UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

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P.F. CHANG’S CHINA BISTRO, INC.

 

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P.F. CHANG’S CHINA BISTRO, INC.
7676 East Pinnacle Peak Road
Scottsdale, AZ 85255

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held April 19, 2011

 

Dear Stockholder:

 

You are invited to attend the Annual Meeting of the Stockholders of P.F. Chang’s China Bistro, Inc., a Delaware corporation (the “Company”), which will be held on April 19, 2011 at 8 a.m., Mountain Standard Time, at our principal executive offices located at 7676 E. Pinnacle Peak Road, Scottsdale, Arizona, 85255, for the following purposes:

 

1. To elect nine directors specified in this Proxy Statement to the Board of Directors, each to serve until the Company’s 2012 Annual Meeting of Stockholders and until his or her respective successor is elected and qualified.

 

2. To ratify the appointment of KPMG LLP as the Company’s independent registered public accounting firm for the fiscal year ending January 1, 2012.

 

3. To approve revised performance criteria under the P.F. Chang’s China Bistro, Inc. Amended and Restated 2006 Equity Incentive Plan.

 

4. To provide an advisory vote on executive compensation.

 

5. To provide an advisory vote on the frequency of a stockholder vote on executive compensation.

 

6. To approve any adjournments of the meeting to another time or place, if necessary in the judgment of the proxy holders, for the purpose of soliciting additional proxies in favor of any of the foregoing proposals.

 

7. To transact such other business as may properly come before the meeting.

 

The Board of Directors recommends a vote “FOR” proposals 1 through 4 and 6 and for “1 YEAR” on proposal 5.

 

Stockholders of record at the close of business on February 25, 2011 (“record date”) are entitled to notice of, and to vote at, this meeting and any adjournments or postponements thereof. For ten days prior to the meeting, a complete list of the stockholders entitled to vote at the meeting will be available for examination by any stockholder for any purpose relating to the meeting during ordinary business hours at our principal offices located at 7676 E. Pinnacle Peak Road, Scottsdale, Arizona 85255.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2011 ANNUAL MEETING OF STOCKHOLDERS:

 

Our Annual Meeting materials, including our Proxy Statement and Annual Report, are available over the internet at www.proxyvote.com. We believe that this delivery process expedites stockholders’ receipt of proxy materials as well as lowers the costs and reduces the environmental impact of our Annual Meeting. All stockholders as of the record date were mailed a Notice of Internet Availability (the “Notice”) with instructions on how to access our Annual Meeting materials online and how to request a paper copy of the materials by mail. The Notice also includes instructions on how to vote online or by telephone. Internet voting must be completed before midnight, Eastern Time, prior to the meeting.

 

By Order of the Board of Directors,

 

Richard L. Federico

Chairman of the Board of Directors

and Co-Chief Executive Officer

 

Scottsdale, Arizona

March 10, 2011

 

 

 

TABLE OF CONTENTS

 

 

The accompanying proxy is solicited by the Board of Directors of P.F. Chang’s China Bistro, Inc., a Delaware corporation (“P.F. Chang’s” or the “Company”), for use at its Annual Meeting of Stockholders to be held on April 19, 2011, or any adjournment or postponement thereof, for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. The date of this Proxy Statement is March 10, 2011, the approximate date on which this Proxy Statement and the enclosed proxy were first sent or made available to stockholders.

 

Notice of Internet Availability.  In accordance with the electronic delivery rules adopted by the Securities and Exchange Commission (“SEC”), the Company is permitted to furnish proxy materials to its stockholders on the internet, in lieu of mailing a printed copy of proxy materials to each stockholder of record. You will not receive a printed copy of proxy materials unless you request a printed copy. The Notice instructs you as to how you may access and review on the internet all of the important information contained in the proxy materials. The Notice also instructs you as to how you may vote your proxy. If you received a Notice by mail and would like to receive a printed copy of the Company’s proxy materials and annual report, you must follow the instructions for requesting such materials included in the Notice. Alternatively, you may download or print these materials, or any portion thereof, from any computer with internet access and a printer. The Company believes this process provides its stockholders the information they need in a timelier manner, while reducing the environmental impact and lowering the costs of printing and delivering the proxy materials.

 

Electronic Access.  To access the Company’s proxy statement and annual report electronically, please visit www.proxyvote.com or in the investor relations section of the Company’s website at www.pfcb.com.

 

Voting Securities.  Only stockholders of record as of the close of business on February 25, 2011, will be entitled to vote at the meeting and any adjournments or postponements thereof. As of that date, there were 22,843,523 shares of common stock of the Company, par value $0.001 per share, issued and outstanding, all of which are entitled to vote with respect to all matters to be acted upon at the Annual Meeting. Each holder of record as of that date is entitled to one (1) vote for each share of stock held. The Company’s bylaws provide that a majority of all of the shares of the stock entitled to vote, whether present in person or represented by proxy, shall constitute a quorum for the transaction of business at the meeting. Votes for and against, abstentions and “broker non-votes” will each be counted as present for purposes of determining the presence of a quorum.

 

Broker Non-Votes.  A broker non-vote occurs when a broker submits a proxy card with respect to shares held in a fiduciary capacity (typically referred to as being held in “street name”) but declines to vote on a particular matter because the broker has not received voting instructions from the beneficial owner. Under the rules that govern brokers who are voting with respect to shares held in street name, brokers have the discretion to vote such shares on routine matters, but not on non-routine matters. Routine matters include the ratification of the Company’s independent registered public accounting firm. The non-routine matters in this proxy statement are the election of directors, the approval of the revised performance criteria of the Amended and Restated 2006 Equity Incentive Plan, the advisory vote on executive compensation and the advisory vote on the frequency of the stockholder vote on executive compensation.

 

Solicitation of Proxies.  The cost of soliciting proxies will be borne by the Company. The Company will solicit stockholders by mail through its regular employees, and no additional compensation will be paid to regular employees for such services. The Company will also request banks and brokers, and other custodians, nominees and fiduciaries, to solicit their customers who have stock of the Company registered in the names of such persons and will reimburse them for their reasonable, out-of-pocket costs. The Company also may use the services of its officers, directors, and others to solicit proxies, personally or by telephone, without additional compensation for such services. The Company may engage a proxy soliciting firm to assist in the solicitation of proxies, for which the Company would be required to pay the proxy-solicitation firm a customary fee (not to exceed $15,000) and reimburse the firm for certain out of pocket expenses.

 

Voting of Proxies.  All valid proxies received prior to the meeting will be exercised. All shares represented by a proxy will be voted, and where a proxy specifies a stockholder’s choice with respect to any matter to be acted upon, the shares will be voted in accordance with that specification. If no choice is indicated on the proxy, the shares will be voted in favor of the proposal. A stockholder giving a proxy has the power to revoke his or her proxy, at any time prior to the time it is exercised, by delivering to the Secretary of the Company a written instrument revoking the proxy or a duly executed proxy with a later date, or by attending the meeting and voting in person.

 

ELECTION OF DIRECTORS

 

Directors.  The following sets forth information, as of March 10, 2011, regarding members of the Board, including the nine director nominees for election at the Annual Meeting, related to his or her business experience and service on other boards of directors. In addition, below is a discussion of the qualifications, attributes and skills that led the Board to the conclusion that each of these directors should serve as a director. The Company believes that the current Board includes individuals with a strong background in executive leadership and management, accounting and finance, and Company and industry knowledge. In addition to this information, the Company also believes that each of our directors possesses the highest personal and professional ethics, integrity and values, and is committed to representing the long-term interests of the Company’s stockholders. They each have demonstrated an inquisitive and objective approach, business acumen and an ability to exercise sound judgment, as well as a commitment of service to the Company and the Board. The Company also believes that the directors’ diversity of backgrounds and experiences results in different perspectives, ideas, and viewpoints, which make the Board more effective in carrying out its duties. Finally, the Company values their significant experience on other company boards of directors and board committees.

 

 

Kerrii B. Anderson has served as a director of the Company since October 2009. Ms. Anderson served as Chief Executive Officer and President of Wendy’s International, Inc., a restaurant operating and franchising company, from 2006 to September 2008. From 2000 to 2006, she served as Wendy’s Executive Vice President and Chief Financial Officer. Previously, Ms. Anderson served as Senior Vice President and Chief Financial Officer of M/I Schottenstein Homes, Inc. from 1987 to 2000. Ms. Anderson also serves as a board member of Chiquita Brands International (NYSE: CQB) where she is the lead independent director since 2010 and a member of the audit committee, the compensation committee and the nominating and governance committee. Additionally, she serves on the board of Laboratory Corporation of America Holdings (NYSE: LH) where she is chairperson of the audit committee and a member of the compensation committee. Ms. Anderson also serves as a board member of Worthington Industries (NYSE: WOR) since September 2010 where she is a member of the compensation committee. Ms. Anderson also previously served on the board and was a member of the audit committee of Lancaster Colony Corporation (NASDAQ: LANC) from 1998 through 2005.

 

Qualifications: Ms. Anderson’s qualifications to serve on the Board include her broad executive leadership and experience in the restaurant industry as well as 25 years of experience in accounting and financial reporting as a controller and chief financial officer. She is a Certified Public Accountant. Additionally, she has broad corporate governance experience from her service on the board and board committees of other public companies.

 

F. Lane Cardwell, Jr. has served as a director of the Company since December 2010. Effective March 1, 2011, Mr. Cardwell joined the Company as President of P.F. Chang’s China Bistro concept. He previously served as a director of the Company from 1999 through 2009. He most recently served as the President and Chief Executive

Officer of Boston Market from June 2009 to October 2010. Mr. Cardwell also served as the interim President and Chief Executive Officer of Famous Dave’s of America, Inc. (NASDAQ: DAVE) from December 2007 until April 2008. He previously served as President and Chief Executive Officer of Eatzi’s Market and Bakery from 1996 to 1999. Prior to joining Eatzi’s, Mr. Cardwell was Executive Vice President, Chief Administrative Officer and a member of the board of directors of Brinker International, Inc. (NYSE: EAT). Mr. Cardwell served as a board member of Famous Dave’s of America, Inc. from 2003 through 2009. Mr. Cardwell also serves on the board of directors of a private company.

 

Qualifications: Mr. Cardwell’s qualifications to serve on the Board include his 32 years of executive leadership experience in the restaurant industry as president and chief executive officer of other restaurant companies. Additionally, he has broad corporate governance experience from his service on the board and board committees of other public and private companies.

