LeapFrog 2011 Annual Report Download - page 153

Determination of Mr. Barbour’s Initial Compensation Package
Our named executive officers, other than Mr. Barbour, are employed at will. In March 2011, we executed
an employment agreement with Mr. Barbour under which he became the Company’s new Chief Executive
Officer. In connection with the negotiation of Mr. Barbour’s employment agreement, the Board drew upon
CEO compensation benchmarking data compiled by Compensia. The Board also considered other sources of
compensation data relevant to the CEO position, including employment agreements with the Company’s prior
CEOs and executives and Mr. Barbour’s publicly reported compensation at other companies at which he was
employed in an executive role. The Board sought to execute an agreement having terms consistent with the
available compensation data and the executive compensation philosophy set forth above. The Board further
worked with outside legal advisors familiar with executive compensation practices to prepare and negotiate
Mr. Barbour’s employment agreement.
Tax and Accounting Considerations
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to a public reporting
company for compensation exceeding $1 million paid to its chief executive officer and its three other most
highly-compensated executive officers (other than its chief financial officer). This limitation applies only to
compensation that is not considered to be ‘‘performance-based.’’
Our 2011 EIP, includes various provisions designed to allow us to qualify stock options and other equity
awards as ‘‘performance-based’’ compensation under Section 162(m), including a limitation on the maximum
number of shares subject to awards that may be granted to an individual under the plan in any one year. The
2011 EIP currently includes a limit of 3.5 million shares as the maximum number of shares subject to awards
that may be granted to an individual under the plan in any one year. Generally, we intend to grant stock
options to our executives in a manner that satisfies the requirements for ‘‘performance-based’’ compensation to
avoid any deduction disallowance for these awards under Section 162(m). In addition, the 2011 EIP provides
for performance based cash compensation of up to $1 million per individual. We may elect to grant
performance based cash awards under the 2011 EIP to our executive officers in the future.
The compensation committee believes that it is appropriate for us to retain the flexibility to pay
compensation that is not necessarily deductible if it deems such compensation to be in the best interests of our
company and stockholders. Accordingly, from time to time, we may pay compensation to our executives that
is not deductible, including cash bonuses and equity awards.
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