UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No.__)

Filed by the Registrantþ
Filed by a Party other than the Registranto

Check the appropriate box:

o Preliminary Proxy Statement
o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to § 240.14a-12

(Name of Registrant as Specified In Its Charter)

N/A

(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box)

þ No fee required.
o Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

1.		Title of each class of securities to which transaction applies:
2.		Aggregate number of securities to which transaction applies:
3.		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):
4.		Proposed maximum aggregate value of transaction:
5.		Total fee paid:

o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

1.		Amount Previously Paid:
2.		Form, Schedule or Registration Statement No.:
3.		Filing Party:
4.		Date Filed:

 

BLUE NILE, INC.
705 Fifth Avenue South
Suite 900
Seattle, Washington 98104

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

To Be Held On May 17, 2011

 

Dear Stockholder:

 

You are cordially invited to attend the Annual Meeting of Stockholders of Blue Nile, Inc., a Delaware corporation (the “Company”). Notice is hereby given that the Annual Meeting will be held on Tuesday, May 17, 2011 at 11:00 AM Pacific Time at the Washington Athletic Club located at 1325 Sixth Avenue, Seattle, Washington 98101 for the following purposes:

 

 

These items of business are more fully described in the Proxy Statement accompanying this notice.

 

The record date for the Annual Meeting is March 31, 2011. Only stockholders of record at the close of business on that date may vote at the Annual Meeting or any adjournment thereof. For ten days prior to the Annual Meeting, a complete list of stockholders entitled to vote at the Annual Meeting will be available for examination by any stockholder, for any purpose relating to the Annual Meeting, during ordinary business hours at our principal offices located at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104.

 

By Order of the Board of Directors,

 

 

Lauren Neiswender

General Counsel and Corporate Secretary

 

Seattle, Washington
April 15, 2011

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting to be Held on

May 17, 2011. The Company’s Proxy Statement and Annual Report to security holders for the fiscal

year ended January 2, 2011 are also available at http://investor.bluenile.com.

 

BLUE NILE, INC.

705 Fifth Avenue South

Suite 900

Seattle, Washington 98104

 

PROXY STATEMENT
FOR THE 2011 ANNUAL MEETING OF STOCKHOLDERS

 

Tuesday, May 17, 2011

 

QUESTIONS AND ANSWERS ABOUT THESE PROXY MATERIALS AND VOTING

 

Why am I receiving these materials?

 

We have sent you this proxy statement and the enclosed proxy card because the Board of Directors of Blue Nile, Inc. (sometimes referred to as “we,” the “Company” or “Blue Nile”) is soliciting your proxy to vote at the 2011 Annual Meeting of Stockholders. You are invited to attend the Annual Meeting to vote on the proposals described in this proxy statement. However, you do not need to attend the meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card or follow the instructions below to submit your proxy over the telephone or on the Internet.

 

We intend to mail this proxy statement and accompanying proxy card on or about April 15, 2011 to all stockholders of record entitled to vote at the Annual Meeting.

 

How do I attend the Annual Meeting?

 

The meeting will be held on Tuesday, May 17, 2011 at 11:00 AM. Directions to the Annual Meeting may be found at http://investor.bluenile.com. Information about how to vote in person at the Annual Meeting is discussed below.

 

Who may vote at the Annual Meeting?

 

Only stockholders of record at the close of business on March 31, 2011 will be entitled to vote at the Annual Meeting. On this record date, there were 14,588,679 shares of common stock outstanding and entitled to vote.

 

Stockholder of Record: Shares Registered in Your Name. If on March 31, 2011 your shares were registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, then you are a stockholder of record. As a stockholder of record, you may vote in person at the Annual Meeting or vote by proxy. Whether or not you plan to attend the Annual Meeting, please fill out and return the enclosed proxy card or vote by proxy over the telephone or on the Internet as instructed below to ensure your vote is counted.

 

Beneficial Owner: Shares Registered in the Name of Broker or Bank. If on March 31, 2011 your shares were held, not in your name, but rather in an account at a brokerage firm, bank or similar organization, then you are the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered to be the stockholder of record for purposes of voting at the Annual Meeting. As a beneficial owner, you have the right to direct your broker or other agent regarding how to vote the shares in your account. You are also invited to attend the Annual Meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the meeting unless you request and obtain a valid proxy from your broker or other agent.

 

What proposals will be voted on at the meeting?

 

There are four proposals scheduled to be voted on at the meeting:

 

1.  To elect two directors to hold office until the 2014 Annual Meeting of Stockholders (Proposal 1);

 

2.  To approve an advisory resolution on executive compensation (Proposal 2);

 

We will also consider any other business that properly comes before the meeting. As of the record date, we are not aware of any other matters to be submitted for consideration at the meeting. If any other matters are properly brought before the meeting, the persons named in the enclosed proxy card or voter instruction card will vote the shares they represent using their best judgment.

 

How do I vote?

 

The procedures for voting are as follows:

 

Stockholder of Record: Shares Registered in Your Name. If you are a stockholder of record, you may vote in person at the Annual Meeting, vote by proxy using the enclosed proxy card, vote by proxy over the telephone, or vote by proxy on the Internet. Whether or not you plan to attend the Annual Meeting, we urge you to vote by proxy to ensure your vote is counted. You may still attend the Annual Meeting and vote in person even if you have already voted by proxy.

 

 

 

 

Beneficial Owner: Shares Registered in the Name of Broker or Bank. If on March 31, 2011 you are a beneficial owner of shares registered in the name of your broker, bank or other agent, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from Blue Nile. To vote by proxy card, simply complete and mail the proxy card according to the instructions provided to you to ensure that your vote is counted. Alternatively, you may vote by telephone or on the Internet as instructed by your broker, bank or other agent. To vote in person at the Annual Meeting, you must obtain from the record holder a valid proxy issued in your name and present it to our inspector of elections at the Annual Meeting.

 

How many votes do I have?

 

On each matter to be voted upon, you have one vote for each share of common stock you own as of March 31, 2011.

 

Who is paying for this proxy solicitation?

 

We will pay for the entire cost of soliciting proxies. In addition to these mailed proxy materials, our directors and employees may also solicit proxies in person, by telephone, or by other means of communication. Directors and

employees will not be paid any additional compensation for soliciting proxies. We may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.

 

What does it mean if I receive more than one proxy card?

 

If you receive more than one proxy card, your shares are registered in more than one name or are registered in different accounts. Please complete, sign and return each proxy card to ensure that all of your shares are voted.

 

Can I change my vote after submitting my proxy?

 

Yes. You can revoke your proxy at any time before the final vote at the Annual Meeting. If you are the record holder of your shares, you may revoke your proxy in any one of four ways:

 

 

Your most current proxy card or telephone or Internet proxy is the one that is counted.

 

If your shares are held by your broker, bank or other agent, you should follow the instructions provided by that organization.

 

When are stockholder proposals due for next year’s Annual Meeting?

 

To be considered for inclusion in next year’s proxy materials, your proposal must be submitted in writing by December 17, 2011 (120 calendar days prior to the anniversary of the mailing date of this proxy statement), to our Corporate Secretary at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104. In addition, stockholder proposals must otherwise comply with the requirements of Rule 14a-8 of the Securities and Exchange Act of 1934, as amended.

 

A stockholder proposal or nomination for director that will not be included in next year’s proxy materials, but that a stockholder intends to present in person at next year’s Annual Meeting, must comply with the notice, information and consent provisions contained in our Bylaws. In part, the Bylaws provide that to timely submit a proposal or nominate a director you must do so by submitting the proposal or nomination in writing to our Corporate Secretary at our principal executive offices no later than the close of business on February 17, 2012 (90 days prior to the first anniversary of the 2011 Annual Meeting Date) nor earlier than the close of business on January 18, 2012 (120 days prior to the first anniversary of the 2011 Annual Meeting date). In the event that we set an Annual Meeting date for 2012 that is not within 30 days before or after the anniversary of the 2011 Annual Meeting date, notice by the stockholder must be received no earlier than the close of business on the 120th day prior to the 2012 Annual Meeting and no later than the close of business on the later of the 90th day prior to the 2012 Annual Meeting or the 10th day following the day on which public announcement of the date of the 2012 Annual Meeting is first made. You are also advised to carefully review our Amended and Restated Bylaws, which contain additional requirements about advance notice of stockholder proposals and director nominations, including the submission of certain information with respect to proposed nominees and proponents of any stockholder proposals. You may obtain a copy of our Bylaws by mailing a request in writing to Blue Nile’s Corporate Secretary at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104.

 

How many votes are needed to approve each proposal?

 

If a quorum is present, each proposal requires the votes described below to be approved.

 

 

What is the quorum requirement?

 

A quorum of stockholders is necessary to hold a valid Annual Meeting. A quorum will be present if stockholders holding at least a majority of the outstanding shares of stock entitled to vote are present at the Annual Meeting or represented by proxy. On the record date, there were 14,588,679 shares of common stock outstanding and entitled to vote. Thus, the holders of 7,294,340 shares of common stock must be present in person or represented by proxy at the Annual Meeting to have a quorum.

 

Your shares will be counted towards the quorum only if you submit a valid proxy (or one is submitted on your behalf by your broker, bank or other agent) or if you vote in person at the Annual Meeting. Abstentions and broker non-votes will be counted towards the quorum requirement. In the absence of a quorum, the Annual Meeting may be adjourned either by the chairman of the meeting or by vote of the holders of a majority of shares present at the meeting in person or represented by proxy.

 

What if I return a proxy card but do not make specific choices?

 

If you are a stockholder of record and return a signed and dated proxy card without marking any voting selections, your shares will be voted as recommended by the Board of Directors. The Board of Directors unanimously recommends a vote:

 

 

If any other matter is properly presented at the Annual Meeting, your proxyholder (one of the individuals named on your proxy card) will vote your shares using her best judgment.

 

If your shares are held in street name and you do not instruct your broker on a timely basis on how to vote your shares, your brokerage firm, in its discretion may either leave your shares unvoted or vote your shares on routine matters. The election of directors, the advisory approval of executive compensation, and the advisory vote on the frequency of the advisory vote on executive compensation are non-routine matters. Consequently, without your voting instructions, your brokerage firm cannot vote your shares on these proposals. These unvoted shares, called “broker non-votes,” refer to shares held by brokers who have not received voting instructions from their clients, and who do not have discretionary authority to vote on these matters because they are non-routine matters. In tabulating the voting results for the election of directors, the advisory approval of executive compensation, and the advisory vote of the frequency of the advisory

vote on executive compensation, shares that constitute broker non-votes are not considered entitled to vote on such proposals. Accordingly, broker non-votes will not affect the outcome of the vote on these proposals.

 

The proposal to ratify the appointment of Deloitte & Touche LLP as our independent auditors for the fiscal year ending January 1, 2012 is considered a routine matter.

 

Whether or not your brokerage firm can vote or does vote your shares on your behalf on any proposal, your shares will be counted as present for the purpose of determining a quorum.

 

How can I find out the results of the voting at the Annual Meeting?

 

Votes will be counted by a representative of our independent inspector of elections appointed for the Annual Meeting. Preliminary voting results will be announced at the Annual Meeting. We will publish final voting results on a Form 8-K that we expect to file within four business days after our Annual Meeting. If final voting results are not available to us in time to file a Form 8-K within four business days after the meeting, we intend to file a Form 8-K to publish the preliminary results and, within four business days after the final results are known to us, file an additional Form 8-K to publish the final results.

