This excerpt taken from the ATVI DEF 14A filed Jul 29, 2005.
Activision's Compensation Philosophy and Objectives
The Compensation Committee is guided by the following key principles in determining the compensation programs for the Company's executives and other employees:
sensitive to marketplace conditions as it shapes compensation policies to support the Company's business expansion strategy.
Elements of Activision's Compensation Program
The Company's executive compensation program incorporates the following components:
to the Company's multi-year business growth strategy. For other talented individuals, the Committee fixes annual grants by setting parameters that are based on an individual's position within the organization.
Each year, the Compensation Committee reviews the mix of these elements as part of its oversight of the Company's compensation program for executives. Over the last several years the Company has grown dramatically in size, profitability and cash flow. As a result, the mix has changed to better reflect the Company's current organizational maturity, its position in the video game sector and the competitive requirements of the marketplace. Although stock option grants are and will continue to be a powerful compensation tool, the Company has gradually shifted the balance of its compensation from equity awards towards performance-based cash compensation rewards. Because the latter prominently weighs earnings per share results and other financial metrics, the alignment between our executives' interests and our stockholders' interests is effectively maintained.
Review of Fiscal Year 2005
As in prior years, for fiscal year 2005, the Compensation Committee reviewed the compensation for the Company's senior executives against the compensation provided to executives in comparable positions at peer companies. The Committee believes that this analysis assists the Compensation Committee and the Board in validating current compensation policies that promote the Company's executive retention goals, ensure the proper motivation of the senior leadership of the Company, and aid recruitment of talented individuals. As the Company pursues an aggressive business strategy, its reputation as a leader in the industry, combined with favorable notice of a healthy work environment and a highly motivated work force, are critical foundations for attracting the talent essential to achieving the Company's ambitious growth plans.
In evaluating the Company's performance and each individual executive's fiscal 2005 performance, the Compensation Committee determined that the Company and its executives generally met or exceeded the goals that were established for the year. For fiscal year 2005, Activision reported consolidated net revenues of $1,406 million, an increase of $458 million over the results reported for year ended March 31, 2004, or an amount that is 48% higher than the previous year. The consolidated operating income for fiscal year 2005 was $184.6 million, an increase of $74.8 million over fiscal year 2004, or a 68% year over year increase. At the same time, the Company generated significant positive cash flow from operations and financing activities. Its balance sheet indicates a healthy liquidity and cash and short-term investments balance of $841 million, which represents a $253 million increase from the year ended March 31, 2004.
These results were the key indices in the Compensation Committee's consideration of fiscal 2005 executive bonuses. In addition, in establishing bonus payments for the executive officers, these substantial financial results were also reviewed against the backdrop of the Company's other significant achievement during fiscal 2005. For example:
The Annual Bonus for the Chairman and Co-Chairman
The Compensation Committee believes that the Chairman and Co-Chairman's annual bonus should be clearly linked to the Company's financial performance. In determining and approving Messrs. Kotick and Kelly's fiscal year 2005 bonus, the Committee used a formula that defined the target bonus by specific objectives. The formula is heavily weighted towards the creation of stockholder value, with over 70% of the bonus opportunity dependent upon a significant improvement in the earnings per share (EPS) and the optimization of the Company's capital and cash position. The remainder of Messrs. Kotick and Kelly's bonus opportunity was determined by performances related to individual goals, including succession planning; improving Board processes; expanding franchise development; defining, communicating and executing a business growth strategy; and improving the reputation of the Company among investors and other interested parties. These measurements, when added to the EPS component, generated a bonus that equated to 90% of the bonus opportunity that was identified at the beginning of the year.
As has been the case in previous years, the Compensation Committee determined that Mr. Kotick and Mr. Kelly will receive their bonuses in stock option equivalents in place of a current cash payment. For 2005, Messrs. Kotick and Kelly have each been awarded 254,765 options, based on a Black Scholes value of the Company's options as calculated by the Compensation Committee's outside experts. This value is then reduced by 20%, representing the discounted value based on the fact that the granted options are restricted from being exercised for 24 months even though Messrs. Kotick's and Kelly's annual bonuses were currently earned.
Annual Bonus for Other Senior Executives
The Compensation Committee established the fiscal year 2005 bonuses for other senior executives in a similar manner as for the Chairman and Co-Chairman. The Compensation Committee reviewed the financial performance of the Company and weighed the individual performance of each executive against pre-established goals for the year. In light of their and the Company's achievements, the Company's senior executives were awarded fiscal year 2005 annual cash bonuses, as set forth in the Summary Compensation Table included in this proxy statement. As a group, the bonuses reflect the overall impressive financial performance of the Company for fiscal year 2005 and the significant individual accomplishments of each executive during fiscal year 2005.
2005 Stock Based Grants
Stock option grants continue to be an important aspect of compensation because they align the interests of the recipient with stockholder interest. The Compensation Committee also believes that, properly structured, options place a premium on loyalty to the Company, foster the retention of key executives and emphasize a long-term perspective. However, in recent years, the amounts awarded have been gradually reduced to modify their dilutive characteristics and to seek to comport with Institutional Shareholder Service's guidelines and to adjust for potential future stock option expensing requirements. For fiscal year 2005, the Compensation Committee limited aggregate grants to no more than three percent of the total shares outstanding. This guideline has been in place for the last two fiscal years. As a result, the Company has significantly reduced the annual dilutive impact of its stock-based compensation program and, combined with its enhanced operating position, is now better positioned to implement stock option expensing requirements, as and when required.
Stock Ownership and Retention Guidelines
Recently, the Compensation Committee recommended and the Board adopted new guidelines with respect to stock ownership by newly hired senior executives. Every newly hired senior executive must acquire and maintain shares of Activision stock or stock options, that have total value of at least 1.5 times the annual base salary of such executive. For newly appointed officers of the Company, the guidelines provide a two-year period to reach the minimum stock ownership requirement.
Section 162(m) Considerations
In structuring compensation programs and in awarding bonuses, the Compensation Committee considers the potential impact of Section 162(m) of the Code, adopted under the Revenue Reconciliation Act of 1993. This section disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1,000,000 in any taxable year paid to its chief executive officer or any of its four other highest paid officers unless (i) the compensation is payable solely on account of the attainment of performance goals, (ii) the performance goals are determined by a committee of two or more outside directors, (iii) the material terms under which compensation is to be paid are disclosed to and approved by stockholders, and (iv) the committee certifies that the performance goals were met.
As discussed above, the Company's executive compensation program incorporates three components: an annual base salary, a performance-based annual bonus, and long-term incentive and equity grants. None of the Company's executives' salaries exceed $1.0 million, and the Company may therefore deduct the full amount of each executive's salary in any taxable year. With respect to the performance-based annual bonuses, the Compensation Committee has structured annual cash bonuses to executives so that they are based on the achievement of annual performance goals in order to qualify for tax deductibility without regard to the Section 162(m) limitations. With respect to long-term incentive and equity grants, the Compensation Committee has determined, in light of the competitive environment in which the Company operates, that stock options or other equity-based compensation are necessary to attract and retain the best executives, whether or not the option exercises result in expenses that are fully deductible under Section 162(m). Nevertheless, in recognition of the costs to the Company arising from its inability to deduct fully the value of long-term incentive and equity grants, the Compensation Committee has recommended to the Board that the Company seek stockholder approval of the Company's 2003 Incentive Plan so that future grants under the 2003 Incentive Plan will not be subject to the deductibility limits under Section 162(m).