LeapFrog 2007 Annual Report Download - page 158

Compensation Methodology
The compensation committee of our board of directors is responsible for the design, implementation and
oversight of the executive compensation programs for our executive officers and reports to the full board of
directors its discussions and actions. The compensation committee also recommends to the full board for
approval all compensation matters related to our CEO. The compensation committee has engaged and uses the
services of an independent compensation consultant, Towers Perrin, to provide it with advice and guidance on
the design of our compensation programs and policies and relevant information regarding executive
compensation at similarly situated companies, as well as relevant information about other market practices and
trends. Towers Perrin is retained directly by the compensation committee and works with our management under
the direction of the compensation committee. Towers Perrin provides comment and guidance to the
compensation committee and management in advance of compensation committee meetings on compensation
proposals, including changes to compensation levels for any executive officers, the design of equity programs,
and the design of compensation programs, such as severance and change-in-control policies, perquisites and
other executive benefit programs. In addition, Towers Perrin reviews compensation materials prepared by
management in advance of compensation committee meetings.
Annually, under the direction of the compensation committee, Towers Perrin conducts a review of the
effectiveness and competitiveness of our total executive compensation, which includes reviewing base salaries,
short- and long-term incentives, including cash bonuses and equity awards, and other executive benefits, by
conducting benchmarking studies of our compensation peer group described below and analyzing the results of
these studies, as well as data from third-party compensation surveys. The information provided by Towers Perrin
is used to determine if the total compensation packages of our executive officers are competitive and if each
element of those compensation packages is aligned with reasonable and responsible practices in our industry and
geographic marketplace. In October 2007, the board approved an amendment of the compensation committee’s
charter which provides that the compensation committee will make recommendations to the full board on matters
related to the compensation of our CEO and the board will have ultimate responsibility for approval of such
actions. The compensation committee’s recommendations regarding CEO compensation are based on the
compensation committee’s assessment of company and CEO performance, input from Towers Perrin and other
factors such as prevailing industry trends. Our CEO makes recommendations to the compensation committee
regarding short- and long-term compensation for our named executive officers as well as our other executive
officers based on company results, an individual executive’s contribution toward these results, performance
toward goal achievement, market surveys and input from our Human Resources department and Towers Perrin.
With assistance from Towers Perrin, the compensation committee has established a compensation peer
group and annually reviews executive compensation practices of its peer group to determine competitive
compensation levels for our executive officers. In determining which companies should be included in our
compensation peer group for 2007, Towers Perrin reviewed a cross section of competitors and related industries
with a focus on toy, gaming and educational products and identified 18 companies from the toy, education,
consumer goods and prepackaged software industries as our “compensation peer group.” The compensation
committee reviewed and approved the 18 companies recommended by Towers Perrin. Our compensation peer
group is composed of the following companies:
Activision, Inc. CNET Networks, Inc. Educate, Inc.
Electronic Arts Inc. The Gymboree Corporation Hasbro, Inc.
JAKKS Pacific, Inc. Mattel, Inc. McAfee, Inc.
McGraw-Hill Companies Midway Games Inc. Palm, Inc.
RC2 Corporation Renaissance Learning, Inc. Scholastic Corporation
Take-Two Interactive Software THQ Inc. John Wiley & Sons, Inc.
We believe the 18 companies in our compensation peer group represent a good cross-section of the
companies against which we compete for talent or that are similar to us in size and business focus. While two of
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