companies in the technology industry.
  • High Growth — We are a high growth company that continues to experience rapid changes to our technology, personnel and business tactics. We have experienced rapid growth in the geographic breadth and technical scope of our operations, along with the number of personnel we employ. Not all executives desire or are suited to manage in such an environment, making the services of our current executives more valuable and in some cases hindering our efforts to recruit new executives.
  • Executive Background — Typically, we hire experienced executives with specific skills in key functional areas who have worked in a high growth environment comparable to ours. The number of executives with the most desirable experience is relatively low and proven executives are difficult to find. We have expanded our recruiting efforts both geographically and into other industries and sectors, which leads to increased complexity in recruiting efforts and has required us to be more flexible with our executive compensation packages.

Given this challenging hiring environment, our compensation program is designed to be competitive with those companies with whom we compete for talent and to strengthen our ability to attract and retain the caliber of employees that we need to sustain our industry-leading success.

Compensation and Governance Practices and Policies

We endeavor to maintain strong governance standards in our policies and practices related to executive compensation. Below is a summary of key executive compensation and corporate governance practices in place during fiscal 2017.

What We DoWhat We Don't Do
Actively engage in year-round dialogue with our stockholders to incorporate feedback into our compensation programsNo individual Supplemental Executive Retirement Plans
Significant portion of compensation for Named Executive Officers is in the form of at-risk compensationNo stock option repricing
Provide appropriate mix of fixed and variable payNo hedging or pledging of our securities
Implemented performance-based RSUs for all NEOsNo excise tax gross-ups upon a change of control
Stringent stock ownership requirements for executives and directors
Annual advisory vote on executive compensation
Compensation Committee composed entirely of directors independent under NYSE rules
Regular reviews of executive compensation and peer group data
Maintain a compensation clawback policy
Use an independent compensation consultant

Compensation Elements and Compensation for Named Executive Officers

We award cash compensation to our NEOs in the form of base salaries and annual cash incentives under our Kokua Bonus Plan and equity compensation in the form of stock options, restricted stock units (“RSUs”) and PRSUs, with the exception of our CEO, whose equity compensation consists solely of stock options and PRSUs. To a lesser extent, we also provide certain other benefits, generally consistent with what we provide to other employees, all as described further below. We believe that each of these compensation elements is necessary to attract and retain individuals in a very competitive market for executive talent. A description of each of these elements, the related performance measures (if any) and the rationale are set forth in the following table:

 Pay ComponentFY 2017 MeasureRationale
Annual IncentiveAnnual Performance-Based Cash BonusRevenueTo influence executive performance in achieving pre-established annual corporate performance goals in line with our strategy and that are used by investors to evaluate our financial performance
Operating Cash Flow
Non-GAAP Income from Operations
Long-Term Incentives (LTI)Performance-Based Restricted Stock UnitsRelative TSRTo directly align our executives’ interests with those of our stockholders

(CEO LTI consists of PRSUs and stock options)
Restricted Stock UnitsStock Price
Stock OptionsStock Price
Base CompensationSalaryTo attract, motivate and retain all employees

Base Salaries

We believe we must offer competitive base salaries to attract, motivate and retain all employees, including our executives. The Compensation Committee has generally set the base salaries for our executives, including the NEOs other than our CEO, based on three primary factors:

  • a comparison to the base salaries paid by the companies in our compensation peer group;
  • the overall compensation that each executive may potentially receive during his or her employment with us; and
  • internal parity considerations with respect to the base salaries of other executives who are comparably situated in terms of reporting structure and level of responsibility.

In November 2015, the Compensation Committee conducted a review of our executive compensation program for purposes of determining the base salaries and bonus opportunity for our executives for fiscal 2017, taking into account the above factors as well as overall Company and individual performance and the roles and responsibilities of each of our executives. For fiscal 2017, the Compensation Committee set base salaries for the NEOs, effective February 1, 2016, as follows:

fybase17

For fiscal 2017, there was no change to Mr. Benioff’s base salary from fiscal 2016. For the other NEOs, base salaries represented increases over fiscal 2016 levels of 7% for Mr. Hawkins and Mr. Block, and 29% for Mr. Harris and Mr. Dayon. The relative size of these increases reflects a focus on internal parity with respect to similarly situated executives, and the increases were determined to be appropriate due to these executives’ paramount roles in our continuing growth and success, the increase in the size and complexity of our business, especially from a Products and Technology perspective, and our overall performance in fiscal 2016, including its significant revenue growth.

