We made progress on our product strategies, including:

We made progress on our distribution strategies, including:

We began to modernize our marketing and increase brand and product awareness through:

EXECUTIVE COMPENSATION

Sound program design. We designed our executive officer compensation programs to attract, motivate and retain the key executives who drive our success and industry leadership. Pay that reflects performance and alignment with the interests of long-term shareholders are key principles. We achieve our objectives through compensation that:

Pay practices. We believe that appropriate corporate governance of our executive compensation program is enhanced by a number of practices, including engagement by the Compensation Committee of its own independent consultant, the absence of tax gross-ups in any of our compensation programs (including no excise tax gross-ups) and the adoption of stock ownership guidelines applicable to directors and officers.

Pay for performance. Our compensation program allows our Compensation Committee to determine pay based on a comprehensive view of quantitative and qualitative factors designed to produce long-term business success. The correlation between our financial results and executive officer compensation awarded, as described in the “Executive Compensation Discussion and Analysis” which follows in this proxy statement, aligns the interests of our executive officers with those of the Company. Specifically in fiscal 2016:

CORPORATE GOVERNANCE HIGHLIGHTS

Our governance principles and practices include a number of policies and structures that we believe are “best practices” in corporate governance, including:

QUESTIONS AND ANSWERS

See “Questions and Answers” on page 37 for additional information.

Please see the Questions and Answers section beginning on page 37 for important information about the proxy materials, voting, the Annual Meeting, Vera Bradley documents, communications and the deadlines to submit shareholder proposals for the 2017 Annual Meeting of Shareholders.

Note about forward-looking statements

Certain statements in this proxy statement, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, this Proxy Summary and “Executive Compensation Discussion and Analysis.” These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” of our Forms 10-K and 10-Q. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

VERA BRADLEY’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS

A VOTE “FOR” THE ELECTION OF THE ABOVE-LISTED

CLASS III NOMINEES TO THE BOARD OF DIRECTORS.

Each year at the Company’s annual meeting of shareholders, the Board recommends a slate of director nominees for election by shareholders. In addition, the Board fills vacancies on the Board when necessary or appropriate. The Board’s recommendations or determinations are based on the recommendations of, and information supplied by, the Nominating and Corporate Governance Committee as to the suitability of each individual and, where applicable, the slate as a whole to serve as directors, taking into account the criteria described below and other factors, including the requirements for Board committee membership.

The Nominating and Corporate Governance Committee is responsible for, among other things, reviewing on an annual basis the appropriate skills and characteristics required of directors in the context of prevailing business conditions and for making recommendations regarding the size and composition of the Board. The objective is a Board that brings to the Company a variety of perspectives and skills that are derived from high-quality business and professional experience and that are aligned with the Company’s strategic objectives.

Nominees for the Board must be committed to enhancing long-term shareholder value and possess a high level of personal and professional ethics, sound business judgment, appropriate experience and achievements, personal

character and integrity. Board members are expected to understand our business and the industry in which we operate, regularly attend Board and committee meetings, participate in meetings and decision making processes in an objective and constructive manner and be available to advise our officers and management. Evaluations of candidates generally involve a review of background materials, internal discussions and interviews with selected candidates, as appropriate. Upon selection of a qualified candidate, the Nominating and Corporate Governance Committee recommends the candidate to the Board.

The Board also seeks members from diverse backgrounds so that the Board consists of members with a broad spectrum of experience and expertise and with a reputation for integrity, however, the Board does not believe the subjective and varying nature of the nomination process lends itself to a formal policy or fixed rules with respect to the diversity of the Board. The Nominating and Corporate Governance Committee may engage consultants or third-party search firms to assist in identifying and evaluating potential nominees.

In recommending nominees, the Committee considers nominees recommended by the Company’s shareholders provided any such shareholder follows the procedures set forth in the Company’s proxy statement for its most recent annual meeting of shareholders.

We believe corporate governance should promote the long-term interests of our shareholders, as well as maintain internal checks and balances, strengthen management accountability, engender public trust and foster responsible decision making and accountability. We continue to strengthen existing governance practices and develop new policies that make us a better company. To that end, the following policies and practices are used to guide and regulate various actions, in addition to the Company’s Articles of Incorporation and Bylaws.

CORPORATE GOVERNANCE GUIDELINES

Our Corporate Governance Guidelines set out various rules and principles for self-governance and address such matters as Board composition and structure, duties and responsibilities of directors and the Board and the duties of the Lead Independent Director, among other matters.

CONFLICT OF INTEREST AND BUSINESS ETHICS POLICY

We believe that credibility, integrity, trustworthiness and our core values are critical components of the current and future success of our business. Our Conflict of Interest and Business Ethics Policy is intended to help uphold high ethical standards in all of our operations by promoting ethical conduct and compliance with applicable laws, rules, regulations and standards. Our Board recognizes that no code of ethics can replace the thoughtful behavior of an ethical director or employee, but such a Code can provide guidance to help recognize and deal with ethical issues and to foster a culture of accountability.

CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS

In addition to being subject to the Conflict of Interest and Business Ethics Policy, our Chief Executive Officer, Chief Financial Officer, Treasurer and Corporate Controller are also subject to our Code of Ethics for Senior Financial Officers. We will disclose on our website (www.verbradley.com) any amendment to, or waiver from, a provision of the Policy or Code that applies to our Chief Executive Officer, Chief Financial Officer, Treasurer and Corporate Controller or persons performing similar functions and that relates to:

RISK OVERSIGHT

Our Board has and exercises ultimate oversight responsibility with respect to enterprise risk assessment and to the management of the strategic, operational, financial and legal risks facing our Company and its operations and financial condition. The Board is involved in setting our business and financial strategies and establishing what constitutes the appropriate level of risk for us and our business segments. Various committees of the Board provide assistance to the Board in its oversight of, among other things, risk assessment and risk management. The Board also monitors the process by which risk assessment and management is developed and implemented by management and reported to the full Board.

Our Audit Committee assists the Board in its oversight of our policies relating to risk assessment and risk management generally, with particular focus on our management of major financial risk exposures.

Our Compensation Committee assists the Board in assessing the nature and degree of risk that may be created by our compensation policies and practices to ensure both their appropriateness in terms of the level of risk-taking and consistency with our business strategies. In conjunction with its assessment, the Committee, with the assistance of Meridian Compensation Consultants, its independent compensation consultant, reviews our compensation policies and practices. That review encompasses each of our incentive plans, eligible participants, performance measurements, parties responsible for certifying performance achievement and sums that could be earned, including caps on the amount of bonus and performance share units that can be earned.

