LeapFrog 2008 Annual Report Download - page 139

Under the 2008 bonus plan approved by the compensation committee in February 2008, our CEO, Mr. Katz,
had an overall bonus target of 100% of his 2008 base compensation and our other named executive officers had
overall bonus targets of 50% of their 2008 base compensation. For all our named executive officers, their
individual portions of the bonus pool were funded with an amount equal to 20% of their target bonuses. The
overall target bonuses are typically initially set in employees’ offer letters or employment terms and are based on
competitive market data for their positions. The individual versus company portion allocation is determined by
using competitive market practices and by our assessment of the amount of pay that should be at risk for our
named executive officers. Percentages may be modified from year to year based on competitive market data or
on changes to an employee’s position within the company.
The funding of the company performance portion of the bonus pool for 2008 performance was based on four
company financial measures: (1) total 2008 net sales, (2) overall gross margin, (3) overall operating income and
(4) achievement of a “momentum index,” which is a measure of projected 2009 operating income. The
momentum index measure was implemented to provide incentives in 2007 during the “reload” phase of our
turnaround strategy, which entailed the development of a strong new product line for 2008 to position us for sales
growth, and was measured based on the 2007 projection for net sales of new products in 2008. In 2008, as we
launched the product lines developed in 2007, the momentum index was modified to focus on projected operating
income for 2009 to reflect the focus on profitability for 2009 and beyond, and the weighting of this measure was
reduced from 40% to 10% of the overall company-performance portion of the bonus pool. Giving financial
performance metrics more weight reflected our renewed focus on achieving our projected financial results in
2008, compared to a primary focus on product development for 2007. With each measure, there is minimum
performance level required to trigger any funding of the company-performance portion of the bonus pool in any
of the categories. If the minimum performance for any measure is achieved, 80% of the amount allocated to that
measure is funded. If the target performance for any measure is achieved, 100% of the amount allocated to that
measure is funded. If performance exceeds the target performance for any measure, up to 200% of the amount
allocated to that measure is funded. In addition, as part of our 2008 bonus program, the compensation committee
required that our actual 2008 net sales of new products achieve the level projected by the 2007 momentum index
before the 2008 bonus pool could be funded for the 2008 net sales component.
The weighting of each measure and range of potential payout resulting from the achievement of each
measure were approved by the compensation committee in February 2008 and were as follows:
Company Performance Measure Weight
2008 net sales ................................................................ 30%
2008 gross margin ............................................................. 30%
2008 operating income ......................................................... 30%
Momentum index, which is based on projected 2009 operating income ................... 10%
In 2008, our net sales were $459.1 million, we had an overall gross margin of 40%, and we had an operating
loss of ($60.1 million). None of these met the minimum target amounts required by our 2008 bonus plan. Further,
in February 2009, we projected 2009 operating income to be below the minimum performance level for our
momentum index measure, resulting in no bonus payout on that company performance measure either. As a
result, no company-performance bonuses were paid. This result is consistent with our philosophy that a sufficient
portion of executive target bonuses be funded based solely on quantitative overall company performance
measures. We believe this aligns the interests of our executives with those of our stockholders in achieving
company operating goals.
While funding for the bonus pool as a whole was based on the calculations described above, the actual
bonus payout for each of the named executive officers (other than the CEO) was to be determined under the 2008
bonus plan on the basis of the CEO’s evaluation of the individual performance of the named executive officer, in
part with respect to overall achievement of his or her goals for the year, and in part with respect to the
contributions and impact that his or her area of responsibility made to the achievement of key corporate
35