LeapFrog 2007 Annual Report Download - page 159

the toy companies that are directly competitive, Hasbro and Mattel, are notably larger than LeapFrog, they are
also competitors with respect to executive talent. RC2 Corporation and Jakks Pacific, also toy companies, are
closer in size to LeapFrog. Electronic Arts is also a much larger company, but it is one with which we compete
for executive talent and its product portfolio and location in the San Francisco Bay Area make it important to
include in our executive compensation comparisons. Other companies in our compensation peer group represent
educational product makers or publishers or San Francisco Bay Area companies that are either of similar size to
LeapFrog or have a similar product portfolio. Following a review of current and potential peer companies in
December 2006, the peer group was modified to include four additional companies that were relevant from an
industry or geographic standpoint (CNET Networks, Gymboree, McAfee, THQ and John Wiley & Sons) and to
exclude one company that was no longer publicly reporting (Pixar) and one that was considered to be less
relevant (Clorox). The compensation committee believes that the resulting peer group of 18 companies represents
a cross-section of peers in the toy, education, publishing, gaming and technology industries as well as related San
Francisco Bay Area companies.
In addition to benchmarking studies of the compensation peer group, the compensation committee employs
the collective experience and judgment of its members and advisors in determining the total compensation and
the various components of the packages paid to our named executive officers. The compensation committee has
also historically taken into account input from other sources, including other independent members of the board,
publicly available data relating to the compensation practices and policies of other companies within and outside
of our industry, and the input of our CEO and Human Resources department. While the compensation committee
does not believe that compensation peer group benchmarking is appropriate as a stand-alone tool for setting
compensation due to the aspects of our business and objectives that may be unique to us, the compensation
committee finds that evaluating this information is an important part of its decision-making process and exercises
its discretion in determining the nature and extent of its use.
Elements of Executive Compensation
The compensation committee has determined that a mix of cash and equity, along with severance, health
and other benefits, be used in order to provide total compensation packages for our named executive officers and
others that meet our objectives as outlined above. The elements of our executive compensation are:
• Base salary
• Performance-based annual bonus awards
• Equity incentive awards, including stock options and restricted stock units
• Severance benefits
• Other benefits and perquisites
The overall composition of an executive’s total compensation package is determined initially based on
competitive market benchmarks provided by Towers Perrin for the position and the skills and experience of the
individual hired. Each year, the total compensation of executives is evaluated with respect to company
performance, individual performance, changes in scope of responsibility and competitive market changes for
each position. There is no pre-established policy or target for the allocation between either cash and non-cash or
short-term and long-term incentive compensation. Rather, the compensation committee reviews information
provided by Towers Perrin to determine the appropriate level and mix of incentive compensation. While the
determination of base salary and equity components are generally independent of the decisions regarding other
elements of compensation, target bonus is expressed as a percentage of base salary and, therefore, dependent
upon the determination of base salary. As a general matter, the level of compensation “at risk” increases with the
executive’s level of responsibility.
The specific compensation elements are described below.
Base Salary. The compensation committee reviews and determines the base salaries of the named
executive officers, including our CEO, on an annual basis, and it makes these determinations on a case-by-case
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