 

Richard L. Federico has served as a director of the Company since February 1996, and he has served as the Co-Chief Executive Officer of the Company since January 2009. He was previously the Chief Executive Officer of the Company from September 1997, when he succeeded Paul M. Fleming, founder of the Company, through January 2009. He joined the Company as President in February 1996. In December 2000, Mr. Federico was named Chairman of the Board. From February 1989 to January 1996, Mr. Federico served as President of the Italian Concepts division of Brinker International, Inc. (NYSE:EAT), where he was responsible for concept development and operations. Mr. Federico serves on the board of directors of Jamba, Inc. (NASDAQ:JMBA) where he is chairman of the nominating and corporate governance committee and a member of the audit committee. Mr. Federico also serves as a board member of Domino’s Pizza (NYSE: DPZ) since February 2011.

 

Qualifications: Mr. Federico’s qualifications to serve on the Board include his extensive executive leadership and strategic experience in the restaurant industry. His long history with the Company, knowledge of the business and his appreciation of the Company’s values and culture make Mr. Federico a valuable member of the Board. Additionally, he has broad corporate governance experience from his service on the board and board committees of other public companies.

 

Lesley H. Howe has served as a director of the Company since March 2003. Mr. Howe spent over 30 years with the international accounting firm of KPMG LLP, where he was a senior partner and served as area managing partner/managing partner of that firm’s Los Angeles Office from 1994 to 1997. From December 2001 until its sale in 2007, he was the Chief Executive Officer of Consumer Networks, LLC, a San Diego-based Internet marketing and promotions company. He also serves on the boards of directors and is chair of the audit committees of Volcano Corporation (NASDAQ:VOLC), Jamba, Inc. (NASDAQ:JMBA) and NuVasive, Inc. (NASDAQ:NUVA). Additionally, Mr. Howe is also a member of the compensation committee of NuVasive, Inc., and he is the lead director and a member of the compensation committee of Jamba, Inc. He also serves on the board of a privately held company. He previously served on the board and was chair of the audit committee of dj Orthopedics, Inc. (NYSE: DJO) from 2002 through 2008.

 

Qualifications: Mr. Howe’s qualifications to serve on the Board include his executive leadership experience and his extensive experience in accounting and finance with over 30 years of experience in public accounting, which is valuable in his position as the chairperson of the Company’s audit committee. He is a Certified Public Accountant (inactive). Also, he has broad corporate governance experience from his service on the board and board committees of other public and private companies.

 

Dawn E. Hudson has served as a director of the Company since February 2010. Since March 2009, Ms. Hudson has served as Vice Chairman of The Parthenon Group, an advisory firm specializing in business strategy consulting. She was President and Chief Executive Officer of Pepsi-Cola North America (PCNA), the multi-billion dollar refreshment beverage unit of PepsiCo, Inc. (NYSE: PEP) in the United States and Canada, and Chief Executive Officer of the PepsiCo Foodservice Division from March 2005 until November 2007. From May 2002 to March 2005, Ms. Hudson served as President of PCNA. She previously served as Senior Vice President, Strategy and Marketing, for PCNA from 1997 to 2002. Ms. Hudson currently serves as a board member of Lowe’s Companies, Inc. (NYSE: LOW), where she is a member of the compensation and organization committee and the governance committee, and Allergan, Inc. (NYSE: AGN), where she is a member of the audit and finance committee and the organization and compensation committee.

Qualifications: Ms. Hudson’s qualifications to serve on the Board include her executive leadership and strategic experience as well as valuable expertise in consumer brand management and marketing in the food service industry. Additionally, she has broad corporate governance experience from her service on the board and board committees of other public companies.

 

M. Ann Rhoades has served as a director of the Company since March 2003. Ms. Rhoades is currently the President of People Ink, a human resources consulting company she founded. Ms. Rhoades was the Executive Vice President of People for JetBlue Airways Corporation (NASDAQ: JBLU) from 1999 to April 2002. Prior to joining JetBlue, Ms. Rhoades was the Executive Vice President, Team Services & Public Relations of Promus Hotel Corporation/Doubletree Hotel Corporation. She also serves as a board member of JetBlue Airways Corporation where she is chairperson of the compensation committee. Ms. Rhoades previously served on the board of directors of Restoration Hardware, Inc. (NASDAQ: RSTO) from 2005 through 2009. Ms. Rhoades also serves on the board of directors of a private company.

 

Qualifications: Ms. Rhoades’ qualifications to serve on the Board include her executive leadership experience in service-based industries and her experience in human resources, including her in-depth knowledge of corporate values, strategic decision making and customer service. Additionally, she has broad corporate governance experience from her service on the board and board committees of other public and private companies.

 

James G. Shennan, Jr. has served as a director of the Company since May 1997. He is General Partner Emeritus of Trinity Ventures, a venture capital firm, where he served as a general partner from 1989 through 2005. Mr. Shennan also serves on the board of directors of Starbucks Corporation (NASDAQ: SBUX) where he is a member of the compensation and management development committee and chairperson of the nominating and corporate governance committee.

 

Qualifications: Mr. Shennan’s qualifications to serve on the Board include his extensive experience in finance, marketing and consumer products gained through his experience with Trinity Ventures, Addison Consultants and Procter & Gamble. Additionally, he has broad corporate governance and compensation knowledge from his service on the board and board committees of other public companies.

 

Robert T. Vivian has served as a director of the Company since January 2009 when he was appointed Co-Chief Executive Officer. He served as President of the Company from December 2000 through January 2009. Prior to December 2000, Mr. Vivian served as Chief Financial Officer since joining the Company in 1996. From January 1991 to April 1996, Mr. Vivian served in a variety of positions at Brinker International, Inc., (NYSE:EAT) the most recent of which was Vice President of Investor Relations.

 

Qualifications: Mr. Vivian’s qualifications to serve on the Board include his extensive executive leadership and strategic experience in the restaurant industry. His long history with the Company, knowledge of the business and his appreciation of the Company’s values and culture make Mr. Vivian a valuable member of the Board.

 

R. Michael Welborn joined the Company as Executive Vice President in May 2005 and was appointed President, Global Brand Development during 2009. He has served as a director of the Company since August 1996. Mr. Welborn was Executive Vice President for Bank One Corporation, a national bank, from January 1996 through July 2004. From September 1993 to December 1995, he served as Managing Director of The Venture West Group, a merchant bank. From May 1988 to September 1993, Mr. Welborn served as Chairman of Citibank of Arizona. Mr. Welborn also serves on the board of directors of a private company.

 

Qualifications: Mr. Welborn’s qualifications to serve on the Board include his background in executive leadership, strategic planning, and evaluating and investing in new business opportunities with over 25 years of experience in financial service companies. Additionally, he has broad corporate governance knowledge from his service on the board of a private company.

 

Kenneth J. Wessels has served as a director of the Company since October 2000. Mr. Wessels was the Chief Executive Officer and Chairman of the Board of Strong Financial Corporation from December 2003 through December 2004, where he remains a member of the board of directors. Mr. Wessels was Chief Executive Officer of Dain Rauscher Wessels and a director of Dain Rauscher, Inc., from March 1998 to May 2000. Prior to joining Dain

Rauscher, Mr. Wessels was Chief Executive Officer of Wessels, Arnold & Henderson, an investment banking firm which he founded in 1986.

 

Qualifications: Mr. Wessels’ qualifications to serve on the Board include his broad experience in executive leadership and evaluating and developing companies with over 30 years of experience in investment banking. Additionally, he has broad corporate governance knowledge from his service on the board of a private company.

 

Vote Required and Board of Directors’ Recommendation

 

In December 2010, Mr. Vivian announced his plan to retire from the Company at the end of fiscal 2011. As a result of his planned retirement and the hiring of director, Mr. Cardwell, as the President of P.F. Chang’s China Bistro concept effective March 1, 2011, the Nominating Committee and the Board decided not to nominate Robert T. Vivian for re-election to the position of director of the Company during fiscal 2011.

 

The Board has nominated the following nine (9) individuals for election at the Annual Meeting of Stockholders to the Board of Directors: Kerrii B. Anderson, F. Lane Cardwell, Jr., Richard L. Federico, Lesley H. Howe, Dawn E. Hudson, M. Ann Rhoades, James G. Shennan, Jr., R. Michael Welborn and Kenneth J. Wessels. If elected, the nominees will serve as directors until the Company’s 2012 Annual Meeting of Stockholders, and until their successors are elected and qualified. If a nominee declines to serve or becomes unavailable for any reason, or if a vacancy occurs before the election, the proxies may be voted for such substitute nominee as management may designate.

 

If a quorum is present and voting, each of the nine (9) nominees receiving a higher number of votes cast “for” such nominee than “against” such nominee will be elected. Abstentions, “broker non-votes” and withheld votes will have no effect on the outcome of the vote.

 

Under the Company’s Bylaws, if an incumbent director is not elected, the director shall tender his or her resignation to the Board of Directors. The Nominating and Corporate Governance Committee will make a recommendation to the Board of Directors on whether to accept or reject such director’s resignation. The Board of Directors will act on the Nominating and Corporate Governance Committee’s recommendation and publicly disclose its decision and the rationale behind it within ninety (90) days from the date of the certification of the election results. The Nominating and Corporate Governance Committee in making its recommendation and the Board of Directors in making its decision may each consider any factors or other information that they consider appropriate and relevant. The director who tenders his or her resignation will not participate in the recommendation of the Nominating and Corporate Governance Committee or the Board of Directors’ decision with respect to his or her resignation.

 

If a director’s resignation is accepted by the Board of Directors, then the Board of Directors may fill the resulting vacancy or may decrease the size of the Board of Directors as permitted by the Bylaws of the Company.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE NOMINEES NAMED ABOVE.

 

Corporate Governance Principles and Practices

 

Corporate Governance Principles and Practices are designed to ensure effective corporate governance of the Company. The Company’s Corporate Governance Principles and Practices cover topics including, but not limited to, director qualification criteria, director responsibilities (including those of the Lead Independent Director), director compensation, director orientation and continuing education, communications from stockholders to the Board, and succession planning. The Company’s Corporate Governance Principles and Practices are reviewed on an annual basis by the Nominating and Corporate Governance Committee and revised when appropriate. The full text of the Company’s Corporate Governance Principles and Practices can be found under the “Investors” section of the Company’s website at www.pfcb.com, by clicking the “Corporate Governance” link.