In October and November 2016, the Compensation Committee conducted a review of our executive compensation program for purposes of determining the base salaries and bonus opportunity for our executives for fiscal 2018. The Compensation Committee also considered overall Company and individual performance and the roles and responsibilities of each of our executives as well as considerations of internal parity with respect to similarly situated executives. For fiscal 2018, the Compensation Committee set base salaries for the NEOs, effective February 1, 2017, as shown below. For all NEOs, the Compensation Committee kept fiscal 2018 salaries at fiscal 2017 levels.

fy2018-base-salary

Performance-Based Cash Bonuses

We provide annual performance-based cash incentive awards linked to achievement against certain corporate performance goals under our broad-based Kokua Bonus Plan. The Compensation Committee believes that the annual performance metrics used in the bonus plan contribute to driving long-term stockholder value, play an important role in influencing executive performance and are an important component of our compensation program to help attract, motivate and retain our executives and other employees.

Under the Kokua Bonus Plan, the Compensation Committee establishes three bonus pool targets: one for our executive officers, including the NEOs, a second for non-executive officers at the Vice President level and above, and a third for employees at the level of Senior Director and below. Each pool may be funded based on achievement of certain Company performance goals pre-established by the Committee for each of the three groups. The performance goals applicable to executive officers in fiscal 2017 are discussed in more detail below.

Typically, after the first half of the fiscal year, we pay 25% of the full target bonus amount, and after the end of the fiscal year, we pay the remaining amount. The remaining amount is determined based on the level of achievement against the applicable Company performance goals, and may also take into account individual performance.

The Compensation Committee administers the Kokua Bonus Plan with respect to our executive officers and determines the amounts of any awards under this plan to our executive officers. The Committee may increase or decrease awards under this plan in its discretion based on factors the Committee deems appropriate, including an assessment of individual performance and input from our CEO.

Fiscal 2017 Target Cash Bonus Opportunity

To establish our executive officers’ individual target cash bonus opportunities, which are expressed as a percentage of base salary, the Compensation Committee considers competitive pay data, input from its compensation consultant, and the level, position, objectives and scope of responsibilities of each executive, as well as considerations of internal parity among similarly situated Company executives.

In November 2015, based on its review of our executive compensation program as described above and peer company data, the Compensation Committee approved the following target annual cash bonus opportunities of the NEOs for fiscal 2017.

2017-target-base

For fiscal 2017, the target bonus opportunity for our NEOs, expressed as a percentage of base salary, remained unchanged from fiscal 2016 levels. The Compensation Committee maintained Mr. Benioff’s target bonus opportunity at 200% of base salary for fiscal 2017 in light of our continuing growth and success, the increasing size and complexity of our business and our overall fiscal 2017 performance, including significant revenue growth.

In addition, for fiscal 2018, the Compensation Committee did not make any increases to the target bonus opportunity of the NEOs for the second year in a row, keeping our CEO’s fiscal 2018 target bonus opportunity at 200% of base salary and each other Named Executive Officer’s target bonus opportunity for fiscal 2018 at 100% of base salary.

Fiscal 2017 Cash Bonus Pool Payout Metrics, Performance and Fiscal 2017 Payouts

For fiscal 2017, the amount of the bonus pool for executive officers was based on our performance during the fiscal year compared to pre-established target levels for three equally weighted measures. The Compensation Committee believes that these measures and this weighting are appropriate to influence executive performance in achieving certain annual corporate performance goals that further our strategy and that are used by investors to evaluate our financial performance. The Compensation Committee believes that targets for the cash pool should be rigorous and challenging and therefore has a practice of setting targets at levels that exceed financial guidance:

Annual Bonus Performance Metric Target Setting
(all amounts in millions)

16-17-nongaap-income

For purposes of the Kokua Bonus Plan, “Revenue” is defined as our GAAP revenues, as may be adjusted for certain acquisitions. “Operating Cash Flow” is defined as our GAAP operating cash flow. “Non-GAAP Income from Operations” is defined as our non- GAAP income from operations (revenues less cost of revenues and operating expenses, excluding the impact of stock-based compensation expense and amortization of acquisition-related intangible assets), as adjusted for certain acquisitions and not including the impact of amounts payable under the Kokua Bonus Plan.

The Compensation Committee believes that basing the executive officer bonus pool under the Kokua Bonus Plan on these measures aligns executive incentives with stockholder interests in accordance with our compensation philosophy.

The Compensation Committee has the discretion to increase or decrease the bonus amounts actually paid to individual executives but did not exercise such discretion for fiscal 2017 awards, although the Company’s performance for fiscal 2017 exceeded the target for all three measures. Instead, the Compensation Committee capped funding of the executive officer bonus pool and the amounts payable to each individual Named Executive Officer with respect to fiscal 2017 at 100% of the target opportunity.

