This excerpt taken from the FFIV DEF 14A filed Jan 7, 2005.
Report of Compensation Committee
The Compensation Committee is comprised of three members of the Board of Directors who are not employees of the Company. It has overall responsibility for approving and evaluating the director and officer compensation plans, policies and programs of the Company. The objectives of the committee are to correlate executive compensation with the Companys business objectives and performance, and to enable the Company to attract, retain and reward executive officers who contribute to its long-term success.
The Companys philosophy concerning compensation for executive officers is to directly link their compensation to continuous improvements in the Companys financial performance. The key elements of this philosophy are as follows:
Consistent with this philosophy, the compensation package offered to executive officers includes: base salary, cash incentive compensation in the form of bonuses, and long-term equity incentives in the form of stock options.
The Compensation Committee consists of three independent directors. Its function is to annually assess the performance of and recommend to the full board salary and incentive compensation for the President and Chief Executive Officer. The Compensation Committee also reviews and approves annual salary and incentive compensation increases for other executive officers recommended by the President and Chief Executive Officer.
In setting Mr. McAdams compensation, the Committee considers compensation levels for similar positions at public companies of similar size and revenue levels, in similar industries, and with similar technological and marketing challenges, operational complexities and long-term performance and growth objectives. The Committee reviews salary surveys and publicly available information on compensation levels in performing this analysis. Mr. McAdam began his employment with the Company in July 2000 with a salary and bonus comparable to his then-current compensation level with his former employer. His base salary was increased by 6% for fiscal 2002, and by 5% for fiscal 2003, consistent with base salary increases for the rest of the Companys executive officers in those years. At Mr. McAdams request, no increase was granted for fiscal 2004. Mr. McAdam repeated his request for no increase for fiscal 2005, but the board granted a 5% increase in base salary.
In determining executive officer salaries, the Compensation Committee reviews recommendations from Mr. McAdam, which are based on information from salary surveys covering technology companies in the Seattle and other comparable areas, individual performance levels and the Companys financial condition. The Compensation Committee also considers incentive compensation based on the Companys financial performance.
To reinforce the attainment of Company goals, the Committee believes that a significant portion of the annual compensation of the executive officers should be in the form of incentive compensation. The Committee believes that incentives based on attaining or exceeding established financial targets, properly aligns the interests of the executive officers with the interests of the shareholders. Bonuses for Mr. McAdam and the other executive officers are awarded quarterly based on achievement of the Companys top and bottom line objectives. Mr. McAdams bonus is set at 75% of his base salary for meeting these performance targets. Mr. McAdam and the other executive officers may earn additional bonuses for over-achievement of these targets.
The Compensation Committee believes that employee equity ownership provides significant motivation to executive officers to maximize value for the Companys shareholders and periodically approves stock option grants under the Companys employee stock option plans. Stock options are typically granted at the current market price and will only have value if the Companys stock price increases over the exercise price.
The Compensation Committee reviews and approves recommendations made by the Chief Executive Officer on stock option grants for other executive officers. These recommendations for options are based on the relative position and responsibilities of each executive officer and previous and expected contributions of each officer to the Companys success. Generally option grants vest over a two or four-year period. Options that vest after one year have also been granted. Upon joining the Company, Mr. McAdam was given options in an amount comparable to those given to other non-founder executives hired to perform similar functions in comparable companies. This initial option grant was subsequently cancelled at his request. Mr. McAdam has been awarded several additional option grants in amounts considered by the Compensation Committee to be appropriate considering Mr. McAdams performance and market conditions, including an option to purchase 100,000 shares of common stock granted in fiscal 2004. This option grant was awarded based on an analysis of comparable companies similar to that used to determine appropriate base salary. In addition, the Compensation Committee considered the total number of the Companys outstanding shares, the number of options available for grant under the Companys equity compensation plans, and the unique retention value inherent in stock options as compared to other forms of compensation.
Under the Omnibus Budget Reconciliation Act of 1993, the federal income tax deduction for certain types of compensation paid to the chief executive officer and four other most highly compensated executive officers of publicly held companies is limited to $1 million per officer per fiscal year unless such
compensation meets certain requirements. The Compensation Committee is aware of this limitation and had decided that it is not appropriate at this time to limit the Companys discretion to design the cash compensation packages payable to the Companys executive officers.