LeapFrog 2007 Annual Report Download - page 167

statement entitled “Potential Payments Upon Termination or Change in Control” beginning on page 58. None of
the executive officers is entitled to any tax gross-up benefits under the Severance Plan.
The terms of Mr. Katz’s severance benefits under his employment agreement were reviewed and approved
by our board upon the hiring of Mr. Katz as our CEO and President in July 2006. The terms of Mr. Katz’s
severance benefits are described in the section in this proxy statement entitled “Potential Payments Upon
Termination or Change in Control.”
Other Benefits and Perquisites. While the compensation committee seeks to offer benefits that are
competitive with companies with which we compete for talent, it also seeks to limit, in a reasonable and
responsible manner, the level of perquisites offered. The compensation committee reviews and approves any
benefits we provide to our executive officers. Employee benefits include healthcare coverage and opportunity to
participate in our 401(k) plan and our employee stock purchase plan. These benefits are generally available to all
full-time employees, with no additional elements for our executive officers other than an additional week of
vacation. We do not offer guaranteed retirement or pension plan benefits.
In May 2007, based on management’s recommendation, the compensation committee eliminated automobile
allowances for all executive officers in view of the declining prevalence of this perquisite among our peer
companies and our industry in general. To avoid penalizing our executives, who did not receive any increases in
base salary in 2007, the compensation committee determined instead to add the amount of the automobile
allowance to each executive officer’s base salary. These amounts ranged from $7,200 to $7,800, which is
equivalent to the automobile allowances that had been received by our executive officers in amounts of $600 or
$650 per month.
In addition, in light of the high cost of housing in the San Francisco Bay Area relative to other parts of the
country, we have offered relocation reimbursements and mortgage interest differential payments for newly hired
executives who need to relocate to the area from lower cost locations. For our named executive officers, the
value of these benefits is described in the Summary Compensation Table and the related footnotes beginning on
page 50. In 2007, we provided Mr. Pidel with an aggregate of $74,041 in relocation expense reimbursement,
including amounts for tax gross-ups, as well as mortgage interest assistance payments of $3,000 per month for a
period of two years and $2,000 per month for a third year. The compensation committee believes that, after the
three-year period, if the company and Mr. Pidel are performing well, his salary will have increased to a level at
which he can absorb the difference in his mortgage payments compared with his cost of housing in Rhode Island.
In total, Mr. Pidel’s relocation assistance amounted to $92,041 in 2007.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to publicly held
companies for compensation exceeding $1.0 million paid to certain of a company’s executive officers. The
limitation applies only to compensation that is not considered to be performance-based. Our 2002 Equity
Incentive Plan includes certain provisions intended to allow us to qualify performance share grants as
“performance-based” compensation under Section 162(m), although, in February 2007, we discontinued our
performance share program. In addition, grants of stock options under our 2002 Equity Incentive Plan are also
designed to qualify as “performance-based,” provided the grants have exercise prices of no less than 100% of fair
market value on the date of grant and do not exceed a calendar year total grant limit for each optionee that is set
forth in our 2002 Equity Incentive Plan. We generally intend to grant stock options to our executives in a manner
that satisfies the requirements for qualified performance-based compensation to avoid any disallowance of
deductions under Section 162(m).
The compensation committee believes it is appropriate for us to retain the flexibility to pay compensation
above $1.0 million if warranted based upon exceptional company and individual performance, and thus, from time
to time, we may pay compensation to executives that is not deductible, including grants of equity and cash bonuses.
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