Accordingly, the cash bonuses paid to the NEOs for fiscal 2017 under the Kokua Bonus Plan were:

fy17-bonus

Equity Compensation

The Compensation Committee periodically reviews our equity compensation program from a market perspective as well as in the context of our overall compensation philosophy. The Compensation Committee also considers the appropriateness of various equity vehicles, such as stock options, PRSUs and RSUs, as well as overall program costs (which include both stockholder dilution and compensation expense), when evaluating the longterm incentive mix. Further, the Compensation Committee considers peer company data and competitive positioning analysis, each executive’s individual performance, as described below, as well as stockholder input. A subcommittee of the Compensation Committee considers and formally approves equity awards to our NEOs following discussions and policy determinations by the Compensation Committee.

Stock Options

We grant stock options to our executives when they join us, and periodically thereafter, to align their interests with those of our stockholders and as an incentive to remain with us. The Compensation Committee believes that options to purchase shares of our common stock, with an exercise price equal to the market price of our common stock on the date of grant, are inherently performance-based and are a very effective tool to motivate our executives to build stockholder value. With stock options, our executives can realize value only to the extent that the market price of our common stock increases during the period that the option is outstanding, which provides a strong incentive to our executives to increase stockholder value. Further, because these options typically vest over a four-year period, they incentivize our executives to build value that can be sustained over time.

Restricted Stock Units (RSUs)

We also grant restricted stock units, or RSUs, to our executives and other employees to help manage the dilutive effect of our equity compensation program. Our RSUs are subject to timebased vesting. Because RSUs have value to the recipient even in the absence of stock price appreciation, RSUs help us retain and incentivize employees during periods of market volatility, and also result in our granting fewer shares of common stock than through stock options of equivalent grant date fair value. Our RSUs typically vest over a four-year period and we believe that, like stock options, they help incentivize our executives to build value that can be sustained over time.

Performance-Based Restricted Stock Units (PRSUs)

We also grant equity awards subject to pre-established performance-based vesting conditions, which may be absolute or relative to the performance of other companies. We initially granted PRSUs to our CEO in fiscal 2016 and, in November 2016, the Compensation Committee granted PRSUs to all of the NEOs, including our CEO, for fiscal 2017.

The PRSUs granted to our NEOs for fiscal 2017 have the following key terms:

  • A single, three-year performance period (starting from grant date)
  • The performance metric is three-year relative TSR, as compared to the NASDAQ 100 Index group of companies as of the grant date
  • Target payout requires 60th percentile TSR performance percentile
  • No payout if performance is below the 30th TSR percentile
  • No payout above target if TSR is negative on an absolute basis
  • A maximum payout capped at 2x target
  • Each percentile of TSR performance below target reduces payout by 31/3%, whereas performance above target only increases payout by 2.5641%

In developing the performance conditions, performance period, comparison group, payout scale and other terms of the PRSUs, the Compensation Committee undertook significant deliberation. It considered input received from institutional stockholders as well as market data and the advice of its compensation consultant. In determining the terms of the award, the Compensation Committee considered that the annual cash incentive plan (the Kokua Bonus Plan) already incentivizes performance on three key Company-specific financial measures. The Compensation Committee also considered the importance of emphasizing the performance of the Company as a whole, as opposed to an isolated metric; the importance of achieving a sufficiently difficult maximum payout; the benefit of a large and objectively determined performance comparator group; and the overarching goals of having an incentive that is clearly and directly aligned with stockholder interests.

prsu-payout

Specifically, the fiscal 2017 PRSUs provide that, if the NEO remains employed through December 15, 2019, the PRSUs granted to such officer will vest in a percentage of the target number of shares shown above, between zero and 200%, depending on how our TSR ranks over the three-year period from the grant date (the “Performance Period”), relative to the companies in the NASDAQ 100 Index as of the grant date (the “Index Group”). If our TSR over the Performance Period is at the 60th percentile when ranked against the TSRs of the companies in the Index Group, 100% of the target number of shares will be eligible to vest. For every percentile by which our TSR ranking within the Index Group exceeds the 60th percentile, the number of shares eligible to vest will increase by 2.5641% of target, up to a maximum payout of 200% of target if our TSR ranking is at the 99th percentile. For every percentile by which our TSR ranking within the Index Group is below the 60th percentile, the number of shares eligible to vest will decrease by 31/3% of target, with no payout if our TSR ranking is below the 30th percentile. Additionally, if our absolute TSR over the Performance Period is negative, the number of shares eligible to vest will not exceed 100% of the target amount, even if our TSR ranks above the 60th percentile within the Index Group. A table setting forth the potential payouts based on relative TSR percentile performance is set forth below:

PercentilePayout if TSR ≥ 0Payout if TSR < 0
99th200%100%
90th177%100%
80th151%100%
70th126%100%
60th100%100%
50th67%67%
40th33%33%
30th0%0%

Additional vesting rules apply in the event of a change of control of the Company. These provide for measurement of TSR at the time of the change of control, if one occurs before the end of the Performance Period, with a portion of the award vesting pro-rata based on performance through the change of control, and the remaining eligible shares vesting quarterly over the balance of the Performance Period. The award also is subject to certain acceleration of vesting provisions that apply if the Named Executive Officer qualifies for severance payments and benefits under his Change of Control and Retention Agreement. These additional vesting rules are described under “Performance-Based Restricted Stock Units” beginning on page 43.