STOCK OWNERSHIP GUIDELINES

Our Board of Directors has adopted stock ownership guidelines for directors, executive officers and other senior executives. These guidelines are a means to motivate directors and executives to perpetuate enduring shareholder value and to ensure that the interests of directors and executives are aligned with those of shareholders.

The stock ownership guidelines require that all non-employee directors own share units (as defined below) of the Company’s common stock with a value equal to four times the annual cash retainer, or $220,000 in fiscal 2016. Until such time as a director has attained the applicable share ownership guideline, he or she is expected to retain 60% of the share units awarded to him or her by the Company. The guideline is automatically revised in the event that the annual retainer is changed.

The Chief Executive Officer is required to hold share units with a value equal to three times his annual base salary rate, or $2,250,000 in fiscal 2016. The guideline is automatically revised in the event that Mr. Wallstrom’s annual base salary rate changes. Executive Vice Presidents and other key executives as determined by the Compensation Committee are required to hold share units with a value equal to two times their annual base salary rate. Until such time as the Chief Executive Officer or another officer covered by the guidelines has attained the applicable share ownership guideline, they are expected to retain 60% the share units awarded to him or her by the Company.

The guidelines define a “share unit” as each share of Vera Bradley common stock beneficially owned, including shares of restricted stock and restricted stock units (but excluding any stock options). Both vested and unvested shares of restricted stock and restricted stock units are included in calculating share units, except that unvested equity awards subject to performance criteria are not included. All directors and officers subject to the stock ownership guidelines were in compliance with the guidelines as of March 31, 2016.

HEDGING, DERIVATIVES AND PLEDGING

The Company has adopted an Insider Trading Policy, which, among other things, prohibits directors and employees from:

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee as of January 30, 2016 were Mary Lou Kelley, Frances P. Philip and Edward M. Schmults. None of the members of the Compensation Committee are now serving or previously have served as employees or officers of the Company or any subsidiary, nor has any member of the Compensation Committee engaged in any related party transaction with the Company. None of the Company’s executive officers serve as directors of, or in any compensation related capacity for, companies with which members of the Compensation Committee are affiliated.

POLICY ON RELATED PARTY TRANSACTIONS

In accordance with the rules of The NASDAQ Stock Market and our Audit Committee Charter, our Audit Committee reviews and, prior to consummation, approves any transaction, arrangement or relationship in which the Company is a participant; the amount involved exceeds $120,000; and one of our executive officers, directors, director nominees or 5% or greater shareholders (or their immediate family members) (each, a “related party”) has a direct or indirect material interest. Based on its consideration of all relevant facts and circumstances, the Audit Committee decides whether or not to approve the particular transaction and will generally approve only those transactions that are on terms no less favorable to us than those that we could obtain from unaffiliated third parties and have terms and conditions that are reasonable and customary.

RELATED PARTY TRANSACTIONS FOR FISCAL 2016

Other than the transactions described below, since February 1, 2015, there has not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which any of our directors, executive officers, holders of more than 5% of any class of our voting securities or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest. We believe all of the transactions set forth below are on terms no less favorable to us than those that we could obtain from unaffiliated third parties and have terms and conditions that are reasonable and customary.

Certain Employees of the Company. Joan Reedy, the sister of Barbara Bradley Baekgaard, is employed by us in a sales and public relations role. As the daughter of our namesake, Vera Bradley, she attends retail events to share our history with our customers. In fiscal 2016, she received compensation of $65,158.79 for her service as a sales consultant in the Indirect channel and brand ambassador.

Doug Wallstrom, the brother of Robert Wallstrom, is employed by us as our Photography Studio Director. In fiscal 2016, he received compensation of $92,482.30 in connection with his employment, as well as a grant of restricted shares with a grant date fair value of $8,004.

Vera Bradley Foundation for Breast Cancer. The Company routinely makes charitable contributions to the Vera Bradley Foundation for Breast Cancer (the “Foundation”) and also provides employees and office space to the Foundation. The Foundation was founded by the co-founders of the Company, Barbara Bradley Baekgaard and Patricia R. Miller. Ms. Baekgaard is an employee and director of the

Company, Ms. Miller is a director of the Company and each also serves on the board of directors of the Foundation. In addition, P. Michael Miller, a director of the Company, serves on the board of directors of the Foundation. There were no Company contributions made to the Foundation in fiscal 2016.

FAMILY RELATIONSHIPS

Barbara Bradley Baekgaard and Patricia Miller founded the Company in 1982 in Fort Wayne, Indiana. Both Ms. Baekgaard and Ms. Miller continue to serve on our Board of Directors and Ms. Baekgaard serves as our Chief Creative Officer. P. Michael Miller, a director, is the husband

of Ms. Miller. Robert J. Hall, our Chairman, is the son-in-law of Ms. Baekgaard.

COPIES OF GOVERNANCE DOCUMENTS

You may view the following documents at http://investors.verabradley.com/governance.cfm (please note that our website is not a part of this proxy statement):

BOARD RESPONSIBILITIES

Being elected to serve on the Board of Directors is a high honor and privilege, but one that carries with it a serious responsibility to serve the interests of the Company and its shareholders. It is our desire that all Board members conduct themselves and perform their duties in an exemplary fashion, commensurate with the position of leadership that has been bestowed upon them by the shareholders.

Each Board member has the following basic responsibilities:

The primary duties of the Board include maximizing long-term shareholder value, by:

BOARD INDEPENDENCE

A majority of our directors are independent of the Company and management. In February 2016, the Board (with the input of the Nominating and Corporate Governance Committee) evaluated all business and charitable relationships between the Company and the Company’s non-employee directors and all other relevant facts and circumstances. As a result of the evaluation, the Board determined, as required by the Company’s Corporate Governance Guidelines, that the following non-employee directors are “independent directors” as defined by the standards for director independence established and described below: Richard Baum, Mary Lou Kelley, John E. Kyees, Matthew McEvoy, Frances P. Philip and Edward M. Schmults. Under these same standards, the Board of Directors has determined that Barbara Bradley Baekgaard, Robert J. Hall, Patricia R. Miller, P. Michael Miller and Robert Wallstrom are not independent.