 

Proposal 1

 

Election Of Directors

 

Our Board of Directors is divided into three classes. Each class consists, as nearly as possible, of one-third of the total number of directors, and each class has a three-year term. Vacancies on the Board of Directors may be filled only by persons elected by a majority of the remaining directors. A director elected by the Board of Directors to fill a vacancy in a class, including a vacancy created by an increase in the number of directors, shall serve for the remainder of the full term of that class and until the director’s successor is elected and qualified.

 

Our Board of Directors presently has eight members. There are two directors in the class whose terms of office expire in 2011, Eric Carlborg and Mark Vadon. Mr. Carlborg has served as a director since 2005 and was previously elected by the stockholders. Mr. Vadon has served as a director since our inception in March 1999 and was previously elected by the stockholders.

 

Mr. Carlborg has been designated by our Board of Directors as an Audit Committee financial expert. In addition, the Board of Directors affirmatively determined that Mr. Carlborg is an independent director and independent Audit Committee member within the independent meaning of the applicable NASDAQ Stock Market LLC (“Nasdaq”) listing standards. Mr. Carlborg brings extensive financial expertise and tremendous leadership to our Board of Directors and Audit Committee. Mr. Vadon has served as chairman of the Board of Directors since our inception in March 1999. He brings a deep understanding and expertise of the business and provides valuable strategic leadership to the business. On the recommendation of the Nominating and Corporate Governance Committee, the Board of Directors has nominated Mr. Carlborg and Mr. Vadon to stand for election at the 2011 Annual Meeting. If elected at the 2011 Annual Meeting, each of Mr. Carlborg and Mr. Vadon would serve until the 2014 Annual Meeting and until his successor is elected and qualified, or, if sooner, until the director’s death, resignation or removal. If elected, Mr. Carlborg would be an independent non-employee director. If elected, Mr. Vadon would not be considered an independent director because he is employed by us as our executive chairman. It is our policy to invite and encourage directors and nominees for director to attend the Annual Meeting. Mr. Vadon and Ms. Irvine attended the 2010 Annual Meeting.

 

For the election of directors, the two nominees receiving the most “For” votes (among votes properly cast in person or by proxy) will be elected. Only votes “For” or “Withheld” will affect the outcome. In the unexpected event that a nominee is unable or unwilling to serve as a nominee at the time of the Annual Meeting, the persons named as proxies may vote for a substitute nominee chosen by us. Alternatively, the Board of Directors may decide to reduce the size of the Board of Directors. Each person nominated for election has agreed to serve if elected, and we have no reason to believe that any nominee will be unable or unwilling to serve.

 

Below is a biography of each nominee and each director whose term will continue after the Annual Meeting. The biographies below include information, as of the date of this proxy statement, regarding specific and particular experience, qualifications, attributions or skills of each director that led the Nominating and Corporate Governance Committee to recommend the director nominees to the Board of Directors and to conclude that each of the other directors should continue to serve as members of our Board of Directors.

 

In addition to the individual information set forth below, all of our directors, including our nominees, must exemplify the highest levels of ethics and integrity, have a demonstrated willingness to devote sufficient time and energy to serving on our Board of Directors and Committees of the Board of Directors, and have a commitment to rigorously representing the long-term interests of our stockholders.

 

Nominees for Election for a Three-year Term Expiring at the 2014 Annual Meeting

 

Mark Vadon

Mark Vadon, age 41, co-founded Blue Nile and has served as Chairman of the Board of Directors since its inception in March 1999. He has served as the Company’s Executive Chairman since February 2008 and served as the Company’s Chief Executive Officer from March 1999 to February 2008. From March 1999 to February 2007, Mr. Vadon was also Blue Nile’s President. From December 1992 to March 1999, Mr. Vadon was a consultant for Bain & Company, a management consulting firm. In 2009, Mr. Vadon founded Zulily, Inc., a private-sale shopping site for moms, and

serves as its Chairman of the Board of Directors. Mr. Vadon holds a B.A. in Social Studies from Harvard University and an M.B.A. from Stanford University. Mr. Vadon serves as our Chairman of the Board of Directors. Mr. Vadon founded Blue Nile over ten years ago and brings to the Board of Directors a deep understanding and expertise of the business and the strategic vision for the business. Further, Mr. Vadon’s experience and tenure both on the Board of Directors and at the Company provides the Board of Directors with critical leadership and institutional knowledge. Mr. Vadon’s expertise and experience with Blue Nile make him exceptionally well suited to serve as our Chairman of the Board of Directors.

 

Eric Carlborg

Eric Carlborg, age 47, has served as a director since February 2005. Since June 2010, Mr. Carlborg has served as a partner at August Capital, an investment company. From April 2006 to June 2010, Mr. Carlborg served as a partner at Continental Investors LLC, an investment company. From September 2005 to March 2006, Mr. Carlborg served as Chief Financial Officer of ProvideCommerce, Inc., an e-commerce company. From July 2001 to October 2004, Mr. Carlborg was a Managing Director of Investment Banking with Merrill Lynch & Co., a financial services company. Prior to his tenure at Merrill Lynch, Mr. Carlborg served in various executive financial positions, including Chief Financial Officer at Authorize.net, Inc. and Chief Strategy Officer at Go2Net, Inc., providers of Internet products and services. Mr. Carlborg also previously served as Chief Financial Officer for Einstein/Noah Bagel Corp., a food service company. Mr. Carlborg previously served as a member of the Board of Directors of Big Lots, Inc., a Fortune 500 retailer. Mr. Carlborg holds a B.A. from the University of Illinois and an M.B.A. from the University of Chicago. Mr. Carlborg serves as the Chair of our Audit Committee. Mr. Carlborg’s extensive background in accounting and financial management is valuable to our Board of Directors and Audit Committee. Additionally, Mr. Carlborg has a deep understanding of our financials and our business, which make him an especially valuable and effective Audit Committee Chair. Mr. Carlborg has been designated by our Board of Directors as an Audit Committee financial expert.

 

The Board Of Directors Unanimously Recommends

A Vote In Favor Of Each Named Nominee (Proposal 1).

 

Directors Continuing in Office Until the 2012 Annual Meeting

 

Mary Alice Taylor

Mary Alice Taylor, age 61, has served as a director since March 2000 and served as Blue Nile’s lead independent director from May 2004 through February 2011. Ms. Taylor has been an independent business executive since October 2000. She held a temporary assignment as Chairman and Chief Executive Officer of Webvan Group, Inc., an e-commerce company, from July 2001 to December 2001. Prior to that, she served as Chairman and Chief Executive Officer of HomeGrocer.com, an e-commerce company, from September 1999 until she completed a sale of the company to Webvan Group, Inc. in October 2000. From January 1997 to September 1999, Ms. Taylor served as Corporate Executive Vice President of Worldwide Operations and Technology for Citigroup, Inc., a financial services organization. Ms. Taylor also served as Senior Vice President of Federal Express Corporation, a delivery services company, from September 1991 until December 1996. Ms. Taylor also serves on the Board of Directors of Allstate Corporation, an insurance company. Ms. Taylor formerly served on the Board of Directors of Autodesk Inc., a design software company, and Sabre Holdings, an Internet travel services company. Ms. Taylor holds a B.S. in Finance from Mississippi State University. Ms. Taylor served as our lead independent director from May 2004 through February 2011 and is the Chair of the Nominating and Corporate Governance Committee. She also serves as a member of our Audit Committee. Ms. Taylor is a seasoned business leader and director. Her executive leadership experience, including her role as Chief Executive Officer, provides the Board of Directors with valuable operational, financial, and executive leadership skills. Her tenure and in-depth knowledge about our business made her exceptionally well suited to serve as our lead independent director. Ms. Taylor has been designated by our Board of Directors as an Audit Committee financial expert.

 

Michael Potter

Michael Potter, age 49, has served as a director since October 2007 and has served as our lead independent director since February 2011. Mr. Potter served as Chairman and Chief Executive Officer of Big Lots, Inc., a Fortune 500 retailer, from June 2000 to June 2005. Prior to serving as Chief Executive Officer, Mr. Potter served in various capacities at Big Lots, including the role of Chief Financial Officer. Prior to Big Lots, Mr. Potter held various positions

at The Limited, Inc., May Department Stores, and Meier & Frank, all retail companies. Mr. Potter currently serves on the Board of Directors of Coldwater Creek, Inc., a triple channel retailer of women’s apparel, gifts and accessories. Mr. Potter formerly served on the Board of Directors of Newegg, Inc., an online-only retailer specializing in high-tech products, and Big Lots, Inc. Mr. Potter holds an M.B.A. from Capital University in Ohio and a B.S. in Finance and Management from the University of Oregon. Mr. Potter serves on our Audit Committee and Compensation Committee. Mr. Potter brings a wealth of retail experience to the Board of Directors. Additionally, his experience as a Chief Executive Officer and former director of a Fortune 500 retailer provides the Board of Directors with valuable leadership skills, operational experience, and strategic planning experience. His prior experience as a Chief Financial Officer also provides valuable financial expertise to the Board of Directors and to the Audit Committee. Mr. Potter’s leadership, tenure, and experience make him extremely well qualified to serve as our lead independent director. Mr. Potter has been designated by our Board of Directors as an Audit Committee financial expert.

 

Steve Scheid

Steve Scheid, age 57, has served as a director since October 2007. Mr. Scheid currently serves as Chairman of the Board of Janus Capital Group, Inc., an asset management company. From April 2004 until December 2005, Mr. Scheid served as Chief Executive Officer and Chairman of the Board of Janus. Mr. Scheid joined the Janus Board in December 2002 and was appointed Chairman in January 2004. Mr. Scheid served as Vice Chairman of The Charles Schwab Corporation and President of Schwab’s retail group from 2000 to 2002. Prior thereto, Mr. Scheid headed Schwab’s financial products and services group and was the firm’s Chief Financial Officer from 1996 through 1999. From 2001 to 2002, Mr. Scheid served on the Federal Advisory Council, which provides oversight to the Federal Reserve Board in Washington, D.C. Mr. Scheid has served as a founding partner of Strategic Execution Group, LLC, a consulting firm, since April 2007. Mr. Scheid formerly served on the Board of Directors of PMI Group, Inc., an international provider of credit enhancement products and Autodesk, Inc., a design software company. Mr. Scheid holds a B.S. from Michigan State University. Mr. Scheid serves as the Chair of our Compensation Committee. Mr. Scheid has a deep expertise in finance, retail strategies, risk management, and investment services. Additionally, he provides the Board of Directors with valuable executive leadership experience. Mr. Scheid has a deep understanding of and tremendous experience with executive compensation packages making him an exceptionally valuable and effective Compensation Committee Chair.

 

Directors Continuing in Office Until the 2013 Annual Meeting

 

Diane Irvine

Diane Irvine, age 52, has served as a director since May 2001, and has served as Blue Nile’s Chief Executive Officer since February 2008 and as President since February 2007. She served as the Company’s Chief Financial Officer from December 1999 to September 2007. From February 1994 to May 1999, Ms. Irvine served as Vice President and Chief Financial Officer of Plum Creek Timber Company, Inc., a timberland management and wood products company. From September 1981 to February 1994, Ms. Irvine served in various capacities, most recently as a partner, with Coopers and Lybrand LLP, an accounting firm. Ms. Irvine formerly served on the Board of Directors of Ticketmaster Entertainment, Inc., a live entertainment ticketing and marketing company, and Davidson Companies, an investment banking and asset management company. Ms. Irvine holds a B.S. in Accounting from Illinois State University and an M.S. in Taxation from Golden Gate University. Ms. Irvine’s experience and tenure at Blue Nile provides the Board of Directors with critical insights into the Company’s day-to-day operations, organizational development and structure, and short and long-term strategic opportunities and challenges. Additionally, Ms. Irvine brings substantial leadership skills and financial expertise to the Board of Directors.