 

Business Ethics Policy

 

The Board adopted a Business Ethics Policy to ensure that the Company’s business is conducted in a consistently legal and ethical manner. The Business Ethics Policy establishes policies pertaining to, among other things, employee conduct in the workplace, securities trading, confidentiality, conflicts of interest and fairness in business practices. All of the Company’s employees, including the executive officers, as well as members of the Board, are required to comply with the Business Ethics Policy. The full text of the Business Ethics Policy can be found in the “Investor Relations” section of the Company’s website at www.pfcb.com, by clicking the “Corporate Governance” link. Any waiver of the Business Ethics Policy for executive officers or directors must be approved by the Board. The Company will disclose future amendments to the Business Ethics Policy, or waivers required to be disclosed under applicable law from the Business Ethics Policy for the named executive officers and directors, on the Company’s website, www.pfcb.com, within four business days following the date of the amendment or waiver.

 

Director Independence

 

The Board assesses on a regular basis, and at least annually, the independence of the directors and, based on the recommendation of the Nominating and Corporate Governance Committee, makes a determination as to which directors are independent. The Board has determined that, other than Mr. Federico, Mr. Vivian, Mr. Cardwell and Mr. Welborn, each of the existing members of the Board are independent directors under the listing rules of the Nasdaq Stock Market and the Company’s Corporate Governance Principles and Practices. In addition, during their respective service on the Board during fiscal 2010, Mr. Kenneth A. May and Mr. Cardwell were each independent directors. Mr. May resigned from the Board in November 2010. Mr. Cardwell was appointed to the Board in December 2010 and was an independent director until he was appointed President of P.F. Chang’s China Bistro concept effective March 1, 2011.

 

Board Leadership Structure

 

Mr. Federico serves as Co-Chief Executive Officer and Chairman of the Board. The Board has determined that combining the Co-Chief Executive Officer and Chairman positions is the appropriate leadership structure for the Company at this time. The Board believes that combining the Co-Chief Executive Officer and Chairman roles fosters clear accountability, effective decision-making and alignment of corporate strategy. The Board believes this leadership structure is particularly appropriate for the Company at this time given Mr. Federico’s long history with the Company, his knowledge and experience with the Company’s business and his ability to effectively identify strategic priorities for the Company. The Board also believes that the combined role of Co-Chief Executive Officer and Chairman promotes effective execution of strategic goals and facilitates information flow between management and the Board. Nevertheless, the Board intends to carefully evaluate from time to time whether the Co-Chief Executive Officer and Chairman positions should be combined based on what the Board believes is best for the Company and its stockholders.

 

The Board has determined that maintaining a board with a majority of independent directors, maintaining Board committees that are comprised entirely of independent directors, managing the function of the Board committees, and appointing a Lead Independent Director having the duties described below help maintain the Board’s strong,

independent oversight of management. In addition, the independent directors meet regularly in executive session without the presence of management. The Board has appointed Mr. Shennan as Lead Independent Director as a matter of good corporate governance and believes that the appointment of the Lead Independent Director provides for effective and independent oversight of management. The Lead Independent Director is selected annually by the independent directors and presides as Chairman of the Board during the executive sessions of independent directors that are held at each meeting. The Lead Independent Director also performs such other functions as the Board may direct, including advising on the selection of committee chairs and advising management on the agenda for Board meetings. The Lead Independent Director serves as liaison between the Chairman and the independent directors and has the authority to call meetings of the independent directors.

 

The Board believes that this structure is in the best interest of the Company and will provide an environment in which its independent directors are fully informed, have significant input into the content of Board meetings and are able to provide objective and thoughtful oversight of management.

 

Attendance at Board and Committee Meetings

 

During the fiscal year ended January 2, 2011, the Board held five (5) meetings. Each director serving on the Board in fiscal 2010 attended at least 75% of the meetings of the Board and the Committees on which he or she served.

 

Executive Sessions

 

Executive sessions of independent directors, chaired by the Lead Independent Director, are held in connection with each regularly scheduled Board meeting and at other times as necessary. The Board’s policy is to hold executive sessions without the presence of management, including the Co-Chief Executive Officers and other non-independent directors. The committees of the Board also generally meet in executive session at the end of each committee meeting.

 

Oversight of Risk Management

 

The Board is actively involved in the oversight of risks that could affect the Company. The Board as a whole has responsibility for risk oversight of the Company’s risk management policies and procedures, with reviews of certain areas being conducted by the relevant Board committee. The Board satisfies this responsibility through reports by each committee chair regarding the committee’s considerations and actions, as well as through regular reports directly from management responsible for oversight of particular risks within the Company.

 

The Compensation and Executive Development Committee is responsible for overseeing the management of risks related to the Company’s executive compensation plans and arrangements. The Audit Committee oversees management of financial risks and meets with management on a quarterly basis regarding enterprise risk management. The reports on enterprise risk management that are made to the Audit Committee summarize management’s assessment of risk exposures, including risks related to liquidity, credit, operations and regulatory compliance, among others, and the processes in place to monitor and control such exposures. The Nominating and Corporate Governance Committee manages risks associated with the independence of the Board of Directors and potential conflicts of interest.

 

Board Committees

 

The Board of Directors has three standing committees: the Audit Committee, the Compensation and Executive Development Committee and the Nominating and Corporate Governance Committee.

 

Audit Committee

 

The members of the Audit Committee are Mr. Howe (Chairperson), Ms. Anderson, Ms. Hudson and Mr. Wessels. Each of the members of the Audit Committee satisfy the independence and experience requirements of the Nasdaq Stock Market and SEC as they apply to audit committee members. The Board of Directors has determined that all of the members are audit committee financial experts, as defined in the rules and regulations of

the SEC. The Audit Committee held eight (8) meetings during the fiscal year ended January 2, 2011. The functions of the Audit Committee include: the retention of an independent registered public accounting firm, reviewing and approving the planned scope, proposed fee arrangements and results of the Company’s annual audit, reviewing the adequacy of the Company’s accounting and financial controls and reviewing the independence of the Company’s independent registered public accounting firm. Additional information regarding the functions performed by the Audit Committee is set forth in the “REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS” included in this annual proxy statement. The Audit Committee is governed by a written charter approved by the Board of Directors, a copy of which is available on the Company’s website at www.pfcb.com.

 

Compensation and Executive Development Committee

 

The members of the Compensation and Executive Development Committee (the “Committee”) are Ms. Rhoades (Chairperson), Ms. Hudson and Mr. Shennan. Mr. May served on the Committee through his board departure in November 2010 and Mr. Cardwell served on the Committee from December 2010 until he was appointed as the President of P.F. Chang’s China Bistro concept effective March 1, 2011. Each of the members of the Committee is independent consistent with the Nasdaq Listing Standards and in accordance with the Corporate Governance Guidelines. In addition, the members of the Committee qualify as “non-employee directors” for purposes of Rule 16b-3 under the Exchange Act and as “outside directors” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended. During the fiscal year ended January 2, 2011, the Committee held five (5) meetings. The Committee’s function is to review and approve the salaries, annual incentive compensation and long-term incentive compensation for executive officers and key employees. For additional information concerning the Committee, see “COMPENSATION DISCUSSION AND ANALYSIS” and “COMPENSATION AND EXECUTIVE DEVELOPMENT COMMITTEE REPORT” included in this annual proxy statement. The Committee is governed by a written charter approved by the Board of Directors, a copy of which is available on the Company’s website at www.pfcb.com.

 

Nominating and Corporate Governance Committee

 

The members of the Nominating and Corporate Governance Committee (the “Nominating Committee”) are Mr. Shennan (Chairperson), Ms. Anderson and Mr. Wessels. Mr. May served on the Nominating Committee through his board departure in November 2010 and Mr. Cardwell served on the Nominating Committee from December 2010 until he was appointed as the President of P.F. Chang’s China Bistro concept effective March 1, 2011. Each of the members of the Nominating Committee is independent consistent with the Nasdaq Listing Standards and in accordance with the Corporate Governance Guidelines. During the fiscal year ended January 2, 2011, the Nominating Committee held five (5) meetings. The Nominating Committee’s functions are to consider qualified candidates for appointment and nomination for election to the Board of Directors and make recommendations concerning such candidates, develop corporate governance principles for recommendation to the Board of Directors and oversee the regular evaluation of the Company’s directors and management. The Nominating Committee is governed by a written charter approved by the Board of Directors, a copy of which is available on the Company’s website at www.pfcb.com.

 

Director Nominations and Criteria

 

The Nominating Committee uses a variety of methods for identifying and evaluating nominees for director. The Nominating Committee regularly assesses the appropriate size and composition of the Board, the needs of the Board and the respective committees of the Board, and the qualifications of candidates in light of these needs. While the Board does not have a stand-alone diversity policy, in considering whether to recommend any director nominee, including candidates recommended by stockholders, the Board believes that the backgrounds and qualifications of the directors, considered as a group, should provide a significant mix of experience, knowledge and abilities that will allow the Board to fulfill its responsibilities. As set forth in the Corporate Governance Principles and Practices, these criteria generally include, among other things, the extent of the nominee’s experience in business, trade, finance, accounting or management; the extent of the nominee’s knowledge of regional and national business affairs; the nominee’s overall judgment to advise and direct the Company in meeting its responsibilities to stockholders, customers, employees and the public; and the nominee’s ability to commit sufficient time and attention to the

activities of the Board. The objective is to have a Board that brings to the Company a variety of perspectives and skills derived from high quality business and professional experience. In addition, the Nominating Committee will also consider the absence of any potential conflicts with the Company’s interests. The Nominating Committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees.

 

Internal Process for Identifying Candidates

 

The Nominating Committee has two primary methods for identifying Candidates (other than those proposed by the Company’s stockholders, as discussed below). First, on a periodic basis, the Nominating Committee solicits ideas for possible Candidates from a number of sources — members of the Board; senior-level Company executives; individuals personally known to the members of the Board; and research, including database and internet searches. Mr. Cardwell was found under this process.

