LeapFrog 2012 Annual Report Download - page 123

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committee uses to determine the competitiveness of our executive and director compensation programs. To be
included in the direct peer group, a company should be in the software, educational or leisure products
industries, have net revenue in the range of $200 – 800 million and have a market capitalization between
$200 million and $1 billion. These criteria represent general guidelines; not all of the Company’s direct peers
will meet all selection criteria. Given the limited number of directly comparable companies, the selection
criteria have been broadened for those companies that are the closest fits from an industry perspective.
The following companies were approved by our compensation committee in February 2012 as our direct
peer group for 2012:
Demand Media JAKKS Pacific K12
RealNetworks Rosetta Stone Shutterfly
Skullcandy Take-Two Interactive Software TiVo
Universal Electronics
In addition, an industry reference group is used as a secondary reference point for our executive and
director compensation programs to identify compensation design trends and ‘‘best practices’’ in our industry.
For 2012, the industry reference group was comprised of Activision Blizzard, Electronic Arts, Hasbro and
Mattel, companies that provide software and/or children’s products. Although they operate in a relevant
business or industry, these companies are included in the industry reference group rather than the direct peer
group because they are significantly larger than we are and were not within the targeted range for net revenue
or market capitalization.
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 considers this
information to be a valuable reference during its decision-making process. In addition to reviewing analyses of
compensation data from the Peer Group, the compensation committee employs the collective experience and
judgment of its members and advisors (including Compensia, management and the Company’s human
resource department) in determining the total compensation and the various components provided to our
executives.
For 2012, the compensation committee directed Compensia to conduct an analysis of the compensation of
our executives using data compiled from the Peer Group, supplemented with data from the Radford 2011 High
Technology Executive Compensation Survey, a broad-based third-party survey that reflects widespread
compensation practices among more than 700 high-technology companies. This analysis, which was updated
in February 2012, indicated that, while cash compensation and target total cash compensation for our
executives was near the market median, the value of equity awards tended to bring their target total direct
compensation below the market median, as summarized in the table below.
Element of Compensation
Percentile of the Competitive Market
(average of all executives)
Base Salary 45
th
percentile
Target Total Cash Compensation 55
th
percentile
Target Total Direct Compensation* 25
th
percentile
* Equals the sum of target total cash compensation and the value of annual equity awards.
Compensation Design and Mix
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, taking into consideration
how that mix creates or awards incentives that might lead to excessive risk-taking. In general, the level of an
executive’s variable compensation opportunity (short-term and long-term incentive compensation) increases
31