Fiscal 2017 Equity Award Decisions

In November 2016, after considering the recommendations of our CEO (except with respect to his own equity awards), its assessment of the performance and expected future contributions of each NEO, the NEOs’ overall compensation arrangements, the highly competitive market for executive talent in which we operate, input from our stockholders and company performance, the Compensation Committee subcommittee approved equity awards for each of the NEOs as follows:

fiscal-17-equity-decisions

(1) Each of the options to purchase shares of our common stock was granted with an exercise price of $75.57 per share and all stock options and RSUs were subject to our standard four-year time-based vesting schedule.
(2) Target number of shares. Actual payout may range from zero shares to 2x target.

For Mr. Benioff, approximately 61% of the value of the fiscal 2017 equity compensation granted to him was in the form of PRSUs and 39% was in the form of stock options, which was consistent with the fiscal 2016 ratio for his equity awards of 64/36. For our NEOs other than our CEO, approximately 25% of the value of the fiscal 2017 equity compensation granted to them was in the form of PRSUs, 25% was in the form of RSUs, and 50% was in the form of stock options.

The Committee believes that this approach aligns the NEOs’ compensation packages with the creation of long-term stockholder value and is an effective way to tie pay to our performance over time. Specifically, in the case of our CEO, no value will be realized from any of the stock option or PRSUs except to the extent that the market price of our stock increases above the market price on the grant date (for the options) or our TSR performance exceeds the 30th percentile of relative TSR performance of our comparison group TSR performance target at the end of the three-year performance period (for the PRSUs). Similarly, for our non-CEO NEOs, 75% of total equity compensation is based on the Company’s TSR and share price performance and 25% is time based.

CEO Security Program

We have provided a security program for our CEO since fiscal 2012 and continued to do so in fiscal 2017. This CEO security program provides comprehensive physical and personal security services; accordingly, the program has not been limited to providing security services only at business facilities or during business-related travel. Because the security services provided for our CEO may be viewed as conveying a personal benefit to him, we have reported the incremental costs to us of the program in the “All Other Compensation” column in the Summary Compensation Table that accompanies this Compensation Discussion and Analysis. While the Compensation Committee believes that amounts paid by the Company for this security program have been reasonable, necessary and for the Company’s benefit, we acknowledge varied views on this practice, and for fiscal 2018, the Company will eliminate this benefit. The Company will continue to pay for CEO security arrangements that are provided at work and on business travel.

Other Benefits

Like other employees, our executive officers, including the NEOs, participate in our employee benefit and welfare plans, including medical and dental care plans, a fitness reimbursement plan and a 401(k) plan. We generally do not provide our executives, including the NEOs, with additional retirement benefits, pensions, perquisites or other personal benefits, except, in the case of our CEO, providing personal security through fiscal 2017 as described above. We also occasionally provide certain benefits on an ad hoc basis, as noted for our NEOs in our Summary Compensation Table, if we believe that doing so is appropriate, reasonable and serves the interests of the Company, typically on the same terms we would provide such benefits for other employees. For example, we covered employee and guest costs associated with attending certain motivational and leadership Company events in fiscal 2017, as well as the associated taxes, for Messrs. Hawkins, Block and Dayon, consistent with how we treated this benefit for all other employees who attended these events.

In addition, in recognition of Mr. Harris’ leadership of the Company’s technology and engineering team in fiscal 2017, including achievements related to the launch of the Salesforce Lightning platform, the Compensation Committee approved a special one-time recognition bonus to him of an automobile and all associated taxes (see footnote 11 to Summary Compensation Table for details). The Committee is sensitive to potential over-reliance on such one-off benefits and reserves these kinds of awards for unique situations. In this case, the Committee approved this award because it believed that recognizing Mr. Harris’ leadership and success in achieving Company goals was warranted, and that doing so in a memorable and visible way would be motivational not only for the executive, but for other employees who observe exceptional performance being rewarded in exceptional ways consistent with the Company’s philosophy of paying for performance.

Compensation-Setting Process

Role of the Compensation Committee, Tally Sheets and Competitive Data

The Compensation Committee oversees and administers our executive compensation program in accordance with its Charter, which can be viewed in the Corporate Governance section of our Investor Relations website at http://investor.salesforce.com/aboutus/investor/corporate-governance/. The Committee’s role includes oversight of our equity and incentive-based plans.

The Compensation Committee meets regularly throughout the year. It met nine times in fiscal 2017. At least annually, either before or near the beginning of the fiscal year, it reviews the executive compensation program and establishes base salaries and target annual cash bonus opportunities for the next fiscal year. Historically at this time it also has considered and granted equity awards to our executives and other eligible employees.