 

Second, the Nominating Committee may from time to time use its authority under its charter to retain at the Company’s expense one or more search firms to identify Candidates (and to approve any such firms’ fees and other retention terms). If the Nominating Committee retains one or more search firms, they may be asked to identify possible Candidates who meet the minimum and desired qualifications expressed in the Nominating Policy, to interview and screen such candidates (including conducting appropriate background and reference checks), to act as a liaison among the Board, the Nominating Committee and each Candidate during the screening and evaluation process, and thereafter to be available for consultation as needed by the Nominating Committee.

 

The Nominating Policy divides the process for Candidates nominated by stockholders into the general nomination right of all stockholders and nominations by “Qualified Stockholders” (as defined below).

 

General Nomination Right of All Stockholders

 

Any stockholder of the Company may nominate one or more persons for election as a director of the Company at an Annual Meeting of Stockholders if the stockholder complies with the notice, information and consent provisions contained in the Company’s bylaws. The Company’s bylaws are available publicly on the Company’s website at www.pfcb.com. The Nominating Committee will use the same evaluation criteria and process for director nominees recommended by stockholders as it uses for other director nominees.

 

Proposals by Qualified Stockholders

 

In addition to those Candidates identified through its own internal processes, the Nominating Committee will evaluate Candidates proposed by a single stockholder that has beneficially owned more than 2% of the Company’s common stock for at least one year (and will hold the required number of shares through the annual stockholders meeting) (“Qualified Stockholder”) and that satisfies the notice, information and consent provisions in the Company’s bylaws. Any Candidate proposed by a Qualified Stockholder must be independent of the Qualified Stockholder in all respects (i.e., free of any material personal, professional, financial or business relationships from the nominating stockholder), as determined by the Nominating Committee or by applicable law. Any Candidate submitted by a Qualified Stockholder must also meet the definition of an “independent director” under applicable listing rules of the Nasdaq Stock Market. All Candidates (whether identified internally or by a Qualified Stockholder) who, after evaluation, are then recommended by the Nominating Committee and approved by the Board will be included in the Company’s recommended slate of director nominees in its proxy statement.

 

The Company did not receive any director nominations from stockholders for the Annual Meeting.

 

Evaluation of Candidates

 

The Nominating Committee will consider all Candidates identified through the processes described above, and will evaluate each of them, including incumbents, based on the same criteria.

 

If, based on the Nominating Committee’s initial evaluation, a Candidate continues to be of interest to the Nominating Committee, the Chair of the Nominating Committee will interview the Candidate and communicate the Chair’s evaluation to the other Committee members and the Co-Chief Executive Officers. If the Chair’s initial

evaluation is favorable, the Candidate will be interviewed by one or more of the other Nominating Committee members, other Board members, and members of senior management. If the results of these interviews are favorable, the Chair of the Nominating Committee will arrange to have appropriate reference and background checks conducted and the Chair will report the findings from such checks to the other Nominating Committee members. The Nominating Committee will then meet to consider and finalize its list of recommended Candidates for the Board’s consideration. Except as may be required by applicable law, rule or regulation, the Nominating Committee will have no obligation to discuss the outcome of the evaluation process, or the reasons for the Nominating Committee’s recommendations, with any stockholder who made a proposal.

 

Timing of Identification and Evaluation Process

 

The Company’s fiscal year ends each year on the Sunday closest to December 31. The Nominating Committee usually meets in December and February to consider, among other things, Candidates to be recommended to the Board for inclusion in the Company’s recommended slate of director nominees for the next Annual Meeting and the Company’s proxy statement. The Board usually meets each February to vote on, among other things, the slate of director nominees to be submitted to and recommended for election by stockholders at the Annual Meeting, which is typically held in April of the same year.

 

Communications with Directors

 

Stockholders may communicate appropriately with any and all Company directors by sending written correspondence addressed as follows:

 

Corporate Secretary

P.F. Chang’s China Bistro, Inc.

7676 East Pinnacle Peak Road

Scottsdale, Arizona 85255

 

The name or title of any specific recipient or group should be noted in the communication. Communications from stockholders are distributed by the Corporate Secretary to the Board or to the committee or director(s) to whom the communication is addressed; however, the Corporate Secretary will not distribute items that are unrelated to the duties and responsibilities of the Board, such as spam, junk mail and mass mailings, business solicitations and advertisements, and communications that advocate the Company’s engaging in illegal activities or that, under community standards, contain offensive, scurrilous or abusive content.

 

Director Attendance at Annual Meetings

 

The Company believes that the Annual Meeting of Stockholders is a good opportunity for the stockholders to meet and, if appropriate, ask questions of the Board of Directors. It is also a good opportunity for the members of the Board of Directors to hear any feedback the stockholders may share with the Company at the meeting. All directors are strongly encouraged to attend the Company’s Annual Meeting of Stockholders.

 

Compensation and Executive Development Committee Interlocks and Insider Participation

 

During the last fiscal year, executive compensation was administered by the Committee which is comprised of three non-employee directors of the Company, Ms. Rhoades, Ms. Hudson and Mr. Shennan. Mr. May served on the Committee through his board departure in November 2010 and Mr. Cardwell served on the Committee from December 2010 until he was appointed as the President of P.F. Chang’s China Bistro concept effective March 1, 2011. None of the members of the Committee has been an officer or employee of the Company during his or her service on the Committee. None of the Company’s executive officers serves on the board of directors or compensation committee of a company that has an executive officer that serves on the Company’s Board or the Committee.

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

 

The Audit Committee of the Board of Directors has appointed KPMG LLP as the independent registered public accounting firm to audit the consolidated financial statements of the Company for the fiscal year ending January 1, 2012. KPMG LLP has acted in such capacity since its appointment on June 16, 2006. A representative of KPMG LLP is expected to be present at the Annual Meeting of Stockholders with the opportunity to make a statement if the representative desires to do so, and is expected to be available to respond to appropriate questions. At the Annual Meeting, the stockholders are being asked to ratify the appointment of KPMG LLP as the Company’s independent registered public accounting firm for fiscal 2011. If the appointment of KPMG LLP as independent registered public accounting firm for fiscal 2011 is not ratified by stockholders, the Audit Committee will consider whether to retain KPMG LLP or hire another accounting firm to serve as the Company’s independent registered public accounting firm. Even if this appointment is ratified, the Audit Committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if the Audit Committee determines that such a change would be in the best interests of the Company and its stockholders.

 

Fees for Professional Services

 

The following table sets forth the aggregate fees billed to the Company for fiscal 2010 and fiscal 2009 by its independent registered public accounting firm, KPMG LLP:

 

 

 

 

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services Performed by the Independent Registered Public Accounting Firm

 

The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the Company’s independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services. The independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval.

 

Vote Required and Board of Directors’ Recommendation

 

If a quorum is present, a majority of the votes cast for this proposal, whether in person or represented by proxy is required for approval of this proposal. Abstentions and “broker non-votes” will each be counted as present for purposes of determining the presence of a quorum, but will have no effect on the outcome of the vote.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING JANUARY 1, 2012.

 

The following is the report of the Audit Committee with respect to the Company’s audited financial statements for the fiscal year ended January 2, 2011. The following Report of the Audit Committee shall not be deemed to be soliciting material or to be filed with the SEC nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent the Company specifically incorporates it by reference into such filing.

 

The purpose of the Audit Committee is to assist the Board in its general oversight of the Company’s financial reporting, internal controls and audit functions. The Audit Committee’s charter describes in greater detail its full responsibilities and is available on the Company’s website at www.pfcb.com. Each of the members of the Audit Committee is independent for the purposes of the rules and regulations adopted by the SEC and the Nasdaq Stock Market as they apply to audit committee members.

 

The Audit Committee has reviewed and discussed the consolidated financial statements with management and KPMG LLP, the Company’s independent registered public accounting firm. Management is responsible for the preparation, presentation and integrity of the Company’s financial statements; accounting and financial reporting principles; establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)); establishing and maintaining internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)); evaluating the effectiveness of disclosure controls and procedures; evaluating the effectiveness of internal control over financial reporting; and evaluating any change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting. KPMG LLP is responsible for performing an independent audit of the consolidated financial statements and expressing an opinion on the conformity of those financial statements with accounting principles generally accepted in the United States of America, as well as expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

 

Management annually tests and evaluates the Company’s system of internal controls over financial reporting. The Audit Committee is kept apprised of the progress of the evaluation and provides oversight and advice to management. In connection with this oversight, the Audit Committee receives periodic updates provided by management and KPMG LLP at each regularly scheduled Audit Committee meeting. At a minimum, these updates occur quarterly. The Audit Committee also holds regular private sessions with KPMG LLP to discuss its audit plan for the year, the financial statements and risks of fraud. At the conclusion of the process, management provides the Audit Committee with and the Audit Committee reviews a report on the effectiveness of the Company’s internal control over financial reporting. The Audit Committee also reviewed the report of management contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2011 filed with the SEC, as well as KPMG LLP’s Report of Independent Registered Public Accounting Firm included in the Company’s Annual Report on Form 10-K related to its integrated audit of the Company’s fiscal 2010 (i) consolidated financial statements and (ii) the effectiveness of the Company’s internal control over financial reporting.

 

The Company has an Internal Audit Department that reports to the Audit Committee. The Audit Committee reviews and approves the internal audit plan once a year and receives periodic updates of internal audit activity in meetings held at least quarterly throughout the year. Updates include discussion of audit project results, as well as quarterly assessments of internal controls and risks of fraud. The Audit Committee also holds regular private sessions with the head of internal audit.

 

The Audit Committee has discussed with KPMG LLP the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, “Communication with Audit Committees”, as adopted by the PCAOB in Rule 3200T, and PCAOB Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting That is Integrated with an Audit of Financial Statements.” In addition, KPMG LLP has provided the Audit Committee with the written disclosures and the letter required by the Independence Standards Board Standard No. 1, as amended, “Independence Discussions with Audit Committees,” and the Audit Committee has discussed with KPMG LLP the firm’s independence.

 

Based on its review of the consolidated financial statements and discussions with and representations from management and KPMG LLP referred to above, the Audit Committee recommended to the Board of Directors that

the audited financial statements be included in the Company’s Annual Report on Form 10-K for fiscal 2010, for filing with the SEC.

 

In accordance with Audit Committee policy and the requirements of law, the Audit Committee pre-approves all services to be provided by the Company’s external auditor KPMG LLP. Pre-approval is required for audit services, audit-related services, tax services and other services. In some cases, the full Audit Committee provides pre-approval for up to a year, related to a particular defined task or scope of work and subject to a specific budget. In other cases, a designated member of the Audit Committee may have delegated authority from the Audit Committee to pre-approve additional services, and such pre-approval is later reported to the full Audit Committee. See “Fees for Professional Services” for more information regarding fees paid to KPMG LLP for services related to fiscal 2010 and fiscal 2009.