 

Leslie Lane

Leslie Lane, age 43, has served as a director since December 2008. Mr. Lane has served as Vice President and Managing Director of the Nike Foundation at Nike, Inc., a leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories, since June 2010. From October 2006 to June 2010, he served as Vice President and General Manager of Global Running for Nike, Inc. From March 2004 to October 2006, he served as the Director of Nike Global Footwear Finance and Strategic Planning and, from March 2003 to March 2004, he served as the Director of Nike Subsidiaries. From 1998 to 2002, Lane held various positions at Roll International Corporation, a private holding company, including serving as the Chief Operating Officer of PomWonderful LLC, the Chief Financial Officer of Paramount Citrus, and the Vice President of Strategy of Roll International Corporation. From 1990 to 1998, Lane was a consultant with Bain & Company. He holds an M.A. in Chemistry from Oxford University and an M.B.A. from Harvard University. Mr. Lane is a member of our Audit Committee and Nominating and Corporate Governance Committee. Mr. Lane has a strong background in building a customer-centric brand. His experience provides the Board of Directors with valuable insights into strategic branding and marketing opportunities both domestically and internationally. Further, Mr. Lane’s deep financial expertise and experience is valuable to the Board of Directors

and the Audit Committee. Mr. Lane has been designated by our Board of Directors as an Audit Committee financial expert.

 

Ned Mansour

Ned Mansour, age 62, has served as a director since December 2008. Mr. Mansour served as President of Mattel, Inc., a worldwide leader in the design, manufacture and marketing of family products, until his retirement in March 2000. He joined Mattel in 1978 as a senior attorney and held numerous positions before becoming President, including President of Corporate Operations, President of Mattel USA, Chief Administrative Officer, and Executive Vice President and General Counsel. Mr. Mansour currently serves on the Board of Directors of the Ryland Group, one of the nation’s largest homebuilders. In addition, Mr. Mansour previously served as a member of the Board of Directors of Mattel and Big Lots, Inc., a Fortune 500 retailer. He holds a B.A. in Finance from the University of Southern California and a J.D. from the University of San Diego School of Law. Mr. Mansour serves on our Compensation Committee and our Nominating and Corporate Governance Committee. Mr. Mansour brings a wealth of experience in retail operations, international expansion, marketing, and corporate governance. Additionally, having served as a President of a large retailer and a director at several large companies, Mr. Mansour brings valuable executive leadership experience to the Board of Directors.

 

Independence of The Board of Directors

 

As required under the Nasdaq listing standards, a majority of the members of a listed company’s Board of Directors must qualify as “independent,” as affirmatively determined by the Board of Directors. Our Board of Directors consults with our legal counsel to ensure that the Board of Directors’ determinations are consistent with all relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in pertinent listing standards of Nasdaq, as in effect, from time to time.

 

Consistent with these considerations, after reviewing all relevant transactions and relationships between each director, or any of his or her family members, and us, our senior management and our independent auditor, the Board of Directors affirmatively determined that the following six directors are independent directors within the meaning of the applicable Nasdaq listing standards: Mary Alice Taylor, Eric Carlborg, Leslie Lane, Ned Mansour, Michael Potter, and Steve Scheid. In making this determination, the Board of Directors found that none of these directors had a material or other disqualifying relationship with us. In determining the independence of Mr. Carlborg, the Board of Directors considered that August Capital, LLC, an investment company in which Mr. Carlborg serves as a partner, had acquired a less than 10% interest in Zulily, Inc., a company that Mr. Vadon founded and currently serves as chairman of its Board of Directors. In determining the independence of Mr. Potter, the Board of Directors considered that Mr. Potter serves on the Board of Directors of Zulily, Inc. The Board of Directors deemed that the relationships between Mr. Carlborg and Zulily, Inc. and Mr. Potter and Zulily, Inc. would not interfere with the exercise of independent judgment by Mr. Carlborg or Mr. Potter in carrying out each of their responsibilities as a director of Blue Nile. Mr. Vadon, our executive chairman, and Ms. Irvine, our chief executive officer and president, are not independent directors by virtue of their employment with us.

 

The Board of Directors’ Role in Risk Oversight

 

There are risks inherent in every business and our Board of Directors has oversight over how we manage the risks associated with our business. Our Board of Directors has delegated to the Audit Committee the primary responsibility for the oversight of our risks. The Audit Committee Chair reports to the full Board of Directors the process the Audit Committee and management went through to fulfill its oversight responsibilities and the results from the process. The Audit Committee’s Charter provides, in relevant part, that it will review and discuss with management and with our independent auditors, as appropriate, our guidelines and policies with respect to risk assessment and risk management, including our major financial risk exposures and the steps taken by management to monitor and control these exposures.

 

At least annually, the Audit Committee evaluates our risks and the management of our risks. In 2010, management presented to the Audit Committee our Enterprise Risk Management assessment tool. In connection with its review, the Audit Committee went through the risks identified by management, the process management used to identify and rate risks, the mitigation strategies for each of the material risks, and the relevant action items. The Chair of the Audit Committee then reported to the Board of Directors the process it and management went through and discussed the material findings from the review. The Board of Directors believes that the process that it goes through to oversee the

management of risks allows it to understand the critical risks facing the business, evaluate our risk management process and ensure that they are functioning adequately, and foster a culture of risk awareness.

 

Meetings of the Board of Directors

 

The Board of Directors met five times during fiscal year 2010. Each Board member attended 75% or more of the aggregate of the meetings of the Board of Directors and meetings of the committees on which he or she served, held during the period for which he or she was a director or committee member.

 

As required under applicable Nasdaq listing standards, in fiscal year 2010, our independent directors met at least four times in regularly scheduled executive sessions at which only independent directors were present. The lead independent director for fiscal year 2010, Mary Alice Taylor, presided over the executive sessions. Persons interested in communicating with the independent directors with their concerns or issues may address correspondence to a particular director or to the independent directors generally, in care of Blue Nile’s Corporate Secretary at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104. If no particular director is named, letters will be forwarded, depending on the subject matter, to the Chair of the Audit Committee, Compensation Committee or Nominating and Corporate Governance Committee, as applicable.

 

Information Regarding the Board of Directors and its Committees

 

In April 2004, our Board of Directors documented the governance practices followed by us and our Board of Directors by adopting the Corporate Governance Policies of the Board of Directors (the “Governance Policies”). The Governance Policies provide the Board of Directors with the necessary authority to review and evaluate our business operations, as needed, and they are designed to facilitate the Board of Directors’ independent decision making authority. The Governance Policies are intended to align the interests of directors and management with those of our stockholders. The Governance Policies, among other things, set forth the practices the Board of Directors will follow with respect to the selection of directors, the independence of the directors, meetings of the Board of Directors, committees of the Board of Directors, and the responsibilities of the Board of Directors. The Governance Policies were adopted to, among other things, reflect changes to the Nasdaq listing standards and Securities and Exchange Commission rules adopted to implement provisions of the Sarbanes-Oxley Act of 2002. The Corporate Governance Policies of the Board of Directors, as well as the charters for each committee of the Board of Directors, may be viewed on our website at www.bluenile.com in the corporate governance section of our investor relations page.

 

Leadership Structure. The Board of Directors does not have a policy on whether the role of the chairman and chief executive officer should be separate, but currently our former chief executive officer, Mr. Vadon, is serving as our chairman. The role of the chairman and chief executive officer became separate in February 2008, when Mr. Vadon transitioned from our chief executive officer to our executive chairman. The Board of Directors believes that this leadership structure is appropriate at this time as it allows our chief executive officer, Ms. Irvine, to focus on her management responsibilities. Additionally, the Board of Directors believes that Mr. Vadon’s role as the chairman of the Board is appropriate given his responsibilities over our long-term strategic planning. Mr. Vadon is not considered an independent director. Our Governance Policies provide that to the extent that there is not an independent chairman, the Board of Directors will designate an independent director to serve as lead independent director. From May 2004 through February 2011, the Board of Directors designated Ms. Taylor to serve as our lead independent director. In February 2011, the Board of Directors designated Mr. Potter to serve as our lead independent director. Pursuant to our Governance Policies, except to the extent otherwise deemed appropriate by the Board of the Directors, the lead director has the following responsibilities: (i) in conjunction with the chief executive officer, establish any agenda for meetings of the independent directors, (ii) preside over the meetings of the independent directors, and (iii) coordinate the activities of the other independent directors and to perform various other duties. Typically, there is a meeting of the independent directors in conjunction with every meeting of the Board of Directors and in 2010 each meeting of the Board of Directors included a non-management executive session. This allows the directors to speak candidly on any matter of interest, without the executive chairman, chief executive officer, or any other members of management present.

Committees. The Board of Directors has three standing committees: an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The following table provides membership and meeting information for fiscal year 2010 for each of the committees of the Board of Directors:

 

 

Below is a description of each committee of the Board of Directors. Each committee has authority to engage legal counsel or other experts or consultants, as it deems appropriate, to carry out its responsibilities. The Board of Directors has determined that each member of each committee meets the applicable rules and regulations regarding “independence” and that each member is free of any relationship that would interfere with his or her individual exercise of independent judgment.

 

Audit Committee

 

The Audit Committee of the Board of Directors oversees our corporate accounting and financial reporting processes and audits of our financial statements. For this purpose, the Audit Committee performs functions, including, among other things:

 

 

 

Four directors comprise the Audit Committee: Mr. Carlborg (chairman), Mr. Lane, Mr. Potter and Ms. Taylor. The Audit Committee met ten times during fiscal year 2010. The Audit Committee has adopted a written charter that is available on our website, www.bluenile.com, in the corporate governance section of our investor relations page.

 

Our Board of Directors annually reviews the Nasdaq listing standards definition of independence for Audit Committee members and has determined that all members of our Audit Committee are independent (as independence is currently defined in Rule 5605(a)(2) of the Nasdaq listing standards). The Board of Directors has also determined that each of Mr. Carlborg, Mr. Lane, Mr. Potter, and Ms. Taylor, qualifies as an “audit committee financial expert,” as defined in applicable Securities and Exchange Commission rules. In making this determination, the Board of Directors made a qualitative assessment of Mr. Carlborg, Mr. Lane, Mr. Potter and Ms. Taylor’s level of knowledge and experience based on a number of factors, including their respective formal education, experience, business acumen, and independence.

Audit Committee Report⁽¹⁾

 

The Audit Committee reviewed and discussed the audited financial statements for fiscal year 2010 with management of Blue Nile. The Audit Committee has also discussed with Blue Nile’s independent registered public accounting firm the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board (“PCAOB”) in Rule 3200T. The Audit Committee has also received the written disclosures and the letter from Blue Nile’s independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm’s communications with the Audit Committee concerning independence, and has discussed with Blue Nile’s independent registered public accounting firm’s independence. Based on the foregoing, the Audit Committee has recommended to the Board of Directors that the audited financial statements be included in Blue Nile’s Annual Report on Form 10-K for the fiscal year ended January 2, 2011.

 

Date: April 15, 2011

 

Respectfully submitted,

 

Eric Carlborg, Chairman
Leslie Lane
Michael Potter
Mary Alice Taylor

 

 

Compensation Committee

 

The Compensation Committee acts on behalf of the Board of Directors to review, adopt, and oversee our compensation strategy, policies, plans, and programs, including:

 

 

The Compensation Committee also reviews with management our Compensation Discussion and Analysis and considers whether to recommend that it be included in our proxy statement.