Subject to some exceptions, the standards for independent directors established by The NASDAQ National Market (“NASDAQ”) and the Securities and Exchange Commission (“SEC”) generally provide that a non-employee director will not be independent if (a) the director is, or in the past three

years has been, an employee of the Company; (b) the director or a member of the director’s immediate family is, or in the past three years has been, an executive officer of the Company; (c) the director or a member of the director’s immediate family has, in the past three years, received more than $120,000 per year in direct compensation from the Company (other than for service as a director or, for the immediate family member, as a non-executive employee); (d) the director is an employee, or the director or a member of the director’s immediate family is employed as a partner, of Ernst & Young LLP, the Company’s independent registered public accountants, or the director has an immediate family member who is a current employee of such firm and works in any capacity on the Company’s audit, or the director or an immediate family member was within the last three years a partner or employee of such firm and personally worked on the Company’s audit within that time; (e) the director or a member of the director’s immediate family is, or in the past three years has been, employed as an executive officer of a company where a Vera Bradley executive officer at the same time serves or served on the compensation committee; or (f) the director is an employee, or a member of the director’s immediate family is an executive officer, of a company that makes payments to, or receives payments from, Vera Bradley in an amount which, in any twelve-month period during the past three years, exceeds the greater of $200,000 or two percent of the consolidated gross revenues of the company receiving the payment.

The Company’s Corporate Governance Guidelines require that the independent directors meet in executive session at each regular meeting of the Board and, in fiscal 2016, they met four times in executive session. These executive sessions are chaired by the lead independent director, Mr. Kyees.

BOARD LEADERSHIP STRUCTURE AND LEAD INDEPENDENT DIRECTOR

Our Board of Directors believes that one of its most important functions is to protect shareholders’ interests through independent oversight of management, including the Chief Executive Officer; however, the Board of Directors does not believe that effective management oversight necessarily mandates a particular management structure, such as a separation of the role and identities of the Chairman of the Board of Directors and Chief Executive Officer. The Board considers it important to retain flexibility to exercise its judgment as to the most appropriate management structure for us, based on the particular circumstances facing us from time to time. Currently, the positions of Chairman of the Board of Directors and Chief Executive Officer are held by separate persons because the Board of Directors has determined that this structure aids in the oversight of management and is in the best interests of the Company and its shareholders at this point in time.

In addition, John E. Kyees, Chairman of the Company’s Audit Committee, has served as the Lead Independent

Director since 2011. Pursuant to the Company’s Corporate Governance Guidelines, the lead director is an independent director who is elected from time to time, but not less than annually, by the affirmative vote of a majority of the independent directors. The Lead Independent Director, among other things, chairs executive sessions of the independent directors, reviews the meeting agenda with our Chief Executive Officer, leads the discussion with our Chief Executive Officer following the independent directors’ executive sessions, ensures that the Board’s individual group and committee self-assessments are done annually and leads periodic discussions with other Board members and management concerning the Board’s information needs. The Board believes this structure allows all of the independent directors to participate in the full range of the Board’s responsibilities with respect to its oversight of the Company’s management. The Board of Directors has determined that this leadership structure is appropriate given the size and complexity of the Company, the number of directors overseeing the Company and the Board of Directors’ oversight responsibilities. Further, the Board of Directors believes that these responsibilities appropriately and effectively complement our Chairman of the Board and Chief Executive Officer structure.

STANDING COMMITTEES AND MEETINGS OF THE BOARD

Our Board of Directors has established an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. Only independent directors are members of the Audit, Compensation and Nominating and Corporate Governance Committees.

Our Board of Directors held five meetings during fiscal 2016 and each of our directors attended at least 75% of the total number of meetings of the Board and all of the committees of the Board of which such director was a member held during the period in which such director served. Directors are encouraged to attend our annual meetings of shareholders and all directors serving at that time attended the annual shareholders meeting held on May 28, 2015.

Audit Committee. Our Audit Committee reviews and recommends to the Board of Directors internal accounting and financial controls, accounting principles and auditing practices to be employed in the preparation and review of our financial statements. In addition, our Audit Committee has the authority to engage, oversee and dismiss public accountants to audit our annual financial statements and determine the scope of the audit to be undertaken by such accountants. Our Audit Committee also reviews the fairness of related party transactions. The Board of Directors has determined that Mr. John E. Kyees, the Chairman of the Audit Committee, is an “audit committee financial expert” (as defined by Item 407(d)(5)(ii) of Regulation S-K) and is “independent” (under the definitions and interpretations of NASDAQ Stock Market), in accordance with the rules of The NASDAQ Stock Market. The Audit Committee met 11 times in fiscal 2016.

Compensation Committee. Our Compensation Committee reviews and determines policies, practices and procedures relating to the compensation of executive officers, including the Chief Executive Officer, and the establishment and administration of certain employee benefit plans for executive officers. The Compensation Committee has the authority to administer our 2010 Equity and Incentive Plan and to advise and consult with our officers regarding managerial personnel policies. The Compensation Committee met four times in fiscal 2016.

Nominating and Corporate Governance Committee. Our Nominating and Corporate Governance Committee assists the Board of Directors with its responsibilities regarding the identification of individuals qualified to become directors, the selection of the director nominees for the next annual meeting of shareholders and the selection of director candidates to fill any vacancies on the Board of Directors. It also reviews and makes recommendations to the Board regarding the preparation, review of and compliance with corporate governance policies, succession planning for the Chief Executive Officer and tenure and retirement policies for directors. The Nominating and Corporate Governance Committee and management are responsible for director continuing education programs to assist directors in maintaining skills and knowledge necessary or appropriate for the performance of their responsibilities. Continuing education programs for directors may include a combination of internally developed materials and presentations, programs presented by third parties and financial and administrative support for attendance at qualifying academic or other independent programs. The Nominating and Corporate Governance Committee met five times in fiscal 2016.

ANNUAL BOARD AND COMMITTEE EVALUATIONS

Our Board and each of our standing committees annually conduct self-evaluations to identify opportunities to improve Board and committee performance.

COMMITTEE CHARTERS

The charters of the three standing committees of the Board of Directors describe the governance framework for each Committee. The charters, along with the Corporate Governance Guidelines, are intended to ensure our Board has the necessary authority and practices in place to review and evaluate our business operations and to make decisions that are independent of management.

You may view the charters at http://investors.verabradley.com/governance.cfm.

COMMUNICATIONS WITH DIRECTORS

Shareholders may communicate with our directors by transmitting correspondence to our investor relations desk via the internet at

http://investors.verabradley.com/contactBoard.cfm or to our Secretary at:

Secretary and General Counsel

c/o Vera Bradley, Inc.

12420 Stonebridge Road

Roanoke, Indiana 46783

The Secretary will, as appropriate, forward communications to the Board of Directors or to any individual director, directors or committee to whom the communication is directed.