 

AUDIT COMMITTEE

 

Lesley H. Howe (Chairperson)

Kerrii B. Anderson

Dawn E. Hudson

Kenneth J. Wessels

 

The Board of Directors is asking the stockholders of the Company to approve revised performance criteria that would apply to performance awards granted under the P.F. Chang’s China Bistro, Inc. Amended & Restated 2006 Equity Incentive Plan (the “Equity Incentive Plan”). Stockholders are not being asked to approve an increase in the number of shares issuable under the Equity Incentive Plan or any other amendment, other than the revised performance criteria.

 

Stockholder approval of the performance criteria is required for the Company to fully deduct the amount or value of the performance awards, as permitted under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). Section 162(m) of the Code generally limits to $1 million the deduction available to public companies for compensation paid to its chief executive officer and the other three highest compensated officers (other than the chief financial officer) as of the end of its fiscal year (for purposes of Section 162(m), these individuals are referred to as “covered employees”). This $1 million deduction limit does not apply, however, to “performance-based compensation” as defined under Section 162(m) of the Code.

 

Performance awards granted under the Equity Incentive Plan are intended to be eligible to qualify as performance-based compensation that would be fully deductible under Section 162(m) of the Code. To so qualify, a performance award must be subject to performance criteria established by a committee or subcommittee comprised solely of two or more outside directors of the Company (the “Committee”). In addition, the performance criteria must be disclosed to and approved by stockholders of the Company. If, however, the Committee has authority to change the targets under a performance criteria after stockholder approval, as is authorized under the Equity Incentive Plan, the performance criteria must be disclosed to and reapproved by stockholders of the Company no later than the first stockholder meeting that occurs in the fifth year following the year in which stockholders previously approved the performance criteria. The Equity Incentive Plan was last approved by stockholders of the Company at the 2006 Annual Meeting. If stockholder approval of the revised performance criteria is not obtained, performance awards granted under the Equity Incentive Plan will be subject to the $1 million deduction limit, which may result in additional cost to the Company to the extent amounts of compensation paid to covered officers are not deductible.

 

Performance Criteria Under the Equity Incentive Plan

 

Performance awards may be granted under the Equity Incentive Plan to covered employees and other employees, directors and consultants of the Company or any parent, subsidiary or affiliate of the Company. Performance awards may be in the form of performance shares or performance units, which may be denominated or settled in cash, shares of stock (either fully vested or subject to vesting), or a combination thereof. If a performance award is intended to qualify as performance-based compensation under Section 162(m) of the Code, the award must specify a predetermined amount of cash or shares that may be earned by the covered employee to the extent that one or more of the following predetermined performance criteria are attained within a predetermined performance period: (i) sales revenue; (ii) gross margin; (iii) operating margin; (iv) operating income; (v) pre-tax profit; (vi) earnings before stock-based compensation expense, interest, taxes and depreciation and amortization; (vii) earnings before interest, taxes and depreciation and amortization; (viii) earnings before interest and taxes; (ix) net income; (x) expenses; (xi) the market price of the stock; (xii) stock price; (xiii) earnings per share; (xiv) return on stockholder equity; (xv) return on capital, including but not limited to return on invested capital against a weighted average cost of capital; (xvi) return on net assets; (xvii) economic value added; (xviii) market share; (xix) customer service; (xx) customer satisfaction; (xxi) safety; (xxii) total stockholder return; (xxiii) free cash flow; (xxiv) net operating income; (xxv) operating cash flow; (xxvi) return on investment; (xxvii) employee satisfaction; (xxviii) employee retention; (xxix) balance of cash, cash equivalents and marketable securities; (xxx) product development; (xxxi) research and development expenses; (xxxii) completion of an identified special project; (xxxiii) completion of a joint venture or other corporate transaction; or (xxxiv) such other measures as determined by the Committee consistent with the terms of the Equity Incentive Plan.

Performance criteria may be expressed on an absolute basis or relative to a standard specified by the Committee. Performance criteria have the same meanings as used in the Company’s financial statements, or, if such terms are not used in the Company’s financial statements, they shall have the meaning applied pursuant to generally accepted accounting principles, or as used generally in the Company’s industry. Performance criteria are calculated with respect to the Company and each subsidiary corporation consolidated therewith for financial reporting purposes or such division or other business unit as may be selected by the Committee. For purposes of the Equity Incentive Plan, the performance criteria applicable to a performance award is calculated in accordance with generally accepted accounting principles, but prior to the accrual or payment of any performance award for the same performance period and excluding the effect (whether positive or negative) of any change in accounting standards or any extraordinary, unusual or nonrecurring item, as determined by the Committee, occurring after the establishment of the performance criteria applicable to the performance award. Each such adjustment, if any, is made solely for the purpose of providing a consistent basis from period to period for the calculation of performance criteria in order to prevent the dilution or enlargement of a covered employee’s rights with respect to a performance award.

 

In order to permit awards to qualify as performance-based compensation under Section 162(m) of the Code, no employee may be granted awards under the Equity Incentive Plan in excess of the following in each fiscal year of the Company:

 

 

In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, appropriate adjustments will be made in the per-employee grant limits specified above.

 

The above summary of the material terms of the performance criteria under the Plan is qualified in its entirety by the specific language of the Equity Incentive Plan, which is included as an appendix to this proxy statement and which is available to any stockholder upon request.

 

Vote Required and Board of Directors’ Recommendation

 

If a quorum is present, a majority of the stock having voting power present in person or represented by proxy is required for approval of this proposal. Abstentions and “broker non-votes” will each be counted as present for purposes of determining the presence of a quorum, but will have no effect on the outcome of the vote.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF REVISED PERFORMANCE CRITERIA UNDER THE P.F. CHANG’S CHINA BISTRO, INC. AMENDED & RESTATED 2006 EQUITY INCENTIVE PLAN.

 

The Board of Directors is providing stockholders with the opportunity to cast an advisory vote on the compensation of the Company’s named executive officers as disclosed in this proxy statement for the fiscal year ended January 2, 2011. This proposal, commonly known as a “Say on Pay” proposal, gives you, as a stockholder, the opportunity to endorse or to not endorse the executive compensation programs and policies and the compensation paid to the Company’s named executive officers in the prior fiscal year.

 

The Board has a structured process to oversee the compensation program for the Company’s named executive officers. The total compensation received by the named executive officers will vary based on individual and corporate performance measured against annual and long-term performance goals approved by the Board. Executive compensation is comprised of a mix of base salary, annual cash incentive compensation, and long-term incentive awards.

 

The goals of the Company’s executive compensation program are to:

 

 

Stockholders are encouraged to read the “Compensation Discussion and Analysis” section of this Proxy Statement for a more detailed discussion of how the compensation programs reflect the Company’s objectives. The Compensation and Executive Development Committee and the Board of Directors believe that the policies and procedures articulated in the “Compensation Discussion and Analysis” section are effective in achieving the Company’s objectives and long-term goals.

 

Board of Directors’ Recommendation

 

The Board believes the Company’s executive compensation programs use appropriate structures and sound pay practices that are effective in achieving the Company’s core objectives and goals. Accordingly, the Board of Directors recommends that you vote in favor of this proposal.

 

Because your vote is advisory, it will not be binding upon the Board of Directors. However, the Board values the opinions that the Company’s stockholders express and will take into account the outcome of the vote when considering the executive compensation programs of the Company’s named executive officers.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF THE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS FOR THE FISCAL YEAR ENDED JANUARY 2, 2011.

 

This proposal gives the Company’s stockholders the opportunity to advise the Board on how often the Company should conduct an advisory Say on Pay vote on the compensation of its named executive officers. You, as a stockholder, can choose whether the Say on Pay vote should be conducted every three years, every two years or every year. You may also abstain.

 

Factors to Consider in Voting on Say on Frequency

 

The Board believes that the Company has responsible compensation practices that are guided by sound governance processes and that effectively attract, retain and reward the talent needed for achieving the Company’s objectives and long-term goals. The Board has given thoughtful consideration to its recommendation regarding the frequency of a Say on Pay advisory vote. The Board reviewed the alternatives in an effort to determine the approach that would be most meaningful to the Board and its Compensation and Executive Development Committee and best serve the Company and its stockholders. While there are advantages and disadvantages to each alternative, the Board believes an advisory vote on executive compensation every year is the most appropriate time interval at this time.

 

Although the Company’s executive compensation programs are designed to promote a long-term connection between pay and performance, the Board recognizes that executive compensation disclosures are made annually. The Board believes an annual advisory vote may help provide timely feedback on its executive compensation arrangements, plans, programs and policies. However, stockholders should note that because the advisory vote on executive compensation occurs well after the beginning of the compensation year, in many cases it may not be appropriate or feasible to change executive compensation programs in place for a current compensation year based on the advisory vote on executive compensation.

 

Board of Directors’ Recommendation

 

The Board of Directors recommends a Say on Pay vote by the Company’s stockholders on an annual basis.

 

Because your vote is advisory, it will not be binding upon the Board of Directors. However, the Board values the opinions that the Company’s stockholders express and will take into account the outcome of the vote when considering the frequency of an advisory Say on Pay vote on the compensation of the Company’s named executive officers.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE OF ONE YEAR AS THE FREQUENCY OF A STOCKHOLDER VOTE ON EXECUTIVE COMPENSATION.

 

We may ask our stockholders to vote on a proposal to adjourn the annual meeting to another place, date or time if the Board determines that an adjournment of the meeting is appropriate for the purpose of soliciting additional proxies in favor of any proposal being submitted by the Company at the meeting.

 

Vote Required and Board of Directors’ Recommendation

 

Under the Company’s Bylaws, any meeting of stockholders, whether or not a quorum is present or has been established, may be adjourned to another place, date or time by the chairman of the meeting or by the affirmative vote of the holders of a majority of the shares of stock present, in person or by proxy, at the meeting. Abstentions and “broker non-votes” will have no effect on the outcome of the vote to adjourn the meeting.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” ADJOURNMENT OF THE MEETING, IF NECESSARY TO SOLICIT ADDITIONAL PROXIES IN FAVOR OF THE COMPANY’S PROPOSALS IN THIS PROXY STATEMENT.