As discussed above, for fiscal 2017, the Compensation Committee designated a subcommittee (the “Subcommittee”) designed to satisfy the conditions of Section 162(m) of the Internal Revenue Code (“Section 162(m)”) and appointed Mr. Conway and Mr. Roos, both of whom are “outside directors,” to serve on it. This subcommittee participates in discussions and policy determinations by the Compensation Committee and has responsibility and authority to review and approve elements of compensation that are intended to qualify for deductibility under Section 162(m) and related regulations.

In setting the various elements of compensation, including base salaries, target annual cash bonus opportunities, and equity award amounts, the Compensation Committee, or Subcommittee, as applicable, reviews the total target compensation for our executives and also considers developments in compensation practices outside of the Company. Specifically, the Compensation Committee is provided with competitive positioning data for similarly situated executives at companies in our peer group, as well as summary consolidated information about our executives’ total compensation and pay history (commonly called “tally sheets”) to use in setting individual compensation elements and making decisions on total executive compensation levels.

Peer data is a helpful reference for the Compensation Committee to assess the competitiveness and appropriateness of our executive compensation program within our industry sector and the broader business community. Ultimately, the Compensation Committee applies its own business judgment and experience to determine the individual compensation elements, the amount of each compensation element and total target compensation; the Compensation Committee does not set or target the compensation of our executives at specific levels or within specified percentile ranges relative to peer company pay levels. Depending upon Company and individual performance, as well as the various other factors discussed in this Compensation Discussion and Analysis, target and actual total direct compensation of our executives, as well as individual compensation elements, may be within, below, or above the market range for their positions.

Role of Committee Advisors

The Compensation Committee has the authority to engage its own advisors to assist in carrying out its responsibilities. As in the past, the Compensation Committee continued to engage the services of Compensia, Inc., an independent, national compensation consulting firm (the “compensation consultant”) in fiscal 2017. The compensation consultant provides the Compensation Committee and the Board with guidance regarding the amount and types of compensation that we provide to our executives, how these compare to peer company compensation practices and advice regarding other compensation-related matters. The compensation consultant also provides the Compensation Committee with advice related to our equity plans and provides the Board with data that helps the Board develop the Board’s compensation program.

Representatives of the compensation consultant attend meetings of the Compensation Committee as requested and also communicate with the Compensation Committee outside of meetings. The compensation consultant reports to the Compensation Committee rather than to management, although representatives of the firm may meet with members of management, including our CEO and executives in our Employee Success (human resources) department, for purposes of gathering information on proposals that management may make to the Compensation Committee. During fiscal 2016 and fiscal 2017, the compensation consultant met with various executives to collect data and obtain management’s perspective on the fiscal 2017 compensation for our executives. The compensation consultant also provided services and advice, at the request of the Compensation Committee, in connection with the expansion of the performance equity program introduced for our CEO in fiscal 2016 and for other NEOs in fiscal 2016. The Compensation Committee may replace its compensation consultant or hire additional advisors at any time.

Role of Peer Companies

The Compensation Committee regularly reviews the appropriateness of the compensation peer group used by the compensation consultant to generate competitive pay data for the Committee’s review in connection with executive compensation decisions.

In the second half of fiscal 2016, when the Committee evaluated our executive compensation program and considered fiscal 2016 equity awards, as well as fiscal 2017 base salaries and target bonus opportunities, the compensation consultant provided a comparative analysis of our executive compensation program based on pay practices of the group of peer companies listed below (the “2017 Peer Group”). Selected based on similarity to us on various financial and other measures, such as industry, revenue, market capitalization, number of employees and growth history and potential as well as competition for executives, the 2017 Peer Group was:

Adobe Systems, Inc.LinkedIn Corporation
Amazon.com, Inc.Microsoft Corporation
Autodesk, Inc.Netflix, Inc.
CA Technologies, Inc.Oracle Corporation
Cerner CorporationSAP
Citrix Systems, Inc.Symantec Corporation
Expedia, Inc.The Priceline Group Inc.
Facebook, Inc.Twitter, Inc.
IBMVMware, Inc.
Intuit, Inc.Yahoo! Inc.
Juniper Networks, Inc.

In addition, the Compensation Committee reviewed aggregated survey data, which provided additional context regarding executive compensation practices in the marketplace, drawn from the Radford 2015 Custom Compensation Survey. The Compensation Committee also from time to time reviews compensation data from certain other companies in the market for the executive talent for whom we compete.