 

Three directors comprise the Compensation Committee: Mr. Scheid (chairman), Mr. Mansour, and Mr. Potter. Our Board of Directors has determined that all of the members of the Compensation Committee are independent (as independence is currently defined in Rule 5605(a)(2) of the Nasdaq listing standards). The Compensation Committee met eight times during fiscal year 2010. The Compensation Committee has adopted a written Compensation Committee charter that is available on our website, www.bluenile.com, in the corporate governance section of our investor relations page.

 

The agenda for each Compensation Committee meeting is generally developed by the chair of the Compensation Committee, in consultation with the chief executive officer, the executive chairman, and the general counsel, as appropriate. The Compensation Committee meets regularly in executive session. From time to time, various members of management as well as outside advisors or consultants may be invited by the Compensation Committee to make presentations, provide financial or other background information or advice, or otherwise participate in the Compensation Committee meetings. The charter of the Compensation Committee grants the Compensation Committee full access to all of our books, records, facilities and personnel, as well as authority to obtain, at our expense, advice and assistance from internal and external legal, accounting, or other advisors and consultants and other external resources that the Compensation Committee considers necessary or appropriate in the performance of its duties. In particular, the Compensation Committee has the sole authority to retain compensation consultants to assist it in its evaluation of executive and director compensation, including the authority to approve the consultant’s reasonable fees and other retention terms.

 

Under its charter, the Compensation Committee may form, and delegate authority to, subcommittees, as appropriate. In 2004, the Compensation Committee formed the Stock Award Committee. Four executives comprise the Stock Award Committee: our chief executive officer, our executive chairman, our chief financial officer, and our general counsel. The Compensation Committee delegated authority to the Stock Award Committee grant within ranges approved by the Compensation Committee: (1) stock options to newly hired non-executive employees, and (2) merit awards to existing non-executive employees at such times as are specifically authorized. The purpose of this delegation of authority is to enhance the flexibility of our option administration and to facilitate the timely grant of options to non-executive employees within specified limits approved by the Compensation Committee.

 

Compensation Committee Interlocks and Insider Participation

 

Messrs. Scheid, Mansour, and Potter were the only members of the Compensation Committee during the fiscal year ended January 2, 2011. None of the Compensation Committee’s members has at any time been an officer or employee of Blue Nile. None of our executive officers serve, or in the past fiscal year has served, as a member of the Board of Directors or Compensation Committee of any entity that has one or more of its executive officers serving on our Board of Directors or Compensation Committee. None of the Compensation Committee’s members is or was a participant in a “related person transaction” in the past fiscal year (see “Transactions with Related Persons” included herein for a description of our policy on related person transactions).

Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee of the Board of Directors is responsible for, among other things:

 

 

Three directors comprise the Nominating and Corporate Governance Committee: Ms. Taylor (chairwoman), Mr. Lane and Mr. Mansour. All members of the Nominating and Corporate Governance Committee are independent (as independence is currently defined in Rule 5605(a)(2) of the Nasdaq listing standards). The Nominating and Corporate Governance Committee met three times during fiscal year 2010. The Nominating and Corporate Governance Committee has adopted a written charter that is available on our website, www.bluenile.com, in the corporate governance section of our investor relations page.

 

Criteria for Nominees.  The Nominating and Corporate Governance Committee reviews the experience and characteristics appropriate for members of the Board of Directors and director nominees in light of the Board of Directors’ composition at the time, and skills and expertise needed at the Board of Directors and committee levels. The Nominating and Corporate Governance Committee also considers such factors as possessing relevant expertise upon which to be able to offer advice and guidance to management, having sufficient time to devote to our affairs, demonstrated excellence in his or her field, having the ability to exercise sound business judgment and having the commitment to rigorously represent the long-term interests of our stockholders. However, the Nominating and Corporate Governance Committee retains the right to modify these qualifications from time to time. In the case of incumbent directors whose terms of office are set to expire, the Nominating and Corporate Governance Committee reviews such directors’ overall service to us during their term, including the number of meetings attended, level of participation, quality of performance and any other relationships and transactions that might impair such directors’ independence. In the case of new director candidates, the Nominating and Corporate Governance Committee also determines whether the nominee must be “independent” under Nasdaq listing standards, applicable Securities and Exchange Commission rules and regulations and the advice of counsel, if necessary. The Nominating and Corporate Governance Committee uses its network of contacts to compile a list of potential candidates, but may also engage, if it

deems appropriate, a professional search firm. The Nominating and Corporate Governance Committee conducts any appropriate and necessary inquiries into the backgrounds and qualifications of possible nominees after considering the function and needs of the Board of Directors. The Nominating and Corporate Governance Committee meets to discuss and consider the nominees and then selects a nominee or nominees for recommendation to the Board of Directors by majority vote.

 

To date, the Nominating and Corporate Governance Committee has not paid a fee to any third party to assist in the process of identifying or evaluating director nominees. To date, the Nominating and Corporate Governance Committee has not received a timely recommendation for a director nominee from a stockholder or stockholders holding more than 5% of our voting stock.

 

The Nominating and Corporate Governance Committee will consider properly submitted director nominees recommended by stockholders. The Nominating and Corporate Governance Committee does not intend to alter the manner in which it evaluates nominees based on whether or not the nominee was recommended by a stockholder. Stockholders who wish to recommend individuals for consideration by the Nominating and Corporate Governance Committee to become nominees for election to the Board of Directors may do so by delivering a written recommendation to the Nominating and Corporate Governance Committee at the following address: 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104, Attention: Corporate Secretary, at least 120 days prior to the anniversary date of the mailing of our proxy statement for the last Annual Meeting of Stockholders. Our Bylaws contain other specific requirements to properly submit a director nomination to our stockholders. A recommendation of a nominee to the Nominating and Corporate Governance Committee shall not be deemed to satisfy the nomination requirements set forth in our Bylaws.

 

Diversity.  While the Nominating and Corporate Governance Committee does not have a formal diversity policy for Board membership, the Committee seeks directors who represent a mix of backgrounds and experiences that will enhance the quality of the Board’s deliberations and decisions. The Nominating and Corporate Governance Committee identifies qualified potential candidates without regard to any candidate’s race, color, disability, gender, national origin, religion or creed. As part of the process of identifying candidates, the Nominating and Corporate Governance Committee evaluates how a particular candidate would strengthen and increase the diversity of the Board in terms of that candidate’s possible contribution to the Board of Directors’ overall balance of perspectives, backgrounds, knowledge, experience, skill sets and expertise in substantive matters pertaining to our business.

 

Stockholder Communications With The Board Of Directors

 

Our Board of Directors has adopted a formal process by which stockholders may communicate with the Board of Directors or any of our individual directors. Stockholders who wish to communicate with the Board of Directors may do so by sending written communications addressed to the Corporate Secretary of Blue Nile at 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104. All communications will be compiled by our Corporate Secretary and submitted to the Board of Directors or the individual directors, as applicable, on a periodic basis.

 

Code Of Ethics

 

We have adopted the Blue Nile, Inc. Code of Ethics that applies to all officers, directors and employees, including our chief executive officer, chief financial officer, controller, and persons performing similar functions. The Code of Ethics is available on our website at www.bluenile.com in the corporate governance section of our investor relations page. If we make any substantive amendments to the Code of Ethics or grant any waiver from a provision of the Code of Ethics to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website and file a Current Report on Form 8-K to the extent required by law and the Nasdaq listing standards.

 

Proposal 2

 

Advisory Vote On Executive Compensation

 

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), we are asking our stockholders to vote, on an advisory basis, on the compensation of our named executive officers as described in this proxy statement. This proposal, commonly known as a “say-on-pay” proposal, gives our stockholders the opportunity to express their views on the compensation of our named executive officers.

 

As described in detail under the heading “Compensation Discussion and Analysis,” our executive compensation program is designed to attract, motivate and retain our named executive officers, who are critical to our success. We urge our stockholders to read the “Compensation Discussion and Analysis” and the tables and narrative that follow for additional details about our executive compensation program, including information about the fiscal year 2010 compensation paid to our named executive officers.

 

Record Financial Results for 2010. Our executives have successfully managed us through the recent dramatic economic downturn, and we believe our compensation program for our named executive officers was instrumental in helping us achieve strong financial performance. Our fiscal 2010 financial results were highlighted by the following:

 

 

Our strong earnings and operational excellence helped drive our year-end balance of cash, cash equivalents, and short term investments of $113.3 million, compared to $93.1 million at the end of 2009. We have no long-term indebtedness. We believe we are well positioned to reward our stockholders over the long-term.

 

Fiscal Year 2010 Compensation Program Highlights. As discussed in more detail under the heading “Compensation Discussion and Analysis,” we believe that our executive compensation program is reasonable, competitive and strongly focused on pay for performance principles. The Compensation Committee measures performance and sets goals and objectives on the basis of financial and individual results that it believes will position us for long-term sustainable success. We believe that the fiscal year 2010 compensation of our named executive officers was appropriate and aligned with our 2010 results. Our fiscal year 2010 compensation program highlights are set forth below.

 

 

 

The Compensation Committee regularly reviews the compensation program for our executives to ensure they achieve the desired goals of aligning our executive compensation structure with our stockholders’ interests and current market practices. We believe that our executive compensation program has been effective at encouraging the achievement of positive results, appropriately aligning pay and performance, and in enabling us to attract and retain very talented executives.

 

Advisory Vote and Board Recommendation. We request stockholder approval of the 2010 compensation of our named executive officers as disclosed in this proxy statement pursuant to the Securities and Exchange Commission’s compensation disclosure rules (which disclosure includes the “Compensation Discussion and Analysis,” the compensation tables, and the narrative disclosures that accompany the compensation tables within this proxy statement). This vote is not intended to address any specific element of compensation, but rather the overall compensation of our named executive officers and the compensation philosophy, policies and practices described in this proxy statement.

 

Accordingly, we ask that you vote “FOR” the following resolution at this meeting:

 

“RESOLVED, that the stockholders of Blue Nile, Inc. approve, on an advisory basis, the compensation of the named executive officers, as disclosed in Blue Nile’s proxy statement for the 2011 Annual Meeting of Stockholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the 2010 Summary Compensation Table, and the other related tables and disclosure within this proxy statement.”

 

To be approved, the compensation of our named executive officers must receive “For” votes from the holders of a majority of our shares present and entitled to vote either in person or by proxy. You may vote “For,” “Against,” or “Abstain” from the proposal to approve the compensation of our named executive officers. As an advisory vote, the outcome of the vote on this Proposal is not binding upon us. However, our Compensation Committee, which is responsible for designing and administering our executive compensation program, values the opinions expressed by our stockholders in their vote on this Proposal and will consider the outcome of this vote when making future compensation decisions for our named executive officers.

 

The Board Of Directors Unanimously Recommends

A Vote of “For” the compensation of our named executive officers (Proposal 2).

 

Proposal 3

 

Advisory Vote On The Frequency Of An Advisory Vote On Executive Compensation

 

Pursuant to the Dodd-Frank Act, we also are asking our stockholders to provide their input with regard to the frequency of future stockholder advisory votes on our executive compensation program, such as the proposal contained in Proposal 2 above. In particular, we are asking whether the advisory vote on executive compensation should occur every three years, every two years, or every year.