 

The following table sets forth certain information, as of February 25, 2011, with respect to the beneficial ownership of the Company’s common stock by:

 

 

 

 

 

 

 

Compensation Discussion and Analysis

 

Executive Summary

 

The Compensation Discussion and Analysis presents the Company’s executive compensation programs and the compensation objectives with respect to our named executive officers (“NEOs”). The Company’s executive compensation program plays a significant role in attracting, motivating and retaining executives of the caliber necessary to support the company’s growth and success.

 

The goals of the Company’s executive compensation program are to:

 

 

The Committee has a structured process to oversee the compensation program for the Company’s NEOs and other key executive officers. The total compensation received by NEOs will vary based on individual and corporate performance measured against annual and long-term performance goals. Executive compensation is comprised of a mix of base salary, annual cash incentive compensation, and long-term incentive awards with the purpose of aligning to stockholder interests.

 

The Company utilizes annual cash compensation (base salary and annual incentive compensation) to appropriately recognize each individual officer’s scope of responsibility, role in the organization, experience and contributions. The Company’s current annual incentive plan design for the executive officers, which utilizes a measure of Return on Invested Capital, has a long-term focus that is accomplished over three to four years and focuses on incenting specific business improvements that are evaluated annually.

 

A substantial portion of the Company’s executive compensation is offered in the form of long-term incentive compensation, which enables the executive officers to share in the long-term growth and success of the Company. Long-term incentives currently include:

 

 

In addition, the Company provides benefit programs that are competitive within the Company’s defined talent market, provide participant flexibility and are cost-effective to the Company, but are also generally available to all of the Company’s full-time employees.

 

Overview of 2010 Operating Performance

 

The Company’s fiscal 2010 financial performance was a key factor in the compensation decisions and outcomes for the fiscal year. Below are a few highlights of the Company’s results for fiscal 2010:

 

 

 

Overview of 2010 Compensation Outcomes

 

In light of the challenging economic climate, no salary increases for executive officers were approved by the Committee in fiscal 2010. In addition, although the Company’s Return on Invested Capital improved during fiscal 2010 compared to fiscal 2009, the magnitude of such increase was less than the previous year. As a result, annual incentive payouts to executive officers for fiscal 2010 decreased due to a decline in the Company’s Performance Multiplier from 115% in fiscal 2009 to 98% in fiscal 2010. Although base salary and annual cash incentives for fiscal 2010 reflect the short-term impact of the challenging business environment, our long-term incentive awards were issued at target levels because those awards have a three-year performance period and are not based on 2010 Company performance.

 

The following significant changes occurred during fiscal 2010 or are planned for fiscal 2011. These items are discussed in further detail below.

 

 

Executive Officers

 

The following executive officers of the Company held the following positions at the end of fiscal 2010:

 

 

Richard L. Federico is being considered for re-election to the position of director of the Company. See “Directors” for a discussion of Mr. Federico’s business experience.

 

Robert T. Vivian is currently in the position of director of the Company. See “Directors” for a discussion of Mr. Vivian’s business experience.

 

R. Michael Welborn is being considered for re-election to the position of director of the Company. See “Directors” for a discussion of Mr. Welborn’s business experience.

 

Mark D. Mumford has served as Chief Financial Officer of the Company since March 2006. Prior to joining the Company, Mr. Mumford served as Chief Accounting Officer and Vice President Finance for PetSmart, Inc. where he led all facets of accounting, finance and reporting, and was involved in investor relations. Mr. Mumford’s background includes more than 20 years of extensive financial and operational experience in the restaurant, retail and high technology industries.

Kevin C. Moylan was appointed President of the Pei Wei Asian Diner concept in January 2011 after serving as Chief Operating Officer for the Pei Wei concept operations since 2007. Mr. Moylan was appointed an executive officer of the Company in February 2010. Prior to 2007, Mr. Moylan served as a Pei Wei Regional Vice President since joining the Company in 2001. Mr. Moylan has over 25 years of experience in restaurant operations leadership. Prior to joining the Company, he served as President and CEO of Champps Americana Inc. Mr. Moylan has also worked with several other restaurant companies including TGI Friday’s and Peasant Restaurants.

 

Richard K. Tasman joined the Company in January 1998 and has served as Chief Operating Officer for the P.F. Chang’s concept operations since July 2007. He was appointed an executive officer of the Company in February 2010. From 2004 through 2007, Mr. Tasman served as a P.F. Chang’s Regional Vice President. Prior to 2004, he served as a P.F. Chang’s Market Partner and developed the first P.F. Chang’s restaurants in Illinois and Michigan. Mr. Tasman has over 30 years of experience in restaurant operations leadership. Prior to joining the Company, Mr. Tasman was a multi-unit operator at Boston Market and Brinker International and also held general manager roles at various restaurants within S&A Restaurant Corp.

 

Departure of Executive Officer

 

In December 2010, Robert T. Vivian, Co-Chief Executive Officer, announced his retirement from the Company at the end of fiscal 2011. Over the course of fiscal 2011, Richard L. Federico, Co-Chief Executive Officer, and Mark D. Mumford, Chief Financial Officer, will assume responsibility of Mr. Vivian’s duties.

 

Appointment of Executive Officer

 

In February 2011, the Company announced the appointment of director, F. Lane Cardwell, Jr., as President of P.F. Chang’s China Bistro concept effective March 1, 2011. Mr. Cardwell served on the Board as a non-employee director. Upon becoming an employee director on March 1, 2011, he no longer serves as a member of the Compensation and Executive Development Committee and the Nominating and Corporate Governance Committee. After the announcement of his appointment as the President of P.F. Chang’s China Bistro concept, Mr. Cardwell did not participate in any decisions related to executive compensation.

 

Compensation and Executive Development Committee Composition and Charter

 

The Committee assists the Board in fulfilling its responsibilities for determining the compensation provided to the Company’s executive officers. The Committee’s charter is to:

 

 

The Committee is comprised of three non-employee directors of the Company, Ms. Rhoades, Ms. Hudson and Mr. Shennan. As discussed above, Mr. Cardwell’s service as a member of the Committee terminated effective March 1, 2011, and he did not participate in any executive compensation decisions made by the Committee after his appointment as President of P.F. Chang’s China Bistro concept. Currently, no replacement for Mr. Cardwell is expected to be appointed. Each member of the Committee meets the independence requirements specified by NASDAQ, applicable SEC rules and Section 162(m) of the Code, as determined annually by the Board. The Committee held five (5) formal meetings during fiscal 2010. The Chair of the Committee reports the Committee’s actions and recommendations to the full Board following each Committee meeting. Each Board meeting also includes an executive session among only the independent directors in which executive compensation, executive development and succession planning matters are discussed as appropriate.

 

The Committee’s complete charter is available on the Company’s website at www.pfcb.com.

Compensation Consultants

 

The Committee has the authority to retain and terminate independent, third-party compensation consultants and to obtain independent advice and assistance from internal and external legal, accounting and other advisors. In accordance with the authority granted under its charter, the Committee engaged Semler Brossy Consulting Group (“Semler Brossy”) as an independent outside compensation consultant, to advise the Committee from time to time regarding matters related to executive compensation with services including, but not limited to, executive compensation benchmarking, compensation program design and peer group analysis.

 

Role of Executive Officers in Compensation Decisions

 

The Committee makes all decisions regarding the compensation of executive officers, including annual and long-term incentive compensation programs. The Committee and both Co-Chief Executive Officers (Mr. Federico and Mr. Vivian) annually review the performance of the other executive officers. The Chairman of the Committee and the Chairman of the Nominating Committee annually review the performance of each Co-Chief Executive Officer. The conclusions reached and recommendations based on these reviews, including with respect to salary adjustments and annual award amounts, are presented to the Committee, which can exercise its discretion in modifying any recommended adjustments or awards.

 

Compensation Objectives

 

The objectives of the Company’s executive officer compensation policies are to:

 

 

These objectives guide the design and administration of compensation and benefit programs for the Company’s officers, other executives, and the general workforce. The Committee has continued to employ the following key strategies in support of the compensation objectives:

 

 

The Committee refers to external benchmarks as part of its due diligence in determining salary and target award amounts, which include reviewing compensation surveys, peer group companies noted below in this report and other data to enable the Committee to compare the Company’s compensation levels with those of other companies with which it competes for talent and stockholder investment. During fiscal 2010, the Committee oversaw management’s risk assessment of the Company’s compensation programs and concluded that the structure and operation of the programs did not pose a material risk to the Company.

Determining Executive Compensation

 

The Company has structured its executive compensation program to motivate and reward executives for achieving the business goals of the Company. The Committee determines relevant market data and alternatives to consider when making compensation decisions regarding the executive officers.

 

The Committee compares compensation levels and mix against a peer group of restaurant companies. The peer group consists of restaurant companies that are comparable to the Company when evaluating business characteristics, operating results and the potential pool of executive talent. The companies in the peer group are reviewed periodically and changes are made as appropriate. The peer group companies for fiscal 2010 and fiscal 2011 are:

 

 

In order to align executive compensation levels with the Company’s stated compensation objectives regarding competitiveness, the Committee has established an overall pay-positioning strategy for total direct compensation (base salary, targeted annual incentive compensation and targeted long-term incentive compensation) for executive officers between the 50th to 75th percentiles of compensation paid to similarly situated executives of the companies comprising the peer group. Variations to this targeted range may occur as dictated by the experience level of the individual and market factors, such as demand for, and availability of, qualified candidates for a particular position.

 

A significant percentage of total compensation for the Company’s executive officers is allocated to incentive compensation as a result of the compensation objectives mentioned above. The Committee reviews relevant information from industry sources, SEC filings and other publicly available sources to determine the appropriate level and mix of incentive compensation. Income from such incentive compensation is realized as a result of the performance of the Company or the individual, depending on the type of award, compared to established goals. Once the Committee establishes an appropriate level of base annual salary for each executive officer, annual cash incentive compensation and long-term incentive compensation targets are determined as a percentage of base annual salary using the information discussed above to formulate a comprehensive compensation package for each named executive officer that meets the Committee’s stated compensation objectives.

 

For fiscal 2010, total annual cash compensation (base salary and annual incentive compensation) and total direct compensation (total annual cash compensation and long-term incentive compensation) for the named executive officers as a group approximated the range for peer group companies. The base salaries as well as the annual and long-term incentive compensation for the Company’s named executive officers taken as a group and individually were between the 50th to 75th percentiles of the target compensation ranges for the peer group companies.