Similarly, in the second half of fiscal 2017, when the Compensation Committee was evaluating our executive compensation program and considering fiscal 2017 equity awards, as well as fiscal 2018 base salaries and target bonus opportunities, the compensation consultant provided a comparative analysis of the Company’s executive compensation program based on pay practices of the group of peer companies listed below (the “2018 Peer Group”). Also selected, based on similarity to us on various financial and other measures, such as industry, revenue, market capitalization, number of employees and growth history and potential as well as competition for executives, the 2018 Peer Group was:

Activision Blizzard, Inc.LinkedIn Corporation
Adobe Systems, Inc.Microsoft Corporation
Amazon.com, Inc.Netflix, Inc.
CA Technologies, Inc.Oracle Corporation
Cerner CorporationSAP
Citrix Systems, Inc.Symantec Corporation
eBay Inc.The Priceline Group Inc.
Expedia, Inc.Twitter, Inc.
Facebook, Inc.VMware, Inc.
IBMWorkday, Inc.
Intuit, Inc.

In addition, the Compensation Committee reviewed aggregated survey data, which provided additional context regarding executive compensation practices in the marketplace, drawn from the Radford 2016 Custom Compensation Survey. The Compensation Committee also from time to time reviews compensation data from certain other companies in the market for the executive talent for whom we compete.

Role of Executive Officers

Our CEO provides general input to the Compensation Committee with respect to the compensation of executive officers who report directly to him, including the other NEOs, and reviews their performance at least annually. Our CEO considers all relevant factors in his review, including each executive officer’s performance and accomplishments during the year, areas of strength and areas for development. Our CEO may also meet with the compensation consultant if he chooses to do so as he prepares his recommendation. The Compensation Committee takes our CEO’s general input into consideration when determining and approving executive officer compensation, including for the NEOs other than the CEO.

The executives who lead our Legal and Global Employee Success organizations provide general administrative support to the Compensation Committee throughout the year, including providing legal advice and overseeing the documentation of equity plans and awards as approved by the Compensation Committee, and attending Compensation Committee meetings as requested.

Role of Stockholder Input

In setting the form and amount of compensation for our NEOs, the Compensation Committee also considers the voting results from our most recent annual stockholder advisory vote on executive compensation as well as specific input provided by stockholders throughout the year. In particular, in November 2016, when making decisions regarding fiscal 2017 equity awards and in setting cash compensation levels for fiscal 2018, the Compensation Committee gave significant consideration to the 2016 advisory vote as well as specific input provided by stockholders through our stockholder engagement program undertaken in calendar year 2016.

Decisions Regarding Fiscal 2018 Compensation

As set forth above, in November 2016, the Compensation Committee conducted a review of our executive compensation program for purposes of determining the base salaries and target bonus opportunity for our executives for fiscal 2018. As a result of this review, it determined that no NEO would receive an increase in base salary for fiscal 2018. In addition, the Compensation Committee did not make any increases to the target bonus opportunity of any NEO, keeping the CEO’s fiscal 2017 target bonus opportunity at 200% of his base salary and each other NEO’s target bonus opportunity for fiscal 2017 at 100% of his base salary. Finally, for fiscal 2018, the Compensation Committee also decided to eliminate Company-paid expenses for CEO security arrangements that are provided outside of work or business travel, which may be deemed to convey a personal benefit. The Company will continue to pay for the CEO security arrangements that are provided at work and on business travel.

Other Compensation Policies

Stock Ownership Guidelines

We maintain a stock ownership policy for our non-employee directors, as described earlier in “Directors and Corporate Governance—Compensation of Directors” and as set forth in our Corporate Governance Guidelines (the “Guidelines”). The Guidelines also include stock ownership guidelines for our executive officers, including our NEOs. The Guidelines provide that our CEO must attain ownership of, by no later than March 14, 2018 or the fifth anniversary of his or her appointment as CEO, and maintain ownership throughout his or her tenure of a number of shares of our common stock equal to the lesser of 112,000 shares or the number of shares equivalent in value to four times his or her annual salary. With ownership of over 34 million shares, Mr. Benioff significantly exceeds his ownership requirement under these guidelines.

The Guidelines also provide that each other executive officer must attain ownership, by no later than the later of March 14, 2018 or the fifth anniversary from the date he or she becomes an executive officer, and maintain ownership throughout his or her tenure of a number of shares equivalent in value to 1.5 times his or her annual salary. Each of the NEOs, including our CEO, is in compliance with the stock ownership policy.

Performance-Based Compensation Recoupment “Clawback” Policy

The Guidelines include a clawback provision, which provides thatThe Guidelines include a clawback provision, which provides that if we restate our reported financial results, the Board will review the performance-based awards made to our executive officers. If and to the extent required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, other clawback provisions of applicable law, or NYSE Listing Standards, we will seek to recover or cancel any such awards that were granted, vested or earned as a result of achieving performance targets that would not have been met under the restated financial results. We will also continue to monitor rule-making actions of the SEC and the NYSE-related to clawback policies. In addition, if we are required as a result of misconduct to restate our financial results due to our material noncompliance with any financial reporting requirements under the federal securities laws, our CEO and CFO may be legally required to reimburse us for any bonus or other incentive-based or equity-based compensation they receive pursuant to the provisions of Section 304 of the Sarbanes-Oxley Act of 2002.

