Starbucks explained CEO Howard Schultz's $12.1 million pay package in a Securities and Exchange Commission filing Thursday, after requests from institutional investors and an institutional shareholder advisory service. The filing addressed a $1 million discretionary bonus given by the board after Schultz was left out of the regular bonus plan.

He merited the bonus because he exceeded the board's expectations, the filing said, citing among other things Starbucks' 21 percent boost in earnings-per-share and $580 million in cost savings during fiscal 2009.

As previously reported, Schultz's 25 percent pay boost came during a year in which Starbucks closed hundreds of stores and reduced its work force by 19 percent. Sales fell 6 percent, but profit rose 24 percent to $390.8 for the fiscal year ended Sept. 27, 2009. During that time, its stock price climbed 40 percent to almost $20 a share.

In its explanation, Starbucks said that when the board asked Schultz to return as CEO in January 2008, he did not take part in its bonus plan, but instead was given a base salary and stock options. In the end, the options accounted for $9.5 million, or about 79 percent of his total compensation.

In early 2009, Schultz asked that his annual salary be reduced from $1.19 million to $6,900, but that was part way through the fiscal year, so his salary for the year actually came to $643,954. It was raised to $1.3 million for fiscal 2010.

Schultz greatly exceeded the board's expectations, the filing said. "He drove the Company to achieve strong financial results for the year despite the extraordinary challenges facing the Company in a period of unprecedented global financial turmoil, and made significant progress in transforming Starbucks and returning the Company to sustainable, profitable growth while preserving its values and guiding principles."

"In view of Mr. Schultz's extraordinary performance and in light of the Company's improved financial results, the compensation committee determined that Mr. Schultz merited a discretionary bonus award of $1 million," the filing said.

It also addressed the necessity of the $680,961 Starbucks for security services for Schultz and said that he has agreed to forego an annual cash payment he has been given for years to buy life insurance. Last year, that payment was $236,250.

Interestingly, the filing says Schultz has led Starbucks as its founder, a title the board gave him years ago but which is not accurate. The real founders are Jerry Baldwin, Gordon Bowker and Zev Siegl.

Update 3/5/2010: A commenter wrote, "Actually Schultz did found the company now known as Starbucks. Il Giornale is the company Schultz founded in 1985-86 and in 1987 bought the Starbucks name from the original company when the founders put it up for sale." When Schultz bought Starbucks -- its six stores and roasting plant, not just the name -- it was bigger than Il Giornale's three stores, but that's an interesting point. I wonder if that's what the board was thinking when it named him founder.