 

Our Board of Directors believes that an advisory vote on our executive compensation should be conducted every three years, or on a triennial basis. As described in the “Compensation Discussion and Analysis” section below, one of the core principles of our executive compensation program is to ensure our executives’ interest are aligned with our stockholders’ interest to create long-term sustainable value. This principle is exemplified by the Compensation Committee’s focus on long-term incentive compensation. Accordingly, we believe that a triennial vote on our executive compensation program best correlates with our focus on long-term performance and value creation, while avoiding over-emphasis on short-term variations in compensation and business results.

 

Additionally, a triennial vote will provide us with sufficient time to thoughtfully respond to stockholder sentiments and implement any necessary changes. We carefully consider changes to our compensation program to ensure consistency and the continued effectiveness of our program. We believe that a triennial vote is an appropriate frequency to provide our Compensation Committee with sufficient time to thoughtfully consider and implement appropriate changes to our compensation program.

 

Finally, offering the advisory vote every three years will improve the ability of institutional funds that hold shares in a large number of public companies to exercise their voting rights in a more deliberate, thoughtful and informed way. We believe that institutions will be able to provide us with more meaningful input on our compensation program, if they are not simultaneously required to evaluate the compensation program of every public company, every year.

 

If there are any concerns about our executive compensation during the interval between “say-on-pay” votes, stockholders are encouraged to bring their concerns to us, our Board of Directors, or our Compensation Committee at any time. Please refer to “Stockholder Communications with the Board of Directors,” in this proxy for information about communicating with the Board of Directors.

 

We request that our stockholders select, “Every Three Years” when voting on the frequency of advisory votes on executive compensation. Although the advisory vote is non-binding, our Board of Directors and Compensation Committee will review the results of the vote and take them into consideration when making a determination concerning the frequency of advisory votes on executive compensation.

 

Stockholders may cast a vote on the preferred voting frequency by selecting the option of “Every Three Years.” “Every Two Years, or “Every Year” or stockholders may “Abstain” from voting in response to the resolution set forth below.

 

“RESOLVED, that the stockholders determine, on an advisory basis, whether the preferred frequency of an advisory vote on the executive compensation of the Company’s named executive officers as set forth in the Company’s proxy statement should be every three years, every two years, or every year.”

 

The Board Of Directors Unanimously Recommends That You Vote For The Option of “Every Three

Years” on The Proposal Recommending The Frequency of The Advisory Vote on Executive

Compensation (Proposal 3).

 

Proposal 4

 

Ratification Of Selection Of Independent Auditor

 

The Audit Committee of the Board of Directors has selected Deloitte & Touche LLP as our independent auditor for fiscal year ending January 1, 2012 and has further directed that management submit the selection of the independent auditor for ratification by the stockholders at the Annual Meeting. Deloitte & Touche LLP has served as our independent auditor since 2006. Representatives of Deloitte & Touche LLP are expected to be present at the Annual Meeting. They will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

 

Neither our Bylaws nor other governing documents or law require stockholder ratification of the selection of Deloitte & Touche LLP as our independent auditor. The Audit Committee, however, is submitting the selection of Deloitte & Touche LLP to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain that firm. Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of a different independent auditor at any time during the year if they determine that such a change would be in best interest of our stockholders.

 

The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting will be required to ratify the selection of Deloitte & Touche LLP. Abstentions will have the same effect as a vote against this proposal.

 

Principal Accountant Fees and Services

 

The following table represents aggregate fees billed to us for the fiscal years ended January 2, 2011 and January 3, 2010 by Deloitte & Touche LLP, our principal accountant for each of these fiscal years. All fees described below were approved by the Audit Committee.

 

 

 

Pre-Approval Policies and Procedures

 

The Audit Committee has adopted policies and procedures for the pre-approval of audit and non-audit services rendered by our independent auditor. These policies generally provide for the pre-approval of specified services in the defined categories of audit services, audit-related services, and tax services up to specified amounts. Pre-approval may also be given as part of the Audit Committee’s approval of the scope of the engagement of the independent auditor or on an individual explicit case-by-case basis before the independent auditor is engaged to provide each service. The pre-approval of services may be delegated to one or more of the Audit Committee’s members, but the decision must be

reported to and ratified by the full Audit Committee at its next scheduled meeting. As such, the engagement of Deloitte & Touche LLP to render all of the services described in the categories above was approved by the Audit Committee in advance of rendering those services or approved by a delegate and subsequently ratified by the Audit Committee at its next scheduled meeting.

 

The Audit Committee has determined that the rendering of services other than audit services by Deloitte & Touche LLP is compatible with maintaining the principal accountant’s independence.

 

The Board Of Directors Unanimously Recommends

A Vote In Favor Of Proposal 4.

 

Security Ownership of
Certain Beneficial Owners And Management

 

The following table sets forth certain information regarding the ownership of our common stock as of March 11, 2011, except as otherwise indicated, by: (i) each director and nominee for director; (ii) each of our named executive officers (as defined herein); (iii) all of our executive officers, directors and nominees for director as a group; and (iv) all those known by us to be beneficial owners of more than five percent of our common stock. Unless otherwise noted below, the address of each beneficial owner listed in the table is c/o Blue Nile, 705 Fifth Avenue South, Suite 900, Seattle, Washington 98104.

 

 

 

* Less than one percent.

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than ten percent stockholders are required by Securities and Exchange Commission regulation to furnish us with copies of all Section 16(a) forms they file.

 

To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended January 2, 2011, all Section 16(a) filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with, except that due to our administrative error, Ms. Maupin reported one transaction one day late on a Form 4 filed on April 13, 2010.

 

Executive Officers

 

Set forth below is information regarding our executive officers as of March 11, 2011.

 

 

Diane Irvine has served as a director since May 2001, and has served as Blue Nile’s Chief Executive Officer since February 2008 and as President since February 2007. She served as the Company’s Chief Financial Officer from December 1999 to September 2007. From February 1994 to May 1999, Ms. Irvine served as Vice President and Chief Financial Officer of Plum Creek Timber Company, Inc., a timberland management and wood products company. From September 1981 to February 1994, Ms. Irvine served in various capacities, most recently as a partner, with Coopers and Lybrand LLP, an accounting firm. Ms. Irvine formerly served on the Board of Directors of Ticketmaster Entertainment, Inc., a live entertainment ticketing and marketing company, and Davidson Companies, an investment banking and asset management company. Ms. Irvine holds a B.S. in Accounting from Illinois State University and an M.S. in Taxation from Golden Gate University.

 

Mark Vadon co-founded Blue Nile and has served as Chairman of the Board of Directors since its inception in March 1999. He has served as the Company’s Executive Chairman since February 2008 and served as the Company’s Chief Executive Officer from March 1999 to February 2008. From March 1999 to February 2007, Mr. Vadon was also Blue Nile’s President. From December 1992 to March 1999, Mr. Vadon was a consultant for Bain & Company, a management consulting firm. In 2009, Mr. Vadon founded Zulily, Inc., a private-sale shopping site for moms, and serves as its Chairman of the Board of Directors. Mr. Vadon holds a B.A. in Social Studies from Harvard University and an M.B.A. from Stanford University.

 

Vijay Talwar, has served as our Senior Vice President and General Manager of International since August 2010. Since November 2010, he has also served as our interim Chief Financial Officer. From November 2008 to August 2010, Mr. Talwar served as the Chief Executive Officer of the William J. Clinton Foundation India, a global 501(c)(3) nongovernmental organization established to provide healthcare and sustainability programs across India and South Asia. From February 2008 to September 2008, Mr. Talwar served as the Chief Operating Officer of EL Rothschild LLC, a venture designed to bring international luxury brands to India. From April 2007 to January 2008, Mr. Talwar served as the Chief Operating Officer for the Central Europe, Middle East and Africa region at Nike, Inc., the world’s leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories. From June 2004 to April 2007, Mr. Talwar served as the Senior Director of Strategy and Finance at Nike’s Global Apparel division. From December 2003 to June 2004, Mr. Talwar served as the Director of Strategy at Nike’s Global Apparel division, and from April 2002 to December 2003, he served as a Manager of the Global Strategic Planning group at Nike. Prior to Nike, Mr. Talwar was a consultant at Bain & Company, a management consulting firm; a special projects manager and senior internal auditor at the Kellogg Company, a leading producer of cereal and convenience foods; and a senior tax consultant and audit assistant at Deloitte & Touche, an accounting firm.

 

Susan Bell has served as Blue Nile’s Senior Vice President since June 2005. Ms. Bell has held executive level positions in both marketing and merchandising since she joined Blue Nile in September 2001. From October 2000 to

February 2001, Ms. Bell served as Vice President of Merchandising and Marketing for The Body Shop Digital, an e-commerce company. From July 1984 to July 2000, Ms. Bell served in various capacities at Eddie Bauer, Inc., a clothing and merchandise retail company, most recently as Vice President and General Merchandising Manager. Ms. Bell holds a B.A. in Business Administration from San Francisco State University.

 

Dwight Gaston has served as Blue Nile’s Senior Vice President since September 2005. From July 2003 to March 2005, Mr. Gaston served as Vice President of Operations, and from May 1999 to July 2003, Mr. Gaston served as Blue Nile’s Director of Fulfillment Operations. From June 1992 to June 1995 and from August 1997 to May 1999, Mr. Gaston was a consultant with Bain & Company, a management consulting firm. Mr. Gaston holds a B.A. in Economics from Rice University and an M.B.A. from Harvard University.

 

Marianne Marck has served as Blue Nile’s Senior Vice President since January 2009. From May 2003 to January 2009, Ms. Marck served as Vice President of Engineering for Disney Interactive Media Group, a division of The Walt Disney Company. From March 1998 to May 2003, Ms. Marck served in various capacities at CNET Networks, most recently as Senior Vice President of Technology Infrastructure. From November 1991 to March 1998, Ms. Marck served as an engineer and engineering manager at Sybase, an enterprise software company. From June 1989 to November 1991, Ms. Marck served as a software developer at the IBM Almaden Research Laboratory. Ms. Marck holds a B.A. in Mathematics from Mills College and has done graduate work in computer science and executive management.

 

Terri Maupin has served as Blue Nile’s Vice President of Finance and Controller since July 2004 and served as Corporate Secretary from October 2004 through February 2010. From September 2003 to July 2004, Ms. Maupin served as Blue Nile’s Controller. From February 2001 to September 2003, Ms. Maupin served as the Staff Vice President of Finance and Controller at Alaska Air Group, Inc., the parent company of airline companies Alaska Airlines, Inc. and Horizon Air Industries, Inc., and Staff Vice President of Finance and Controller at Alaska Airlines, Inc. From September 1994 to August 1997, Ms. Maupin served as the Manager of Financial Reporting and from September 1997 to January 2001 as the Director of Financial Reporting for Nordstrom, Inc., a fashion specialty retail company. From October 1993 to September 1994, Ms. Maupin served as Controller at Coastal Transportation Inc., a marine transportation company. From January 1987 to October 1993, Ms. Maupin served in various capacities, most recently as audit manager, with Coopers and Lybrand LLP, an accounting firm. Ms. Maupin holds a B.A. in Accounting from Western Washington University.

 

Lauren Neiswender has served as the Company’s General Counsel since October 2004 and has served as the Company’s Corporate Secretary since February 2010. Prior to Blue Nile, Ms. Neiswender was an attorney at Wilson Sonsini Goodrich & Rosati, PC. Ms. Neiswender holds a B.A. in Political Science from Emory University and a J.D. from the University of Virginia.