 

Compensation Components and Processes

 

Annual Base Salary

 

The annual salary for executive officers is determined relative to job scope and responsibilities, past and current contributions, compensation for similar positions at the peer group companies and individual factors such as unique skills, demand in the labor market, and longer-term development and succession plans.

 

The Committee typically reviews executive officer salaries annually after the end of each fiscal year. At its February 10, 2011 meeting, the Committee reviewed the Company’s fiscal 2010 performance, peer group information and recommendations for salary adjustments for the named executive officers for fiscal 2011. In light of the foregoing factors, modest increases to base salaries, representing a 3.9% increase on average, for Mr. Welborn, Mr. Mumford and Mr. Tasman were approved. Additionally, Mr. Vivian’s salary was adjusted to $350,000 to reflect the planned reduction in his responsibilities in connection with his announced retirement from the Company at the end of fiscal 2011. Mr. Moylan was appointed President of Pei Wei Asian Diner at the end of

fiscal 2010, and his annual base salary was increased to $300,000 in conjunction with this promotion. Upon the request of Mr. Federico, no increase was made to his salary for fiscal 2011.

 

The following table shows annual base salaries for the named executive officers for the current year and each of the past two years:

 

 

 

 

Annual Incentive Compensation

 

The Company maintains an annual Officer Bonus Plan (the “Bonus Plan”) designed to reward achievement of specified levels of financial and individual performance.

 

2010 and 2011 Annual Incentive Targets

 

The Company believes that measuring annual performance and determining annual incentive payouts utilizing long-term measures, such as Return on Invested Capital (“ROIC”), creates solid alignment between executive compensation and stockholder interests by providing an enhanced focus on long-term stockholder value creation. Accordingly, annual bonuses paid to the Company’s executive officers under the fiscal 2010 Bonus Plan were based on the Company’s current fiscal year ROIC relative to both the current fiscal year Weighted Average Cost of Capital (“WACC”) and the prior fiscal year ROIC. The Company’s ROIC for any given fiscal year is calculated as Net Operating Profit After-Tax divided by Total Invested Capital.

 

The following salary multipliers are used in the bonus determination for each executive officer:

 

 

The actual fiscal year cash bonus payout for each executive officer is calculated by multiplying each executive’s annual base salary by his salary multiplier and the current fiscal year company performance multiplier. The company performance multiplier is defined as follows:

 

Company Performance Multiplier = (Current Year ROIC divided by Current Year WACC) multiplied by

(Current Year ROIC divided by Prior Year ROIC)

 

The Company Performance Multiplier for fiscal 2010 was 98% and such amount was applied to the salary multiplier for each executive officer to determine the amount of each officer’s fiscal 2010 annual incentive payment. See the Summary Compensation Table for related amounts.

 

The Committee approved the fiscal 2011 Bonus Plan, which is identical in form to the 2010 Bonus Plan, at its February 28, 2011 meeting.

 

Long-Term Incentive Compensation

 

The Company believes in a strong alignment of interests between its executive officers and its stockholders. As such, long-term incentives are designed to emphasize sustained performance over multiple years to help build stockholder value. Such incentives may be equity-classified or liability-classified but all awards have a strong linkage to the Company’s stock performance and other long-term measures.

2010 Long-Term Incentives

 

Cash-Settled Stock-Based Awards

 

Fiscal 2010 long-term incentive awards granted to employees and executive officers (excluding Mr. Federico and Mr. Vivian who received the performance unit awards discussed below) were made in the form of cash-settled stock-based awards (restricted cash units or “RCUs”), which vest three years after the date of grant. The settlement value of RCUs is based on the Company’s stock price on the settlement date and therefore such awards strongly align with the interests of the Company’s stockholders. RCUs are settled in cash rather than through the issuance of additional shares; therefore, such awards eliminate the potential stockholder dilution impact that resulted from previous equity award issuances. Additionally, RCUs receive variable accounting treatment under the current accounting literature, which enables the Company to achieve better matching of the share-based compensation expense recognized for financial statement purposes with the ultimate value received by employees.

 

Historically and through fiscal 2011, the Committee granted share-based awards to the executive officers and employees after the end of each second fiscal quarter, and the Board was granted share-based awards after the annual shareholder meeting. During February 2011, the Committee decided that for years commencing after January 1, 2012, the grant date of share-based awards for the executives and employees will coincide with the grant of the awards to the Board of Directors.

 

Performance Units

 

On February 16, 2009, the Committee approved the award of 600,000 performance units to each of the Company’s Co-Chief Executive Officers, Mr. Federico and Mr. Vivian, pursuant to the Company’s 2006 Equity Incentive Plan. Each award will vest on January 1, 2012, at which time the value of such awards, if any, will be determined and paid in cash.

 

The cash value of the performance units will be equal to the amount, if any, by which the Company’s final average stock price, as defined, exceeds the strike price. The strike price will be adjusted, either up or down, based on the percentage change in the Russell 2000 Index during the performance period, as defined, which approximates three years. The total value of the performance units at issuance was subject to a maximum value of $12.50 per unit. If the Company’s stock appreciation is less than the Russell 2000 Index, the performance units will have no value. In the event of an executive’s involuntary separation without cause or due to a change in control (as both terms are defined in the executive employment agreements) prior to the end of the performance period, the performance period will end and the maximum value per unit may be calculated at a reduced amount. Additionally, if the Company’s final average stock price declines compared to the original strike price, the total value of the performance units, if any, will be reduced by 50%. The performance units were granted in February 2009, and since the grant date, the Russell 2000 Index has increased 69% while the Company’s stock has appreciated 155% as of January 2, 2011.

 

On December 14, 2010, the Committee approved the modification of the performance units granted to Mr. Vivian in connection with his planned retirement at the end of fiscal 2011. The total value of the performance units will be subject to a maximum value of $9.00 per unit, a reduction from the previous maximum value of $12.50 per unit. All other terms remain the same as specified in the original award agreement.

 

It remains the Committee’s intent that the granting of these performance units has satisfied the long-term incentive needs of Mr. Federico and Mr. Vivian during the term of these awards, and as a result, the Committee does not intend to grant RCUs to Mr. Federico and Mr. Vivian in fiscal 2011.

 

2011 Long-Term Incentives

 

Concept Presidents Performance Award Plan

 

In December 2010, the Committee approved the adoption of the Concept Presidents Performance Award Plan (“Performance Award Plan”), which is a sub-plan under the Company’s 2006 Equity Incentive Plan. The effective date of the Performance Award Plan is January 3, 2011. The Performance Award Plan was established to provide compensation for performance at both the concept and Company level for each of the concept presidents:

R. Michael Welborn, Executive Vice President and President, Global Brand Development, Kevin C. Moylan, President of Pei Wei Asian Diner concept and F. Lane Cardwell, Jr., President of P.F. Chang’s China Bistro concept. The performance period for the initial performance awards is the approximate three-year fiscal period ending on December 29, 2013.

 

The performance award is based on the performance of each president’s respective concept during each fiscal year in the performance period as well as year-over-year performance during that period. For Mr. Welborn, the performance award is based on (1) 2% of the revenues of Global Brand restaurants plus 6% of the amount by which the revenues of Global Brand restaurants increased or decreased as of the end of the fiscal year; and (2) 1% of the revenues of Unilever retail products plus 3% of the amount by which the revenues of Unilever retail products increased or decreased as of the end of the fiscal year. For Mr. Moylan, the performance award is based on the sum of 0.5% of Pei Wei Asian Diner concept’s net income and 8% of year-over-year change in Pei Wei Asian Diner concept’s net income. For Mr. Cardwell, the performance award is based on the sum of 0.1% of P.F. Chang’s China Bistro concept’s net income and 8% of year-over-year change in P.F. Chang’s China Bistro concept’s net income. Amounts determined based on these performance awards are credited annually to an account. The participant will receive payment for one-third of any positive account balance after the end of each fiscal year in the performance period. Prior to the annual payment, the award is adjusted by the percentage change in the Company’s stock price over the performance year. The maximum amount that may be credited to any participant’s account under the Performance Award Plan is $1.0 million during the three year performance period.

 

Employee Stock Purchase Plan

 

The Company has an Employee Stock Purchase Plan (“ESPP”) in which all employees, including the executive officers, may choose to participate. Participants are currently able to purchase shares of the Company’s common stock with a value of up to $6,250 at a price equal to 95% of the fair market value of the stock at the end of each three-month offering period for the ESPP. The Committee continues to believe that this is an effective vehicle for enabling executives and employees to increase their ownership position in the Company, thereby promoting a closer link between the interests of employees and the Company’s stockholders.

 

Restoration Plan

 

Effective July 1, 2007, the Company adopted a Restoration Plan, a nonqualified unfunded deferred compensation plan which allows the named executive officers and highly compensated employees with six months of service to defer receipt of a portion of their compensation and contribute such amounts to one or more investment funds. The employees’ accounts, which consist of employee contributions and employer match contributions, are credited with returns based on the investment funds they selected. The maximum aggregate amount deferrable under the Restoration Plan is 75% of base salary and 100% of cash incentive compensation. The Company makes bi-weekly matching contributions in an amount equal to 25% of the first 6% of employee compensation contributed, subject to an annual maximum of $3,675 during fiscal 2010. Company match contributions to the Restoration Plan commence after one year of service and a minimum of 1,000 hours worked. Matching contributions vest at the rate of 20% each year beginning after the employee’s second year of service. For the fiscal year ended January 2, 2011, the Company’s matching contribution expense for all employees participating in the Restoration Plan was $0.2 million. The Restoration Plan provides executives with an opportunity to achieve retirement income security and acts as an additional means to help the Company retain its executive officers.

The following table summarizes certain activity for the named executive officers who participated in the Restoration Plan during fiscal 2010:

 

 

 

 

Benefits and Perquisites

 

The Committee oversees the design, implementation and administration of all Company-wide benefit programs. The Committee periodically reviews the cost and prevalence of these programs to ensure these programs are in line with competitive practices and are warranted, based upon the business need and contributions of the executive officers. The benefits and perquisites available to the executive officers are also generally available to the Company’s home office employees, multi-unit management and key restaurant leadership.