In March 2013, our Board of Directors approved a compensation program for non-employee directors, to be reviewed biannually. In doing so, the Board reviewed the recommendations of the Compensation Committee, along with a review by the Compensation Committee’s outside compensation consultant, of non-employee director compensation among peer group companies. In reviewing total compensation for our non-employee directors, the consultant evaluated the cash compensation programs and long-term equity incentive programs for non-employee directors of comparable companies. All directors other than Mr. Wallstrom and Ms. Baekgaard participate in our non-employee director compensation program. In February 2015, the Compensation Committee and Board again reviewed the director compensation program and agreed to continue the program as adopted in March 2013.

CASH COMPENSATION FOR NON-

EMPLOYEE DIRECTORS

Under the cash compensation element of the program, we pay each of our non-employee directors a cash retainer of $55,000 annually. We pay the Chairperson of our Board of Directors an additional $30,000 retainer and the Lead Independent Director an additional retainer of $10,000. In addition, we pay the following annual retainers for committee service:

All of our directors are reimbursed for reasonable travel and other expenses incurred in connection with attending meetings of the Board of Directors and its committees.

RESTRICTED STOCK UNITS FOR NON-

EMPLOYEE DIRECTORS

We also provide each of our non-employee directors with an annual equity grant with a grant date value of approximately $85,000. These restricted stock units vest and settle in our common shares, on a one-for-one basis, on the first anniversary of the grant date. The applicable award agreement also provides that the units shall vest immediately upon the death or disability of the director and upon the occurrence of a change in control of the Company, as defined in the agreement.

FISCAL 2016 DIRECTOR COMPENSATION

The following table summarizes compensation that our non-employee directors earned during fiscal 2016 for services as members of our Board of Directors.

(1)    We did not pay our employee directors, Mr. Wallstrom and Ms. Baekgaard, any compensation for their services on our Board of Directors in fiscal 2016.

(2)    Represents the aggregate grant date fair value of restricted stock awarded during the fiscal year computed in accordance with FASB ASC Topic 718. Additional information regarding the calculation of these values is included in Notes 2 and 8 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended January 30, 2016.

(3)    Effective May 28, 2015, Ms. Kaplan resigned as a member of the Company’s Board of Directors and Compensation Committee.

(4)    Ms. Kelley was elected to the Board of Directors effective December 3, 2015.

PROPOSAL

The Audit Committee has selected Ernst & Young LLP, or E&Y, as our independent registered public accounting firm to audit the consolidated financial statements of Vera Bradley for the fiscal year ending January 28, 2017. The Audit Committee and the Board of Directors seek to have the shareholders ratify the Audit Committee’s appointment of E&Y. Representatives of E&Y will be present at the Annual Meeting and will have the opportunity to make a statement, if they desire to do so, and to respond to appropriate questions. E&Y also served as our independent registered public accounting firm for fiscal 2016.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table sets forth the aggregate fees billed by E&Y to Vera Bradley for the fiscal years ended January 30, 2016 and January 31, 2015:

(1)    Audit Fees for fiscal 2016 and fiscal 2015 consist of fees for professional services rendered by E&Y in connection with the integrated audit of the consolidated financial statements and the effectiveness of the Company’s controls over financial reporting and reviews of our interim consolidated financial statements.

(2)    Tax fees consist primarily of fees associated with tax compliance, advice and planning services.

(3)    All Other Fees consist of fees for products and services other than the above-described services. In both years, these fees related primarily to subscriptions to online research databases.

The Audit Committee’s written charter requires the Audit Committee to pre-approve, prior to engagement, all audit and permissible non-audit services provided by the independent registered public accounting firm on an individual basis. All of the services described in the table above were pre-approved by the Audit Committee. The Audit Committee considered the services listed above to be compatible with maintaining E&Y’s independence.

VOTE REQUIRED AND BOARD

RECOMMENDATION

This proposal will be approved if a quorum is present, in person or by proxy, at the Annual Meeting and the votes properly cast favoring the proposal exceed the votes properly cast opposing the proposal. Abstentions and broker non-votes will each be counted as present for purposes of determining the presence of a quorum but will not have any effect on the outcome of the proposal.

OUR COMPENSATION PHILOSOPHY AND

OBJECTIVES

We believe that the Company’s compensation philosophy should act as the “blue print” for the total compensation design and targeted value to be delivered to the executive officers. Our compensation philosophy is intended to ensure that the framework for the Company’s compensation program supports the strategic needs of the business, that the components of the pay system work in concert to influence executive behavior in support of organization imperatives and that the mechanics of the executive reward structure reinforce the corporate culture and management style of the organization.

Our compensation philosophy includes two identifiable components: compensation objectives and pay goals.

Compensation Objectives. These objectives serve as a set of “guiding principles” that provide an overview of the intended purpose of our compensation program. Our compensation objectives are:

Pay Goals. The Committee has determined that it is beneficial to establish ranges of compensation, both in total and with respect to each of the Company’s main compensation components around the 50^th percentile of peer group compensation. A primary focus of the Committee in setting executive compensation is to target total compensation within the established ranges noted below, although competitiveness of the other pay components is also strongly considered. For the Chief Executive Officer and the other named executive officers, the Compensation Committee considers the following ranges when assessing the competitiveness of each pay component:

COMPENSATION MIX AND PAY FOR

PERFORMANCE

Annually, the Compensation Committee considers the total compensation opportunities for each named executive officer and determines how total potential compensation should be allocated across the different elements of compensation. The Compensation Committee does not follow a definitive policy when determining the mix of and structure for total compensation. Instead, it considers factors such as achievement of corporate and individual goals, level of experience, responsibilities, demonstrated performance, time with the corporation, risk associated with any payout and retention considerations.

Generally, the Compensation Committee considers market practices as reflected in the peer group data provided by its compensation consultant to obtain a baseline of total potential compensation for each named executive officer. Using this analysis as a starting point, the Compensation Committee engages in discussions with the objective of ensuring that a material portion of each named executive officer’s total compensation is at-risk and dependent on the Company’s financial performance. Care is taken to balance incentives to drive performance in the short-term versus the long-term. In this way, we encourage named executive officers to vigorously pursue financial performance while discouraging incentives to take excessive risks that may be beneficial in the short term, but harmful in the long run. We believe that these practices align the interests of the named executive officers with those of the shareholders year-over-year, as well as over the long term.

The Compensation Committee seeks to ensure that a substantial portion of the total compensation awarded to the named executive officers is performance-based and is comprised of both annual and long-term incentives. The fiscal 2016 mix of compensation for the Chief Executive Officer and other NEOs is set forth below:

PAY POLICIES

We believe that appropriate corporate governance of our executive compensation program is enhanced by a number of policies and practices, including: engagement by the Compensation Committee of its own independent consultant, the absence of tax gross-ups contained in any of our compensation programs (including no excise tax gross-ups) and the adoption of stock ownership guidelines applicable to directors and executive officers.