Prohibition on Hedging and Pledging Transactions

Our insider trading policy prohibits any employee or director from, among other things, engaging in short sales, hedging of stock ownership positions and transactions involving derivative securities relating to our common stock. Executive officers and directors are also not permitted to pledge our securities.

Equity Award Grant Practices

The majority of our equity awards are granted on an annual basis, historically in the month of November, with new hire and ad hoc awards generally being granted monthly throughout the fiscal year, typically on the 22nd day of the month.

Post-Employment Compensation

We recognize that it is possible that we may be involved in a transaction involving a change of control of the Company, and that this possibility could result in the departure or distraction of our executives to the detriment of our business. The Compensation Committee and the Board believe that the prospect of such a change of control transaction would likely result in our executives facing uncertainties about their future employment and distractions resulting from concern over how the potential transaction might personally affect them.

To allow our executives to focus solely on making decisions that are in the best interests of our stockholders in the event of a possible, threatened, or pending change of control transaction, and to encourage them to remain with us despite the possibility that a change of control might affect them adversely, we have entered into Change of Control and Retention Agreements with each of the NEOs that provide them with certain payments and benefits in the event of the termination of their employment within the three-month period prior to, or the 18 month period following, a change of control of the Company (referred to as the “change of control period”). Severance payments and benefits under these agreements are conditioned on the executive’s signing a release of claims in favor of the Company. The Compensation Committee and the Board believe that these agreements serve as an important retention tool to ensure that personal uncertainties do not dilute our executives’ complete focus on building stockholder value.

These agreements provide each of the NEOs (other than, as described below, our CEO) who has a qualifying termination of employment during the change of control period with a payment equal to 150% of his annual base salary and target cash bonus, Company-paid premiums for health care (medical, dental and vision) continuation coverage for a period of up to 18 months following termination of employment, and the full and immediate vesting of all outstanding and unvested equity awards. See “Performance-Based Restricted Stock Units” on page 43 for specific information regarding how such a qualifying termination of employment would impact the non-CEO NEOs’ PRSUs.

If our CEO has a qualifying termination of employment during the change of control period, his Change of Control and Retention Agreement provides him with a lump-sum payment equal to 200% of his annual base salary and target cash bonus, Company-paid premiums for health care (medical, dental and vision) continuation coverage for a period of up to 24 months following termination of employment, and the full and immediate vesting of all outstanding and unvested equity awards. See “Performance-Based Restricted Stock Units” on page 43 for specific information regarding how such a qualifying termination would impact Mr. Benioff’s PRSUs.

In establishing the terms and conditions of these agreements, theIn establishing the terms and conditions of these agreements, the Compensation Committee and the independent members of theBoard considered competitive market data and governance best practices information provided by the compensation consultant.The Compensation Committee and the independent members of the Board also evaluated the cost to us of these arrangements and the potential payout levels to each affected executive under various scenarios. In approving these agreements, they determined that their cost to us and our stockholders was reasonable and not excessive, given the benefit conferred to us.

The Compensation Committee and the Board believe that these agreements will help to maintain the continued focus and dedication of our executives to their assigned duties without the distraction that could result from the possibility of a change of control of the Company.

In addition, in connection with the negotiation of Mr. Block’s employment terms when he joined us in 2013, and Mr. Hawkins’ employment terms when he joined us in 2014, each of these NEOs received an offer letter that provided for eligibility for ongoing severance payments and benefits in connection with involuntary terminations of employment. Under Mr. Block’s offer letter, if his employment is terminated without cause or he resigns for good reason, he will be entitled to payments equal to one year of his base salary and 100% of his annual target cash bonus, as well as any bonus earned as of his termination but not yet paid, and unpaid reimbursement of expenses. Receipt of these severance payments and benefits is conditioned on Mr. Block’s signing a release of claims in favor of the Company. In addition, Mr. Block’s offer letter provides him (or his estate) with certain severance payments and benefits in the event his termination of employment is due to death or disability. Under Mr. Hawkins’ offer letter, if his employment is terminated without cause or he resigns for good reason, he will be entitled to payments equal to one year of his base salary and 100% of his annual target cash bonus, and unpaid reimbursement of expenses. Receipt of these severance payments and benefits is conditioned on Mr. Hawkins’ signing a release of claims in favor of the Company.

For a summary of the material terms and conditions of agreements in effect during fiscal 2017, see “Employment Contracts and Certain Transactions—Change of Control,” elsewhere in this Proxy Statement.

