LeapFrog 2007 Annual Report Download - page 166

RSUs allows us to deliver competitive compensation value to our key employees and strengthen the retention
power of the equity grant program while, at the same time, decreasing the amount of potential dilution for all
stockholders. RSUs are first and foremost a retention vehicle, as the stock continues to have value even when the
stock price declines. In addition, RSUs serve as a valuable recruitment vehicle by offering immediate equity
value in our common stock, which allows us to attract talented executives who typically forfeit valuable equity
stakes at their current employers in order to join us. Shares of our common stock are not issued when an RSU is
granted. Instead, once an RSU vests, one share of our common stock is issued for each share of RSU vested.
RSUs vest at the rate of 25% on each of the four subsequent anniversaries of the vesting commencement date.
In August 2007, the compensation committee authorized the grant of RSUs to our named executive officers
as part of the annual equity grant. Mr. Katz was awarded 60,000 RSUs and Mr. Chiasson, Mr. Dodd,
Ms. MacIntyre and Mr. Pidel were each awarded 10,000 RSUs. All RSUs for the named executive officers were
granted on September 17, 2007, consistent with our stock award granting policy. These RSU awards were based
on the 2007 equity guidelines developed by Towers Perrin and approved by the compensation committee in
February 2007. All of the RSU awards for the named executive officers were within guidelines and were
recommended by the CEO upon consideration of a number of factors, including the executive’s overall
performance during the first portion of 2007, strategic impact on the company and current equity holdings
compared to similar positions within our peer compensation group. The compensation committee approved the
RSU award to Mr. Katz by reviewing his overall performance in achieving corporate and individual goals during
the first portion of 2007 and his total direct compensation compared to CEOs in our compensation peer group.
Severance Benefits. In July 2007, the compensation committee approved the Executive Management
Severance and Change-in-Control Plan under which all of our executive officers may receive benefits, with the
exception of Mr. Katz, who is not eligible to participate in the plan and instead is eligible to receive benefits
under the severance and change-in-control provisions that are part of his employment agreement. Prior to the
approval of the Executive Management Severance and Change-in-Control Plan, or the Severance Plan, our
named executive officers had individually negotiated severance agreements. The Severance Plan was developed
to achieve three objectives: (1) to minimize distraction and risk of departure of executives in the event of a
potential change-in-control transaction involving LeapFrog; (2) to provide consistency in benefits among our
executive officers; and (3) to align our severance benefits for senior executives with competitive practice. In
addition, the compensation committee took into account the multi-year nature of our turnaround plan and the
historic and anticipated continued volatility of our stock price and operating results. The compensation
committee engaged Towers Perrin to review the Severance Plan and to benchmark the Severance Plan benefits
against compensation peer group practices and overall market practices. The Severance Plan was intended to
replace previously negotiated severance benefits set forth in employment offer letters or to provide benefits for
those executive officers who had no benefits in place. In order to determine an appropriate level of severance and
change-in-control benefits, Towers Perrin reviewed data from three general industry surveys and conducted a
review of the severance practices employed by our compensation peer group companies.
Under the terms of the Severance Plan, the executive officers, except for Mr. Katz, are eligible to receive the
benefits described in the Severance Plan if the executive is terminated “without cause” or resigns for “good
reason.” Our Severance Plan excludes performance-based terminations from severance protection. For more
discussion regarding the definition of “without cause” and “good reason” under the Severance Plan, please see
the section in this proxy statement entitled “Potential Payments Upon Termination or Change in Control.”
If the named executive officer is terminated without cause or voluntarily terminates for good reason, the
Severance Plan provides for the payment of 12 months of base salary paid in semi-monthly installments and 12
months of COBRA benefits. If the termination occurs during the period beginning three months before and ending
twelve months after a change-in-control of LeapFrog, the Severance Plan provides for 24 months of base salary
paid in a lump sum, payment of 200% of the executive officer’s target bonus, 24 months of COBRA benefits and
acceleration of vesting of all stock awards held by the named executive officer. Additional information regarding
the severance benefits for which our named executive officers are eligible is provided in the section in this proxy
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