HOW WE MAKE EXECUTIVE COMPENSATION

DECISIONS

Role of the Compensation Committee. The Compensation Committee is responsible to the Board for overseeing the development and administration of our compensation programs. The Compensation Committee is composed of three independent directors and is responsible for the review and approval of all aspects of executive compensation, including the approval of compensation packages of newly-hired executive officers. The Committee is supported in its work by the Chief Executive Officer, the Vice President of Human Resources, her staff and an independent executive compensation consultant, as described below.

Role of Management. Our Compensation Committee generally seeks input from our Chief Executive Officer when discussing the performance and compensation levels of the other named executive officers. The Compensation Committee also works with our Chief Executive Officer, our Chief Financial Officer and the Vice President of Human Resources in evaluating the financial, accounting, tax and retention implications of our various compensation programs. Neither Mr. Wallstrom nor any of our other executives participates in deliberations relating directly to his or her own compensation.

Role of the Compensation Consultant. The Compensation Committee has retained Meridian Compensation Partners, LLC (“Meridian”) as its executive compensation consultant. Meridian is retained by and reports directly to the Compensation Committee and the Committee may replace Meridian or hire additional consultants at any time. A Meridian representative attends Compensation Committee meetings, as requested, and communicates with the chair of the Compensation Committee between meetings. Our Compensation Committee, however, makes all decisions regarding the compensation of our named executive officers.

In fiscal 2016, Meridian was not given a narrow list of instructions, but rather was engaged to provide the Committee with information and advice that might assist the Committee in performing its duties. During fiscal 2016, Meridian’s services included the following:

Role of Shareholders: Response to Advisory Vote on Executive Compensation. At the 2015 Annual Meeting of Shareholders, we were pleased that approximately 99% of the votes cast on the advisory vote on our executive compensation program were in support of the compensation paid to the named executive officers. In view of the overwhelming support from shareholders, the Compensation Committee determined that the results of the vote did not call for any major changes to our executive

compensation plans. In setting fiscal 2016 compensation, the Committee materially maintained the compensation program structure in place since fiscal 2013.

Peer Group and Benchmarking. At least annually, the Compensation Committee, with the assistance of Meridian, conducts a review of a peer group used for executive compensation comparisons to ensure all peer companies remain an appropriate basis for comparison. In selecting peer companies, the Compensation Committee aims to identify companies with similar characteristics to our Company. Specifically, we look for peer group companies that are in the retail industry or another related industry, have a strong consumer brand, are profitable and growing and are of a comparable size (based principally on revenue and market capitalization).

As a result of an extensive review conducted in August 2014, seven (7) companies were removed from the fiscal 2016 compensation peer group including: bebe stores, Inc.; Body Central Corp.; Cache, Inc.; Maidenform Brands, Inc.; rue21, Inc.; Under Armour, Inc.; and The Wet Seal, Inc. These companies were removed for various reasons, including acquisition, management buyout, revenue size and other entity-level disruptors. In addition, the following seven (7) companies were added to the fiscal 2016 compensation peer group based on the criteria described above: Perry Ellis International, Inc.; Tumi Holdings, Inc.; Christopher & Banks Corporation; Quicksilver, Inc.; Vince Holding Corp.; Francesca’s Holdings Corporation; and Kate Spade & Company.

HIGHLIGHTS

Recent highlights of our executive compensation program include:

BASE SALARY

Purposes of Base Salary. We utilize base salary as the primary means of providing compensation for performing the essential elements of an executive’s job. Base salaries are intended to provide a certain level of fixed compensation commensurate with an executive’s position, responsibilities, tenure, historical compensation, retention risk and current and expected future contributions to the Company. In particular, we set base salaries keeping in mind that we are often recruiting from a fashion and retail marketplace that is not typically found in the Company’s hometown of Fort Wayne, Indiana. With these principles in mind, base salaries are reviewed at least annually by our Compensation Committee and may be adjusted from time to time based on the results of this review. Meridian prepares a report for the Compensation Committee annually that contains an assessment of the executive officers’ compensation, including base salary, annual cash incentives and equity-based incentives, relative to comparable positions at the peer group companies. In addition, the Compensation Committee reviews the merit scores of each named executive officer’s annual performance review which

is performed by the Chief Executive Officer. The only exceptions are the Chief Executive Officer, whose annual review is conducted by the Board of Directors, and Ms. Baekgaard, who does not typically receive any annual base salary rate increase.

Setting Base Salary Levels. Our objective is generally to be within a competitive range of the peer group median, on average, for base salaries of our executive officers, including our named executive officers. We consider a range of +/-10% around the market median (50^th percentile) to be competitive but still capable of recognizing differences among executives. In setting base salaries for NEOs, the Committee typically begins with the Company’s overall budget for base salary increases, which was a target merit increase of a 2.5% in fiscal 2016, which is then adjusted up or down based upon an employee’s performance, any changes in his or her role or responsibility and the median peer group base salary information.

Setting Fiscal 2016 Base Salary. In fiscal 2016, the Compensation Committee elected not to increase the base salary rate for any of our NEOs. In making this decision, the Committee primarily considered changes that were being made in both the annual incentive and long-term incentive opportunities for NEOs, as well as budgetary considerations for the year. It was ultimately determined that, while it was important to incentivize the NEOs to achieve financial and strategic targets through incentive compensation, increases to base salary were not appropriate given the financial challenges the Company has recently faced in achieving growth.

As a founder of the Company, Ms. Baekgaard is not considered for increases to her annual base salary, which was initially set in fiscal 2010.

The following table shows annual base salary rates for each of our named executive officers for fiscal 2016 and fiscal 2015. Amounts represent a base rate of pay; actual earnings during a fiscal year may vary based upon a variety of factors, including the number of weeks in the fiscal year.

ANNUAL INCENTIVE COMPENSATION

Purposes of Annual Incentive. Our annual incentive compensation, in the form of an annual cash bonus, is intended to compensate our named executive officers for meeting our short-term corporate financial and strategic objectives and to incentivize our named executive officers to meet these objectives. Our financial and strategic objectives are intended to build shareholder value, maximize growth and profitability and build a strong brand and execute against the annual milestones of the long-range strategic plan.

Setting Annual Incentive Compensation Levels. Our objective is generally to be within the competitive range of the peer group median, on average, for annual incentive opportunities of our executive officers, including our named executive officers. We consider a range of +/-10% around the market median (50^th percentile) to be competitive but still capable of recognizing differences among executives.