 

Jon Sainsbury has served as Blue Nile’s Vice President of Marketing since June 2008. From January 2007 to June 2008, Mr. Sainsbury served as Blue Nile’s Director of Marketing and from September 2006 to January 2007, he served as Blue Nile’s Senior Marketing Manager. From March 2006 to September 2006, Mr. Sainsbury served as Blue Nile’s Search Marketing Manager and from October 2004 to March 2006, he served as Blue Nile’s International Program Manager. From September 2002 to October 2004, Mr. Sainsbury served as Blue Nile’s Senior Marketing Analyst. Prior to Blue Nile, Mr. Sainsbury was an associate consultant with Bain & Company, a management consulting firm. Mr. Sainsbury holds a B.A. in Physics from Pomona College.

 

Compensation of Executive Officers

 

Compensation Discussion and Analysis

 

Philosophy.  Blue Nile tries to establish a high performing environment whereby each executive continually strives for excellence, and we believe such excellence should be rewarded through responsible compensation practices. We seek to attract and retain executives who are passionate about building an iconic consumer brand. As part of our compensation philosophy, our compensation package is designed with a focus on pay for performance. The Compensation Committee believes that our most senior executives have the greatest ability to influence our performance and therefore their compensation should be primarily performance based. The intent of this focus on performance is to reinforce the alignment of interests between the executives and our stockholders.

Record Financial Results for 2010.  The Compensation Committee measures performance and sets goals and objectives on the basis of financial results and believes that stockholders will ultimately be rewarded if we are successful at accomplishing our short and long-term financial targets. We achieved record financial results in fiscal 2010. These financial results were outstanding and accomplished with continued volatility and remaining high levels of uncertainty by the consumer. Our fiscal 2010 financial results were highlighted by the following:

 

 

Our strong earnings and operational excellence helped drive our year-end balance of cash, cash equivalents, and short term investments of $113.3 million, compared to $93.1 million at the end of 2009. We have no long-term indebtedness.

 

In line with our pay for performance philosophy, the Compensation Committee decided to pay executive bonuses under the 2010 incentive bonus plan based on the financial results achieved, as set forth above. The goals and objectives under the 2010 bonus plan were established in the first quarter of 2010. When establishing the goals for 2010, the Compensation Committee believed it was important to continue to incent and motivate the executives to remain primarily focused on profitable growth throughout the year. The Compensation Committee established challenging goals for 2010 and, while we achieved record financial results, the results were below the established targets. Accordingly, on average, the named executive officers, who are identified below, received bonuses equal to 50% of their 2010 target bonus award. For additional discussion and analysis regarding the 2010 bonus payments, see “Incentive Annual Bonus” below.

 

In early 2010, the Compensation Committee made increases to the base salaries and annual incentive bonus targets of our named executive officers. These adjustments reflect the Compensation Committee’s belief that our executives’ performed well through difficult economic times. The economic environment in late 2008 and early 2009 was particularly challenging in the retail jewelry industry, which experienced a significant reduction in capacity as a result of bankruptcies and store closures. Blue Nile, on the other hand, remained profitable, invested in enhancing the customer experience, grew internationally, continued to gain market share, and exceeded its financial targets for fiscal year 2009. On average, the Compensation Committee increased base salaries by 4% and increased the target bonus as a percent of salary by 3%. For most of our named executive officers, including our chief executive officer, this was the first adjustment to their base salaries and target bonus awards since 2008. For more discussion on these adjustments, see “Base Salary” and “Incentive Annual Bonus” below.

 

Consistent with our pay for performance philosophy, in 2010, similar to prior years, the largest component of each of the named executive officer’s compensation was long-term incentive compensation, paid in the form of options to purchase shares of our common stock. In 2010, our chief executive officer also received 1,000 restricted stock units. On average, equity represented approximately 63% of the total compensation paid to the named executive officers in 2010. Stock options are only valuable to our executives if our stock price increases, thereby aligning the interests of our executives and our stockholders. Restricted stock units were awarded to the chief executive officer in 2010 because the Compensation Committee believed that the combination of stock options and restricted stock units were appropriate for our chief executive officer, Ms. Irvine, to further align her interests with those of our stockholders. For more discussion on these equity awards, see “Equity Awards” below.

Named Executive Officers.  The term “named executive officers” refers to:

 

 

Compensation Objectives.  With the philosophy set forth above in mind, our executive compensation package is designed to achieve the following key objectives:

 

 

Compensation Components and How Components Relate to Objectives.  Our compensation package is comprised of three primary components — base salary, annual cash incentive bonus, and equity awards. In addition, we provide our executives with benefits available to substantially all full-time salaried employees. The Compensation Committee believes these elements are consistent with the elements offered by our peer group companies and the combination of these elements effectively helps us to achieve the objectives set forth above.

 

 

When establishing the compensation package for an executive in any given year, the Compensation Committee may also consider the broader economic conditions and negotiations with executives, particularly in connection with an executive’s initial compensation package.

 

Pay Mix.  In setting the total compensation package each year, the Compensation Committee works to create an appropriate mix, considering the relevant circumstances and goals in a given year, between cash and equity compensation and between currently-paid and longer-term cash compensation. To maintain flexibility to address these relevant circumstances and goals, the Compensation Committee does not target a specific percentage or dollar allocation as between base salary, annual cash incentive bonus, and equity awards. Instead, the Compensation Committee believes that a significant portion of executive compensation should be performance based.

As illustrated in the pie chart below, performance-based pay (bonus and equity) was approximately 72% of the total compensation paid to the current named executive officers in 2010.

 

 

The chart above reflects the named executive officers’ 2010 base salary, bonus award, and equity compensation as disclosed in the Summary Compensation Table below. The chart excludes compensation paid to Mr. Stolzman, who resigned in November 2010.

 

Compensation Best Practices.  We believe the following compensation decisions and practices demonstrate our pay for performance philosophy and reflect best practices.

 

 

Role of Compensation Consultant.  The Compensation Committee has the power to engage independent advisors to assist it in carrying out its responsibilities. Since 2007, the Compensation Committee has engaged Milliman, Inc. as its independent executive compensation consultant. Milliman is independent from us, has not provided any services to us other than to the Compensation Committee, and receives compensation from us only for services provided to the Compensation Committee. Milliman reports directly to the Compensation Committee and not to management.

 

In 2009, the Compensation Committee engaged Milliman to provide the following services:

 

 

In February 2010, Milliman provided the Compensation Committee with an update on the market data provided in 2009 and on market compensation trends.

 

In 2009 and in 2010, the Compensation Committee met with Milliman with management present and in executive session without management present. The chair of the Compensation Committee also regularly communicated with Milliman outside of the Compensation Committee meetings. Our chief financial officer and general counsel worked with Milliman to provide any information it needed about us or our executives. The Compensation Committee intends to continue to retain the services of third party executive compensation specialists from time to time, in connection with the establishment of our executive compensation package.

 

2009 Peer Compensation Data.  Milliman’s 2009 analysis of our executive compensation included data from the proxy statements of our peer group of publicly-traded companies and published survey data. The proxy data provided a focused comparison of the five most highly compensated executives for each company within our peer group. To conduct this proxy analysis, Milliman evaluated three years of data and averaged the three years to gain a picture of our peer companies’ compensation policies over time. Additionally, Milliman provided specific compensation data for all of our executive positions using several compensation survey sources. The Milliman survey data came from the following sources: Mercer Executive, Economic Research Institute Executive Assessor, Watson Wyatt Top Management Compensation Survey, Milliman Executive Pay Survey, Aon Executive Compensation Report, Compensation Data Survey, Culpepper Technology Executive Pay Report, Custom Proxy Survey, and Hay Retail Executive.

 

The base salaries and total cash compensation of Ms. Irvine, Mr. Vadon, Mr. Gaston, Ms. Bell, and Mr. Stolzman were reviewed against the 50th percentile of base salaries and total cash compensation paid to similarly situated executives. In its 2009 analysis, Milliman established the 50th percentile for each position through a combination of proxy data and the survey data. Proxy data was not used in determining an appropriate compensation level for the comparison of Mr. Vadon’s compensation because of his unique position as our founder and executive chairman. Instead, for Mr. Vadon, Milliman exclusively used published survey data (rather than a combination of proxy data and survey data) to provide the Compensation Committee with the 25th, 50th and 75th percentiles of base salaries and total cash compensation paid to similarly situated executives.

 

Total compensation (cash and equity) paid to Ms. Irvine, Mr. Gaston, Ms. Bell, and Mr. Stolzman, was reviewed against the 25th, 50th and 75th percentiles of total compensation paid to similarly situated executives. Milliman established these percentiles in its 2009 report by exclusively using the proxy data. To review Mr. Vadon’s total compensation, Milliman provided the Compensation Committee with the 50th percentile of total direct compensation using exclusively the survey data. Milliman used the survey data to calculate the 50th percentile of total compensation by using the 50th percentile of total cash compensation in combination with an estimate of the 50th percentile of long-term incentives as a percent of base pay. (Although the survey data does not typically provide equity values in tandem with cash compensation values, Milliman used survey data to estimate the percentage of base salary that individuals in positions similar to Mr. Vadon’s receive in equity and thus was able to use the survey data to calculate the 50th percentile

of total direct compensation paid to similarly situated executives). As stated above, Milliman believed that the survey data would provide the most reliable results for Mr. Vadon, given his unique role as our founder and executive chairman.

 

In February 2010, Milliman provided the Compensation Committee with an update illustrating the median market data for base salaries and total cash compensation for Ms. Irvine, Mr. Gaston, Ms. Bell, and Mr. Stolzman’s positions. This update also provided the Compensation Committee with general trends in executive compensation. The Compensation Committee used the information provided by Milliman in 2009 and 2010 primarily to ensure that the executive compensation program as a whole is competitive in the marketplace, but the Compensation Committee did not follow a rigid formula for determining where an executive’s compensation should fall within the compensation data ranges provided by Milliman.

 

Peer Group.  Before the proxy data was collected and analyzed, the Compensation Committee worked with Milliman to determine an appropriate peer group. The Compensation Committee periodically reviews the appropriateness of the companies comprising the peer group for which proxy data is analyzed. In determining the appropriate peer group of companies to be used in connection with the 2009 compensation review, the Compensation Committee considered, among other things, revenue, revenue growth, market capitalization, profitability, industry, year founded, and number of employees. The peer group consists of:

 

 

Like Blue Nile, in general, our peer group companies are less than 15 years old, operate online, and are profitable. When establishing our peer group for purposes of Milliman’s 2009 executive compensation review, Milliman used publicly available data from 2008 about our peers. Based on that data, the average revenue of our peer group was approximately $250 million, the average number of employees was approximately 500, the average market capitalization was approximately $670 million, and the average three year revenue growth was in the double digits. In 2008, our revenue was approximately $295 million; we had approximately 177 employees; our market capitalization was approximately $681 million; and our average three year revenue growth (2005 through 2008) was in the double digits.

 

In 2010, the Compensation Committee, in consultation with Milliman, revised the peer group to remove Bankrate, which was acquired in July 2009, and to add OpenTable, Inc. and WebMD Health Corp. This revised peer group was not used to evaluate executive compensation for 2010, but will be used as our peer group in the future.

 

Compensation Decision Process.  The Compensation Committee is responsible for establishing and administering our executive compensation package. In its sole discretion, the Compensation Committee determines the compensation and other terms of employment of our executive officers and may form and delegate authority to subcommittees, as appropriate. The Compensation Committee is comprised entirely of independent directors and regularly meets in executive session without management. Ms Irvine and Mr. Vadon, the Designated Officers, attend Compensation Committee meetings to discuss matters of compensation philosophy and the compensation and performance of the other executive officers. Our general counsel also attends certain meetings in her capacity as corporate secretary, and our chief financial officer attends certain meetings to provide the Compensation Committee with requested compensation and financial information. From time to time, other members of management as well as outside advisors or consultants may attend meetings to make presentations or provide financial or other background information or advice.

