LeapFrog 2008 Annual Report Download - page 137

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.
In light of the current economic climate, the compensation committee considered in February 2009 the
incentives provided by our executive compensation programs and whether they encouraged excessive risk taking
or other behaviors that could have a negative impact on our long-term prospects. While the committee felt that
our various compensation elements provided an appropriate balance of incentives that did not encourage our
management to take unreasonable risks, they determined that the variable component of compensation (in
particular our 2009 bonus program) should be modified for 2009 to reflect new business realities as we weather
the recession. The adjustments to the bonus plan to emphasize cash management and achieving an operating
profit are discussed in more detail in “Elements of Executive Compensation” below under “Performance-Based
Annual Bonus Awards.”
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 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 Compensia for the position and the skills and experience of the
individual. 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
Compensia to determine the appropriate level and mix of incentive compensation for the year. 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.
Towers Perrin conducted for the compensation committee a comprehensive study of executive
compensation in 2006, and that data was updated for 2008. The studies determined that LeapFrog’s executive
compensation was approximately at the median competitive level for all elements of overall compensation for
our executive officers.
For 2009, Compensia conducted for the compensation committee a study of the compensation of our
executive officers for 2009 using the refined direct peer group and industry reference peer group, supplemented
by data from a third-party compensation survey. The study indicated that our target direct total compensation for
our executive officers (target total cash plus the value of ongoing equity awards) aligns with the market 40th
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