Fiscal 2016 Annual Incentive Performance Metrics. For fiscal 2016, the Compensation Committee made modifications to the annual incentive design from recent years, including changes to: performance metrics, weighting and incentive opportunity for NEOs. The changes for FY2016 include:

Selecting the Financial Metrics. Consistent with fiscal 2015, revenue and operating income were the financial metrics used for fiscal 2016. The Compensation Committee selected net revenue because we believe, as a company still in the early stages of growth as a public company, top line growth is important to our shareholders and to the ultimate performance of the Company. Top line growth, however, must be accompanied by improvement to the bottom line; so the Compensation Committee selected operating income as a second performance metric. In the future, as the Company grows and circumstances change, the Compensation Committee will review the application of other financial performance measures. The Compensation Committee typically sets a target level of performance at which the full target bonus can be earned. The Compensation Committee also sets a threshold level of performance below which no bonus is earned and a maximum level of performance that results in a maximum bonus.

Selecting the Strategic Metrics. In fiscal 2016, the Committee once again included corporate-level strategic objectives as a component of the annual incentive compensation program. The Committee believes that this metric is appropriate to incentivize the management team to meet significant strategic objectives key to achieving the Company’s long-range strategic plan.

In fiscal 2016 these corporate strategic goals were to:

In addition to these corporate-level strategic goals, the Committee also included a metric for the measurement of personal objectives for each of the NEOs other than Mr. Wallstrom and Ms. Baekgaard. The Committee felt this was an important change due to the importance of

execution against the strategic plan at the level of each major business function and in order to ensure that the management team focused equally on execution in this important strategic year as on meeting financial targets. The personal objectives were as follows (Mr. Ilagan did not have these goals in light of his April 2015 departure):

For Mr. Wallstrom, the Committee felt that the corporate strategic objectives should also serve as his personal objectives given his entity level responsibility. As founder of the Company, Ms. Baekgaard was not given personal objectives.

In the future, the Compensation Committee will continue to evaluate both payout levels and performance levels in accordance with business conditions and prevailing market practices.

Fiscal 2016 Annual Incentive Payout Opportunity and Payout. In fiscal 2016, the Company achieved adjusted operating income of $56.5 million, which was above the threshold performance level of $52.3 million and below the target performance level of $59.4 million, resulting in a 69% payout for this metric. GAAP fiscal 2016 operating income of $46.7 million was adjusted, in accordance with the requirements of the annual incentive plan, by $5.9 million for restructuring and other charges, $2.8 million for impairment charges and by $1.1 million for severance charges.

Net revenue was $502.6 million in fiscal 2016, above the threshold performance level of $471.9 million and below the target performance level of $536.3 million, resulting in a 61% payout for the net revenue metric.

For financial performance metrics, payout levels are determined using linear interpolation for results falling between the three performance levels.

The corporate strategic objectives were met in all cases, and exceeded in others, resulting in a 125% payout for the corporate strategic objectives metric.

For the NEOs other than Mr. Wallstrom and Ms. Baekgaard, the payout for personal objectives was determined based upon achievement of these goals as rated by Mr. Wallstrom in each NEO’s annual review. Mr. Wallstrom determined that each of Mr. Sierks, Ms. Fuller and Mr. Mann generally performed at or above expectations with respect to their personal objectives, resulting in payouts for their personal objectives of 125%, 125% and 100%, respectively. As founder of the Company, Ms. Baekgaard did not have established personal objectives and was paid at the target level for the personal objectives element based upon Mr. Wallstrom’s assessment of overall performance.

The following table sets forth the payout opportunities at each performance level, as well as actual bonus earned as a percentage of base salary:

Other Cash Bonuses. In connection with being retained as Executive Vice President, Chief Merchandising Officer, Ms. Fuller was given a retention bonus of $375,000. This retention bonus is being paid in three equal annual installments of $125,000. The first installment was paid on August 1, 2015. The second installment was paid on May 22, 2015, and August 14, 2015 for $93,750 and $31,250, respectively. The final installment will be paid on July 29, 2016. In the event that Ms. Fuller is terminated by the Company without cause prior to the final installment date, the Company will pay Ms. Fuller the unpaid installment of the retention bonus. In establishing this retention bonus, the Compensation Committee considered Ms. Fuller’s total compensation package in comparison to both the peer group benchmarks, as well as Ms. Fuller’s compensation package at her former employer, including any unpaid bonus which was forfeited upon her termination of employment.

Mr. Ilagan received a hiring bonus of $300,000 in connection with his position as Executive Vice President, Chief Marketing Officer, which was paid in March 2015. In establishing this hiring bonus, the Compensation Committee considered Mr. Ilagan’s total compensation package in comparison to both the peer group benchmarks, as well as Mr. Ilagan’s compensation package at his former employer, including any unpaid bonus which was forfeited upon his termination of employment.

LONG-TERM INCENTIVE COMPENSATION

Purposes of Long-Term Incentive Compensation. We grant long-term equity awards under our executive compensation program in order to compete for executive talent and align the interests of our employees, including our named executive officers, with those of the Company’s shareholders. These awards are intended to motivate executives by tying a portion of their incentive compensation to the performance of our common stock over the long term and, in turn, also motivate employees to remain with the Company as the value of these awards is intended to increase over time. We believe these awards also serve as motivation to executives to continue to improve the long-term performance of the Company.

Setting Long-Term Incentive Compensation Award Size. Our objective is generally to be within the competitive range of the peer group median, on average, for long-term incentive compensation of our executive officers, including our named executive officers. We consider a range of +/-15% around the market median (50^th percentile) to be competitive but still capable of recognizing differences among executives based on experience, performance, level of responsibility and internal parity.

Fiscal 2016 Long-Term Incentive Vehicles, Mix and Grant Size. The fiscal 2016 grant to each NEO was made up of 50% performance-based restricted stock units and 50% time-based restricted stock units. In fiscal 2015, long-term incentive compensation was made up of 60% performance-based restricted stock units and 40% time-based restricted stock units. The Committee determined that in a turn-around year with an uncertain financial outlook, it was appropriate to compensate the team more evenly between performance and retention than in prior years. In all other respects, the terms of the fiscal 2016 long-term incentive grants were similar to those of the fiscal 2014 and fiscal 2015 grants.

The total long-term incentive grant value for each NEO was based primarily on a combination of factors, including competitive market data, internal pay equity and other considerations as noted above. The Committee also considered each executive’s performance and the potential impact to shareholder dilution. Based on its assessment, the Committee approved the following grant values for the NEOs.