 

When making compensation decisions for executive officers other than the Designated Officers, the Compensation Committee generally begins with recommendations and input from the Designated Officers, and then reviews some or all of the factors described under “Compensation Components and How Components Relate to Objectives.” The Compensation Committee follows the same methodology for reviewing Ms. Irvine and Mr. Vadon’s compensation, except that Mr. Vadon provides input and feedback to the Compensation Committee for Ms. Irvine. The Compensation Committee meets outside the presence of all executive officers, including the Designated Officers, when determining Ms. Irvine and Mr. Vadon’s compensation.

The information below provides a more detailed analysis of how each of the components of our executive compensation package contributes to the objectives set forth above and the process by which the Compensation Committee determines each component of compensation.

 

Base Salary.  In February 2010, the Compensation Committee increased the base salaries for all of the named executive officers, except Mr. Vadon and Mr. Talwar. This was the first increase in most executive’s base salary since 2008. Mr. Vadon’s salary was not adjusted in 2010 at the request of Mr. Vadon, and Mr. Talwar was not employed by us at the time the decisions were made. The Compensation Committee increased Ms. Irvine’s base salary by 6%. The Compensation Committee believed that this increase was reasonable and appropriate based on input from Mr. Vadon, Ms. Irvine’s sustained performance, her expected contributions to the business in 2010, her role and responsibilities, and the market data. The Compensation Committee also took into consideration that Ms. Irvine did not receive an increase in her base salary in fiscal year 2009.

 

Mr. Gaston, Ms. Bell and Mr. Stolzman’s base salaries were increased 4%, 3%, and 6%, respectively. When making these adjustments, the Compensation Committee first considered the recommendations from the Designated Officers, and then reviewed the recommendations in light of the tally sheets, contributions and performance by the executive, the expected contributions from the executive, market data, and the compensation of our other executive officers. The tally sheets used by the Compensation Committee illustrate each executive’s total cash and equity compensation, components of compensation, and historical compensation.

 

As mentioned above, the market data was used as a reference to ensure that the base salaries paid to our named executive officers were competitive in light of the role and responsibilities of each executive, including the chief executive officer, but the Compensation Committee did not target the base salaries to any particular level.

 

Mr. Talwar was hired in August 2010 as our senior vice president and general manager of international. When determining his base salary, the Designated Officers proposed a recommendation to the Compensation Committee based on Mr. Talwar’s level of experience, his expected value to the business, the base salaries of the other top executives, and the compensation negotiations with Mr. Talwar. Mr. Talwar was named our interim chief financial officer in November 2010 but no adjustments were made to his compensation at that time.

 

Annual Cash Incentive Bonus.  The Compensation Committee has authority over our bonus program, including eligibility for participation in the bonus program and determination of the bonus amounts awarded to executives. All of our named executive officers were eligible for participation in our 2010 bonus program. The target bonus award and the objectives under our bonus plan are established early in the fiscal year and are designed to align executive compensation with the creation of stockholder value and therefore to best position us for sustainable long-term success.

 

Bonus Targets.  In the first quarter of 2010, the Compensation Committee established an individual target bonus amount for each executive officer expressed as a percentage of the executive officer’s base salary. The 2010 individual bonus targets for the named executive officers as a percentage of their base salary are as follows:

 

 

In recognition of Ms. Irvine’s ability to influence the achievement of our 2010 goals and objectives and to further ensure that an important portion of Ms. Irvine’s cash compensation was tied to performance, the Compensation Committee decided to increase Ms. Irvine’s target bonus as a percent of her salary. The Compensation Committee also took into consideration that Ms. Irvine did not receive an increase in her target bonus award in fiscal year 2009. The Compensation Committee also increased Mr. Gaston’s bonus target as a percent of his base salary based on input

from the Designated Officers, an increase in his responsibilities, and his ability to influence the achievement of our annual objectives.

 

Mr. Talwar’s 2010 target bonus award was established when he was hired in August 2010. The amount was based on his role, experience and expertise, his expected value and contributions to the business, internal equity with the other named executive officers, and negotiations with Mr. Talwar.

 

2010 Incentive Bonus Plan.  To maximize tax-deductibility, awards granted to named executives officers under the 2010 Incentive Bonus Plan are designed to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, or the Code. When designing the 2010 plan, the Compensation Committee pre-established an objective threshold level of Adjusted EBITDA, as defined below. If this threshold Adjusted EBITDA target was not achieved, no payments would have been paid under the 2010 Plan. Following the certification by the Compensation Committee that the Adjusted EBITDA threshold had been achieved for 2010, each executive was eligible to receive a maximum bonus equal to 200% of such participant’s annual bonus target, up to a maximum of $3 million. This Adjusted EBITDA threshold under the 2010 bonus plan was $29.1 million and the threshold was exceeded.

 

The Compensation Committee then exercised its negative discretion to determine the actual bonus based on: (1) achievement against additional Adjusted EBITDA goals selected by the Compensation Committee; (2) achievement against additional Company financial goals selected by the Compensation Committee; (3) achievement against the individual performance goals established by the Compensation Committee; and (4) any other factors selected by the Compensation Committee in its sole discretion.

 

When establishing the financial objectives, the Compensation Committee reviewed and considered the economic and consumer environment, the short and long-term goals for the business, and our internal forecasts for Adjusted EBITDA, revenue, earnings per diluted share and free cash flow, with the recognition that our executives significantly influence whether we achieve our goals. When setting the goals and objectives for 2010, the Compensation Committee expected that it would be difficult to achieve 100% of the target award based on the financial goals and individual goals. The objectives were designed to be challenging and not guaranteed. The fiscal year 2010 financial targets and actual performance were:

 

 

Adjusted EBITDA is defined as net income adjusted for total other income, net; income tax expense; depreciation and amortization; and stock-based compensation. Free cash flow is defined as net cash provided by operating activities less cash outflow for purchases of fixed assets, including internal use software and website development. The Compensation Committee believes that the use of Adjusted EBITDA and free cash flow provides consistency and comparability with our past financial performance and facilitates period to period comparisons of operations. A reconciliation of each of such non-GAAP measures and our reasons for using such measures can be found in the exhibit to our Current Report on Form 8-K furnished to the SEC on February 10, 2011.

 

Based on the financial results, the Compensation Committee decided to award each executive 56% of his/her target bonus award for achievement against the financial objectives. Following its decision regarding the financial results, the Compensation Committee considered each executive’s performance against his/her individual objectives. Given the financial results, the maximum an executive could receive under the 2010 bonus plan was 56% of his/her bonus target award.

 

Ms. Irvine’s individual performance objectives related to profitability and growth, optimization of our organizational structure, team and leadership, and international growth. When assessing Ms. Irvine’s individual performance, Mr. Vadon provided the Compensation Committee with input, but the Compensation Committee made its final determination regarding her bonus award outside the presence of any members of management. When reviewing

Ms. Irvine’s performance against her 2010 individual objectives, the Compensation Committee believed that Ms. Irvine successfully accomplished all of her personal objectives and awarded Ms. Irvine 56% of her target bonus award. Mr. Vadon’s bonus was based solely on financial results and, at his request, the Compensation Committee reduced his bonus payment from 56% to 44% of his target award.

 

With input from the Designated Officers, the Compensation Committee then assessed Mr. Talwar, Mr. Gaston, and Ms. Bell’s individual performance against their pre-established individual performance objectives to determine their 2010 bonus payment. Mr. Talwar was hired in August 2010, and his primary personal performance objectives related to acclimating to his role and developing an understanding of our business and our industry. Based on the Compensation Committee’s assessment of Mr. Talwar’s performance against his individual objectives, it was decided that Mr. Talwar met his individual objectives and rewarded Mr. Talwar with 56% of his prorated target bonus award. Mr. Gaston’s personal objectives related to optimizing our operations, fulfillment and customer service metrics, international operations, and team development. In assessing Mr. Gaston’s performance against his personal objectives, the Compensation Committee believed Mr. Gaston achieved most of his individual performance objectives and rewarded him with 46% of his target bonus award. Ms. Bell’s individual performance objectives related to merchandising strategy, sourcing, business growth opportunities, team development, and diamond supply initiatives. In assessing Ms. Bell performance against her personal objectives, the Compensation Committee believed Ms. Bell achieved most of her individual performance objectives and rewarded her with 49% of her target bonus award. The 2010 bonus payment for each of our named executive officers is set forth in the Summary Compensation Table below.

 

Mr. Stolzman resigned prior to the end of the year and did not receive a bonus payment.

 

Equity Awards.  Our long-term equity incentive awards are made pursuant to our 2004 Equity Incentive Plan. Historically, our equity incentive compensation for all new hires, including the named executive officers, has exclusively been in the form of options to acquire our common stock. For all new hires, stock option awards are granted on the employee’s hire date and the exercise price of the stock option is equal to the closing price of our common stock on the last trading day prior to the hire date. In all cases, the hire date and the pricing of the option is preceded by approval of the option grant and terms by the Compensation Committee or our Stock Award Committee, as appropriate.

 

Historically, the Compensation Committee has also awarded employees merit-based equity grants annually. Our policy is to award these annual grants during open windows under our internal trading policy to provide for pricing of equity grants that reflects the dissemination of material information and a fair representation of the market’s collective view of our results and performance. If the Compensation Committee approves a merit-based stock option grant to an existing executive during an open window, the exercise price of the stock option award is equal to the last known closing price of our common stock on the date of grant. The Compensation Committee may approve the annual equity award during a closed window for grant on the first day of an open window. The exercise price of the stock option grant in these circumstances is the closing price of our common stock on the last trading day prior to the grant date. Executives receive value from option grants only if the value of our common stock appreciates over the long-term. In general, the stock option awards granted to executive officers vest over a four-year period with 1/4th of the shares vesting one year after the vesting commencement date and 1/48th of the shares vesting monthly thereafter. The Compensation Committee believes this vesting period promotes retention and properly relates the value of this compensation component to our long-term success.

 

In 2010, the Compensation Committee decided to award equity in the form of stock options to the named executive officers. In addition to stock options, restricted stock units were awarded our chief executive officer, Ms. Irvine. Restricted stock units entitle the holder to receive shares of our common stock upon the vesting dates. The restricted stock units awarded to Ms. Irvine in 2010 vest in four equal annual installments commencing on the first anniversary of the date of grant. The Compensation Committee awarded Ms. Irvine a combination of stock options and restricted stock units because it believed that Ms. Irvine’s ownership of our stock was particularly important given her unique ability to influence our performance. Each year the Compensation Committee intends to review the proper form and mix of equity awards in light of our business strategies, current and expected incentive and retention needs, and market competitiveness.

 

When determining Ms. Irvine’s equity award in 2010, the Compensation Committee considered, Mr. Vadon’s input, her share ownership, tally sheets, her level of responsibility, her performance and expected performance, the compensation data provided by Milliman, the Black-Scholes and intrinsic value of her vested and unvested stock options, and the Black-Scholes value of the 2010 grant. When determining the amount of Mr. Vadon’s stock option award, the

Compensation Committee used the same criteria as it used with Ms. Irvine, except that Mr. Vadon did not have input into the equity award granted to him.

