LeapFrog 2009 Annual Report Download - page 145

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In addition to reviewing analyses of the 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 provided to the named executive officers. While the compensation committee does not believe that
the Peer Group data is appropriate as a stand-alone tool for setting compensation due to the unique nature of our
business, it believes that this information is a valuable reference source during its decision-making process.
For 2009, the compensation committee directed Compensia to conduct an analysis of the compensation of our
executives using data compiled from the Peer Group, supplemented by data from the Radford 2008 High
Technology Executive Compensation Survey. This analysis, which was performed in February 2009, indicated that
the target total direct compensation for our executives (the sum of target total cash compensation and the value of
annual equity awards) was generally consistent with the 40th percentile of the competitive market. It also indicated
that the base salaries for our executives aligned with the 55th percentile of the competitive market (although there
was significant variation by individual), that their target bonus opportunities were generally between the 25th and
50th percentiles of the competitive market, and that equity award levels were generally competitive with
approximately the 30th percentile of the competitive market. Generally, our board and compensation committee seek
to align each element of our compensation programs for executives with approximately the median competitive
level, subject to adjustments for individuals based on retention and performance considerations.
Compensation Design and Mix
The overall composition of an executive’s total compensation package is determined initially based on the
competitive market data for the position provided by a compensation consultant and then adjusted to reflect the
specific performance, contributions and experience of the individual. Each year, the compensation committee
evaluates the total compensation of our executives with respect to our overall company performance, individual
performance, changes in scope of responsibility, and any changes in the competitive market for each position.
The compensation committee does not have a pre-established policy or target for the allocation between cash and
non-cash compensation or short-term and long-term incentive compensation. Rather, the compensation
committee uses the compensation data provided by Compensia to determine the appropriate level and mix of
incentive compensation. In general, the level of an executive’s variable compensation opportunity (short-term
and long-term incentive compensation) increases with his or her level of responsibility.
Economic and Risk Considerations
In response to the ongoing global economic recession, in February 2009 and again in February 2010 the
compensation committee considered the incentives under our executive compensation program and whether they
introduced or encouraged excessive risk taking or other behaviors by our executives that could have a negative
impact on our business. The compensation committee determined that our executive compensation program
provides an appropriate balance of incentives and that it does not encourage our executives to take excessive
risks or otherwise create risks that are reasonably likely to have a material adverse effect on us. It also
determined in February 2009 that our variable compensation components (in particular, our cash bonus plans)
should be modified to reflect the prevailing economic environment. These modifications, which placed greater
emphasis on cash management and achieving an operating profit, are discussed in “Elements of Executive
Compensation—Performance-Based Annual Bonus Awards” below. Certain adjustments to the 2010 Plan are
also discussed in that section.
Elements of Executive Compensation
The compensation committee uses a mix of cash and equity compensation, along with severance, health, and
other benefits, to develop total compensation packages for our executives that meet our compensation objectives.
The elements of our executive compensation program are:
• Base salary
• Annual performance-based bonuses
39