 

Executive Stock Ownership Requirements

 

As stated above, one of the goals of the Company’s executive compensation program is to align the interests of its executives with those of its stockholders. Accordingly, the Company maintains stock ownership guidelines for its named executive officers. The guidelines are intended to encourage retention and to further align the financial interests of executive officers with those of its stockholders. The guidelines are based on a multiple of base salary for each position. Each co-chief executive officer must own at least four times his base salary, each president and chief financial officer must own at least two times his base salary and each chief operating officer must own at least a level equal to his base salary. In fiscal 2010, the Committee updated the stock ownership guidelines. Under the updated guidelines, executives are able to count shares that are owned, including shares which have vested under restricted stock award grants, and the value of unexercised options that were in-the-money on the vesting date. Each executive has four years from the initiation of the program or the time he becomes a named executive officer subject to the stock ownership guidelines to comply with the foregoing guidelines. All named executive officers are in compliance with the stock ownership requirements, except for Mr. Mumford and Mr. Moylan who have not yet been subject to the guidelines for four years and are working toward making the required investment.

 

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

 

The Company has entered into employment agreements with Mr. Federico, Mr. Vivian, Mr. Welborn and Mr. Mumford. The agreements are substantially identical. They each provide for an initial three-year term and automatic renewal for subsequent one-year terms unless either the Company or the employee provides written notice that the agreement shall not automatically renew. The agreements prohibit these officers from competing with the Company in the area of Chinese and Asian food concepts during the term of the agreements and for one year after termination. The employment agreements of Mr. Federico and Mr. Vivian were amended during fiscal 2009 to align the end of the term with the January 1, 2012 vesting date of the performance units.

 

Each of the employment agreements also provides for severance payments upon termination and after a change of control of the Company. The Committee believes that terms of these agreements are in line with market standards and are an important means to allow management to continue to focus on running the business of the Company in

the event of a pending or actual change of control event or otherwise. More detailed information concerning these severance payments appears herein under the caption “Potential Payments upon Termination or Change in Control.”

 

Tax Implications

 

The Company has considered the provisions of the Internal Revenue Code of 1986, as amended, and the related regulations of the Internal Revenue Service which restrict deductibility of executive compensation paid to each of the five most highly compensated executive officers (other than the chief financial officer) at the end of any fiscal year to the extent such compensation exceeds $1,000,000 for any of such officers in any year and does not qualify for an exception under the statute or regulations. The Company’s policy is to qualify its executive compensation for deductibility under applicable tax laws as practicable. In the future, the Committee will continue to evaluate the advisability of qualifying its executive compensation for deductibility of such compensation.

 

The Company has also taken into consideration Internal Revenue Code Section 409A in the design and implementation of the Company’s compensation programs. If an executive is entitled to nonqualified deferred compensation benefits that are subject to Section 409A, and such benefits do not comply with Section 409A, then the benefits are taxable in the first year they are not subject to a substantial risk of forfeiture. In such case, the executive is subject to regular federal income tax, interest and an additional federal income tax of 20% of the benefit includible in income.

 

Compensation Information

 

Summary Compensation Table

 

The following table sets forth information for fiscal years 2010, 2009 and 2008 concerning the compensation of the named executive officers of the Company who were serving in such capacity as of the end of the Company’s last completed fiscal year.

 

 

 

 

All Other Compensation Table

 

The following table sets forth information regarding the detail comprising the “All Other Compensation” column of the Summary Compensation Table shown above.

 

 

 

 

Grants of Plan-Based Awards

 

The following table provides certain information concerning grants of share-based awards made during the fiscal year ended January 2, 2011, to the persons named in the Summary Compensation Table.

 

 

 

Outstanding Share-Based Awards at Fiscal Year-End

 

The following table provides certain information with respect to the value of all unexercised options and other share-based awards previously awarded to the Company’s named executive officers as of January 2, 2011.

 

 

 

 

Option Exercises and Stock Vested During Last Fiscal Year

 

The following table sets forth certain information concerning stock option exercises and shares acquired on the vesting of restricted stock awards by the named executive officers during fiscal 2010.

 

 

 

 

Potential Payments upon Termination or Change in Control

 

As noted above, the Company has entered into employment agreements with Mr. Federico, Mr. Vivian, Mr. Welborn and Mr. Mumford that require the Company to provide them compensation in the event of a termination of employment or a change in control of the Company.

Termination for Cause

 

All of the employment agreements provide that if the named executive officer is terminated for “Cause”, the executive officer will be entitled to receive only his base salary then in effect, pro-rated to the date of termination.

 

For purposes of all the employment agreements, “Cause” is defined as: (a) executive’s theft, dishonesty, or falsification of any Company documents or records; (b) executive’s improper use or disclosure of Company’s confidential or proprietary information; (c) any action by executive which has a detrimental effect on the Company’s reputation or business; (d) executive’s failure to perform any reasonable assigned duties after written notice from Company of, and a reasonable opportunity to cure, such failure; (e) any material breach by executive of this Agreement, which breach is not cured after written notice from Company of, and a reasonable opportunity to cure such breach; or (f) executive’s conviction (including any plea of guilty or nolo contendere) of any criminal act which impairs executive’s ability to perform executive’s duties with Company.

 

Termination Without Cause or Termination for Good Reason

 

All of the employment agreements provide that if the named executive officer’s employment is terminated without Cause, the named executive officer will be entitled to a severance package consisting of the following:

 

 

Termination Upon Change of Control

 

All of the employment agreements provide that if the named executive officer’s employment is terminated without Cause or if the named executive officer terminates his employment for “Good Reason” within 24 months after a change in control (as defined in the employment agreement), the named executive officer will be entitled to a severance package consisting of the following:

 

 

For purposes of all the employment agreements, “Good Reason” means any one or more of the following without the named executive officer’s written consent, (i) the assignment to the named executive officer of any duties, or any limitation of his responsibilities, substantially inconsistent with his positions, duties, responsibilities and status with the Company immediately prior to the date of the “Change in Control”; (ii) the relocation of the principal place of the officer’s service to a location that is more than fifty (50) miles from the officer’s principal place of service immediately prior to the date of the Change in Control, or the imposition of travel requirements substantially more demanding of the named executive officer than the travel requirements existing immediately prior to the date of the Change in Control; or (iii) any material failure by Company to pay, or any material reduction by Company of, the named executive officer’s cash compensation in effect immediately prior to the date of the Change in Control.

 

For purposes of all the employment agreements, a Change in Control is defined as any one of the following occurrences: (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)), other than a trustee or other fiduciary holding securities of Company under an employee benefit plan of Company, becomes the “beneficial owner” (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of the securities of Company representing more than 50% of (A) the outstanding shares of common stock of Company or (B) the combined voting power of the Company’s then-outstanding securities; (ii) the sale or disposition of all or substantially all of Company’s assets (or any transaction having similar effect is consummated); or (iii) Company is party to a merger or consolidation that results in the holders of voting securities of Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of Company or such surviving entity outstanding immediately after such merger or consolidation.

 

280G Tax Gross-Up

 

Upon a termination of a named executive officer after a Change in Control of the Company, each named executive officer may be subject to certain excise taxes pursuant to Section 280G of the Internal Revenue Code. Each of the employment agreements require the Company to reimburse the executive for such excise taxes. The total 280G tax gross-up amount in the tables below assumes that the executive is entitled to a full reimbursement by the Company for any excise taxes that are imposed upon the executive as a result of the Change in Control and is based upon a 280G excise tax rate of 20%. For purposes of the 280G calculation, it is assumed that no amounts will be discounted as attributable to reasonable compensation and no value will be attributed to the execution of a non-competition agreement by the executive.

 

The following table describes the potential payments upon termination without Cause or, after a Change in Control of the Company, termination without Cause or termination for Good Reason for each of the Company’s named executive officers covered by an employment agreement:

 

 

 

 

 

Compensation of Directors

 

The Company reimburses non-employee directors for reasonable costs and expenses incurred in attending Board of Directors’ meetings. Each non-employee director receives annual compensation consisting of cash and share-based awards with a targeted aggregate value of $175,000. In addition, the lead independent director receives an annual retainer of $20,000, the Chair of the Audit Committee receives an annual retainer of $20,000, and the Chairs of the Compensation and Executive Development Committee and the Nominating and Corporate Governance Committee each receive an annual retainer of $10,000.

 

For fiscal 2010, each director had the option to determine the amount of cash received with a maximum of 50% of the total compensation to be paid in cash. The balance of the compensation for each director will be granted as restricted stock units. The value of share-based awards is calculated using the same method used by the Company in valuing its share-based compensation awards under GAAP. Consistent with past practice, share-based awards will continue to be made upon election of a new director and, in the case of continuing directors, upon their re-election at each Annual Meeting of the Company’s stockholders. Share-based awards vest in equal monthly increments over the course of the year following the grant date. At the option of each director, the issuance of shares underlying restricted stock units may be deferred until either (a) the date on which he/she ceases serving on the board or (b) the earlier of (i) the third anniversary following grant date or (ii) the date on which he/she ceases serving on the board. Cash payments are made in equal quarterly installments over the course of the year following each annual stockholder meeting. For fiscal 2011, the directors have the same compensation options for cash and restricted stock units as fiscal 2010. Directors who are not P.F. Chang’s employees also receive an annual “Lucky Cat Dining Card” which generally entitles each holder to $5,000 for use at any of the Company’s Bistro or Pei Wei restaurants.

 

The following table provides information with respect to the compensation of directors:

 

 

 

 

Director Stock Ownership Requirements

 

The Company maintains stock ownership guidelines for its independent directors. Each independent director is required to make an investment in the Company’s stock at least a level equal to his or her annual compensation of $175,000. In fiscal 2010, the Committee updated the stock ownership guidelines. Under the updated guidelines, directors are able to count shares that are owned, vested restricted stock units, and the value of unexercised options that were in-the-money on the vesting date. Directors have four years from the date that they join the Board to comply with these guidelines. All independent directors are in compliance with the stock ownership requirements, except for Ms. Anderson and Ms. Hudson who have not yet served on the board for four years and are working toward making the required investment.

 

The Compensation and Executive Development Committee of the Board of Directors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

COMPENSATION AND EXECUTIVE
DEVELOPMENT COMMITTEE

 

M. Ann Rhoades (Chairperson)
Dawn E. Hudson
James G. Shennan, Jr.

 

Information about the Company’s equity compensation plans at January 2, 2011 was as follows: