Activision Blizzard (ATVI)

Business Environment and Associated Talent Requirements

        We operate in the entertainment software industry, which sits at the convergence of the entertainment, media, high-technology and consumer products sectors. Our industry features a number of characteristics, including:

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a high-growth, high-risk environment relative to more mature industries;



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a dependence on "hit titles," which constitute a disproportionate level of revenues and profits;



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rising costs of development partially due to increasingly complex technological requirements;



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an increasing importance on building and growing key franchises with sustained game quality; and



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a global customer and end-user demographic with a number of distribution channels.

        The recent economic downturn had limited impact on our compensation decisions for the nine month period ended December 31, 2008 because of our strong financial performance during that period, our continuous commitment to managing costs and overhead aggressively, and the timing of compensation decisions. As discussed further below, the continued adverse economic conditions were considered in connection with setting 2009 compensation. For example, we are delaying salary increases (other than contractually guaranteed increases) and are continuing to emphasize pay for performance.

        The Combination between Activision, Inc. and Vivendi Games has had a significant impact on the business scope and environment in which we operate. The significant increase in the size, complexity and global nature of our business subsequent to the Combination has increased the roles and responsibilities of many of our executives and has had an impact on who we compete against for executive talent. The increased business scope and responsibilities has impacted our peer group comparisons and has further raised the bar for the caliber of talent that we are required to attract and retain for our success. Additionally, our compensation programs include additional components as they were revised or modified to reflect certain components of the Vivendi Games compensation program for Mr. Morhaime and other former Vivendi Games employees. Furthermore, several of our key

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executives received transaction bonuses in recognition of their roles in the successful completion of the Combination, pursuant to their employment agreements. Details of these transaction bonuses are described below under "—Employment Agreements" and the "Summary Compensation Table" below.

        We believe our success in the business environment in which we operate requires executive talent with the following characteristics:

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significant global experience managing complex brands and franchises;



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an in-depth knowledge of sophisticated strategies and operational models focused on brand management, finance, operations, sales and category management; and



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an aptitude for and experience in managing entertainment and high-technology products and talent in a rapidly changing, high-growth, high-risk environment.

        Finding top executives with these characteristics often requires recruitment of executives from larger and more mature industries, such as consumer products. For example, several of our named executive officers come from top-tier global consumer products companies. These industries feature well developed, sophisticated reward and recognition models.

Compensation Philosophy and Objectives

        To respond to these requirements for top executive talent, the Compensation Committee has established the following compensation philosophy for the named executive officers:

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Attract and Retain Key Executive Talent.    Executives should be recruited and retained through employment agreements.



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Competitive Requirements.    Compensation should reflect the competitive talent market from which we recruit.



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Alignment with Stockholders' Interests.    Our objective is to align executive compensation with the interests of stockholders through the use of performance-based incentive programs and equity. As such, a significant portion of the compensation opportunity should be variable and linked to performance.



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Accountability for Achieving Clearly Defined Short- and Long-Term Goals Aligned with Our Strategy.    Performance and business goals for named executive officers should be clearly defined to provide clear alignment between our business strategy, performance goals, results, and incentive payouts.

        Currently, we have employment agreements with each of our named executive officers. We believe these agreements are critical in enabling us to attract and retain talent in a highly competitive industry. The employment agreements specify details of the approach toward salary, annual incentives, equity awards, termination provisions, and restrictive covenants surrounding executive officer employment, including non-competition and non-solicitation provisions. Generally, the employment agreements are established at the time of hire, which was before 2008 for most executive officers, and were amended in December 2008 in order to comply with the requirements of Section 409A of the Internal Revenue Code. The agreement with Mr. Morhaime was entered into upon the close of the Combination on July 9, 2008. As such, our compensation decisions for the nine month period ended December 31, 2008 reflect the terms of these pre-existing employment agreements.

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The Business Environment and Associated Talent Requirements

        The Company operates in the entertainment software industry, which sits at the convergence of the entertainment, media, high-technology and consumer products sectors. Our industry features a number of characteristics, including:

•

a high-growth, high-risk environment relative to more mature industries;



•

a dependence on "hit titles," which constitute a disproportionate level of revenues and profits;



•

rising costs of development partially due to increasingly complex technological requirements;



•

an increasing importance on building and growing key franchises with sustained game quality; and



•

a global customer and end-user demographic with a number of distribution channels.

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Talent Requirements

        The Company believes these characteristics require executive talent with the following characteristics:

•

significant global experience managing complex brands and franchises;



•

an in-depth knowledge of sophisticated strategies and operational models focused on brand management, finance, operations, sales and category management; and



•

an aptitude for and experience in managing entertainment and high-technology products and talent in a high-growth, high-risk environment.

In addition, the Company has recently expanded into areas of game development, such as the music-game genre, that require additional expertise in global sourcing, supply chain and hardware management.

        Finding top executives with these characteristics often requires recruitment of executives from larger and more mature industries, such as consumer products. For example, four of our named executive officers come from top-tier global consumer products companies. These industries feature well developed, sophisticated reward and recognition models.

Compensation Philosophy and Objectives

        To respond to these requirements for top executive talent, the Compensation Committee follows several key principles in establishing compensation programs for named executive officers:

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Competitive Requirements.    Compensation should reflect the competitive employment market for our industry and the market for the talent from which the Company recruits, while factoring in the Company's historical and expected future growth and significant related managerial and staffing needs. This often requires recruiting executives from stable, mature industries to a fast-growth, higher-risk environment. The Compensation Committee considers these market conditions as it develops compensation policies to attract, retain and motivate talented individuals who will make long-term commitments to the Company. Accordingly, the Company positions annual target total compensation between the 50^th and 75^th percentile of our industry (calculated based on the sum of salaries, target annual incentives and the annualized value of long-term incentive and equity awards).



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Alignment with Stockholders' Interests.    The Company should align executive compensation with the interests of stockholders. To achieve this objective, the Compensation Committee grants options, restricted shares, performance shares and restricted share units. The Compensation Committee also emphasizes awarding annual bonuses based on the achievement of Company earnings per share and operating income targets at both the corporate and divisional levels. In order to align pay, performance and shareholder returns, more than 50 percent of named executive officer compensation is variable, tied to the metrics and results described above.



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Accountability for Achieving Clearly Defined Short and Long-Term Goals Aligned with Company Strategy. The Company should establish clearly defined performance and business goals for named executive officers. The Compensation Committee measures the performance of named executive officers annually against financial and other goals established at the beginning of each fiscal year. These goals reflect the Company's annual targets and long-term operating plans.



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Exercise of Independence.    Although the Compensation Committee uses internal and external data and occasionally retains compensation consultants and consults with senior management, ultimately the Compensation Committee exercises its independent judgment in developing the Company's compensation plans and policies.

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