LeapFrog 2006 Annual Report Download - page 146

Equity Incentive Awards. We grant a combination of equity awards to our executives and other key
employees, including time-vested restricted stock and restricted stock unit awards, or RSUs, and time-vested
stock options. The Compensation Committee believes that time-vested stock options, restricted stock and RSUs
should be part of a balanced equity package to align our key employees’ interests with those of our stockholders.
The Compensation Committee develops its equity award determinations based on its judgment as to whether the
complete compensation packages provided to our executives, including prior equity awards, are sufficient to
retain, motivate and adequately reward our executives.
When our 2002 Equity Incentive Plan was amended and approved by our stockholders in 2004 to allow for
the granting of full-value stock awards, such as restricted stock awards, the Compensation Committee initially
granted time-vested restricted stock awards to certain of our Section 16 officers, but the Compensation
Committee subsequently moved to granting time-vested RSUs to our Section 16 officers and other employees
because RSUs are easier to administer. In 2006, the Compensation Committee’s practice was to award RSUs to
employees below the level of vice president, in order to allow these employees to gain some value through equity
regardless of stock performance. In addition, the Compensation Committee determined RSUs to be an important
retention tool. Further, the Compensation Committee determined that, in general, Section 16 officers and other
executives would be granted equity in the form of stock options rather than RSUs because the performance of
these executives is deemed to have a more direct influence on stock price.
Stock Options. The Compensation Committee believes that stock options provide management with a
strong link to long-term corporate performance and the creation of stockholder value. The size of an option grant
is determined by the Compensation Committee and is based on median competitive practices at companies with
which we compete for talent, the executive’s anticipated future contribution and ability to impact our results, past
performance, prior equity grants and alignment among the executive’s peers. Option grants made to executives
from the 2002 Equity Incentive Plan typically have a four-year vesting period and are generally made at 100% of
the fair market value at close of the market on the business day immediately preceding the date of grant.
Executives receive value from these grants only if our Class A common stock appreciates over the long term.
Employees, including executives, are generally eligible for “new hire” grants upon initial hire, and then annually
thereafter based on factors including individual performance and total equity position, as related to other
employees and our Compensation Peer Group.
At the discretion of the Compensation Committee, Section 16 officers may also be granted stock options to
provide greater incentives to continue their employment with LeapFrog and to strive to increase the value of
LeapFrog’s Class A common stock. In March 2006, based on the foregoing factors and as part of its annual
review of compensation of our Section 16 officers, the Compensation Committee and board awarded
Mr. Chiasson and Mr. Dodd options for 20,000 and 15,000 shares, respectively, and in April 2006, the
Committee awarded Mr. Kalinske an option for 80,000 shares. The foregoing options vest monthly over a four-
year period and were granted with exercise prices equal to fair market value.
In July 2006, the board awarded Mr. Katz, upon his appointment as our new Chief Executive Officer and
President, options for an aggregate of 2.65 million shares, of which an option for 1.2 million shares had a strike
price of $10.30, which was 100% of the closing price of our common stock on the date immediately preceding
the grant date, an option for 950,000 shares had a strike price of $13.33, which was 129% of the closing price of
our common stock on the date immediately preceding the grant date, and an option for 500,000 shares had a
strike price of $16.67, which was 162% of the closing price of our common stock on the date immediately
preceding the grant date. These options vest 25% on the first anniversary of the grant date, with the remaining in
thirty-six equal monthly installments for the three years thereafter.
In October 2006, the board of directors approved supplemental grants of stock options to certain executives
and other employees to re-engage, retain and motivate these employees to execute our new strategic plan. As part
of these supplement grants, Mr. Chiasson and Mr. Dodd received stock options for 180,000 and 150,000 shares,
respectively. One-half of the options under the foregoing grants had a strike price of $9.33, which was 100% of
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