 

When determining the stock option grants to Mr. Gaston, Ms. Bell, and Mr. Stolzman, the Compensation Committee first reviewed the recommendations from the Designated Officers. It then reviewed the recommendations in light of the executive’s level responsibility, executive’s performance and expected performance, tally sheets, compensation data provided by Milliman, Black-Scholes value of the grant, and Black-Scholes value and intrinsic value of each of their vested and unvested stock options.

 

The compensation data provided Milliman was used as a reference point to ensure that the total compensation package paid to the named executive officers, including the chief executive officer, was competitive with our peer companies, but the Compensation Committee did not target a benchmark against our peer group. The amount of equity awarded to our named executive officers in fiscal year 2010 is set forth below in the Summary Compensation Table.

 

When Mr. Talwar commenced employment with us, he received an initial option to purchase 37,500 shares of our stock. When establishing the amount of this initial grant, the Compensation Committee considered the recommendation by the Designated Officers, his experience, his level of responsibility, his expected value to the business, the Black-Scholes value of the award, the amount of the award in relation to the equity awards granted to our other senior executives, and negotiations with Mr. Talwar.

 

Mr. Stolzman resigned in November 2010, prior to the vesting of any of the options granted to him 2010 and therefore, his 2010 option grant was cancelled.

 

Health and Welfare Benefits.  All full-time regular employees, including our named executive officers, may participate in our health and welfare benefit programs, including medical, dental and vision care coverage, disability insurance and life insurance. We believe these benefits are consistent with benefits provided by our peer group companies and help us to attract and retain high quality employees.

 

Retirement Savings Opportunity.  All employees, including our named executive officers, may participate in our tax-qualified 401(k) defined contribution retirement savings plan, or 401(k) Plan. Each employee may make before-tax contributions of their base salary up to the current Internal Revenue Service limits. We provide this plan to help our employees save some amount of their cash compensation for retirement in a tax efficient manner. All contributions to the 401(k) Plan are made in cash and are invested in funds as directed by the participant, with the participant being able to select from a variety of funds. We do not offer participants the opportunity to invest in shares of our stock through the 401(k) Plan. Pursuant to the terms of our 401(k) Plan, we have the discretion to fund a matching contribution based on a percentage of the employee’s cash contribution. In 2010, we matched 50% of the amount contributed by each employee up to four percent of such employee’s annual compensation. Vesting in the matching contribution is based on years of service. Participants are 100% vested after four years of continuous service to the Company. We believe these benefits are consistent with benefits provided by our peer group companies and help us to attract and retain high quality employees.

 

Other Broad-Based Employee Benefits.  All full-time regular employees, including the named executive officers, receive an annual transportation allowance of $720. Additionally, all full-time regular employees are eligible for an employee discount on certain of our products.

 

Employment, Severance and Change of Control Agreements.  Each of our named executive officers, except for Mr. Vadon, has signed an offer letter. These offer letters provide that the officer is an at-will employee. These offer letters also provide for an initial salary and an initial stock option grant as well as other customary benefits and terms. Additionally, Mr. Talwar’s offer letter set forth his 2010 target bonus award and guaranteed that he would receive at least 50% of his prorated target bonus award and not less than the overall bonus payout rate as determined by our financial performance in 2010. The Compensation Committee did not consider this provision in his offer letter when making its decision regarding Mr. Talwar’s bonus payment, but rather independently determined that his performance warranted payment to him of 56% of his prorated target bonus award. All of our offer letters provide that the Company may modify compensation from time to time as it deems appropriate.

 

Outside of a change of control, we are not contractually obligated to pay severance to any named executive officer. In November 2010, we entered into a severance agreement with Mr. Stolzman, our former chief financial officer. Under

the terms of this agreement, we agreed to pay Mr. Stolzman (1) a lump sum of $125,000 and (2) a monthly payment equal to his COBRA premiums for that month (including premiums for Mr. Stolzman and his eligible dependents who elect to remain enrolled in the COBRA coverage), for a number of months equal to the lesser of (i) the duration of the period in which he and his eligible dependents are eligible for and enrolled in COBRA coverage (and not otherwise covered by another employer’s group health plan), and (ii) six (6) months. This severance was given in consideration for his agreement to assist in transitioning his duties, in consideration for the release of all claims against us, and in recognition of the contributions he made to the business.

 

In March 2009, the Compensation Committee approved a Change of Control Severance Plan. This plan provides for the payment of severance benefits to designated executive employees whose employment is terminated within a specified period (not to exceed two years) following a Change of Control of the Company, either due to a termination without Cause or a Resignation for Good Reason, as each term is defined in the Change of Control Severance Plan. Currently, each of our named executive officers is eligible to participate in this plan. Benefits are only paid under the plan if there is: (1) a Change of Control and (2) the executive is terminated without Cause or submits a Resignation for Good Reason. The Change of Control Severance Plan does not provide for any tax gross-ups.

 

Under the terms of the Change of Control Severance Plan, if following a Change of Control a named executive officer is terminated without Cause or submits a Resignation for Good Reason, and provided the executive signs the Company’s standard form of release, he or she will be entitled to receive as severance: (1) a lump sum cash payment equal to a multiple of such employee’s base salary and target annual incentive bonus; (2) Company-paid premiums for continued health insurance for a period of time equal to the period of base salary being provided (but not more than 18 months and in no event for longer than such coverage is available); and (3) full vesting of all then-outstanding equity awards.

 

Under the 2004 Equity Incentive Plan, in the event of certain corporate transactions, if the surviving or acquiring entity elects not to assume, continue or substitute for equity awards granted under the 2004 Equity Incentive Plan, the vesting and, if applicable, exercisability of each equity award granted under the 2004 Equity Incentive Plan will accelerate in full for those whose service with the Company or any of the Company’s affiliates has not terminated. To the extent such equity award requires exercise, such as a stock option, such equity awards will be terminated if not exercised prior to the effective date of such corporate transaction. We believe this treatment is consistent with that provided by our peer group companies.

 

Compensation of Named Executives in Relation to Each Other and to the Chief Executive Officer.  Ms. Irvine’s salary relative to the other named executive officers reflects her level of experience and scope of responsibilities within the Company, including her responsibility over the organizational structure, initiatives, growth, and health and strategic direction of the Company. The Compensation Committee believes that the compensation paid to Mr. Talwar, Mr. Gaston and Ms. Bell in relation to Ms. Irvine and in relation to each other is reasonable and appropriate given each individual’s level of experience and scope of responsibilities. Mr. Vadon does not have day-to-day management responsibilities, but rather helps provide strategic direction and helps establish longer-term objectives. When Mr. Vadon transitioned into the role of executive chairman, the Compensation Committee structured his compensation package in light of his unique role. The Compensation Committee believes that the compensation paid to Mr. Vadon relative to Ms. Irvine and relative to the other named executive officers is appropriate given his role and responsibilities.

 

Executive Equity Ownership Guidelines.  The Compensation Committee believes that equity ownership guidelines help align the interests of executives with that of our stockholders. In August 2009, the Compensation Committee clarified the executive equity ownership guidelines. Pursuant to these guidelines, the Compensation Committee suggests, but does not require, that each of the named executive officers hold “equity value” of at least three times the executive’s annual salary plus target bonus award. The equity value may be comprised of: common stock owned individually; common stock owned joining with, or separately by a spouse, domestic partner, and/or minor children, either directly or indirectly; vested restricted stock units; or vested stock options. The value of the equity is determined based on the intrinsic value of the equity using a rolling three month average stock price.

 

Policy Against Speculative Transactions.  No employee may engage in short sales, transactions in put or call options, margin loans with stock as collateral, certain hedging transactions or other inherently speculative transactions with respect to our stock at any time.

 

Tax Treatment of Compensation.  We review compensation plans in light of applicable tax provisions, including Section 162(m) of the Code. We try to maximize the tax deductibility of compensation paid to our most highly

compensated executives under Section 162(m). Section 162(m) generally limits the deduction for federal income tax purposes to no more than $1.0 million of compensation paid to each of the named executive officers in a taxable year. Compensation above $1.0 million may be deducted if it is “performance-based compensation” within the meaning of the Code. We believe that compensation received upon the exercise of stock option grants awarded under our 2004 Equity Incentive Plan and paid under our 2010 bonus plan qualify as “performance-based compensation” within the meaning of the Code and are therefore exempt from the deduction limit. To qualify bonus awards paid under our annual incentive plan, the Compensation Committee pre-established an objective Adjusted EBITDA target of $29.1 million. The Compensation Committee certified that such performance criteria were achieved before it determined the actual amount paid for 2010 to the individuals whose compensation might not otherwise be deductible.

 

Risk Analysis of Our Compensation Plans.  The Compensation Committee has reviewed our compensation policies as generally applicable to our employees and believes that our policies do not encourage excessive and unnecessary risk-taking, and that the level of risk that they do encourage is not reasonably likely to have a material adverse effect on us. The design of our compensation policies and programs encourage our employees to remain focused on both our short and long-term goals. For example, while our cash bonus plans measure performance on an annual basis, our equity awards typically vest over a number of years, which we believe encourages our employees to focus on sustained stock price appreciation, thus limiting the potential value of excessive risk-taking.

 

Compensation Committee Report ⁽¹⁾

 

As part of fulfilling its responsibilities, the Compensation Committee reviewed and discussed the Compensation Discussion and Analysis (“CD&A”) for the fiscal year ended January 2, 2011 with management. Based on the Compensation Committee’s review of the CD&A and its discussions with management, the Compensation Committee has recommended to the Board of Directors that the CD&A for the fiscal year ended January 2, 2011 be included in this proxy statement for filing with the Securities and Exchange Commission and incorporated into our Annual Report on Form 10-K for the fiscal year ended January 2, 2011.

 

Date: April 15, 2011

 

Respectfully submitted,

 

Steve Scheid (Chairman)

Ned Mansour

Michael Potter

 

 

(1) The material in this report is not “soliciting material,” is not deemed “filed” with the Securities and Exchange Commission, as amended, and is not to be incorporated by reference into any filing of Blue Nile, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

 

Compensation of Executive Officers

 

The following table sets forth compensation earned by our named executive officers for the 2010, 2009, and 2008 fiscal years.

 

Summary Compensation Table
Fiscal 2010, 2009, and 2008

 

 

 

 

 

 

All Other Compensation Table

 

 

 

 

 

The following table supplements the Fiscal Year 2010, 2009, and 2008 Summary Compensation Table by providing additional information about our fiscal year 2010 plan-based compensation.

 

Grants of Plan-Based Awards for Fiscal 2010 Table

 

 

 

 

Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

 

Offer Letters.  Each of our named executive officers, except for Mr. Vadon, has signed offer letters with us. Descriptions of the offer letters with our named executive officers are included under the caption Employment, Severance and Change of Control Agreements in our Compensation Discussion and Analysis above.

 

Non-Equity Incentive Plan Awards.  These amounts reflect the potential target and maximum annual cash incentive awards payable to our named executive officers under our 2010 annual cash incentive bonus plan. For more information regarding this plan, please see the Annual Cash Incentive Bonus section in our Compensation Discussion and Analysis above.

 

Equity Awards.  We grant stock options and restricted stock units to executive officers under our 2004 Equity Incentive Plan. Prior to the adoption of the 2004 Equity Incentive Plan, we granted options to our executive officers under our 1999 Equity Incentive Plan. We have never granted any stock appreciation rights.

 

Other Compensatory Arrangements.  For a description of the other elements of our executive compensation program, see our Compensation Discussion and Analysis above.

The following table provides information regarding unexercised stock options held by each of the named executive officers as of January 2, 2011.

 

Outstanding Equity Awards at Fiscal Year End 2010