Terms of the Fiscal 2016 Time-Based RSU Grant. The time-based restricted stock units vest in our common shares, on a one-for-one basis in three equal annual installments on the first, second and third anniversaries of the date of grant. The applicable award agreement provides that the units

vest immediately upon the NEO’s disability (as defined in the Incentive Plan) or death or, provided the NEO remains employed through the effective date, upon a change in control (which is more specifically defined in the award agreement). The units will also vest upon the NEO’s retirement (as defined in the Incentive Plan) on a prorated basis based on service through the retirement date.

Terms of the Fiscal 2016 Performance-Based RSU Grant. The performance-based restricted stock unit grant is structured to be earned over three annual performance periods (fiscal 2016, fiscal 2017 and fiscal 2018) and for any earned units to vest in our common shares, on a one-for- one basis in a single tranche on the third anniversary of the date of grant.

The performance-based restricted stock units granted in fiscal 2016 are divided into three equal tranches of one-third each of the total award and allocated to each of the three fiscal years of the Company ending with fiscal 2018, with each such fiscal year being considered a performance year. Each tranche of performance-based restricted stock units must be both “earned” and “vested” before it will be settled in the form of shares of the Company’s common stock. Each tranche of performance-based restricted stock units will be deemed earned only if the earnings per share threshold is met in the applicable fiscal year, and each will be deemed vested only if the executive is continuously employed with the Company through the third anniversary of the grant date. For fiscal 2016, threshold and maximum performance levels for the performance-based restricted stock units were set at 88% and 112%, respectively, of target earnings per share performance and payout levels range from 25% for threshold performance up to 200% for maximum performance.

For the second and third tranches of the performance-based restricted stock unit grant, target earnings per share goals will be based on a pre-determined percentage increase in earnings per share over the prior year, and threshold and maximum performance levels will again be set at 88% and 112%, respectively, of target earnings per share. In each year, shares vesting as a percentage of the NEO’s target

grant will be as set forth in the table above. The Compensation Committee will continue to evaluate both payout levels and performance levels in accordance with business conditions and prevailing market practices.

Results of Fiscal 2014 through Fiscal 2016 Performance-Based RSU Cycle. Performance-based restricted stock units granted on March 29, 2013 were subject to a three-year performance period established by the Compensation Committee that ended on January 30, 2016, which represents performance periods covered by fiscal 2014, fiscal 2015 and fiscal 2016. The only current NEOs that received a performance-based restricted stock unit grant for this period were Ms. Baekgaard, Mr. Mann and Mr. Sierks who received target grants of 7,096, 5,754 and 3,106 performance-based restricted stock units, respectively. The target number of performance-based restricted stock units was equally divided into three tranches with the first tranche earned based on fiscal 2014 performance (“FY14 Tranche”), the second tranche earned based on fiscal 2015 performance (“FY15 Tranche”) and the third tranche earned based on fiscal 2016 performance (“FY16 Tranche”).

In order to earn shares under the FY14 Tranche, the Compensation Committee set a net income target of $80.6 million, with maximum performance at $90.3 million and threshold performance of $70.9 million. Actual fiscal 2014 net income was $58.8 million, resulting in a FY14 Tranche payout of 0% of target.

At the time of grant, it was determined that target performance for the FY15 Tranche was 117% of actual fiscal 2014 net income and for the FY16 Tranche was 115% of actual fiscal 2015 net income. Net income in both fiscal 2015 and fiscal 2016 fell below the threshold level of performance for each year resulting in a 0% payout for the FY15 Tranche and the FY16 Tranche. Therefore, Ms. Baekgaard, Mr. Mann and Mr. Sierks earned no shares from this grant.

Retention Grants. In addition to the annual grants set forth above, the Committee also elected to award Mr. Sierks, Ms. Fuller and Mr. Mann an additional grant of time-based restricted stock units with the purpose of increasing the retentive value of each officer’s total equity holdings. Mr. Sierks’ and Ms. Fuller’s retention grants vest in two installments of two-thirds on the second anniversary of the date of grant and one-third on the third anniversary of the date of grant. Mr. Mann’s retention grant vests in three equal annual installments on the first, second and third anniversaries of the grant date.

The applicable award agreement provides that the units vest immediately upon the NEO’s disability (as defined in the Incentive Plan) or death or, provided the NEO remains employed through the effective date, upon a change in control (which is more specifically defined in the award agreement). The units will also vest upon the NEO’s retirement (as defined in the Incentive Plan) on a prorated basis based on service through the retirement date.

For a description of the treatment of the fiscal 2016 long-term incentive awards and these retention grants upon a change of control or in the event of an NEO’s death, disability or retirement, please see “Potential payments upon Termination or Change in Control – Grants under the Long-Term Plan.”

BENEFITS

The named executive officers are eligible for the same level and offering of benefits available to other employees. Our benefits, such as our basic health benefits, 401(k) plan, life insurance, paid time off, matching charitable gifts program, and discounts on certain company products, are intended to provide a stable array of support to our employees and their families throughout various stages of their careers, and these core benefits are provided to all full-time employees. The 401(k) plan allows participants to defer amounts of their annual compensation before taxes, up to the cap set by the Internal Revenue Code, which was $18,000 per person for calendar year 2015 (or $24,000 for employees over age 50). Employees’ elective deferrals are immediately vested and non-forfeitable upon contribution to the 401(k) plan. We currently provide matching contributions equal to 100% for the first 4% of an employee’s individual contribution and 50% for the next 2% of individual contributions, subject to certain limits, including vesting requirements.

AGREEMENTS WITH NAMED EXECUTIVE OFFICERS

The material terms of our agreements with Mr. Wallstrom, Ms. Fuller and Mr. Ilagan are described below.

Mr. Wallstrom’s Employment Agreement. Mr. Wallstrom’s employment agreement with the Company was effective November 11, 2013 (the “Employment Agreement”) and will continue until the end of the Company’s fiscal year ending on or about January 31, 2017. The Employment Agreement

will renew automatically for successive one-year periods unless either the Company or Mr. Wallstrom gives notice to the other of its or his intention not to renew.

Under the Employment Agreement, Mr. Wallstrom’s initial annual base salary rate is $750,000. Mr. Wallstrom has a target annual fiscal bonus of 100% of his annual base salary rate, with a maximum annual cash bonus of up to 200% of his annual base salary rate and he is also eligible for long-term incentive grants. In connection with being retained as President and Chief Executive Officer, Mr. Wallstrom received a one-time grant of 49,080 restricted stock units, equal to approximately $1,200,000. Sixty percent of these restricted stock units will vest based on performance and forty percent vested and will vest in equal amounts on each of November 3, 2015 and 2016. The Company also agreed to reimburse Mr. Wallstrom for the expenses of relocating his residence to the Fort Wayne, Indiana area.