Tax and Accounting Considerations

Deductibility of Executive Compensation

Section 162(m) of the Internal Revenue Code imposes limitations on the deductibility for corporate federal income tax purposes of remuneration in excess of $1 million paid to the chief executive officer and each of the three next most highly compensated executive officers (other than the chief financial officer) of a public company. However, remuneration in excess of $1 million may be deducted if it qualifies as “performance-based compensation” within the meaning of the Internal Revenue Code.

We monitor the application of Section 162(m) and the associated Treasury regulations on an ongoing basis and the advisability of qualifying executive compensation for deductibility. The Compensation Committee considers whether to make efforts to qualify our executive compensation for deductibility under applicable tax laws to the extent practicable, balancing the desirability of having compensation qualify for deductibility with our need to maintain flexibility in compensating executive officers in a manner designed to promote our goals. The Compensation Committee has not adopted a policy that any or all compensation must be deductible. For example, compensation realized upon the vesting of time-based RSUs and fiscal 2017 bonuses paid to our executives are not designed to qualify as “performance-based” for purposes of Section 162(m) and so will not be deductible to the extent that they and the executive’s other non- “performance-based” compensation for the taxable year exceed $1 million. This affords us flexibility in designing the bonus structure best suited to our goals, and allows us the ability to grant time-based RSUs with strong retention value.

Taxation of “Parachute” Payments and Deferred Compensation

Sections 280G and 4999 of the Internal Revenue Code provide that executive officers, directors who hold significant equity interests, and certain other service providers may be subject to significant additional taxes if they receive payments or benefits in connection with a change of control of the Company that exceed certain prescribed limits, and that we (or our successor) may forfeit a deduction on the amounts subject to this additional tax. We did not provide any executive, including any Named Executive Officer, with a “gross-up” or other reimbursement payment for any tax liability that the executive might owe as a result of the application of Sections 280G or 4999 during fiscal 2017 and we have not agreed and are not otherwise obligated to provide any executive with such a “gross-up” or other reimbursement.

Section 409A of the Internal Revenue Code imposes significant additional taxes in the event that an executive officer, director, or service provider receives “deferred compensation” that does not satisfy the restrictive conditions of the provision. Although we do not maintain a traditional nonqualified deferred compensation plan, Section 409A applies to certain equity awards and severance arrangements. We generally have structured our equity awards in a manner intended to comply with the applicable Section 409A conditions. In addition, the Change of Control and Retention Agreements that we have entered into with the NEOs generally have been drafted or modified in a manner intended to comply with Section 409A.

Accounting for Stock-Based Compensation

We follow the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718 (“ASC Topic 718”) in connection with the financial reporting of our stock options and other stock-based awards. ASC Topic 718 requires companies to calculate the grant date “fair value” of their stock option grants using a variety of assumptions, as well as the grant date “fair value” of their other stock-based awards. This calculation is performed for accounting purposes and reported in the compensation tables below, even though our executives may never realize any value from their options or other stock-based awards. ASC Topic 718 also requires companies to recognize the compensation cost of their stock option grants and other stockbased awards in their income statements over the period in which an executive is required to render service in exchange for vesting of the option or other award. When determining the types and amounts of equity compensation granted to the NEOs, the Compensation Committee considers the advantages and disadvantages of various equity vehicles, such as stock options, RSUs and PRSUs. As part of this consideration, the Compensation Committee takes into account the overall program cost, which includes the associated compensation expense for financial reporting purposes.

Compensation Risk Assessment

As part of its review of the compensation to be paid to our executives, as well as the compensation programs generally available to our employees, the Compensation Committee considers potential risks arising from our compensation programs and the management of these risks, in light of our overall business, strategy and objectives.

As is the case with our employees generally, our NEOs’ base salaries are fixed in amount and thus do not encourage risk-taking. Bonus amounts under our bonus plan are tied to overall corporate and individual performance, and the bonus pool for executive officers is based on our performance during the fiscal year compared to pre-established target levels for three equally-weighted measures: revenue, operating cash flow and non-GAAP income from operations. These three financial measures counterbalance each other, decreasing the likelihood that our NEOs will pursue any one measure to the detriment of overall financial performance. Combined, these measures limit the ability of an executive to be rewarded for taking excessive risk on our behalf by, for example, seeking revenue enhancing opportunities at the expense of profitability. Moreover, a significant portion of compensation provided to our NEOs is in the form of long-term equity awards, including PRSUs, that help further align their interests with those of our stockholders. The Compensation Committee believes that these awards do not encourage unnecessary or excessive risk-taking because the ultimate value of the awards is tied to our stock price and because the awards are staggered and subject to long-term vesting schedules to help ensure that executives have significant value tied to long-term stock price performance. We have also implemented controls such as our Code of Conduct and periodic sub-certification processes for our executives to mitigate the risks of unethical behavior.

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