LeapFrog 2004 Annual Report Download - page 137

shares to executives were determined based on the newly approved annual performance-based grant guidelines.
In addition, selected executives received supplemental transitional grants intended to address the lack of unvested
option holdings and facilitate the move from the previous discretionary grant program of large irregular grants to
the new annual program. As a result, for 2004 the combination of the performance-based grants of options and
performance shares plus the transitional grants resulted in total grant levels that were above median competitive
levels, but provided the intended transition from the previous large irregular grants to a more market competitive
regular ongoing grant program.
Performance Shares. Selected executives at the level of Vice President and above receive grants of
performance shares in amounts based upon competitive grant practices and the executive’s level, past
performance and expected future contributions. Performance shares are received by participants at the end of
each three year cycle, and are tied to LeapFrog’s performance against pre-established financial measures.
Participants must continue to be employed at LeapFrog through the end of each three year cycle to receive any
shares under the plan. The measures for the 2004-2006 plan cycle include net income, revenue, operating cash
flow (adjusted for current accounts receivable) and total shareholder return. The total shareholder return measure
spans the entire three-year performance share cycle, while the other three measures have annual goals determined
and approved by the Compensation Committee no later than March 31st of each calendar year. The actual shares
received by participants will vary from zero to 200% of an executive’s target payout, based upon LeapFrog’s
actual performance over the three-year performance period. Awards earned under the plan, if any, will generally
be vested and issued as shares at the end of each three year cycle.
Restricted Stock. Restricted stock is first and foremost a retention vehicle, as the stock continues to have
value even when the stock price fluctuates. In addition, restricted stock serves as a valuable attraction vehicle,
allowing the company to recruit talented executives who might forfeit valuable equity stakes at their current
employer in order to join LeapFrog.
In calendar year 2004, we made time-based restricted stock awards to four executives. For three of the
executives, the purpose of the grants was to supplement current option holdings significantly underwater and
provide additional retention value due to their criticality to the business and new technology under development.
One newly hired executive received restricted stock as part of the new hire package, in part to compensate for a
foregone cash incentive opportunity at the prior employer. Before making the decision to approve these grants,
the Compensation Committee enlisted the services of an independent consultant to conduct an analysis and make
recommendations. The Compensation Committee then approved grants that it believed would retain and motivate
the selected executives over the next three years. The time-based restricted stock grants made to three of the
executives vest at the rate of one-third on each of the first three anniversaries after the date of grant. The newly
hired executive’s grant vests at the rate of 40% after the first anniversary of employment, and 30% on each of the
second and third anniversaries of employment.
As a going-forward equity vehicle, LeapFrog does not intend to provide its executives with time-based
restricted stock on a regular basis, but rather to use it selectively to attract or retain certain critical executives.
Beginning in 2005, LeapFrog intends to begin granting restricted stock in lieu of stock options to key employees
below the level of Vice President. Because restricted stock represents full-value shares, we can grant fewer
shares to deliver a competitive compensation value to our key employees and strengthen the retention power of
the equity grant program.
Chief Executive Officer Compensation
The Compensation Committee meets each year to evaluate the performance and total compensation of the
Chief Executive Officer. The Compensation Committee uses the services of an independent consultant to provide
current market data using the method detailed in the “Elements of Executive Compensation—Base Salary”
section of this report.
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