LeapFrog 2012 Annual Report Download - page 132
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description of the only two employment agreements entered into by the Company with any of our named
executive officers is set forth under ‘‘Employment Arrangements’’ below.
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 Plan includes various provisions designed to allow us to grant stock options and other equity
awards that are designed to be ‘‘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 Plan 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 is designed to satisfy the requirements for
‘‘performance-based’’ compensation to avoid any deduction disallowance for these awards under Section
162(m). In addition, the 2011 Plan provides for performance-based cash compensation of up to $1 million per
individual per year. The performance-based awards described above were all granted under the 2011 Plan and
were intended to qualify as performance-based compensation, while the discretionary and guaranteed bonuses
were not.
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.
Accounting Considerations
We follow Financial Accounting Standards Board Accounting Standards Codification Topic 718, or ASC
718, for our stock-based compensation awards. ASC 718 requires companies to measure the compensation
expense for all share-based payment awards made to employees and directors, including stock options, based
on the grant date ‘‘fair value’’ of these awards. This calculation is performed for accounting purposes and
reported in the compensation tables below, even though our executive officers may never realize any value
from their awards.
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