XM Radio 2010 Annual Report Download - page 32

In this CD&A, we use certain financial performance measures that are not calculated and presented in
accordance with generally accepted accounting principles in the United States of America (“Non-GAAP”).
These Non-GAAP financial measures include: adjusted EBITDA; average monthly revenue per subscriber
(“ARPU”); and free cash flow. We also use in this CD&A subscriber churn and conversion rate, two
performance metrics which management uses in measuring our business. We use these Non-GAAP financial
measures and other performance metrics to manage our business, set operational goals and, in certain cases, as
a basis for determining compensation for our employees. Please refer to the footnotes contained in our Annual
Report for the year ended December 31, 2010 which accompanies this proxy statement for a discussion of
such Non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure and a
discussion of these other performance metrics.
Fiscal Year 2010 Pay Implications
Performance-Based Discretionary Annual Bonuses. None of our named executive officers or employees
is entitled to a guaranteed bonus. Following the end of 2010, the Compensation Committee met to determine
whether to exercise its discretion to pay bonuses to our named executive officers with respect to 2010. In
making this determination, the Compensation Committee carefully reviewed our performance against various
key metrics included in our budget and business plan for 2010, including our efforts to increase subscribers,
revenue, adjusted EBITDA, free cash flow and OEM conversion rate and to control subscriber churn and
operating expenses.
Following its review of our 2010 performance, which the Compensation Committee determined to be
exceptional, the Compensation Committee exercised its discretion and approved a cash bonus pool to be
divided among our employees, other than the named executive officers, and approved the individual amounts
to be granted to our named executive officers. The actual amount of the bonus paid to each named executive
officer was based on a combination of factors, including our 2010 corporate performance, his or her individual
contributions and performance in his or her functional areas of responsibility and, with respect to all named
executive officers other than himself, upon recommendations made by Mr. Karmazin, our Chief Executive
Officer. The amount of Mr. Karmazin’s bonus was approved by the board of directors following a recommen-
dation from the Compensation Committee. The amount of the bonus paid to each named executive officer, and
the specific factors taken into consideration in determining such amounts, is set forth below under the heading
“Executive Compensation Elements”.
Long-Term Equity Grants. We made a broad-based grant of stock options to our employees in 2010,
including Ms. Altman and Mr. Frear, who received options to purchase 1,052,300 shares and 2,244,800 shares,
respectively. The specific number of options granted to each of these named executive officers was determined
by the Compensation Committee with the assistance of our Chief Executive Officer, as further described under
“— Long-Term Incentive Compensation — Process”. In addition, we granted options to purchase
13,163,495 shares to Mr. Donnelly in connection with his entering into an extended employment agreement
with us in 2010. There were no other long-term equity grants to any of our other named executive officers in
2010.
Base Salary Increases. Mr. Donnelly’s base salary was increased in connection with his entering into an
extended employment agreement in 2010, as described below. In 2010, Mr. Greenstein’s base salary increased
from $850,000 to $925,000, and Mr. Meyer’s base salary increased from $950,000 to $1,100,000. These salary
increases were negotiated with Messrs. Greenstein and Meyer in 2009 as part of the execution of new
employment agreements with each of them. There were no other contractual base salary increases for any of
our other named executive officers in 2010.
Employment Agreement with Mr. Donnelly. Consistent with our practice for our other named executive
officers, we entered into a new employment agreement with Mr. Donnelly in 2010. The extended agreement,
which is described in more detail below under the heading “Potential Payments upon Termination or
Change-in-Control — Employment Agreements,” increased Mr. Donnelly’s base salary to $575,000 from
$525,000 and provided him with a grant of options to purchase 13,163,495 shares of our common stock at an
exercise price of $0.6669 per share (the last sale price of our common stock on the NASDAQ prior to the
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