Mr. Wallstrom’s Employment Agreement contains non-compete restrictions. During the period of his employment and for a period of two years following his termination, Mr. Wallstrom may not engage in, manage, join or work for (as an employee, consultant or independent contractor) or permit the use of his name by, or provide financial or other assistance to, any competitor that engages in the design, production, marketing and retailing of (i) handbags and other bags and related accessories or (ii) accessories such as jewelry, travel and leisure items, and baby clothes and accessories. In order to be treated as a competitor pursuant to Mr. Wallstrom’s Employment Agreement, an enterprise would have to have received in the prior fiscal year at least 25% of its revenues from the design, production, marketing and/or retailing of handbags, other bags and related accessories or more than 50% of its revenues from the combination of the design, production, marketing and/or retailing of handbags, other bags and related accessories, accessories such as jewelry, travel and leisure items and baby clothes and accessories. Mr. Wallstrom’s Employment Agreement also contains customary confidentiality provisions.

For a description of severance benefits that Mr. Wallstrom would be entitled to receive under certain circumstances, please see “Potential Payments Upon Termination or Change in Control – Chief Executive Officer.”

Ms. Fuller’s Offer Letter. Ms. Fuller executed her offer letter with the Company on January 1, 2014. The offer letter provides for an annual base salary rate of $500,000 and for participation in the Company’s annual bonus plan with a target bonus of 50% of her annual base salary. Ms. Fuller is also eligible to participate in the Company’s long term incentive plan with annual target awards set at 60% of her annual base salary rate. In connection with being retained

as Executive Vice President, Chief Merchandising Officer, Ms. Fuller received a one-time grant of 24,793 restricted stock units, equal to approximately $600,000. In addition, the offer letter entitled Ms. Fuller to a retention bonus of $375,000, to be paid in three equal annual installments. The first installment was paid on August 1, 2015. The second installment was paid on May 22, 2015, and August 14, 2015 for $93,750 and $31,250, respectively. The final installment will be paid on July 29, 2016. The Company also agreed to reimburse Ms. Fuller for the expense of relocating her residence to the Fort Wayne, Indiana area. As a condition of her employment, Ms. Fuller agreed not to compete with the Company during her tenure and for one year thereafter and to customary confidentiality and non-disparagement restrictions.

Mr. Ilagan’s Offer Letter. Mr. Ilagan executed an offer letter with the Company on May 21, 2014. The offer letter provided for an annual base salary rate of $400,010 and for eligibility to participate in the Company’s annual incentive plan. Mr. Ilagan was also eligible to participate in the Company’s long-term incentive plan. Mr. Ilagan received a one-time grant of 30,000 restricted stock units, equal to approximately $591,300 on the date of grant, the vesting of which accelerated upon his separation from the Company in April 2015. In addition, the offer letter entitled Mr. Ilagan to a hiring bonus of $300,000 that was paid on March 31, 2015. The Company also agreed to reimburse Mr. Ilagan for the expense of relocating his residence to the Fort Wayne, Indiana area. Mr. Ilagan’s employment with the Company terminated April 17, 2015

COMPENSATION AND RISK

The Compensation Committee has evaluated the risk profile of our compensation policies and practices and concluded that they do not motivate imprudent risk taking. In our evaluation, we reviewed our employee compensation structures and noted numerous factors and design elements that manage and mitigate risk without diminishing the incentive nature of the compensation, including a unique and strong corporate culture that attracts passionate and motivated employees who are excited about our products and our brand (as opposed to being motivated by purely financial considerations); a balanced mix between cash and equity and annual and longer-term incentives under our executive compensation program; ownership of our shares by senior management, which aligns their interests with the long-term interests of the Company and our shareholders; reasonable limits on annual incentive awards (as determined by a review of our current business plan); with respect to annual incentive awards, a balanced mix of performance measures, linear payouts between target levels and maximum payouts capped in fiscal 2016 at 200% of

target for the Chief Executive Officer and 175% of target for the other named executive officers; and subjective considerations (including a review of individual performance) and discretion in compensation decisions, which limit the influence of formulae or objective factors on excessive risk taking.

We also reviewed our compensation programs for certain design features that may have the potential to encourage excessive risk-taking, including over-weighting towards annual incentives, highly-leveraged payout curves, unreasonable thresholds and steep payout cliffs at certain performance levels that may encourage short-term business decisions to meet payout thresholds. We concluded that our compensation programs do not include such elements. In addition, we analyzed our overall enterprise risks and how compensation programs may impact individual behavior in a manner that could exacerbate these enterprise risks. In view of these analyses, we concluded that we have a balanced pay and performance program that does not encourage excessive risk-taking that is reasonably likely to have a material adverse effect on the Company.

EFFECT OF ACCOUNTING AND TAX TREATMENT ON COMPENSATION DECISIONS

In the review and establishment of our compensation programs, we consider, among other factors, the anticipated accounting and tax implications to us and our executives. Section 162(m) of the Internal Revenue Code may impose a limit on the amount of compensation that we may deduct in any one year with respect to our Chief Executive Officer and each of our next three most highly compensated executive officers (other than the Chief Financial Officer), unless specific and detailed criteria are satisfied. Performance-based compensation, as defined in the Internal

Revenue Code, is fully deductible if the programs are approved by shareholders and meet other requirements. We will seek to maintain flexibility in compensating our executives in a manner designed to promote our corporate goals and therefore we have not adopted a policy requiring all compensation to be deductible. Our Compensation Committee will assess the impact of Section 162(m) on our compensation practices and determine what further action, if any, is appropriate. The Incentive Plan allows us to provide compensation that meets the deductibility requirements of Section 162(m). In addition, the Incentive Plan requires that, to the extent necessary to comply with Section 162(m), the maximum aggregate dollar amount that may be paid to any one executive during any calendar year under any type of performance award (including restricted stock units and annual incentive) is $5,000,000.

In addition, for Mr. Wallstrom and Ms. Fuller, starting in fiscal 2016, the Committee has approved a 162M Annual Incentive Compensation Umbrella Plan to ensure that annual incentive compensation paid to each of them meets the deductibility requirements of Section 162(m). The Umbrella Plan establishes a cap for the maximum annual cash award that can be provided to Mr. Wallstrom and Ms. Fuller in the applicable performance period based upon operating income performance. Once the maximum awards have been established under the Umbrella Plan, the Compensation Committee will then apply the metrics established under the applicable annual incentive compensation plan to arrive at the final payout. In no event can the Compensation Committee award an annual incentive amount to Mr. Wallstrom or Ms. Fuller in any given year greater than the cap established by the Umbrella Plan. The Umbrella Plan gives the Committee discretion to adjust annual incentive plan awards downward, but not to increase those awards.