Ladenburg Thalmann Financial Services (LTS)

various elements of compensation are not inter-related. For instance, if options that are granted in one year have an exercise price that is less than the current market price of our common stock due to a decrease in our stock price, the amount of compensation paid to an executive officer for the next year is not impacted. Similarly, if options become extremely valuable due to a rising stock price, the amount of compensation for the next year is not affected. A full description of the agreements we have with our executive officers is set forth below under the caption “Compensation Arrangements for Executive Officers.”

 

Compensation Components

 

The four primary compensation components are base salary, brokerage commissions (for those officers who are registered representatives), cash bonuses and equity awards. We discuss each of these items in more detail below.

 

Base Salary.  Generally, we set executive base salaries at levels comparable with those of executives in similar positions and with similar responsibilities at comparable companies. We seek to maintain base salary amounts at or near the industry norms, while avoiding paying amounts in excess of what we believe is necessary to motivate executives to meet corporate goals. We review base salaries annually, subject to terms of any employment agreements, and our compensation committee will seek to adjust base salaries to realign them with industry norms after taking into account individual responsibilities, performance and experience.

 

Brokerage Commissions.  If an executive is a registered representative, part of the executive’s total compensation may be a percentage of the brokerage commissions with respect to customer accounts for which such individual is the designated account representative. We believe this form of additional compensation helps incentivize our executives who are registered representatives. For the year ended December 31, 2007, Mark Zeitchick was the only executive officer who was paid brokerage commissions.

 

Discretionary Cash Bonus.  We also grant discretionary cash bonuses for executives and directors. This is an important part of executive compensation. These bonuses may exceed base salary amounts and are more closely tied to company and individual performance. Our compensation committee establishes bonus amounts by taking account of, among other things, our EBITDA as adjusted, growth in our business through organic growth and acquisitions, satisfaction of financial goals, increase in shareholder value, the business environment in which we operated during the year and individual performance. We believe that EBITDA, as adjusted, is correlated to shareholder value creation and therefore is an appropriate measure to employ in determining executive compensation. EBITDA, as adjusted, is intended to minimize or eliminate the effect of items that do not directly reflect our performance or individual executive performance. While the compensation committee considers the foregoing factors, the actual bonus amount for each executive officer is based on the compensation committee’s subjective assessment of both our overall performance for the year and the contribution which each such individual made to that performance. The compensation committee believes that a discretionary bonus plan is appropriate because objective, short-term financial measures may not fully reflect the underlying reasons for our performance and will not reflect individual executive performance.

 

In 2007, we granted to each of Richard Lampen, our president and CEO, and Mark Zeitchick, our executive vice president and the president and CEO of Ladenburg Thalmann & Co. Inc., a $600,000 cash bonus and to Ms. Chillemi, our former vice president and chief financial officer and current senior vice president and chief financial officer of Ladenburg Thalmann & Co. Inc., a cash bonus of $95,000. In addition, we granted a $600,000 cash bonus to each of Dr. Phillip Frost, our chairman, and Howard Lorber, our vice-chairman. These bonuses were made based on contributions of these individuals to our performance in 2007, including the development of new business. In addition, these bonuses were made based on substantial increases in our revenues, EBITDA, as adjusted, and stock price in 2007, as well as the successful expansion into the independent broker-dealer business through the Investacorp acquisition.

 

Equity Awards.  We also use stock options and other stock-based awards to incentivize executives for long-term performance and to provide an appropriate balance between our long-term and short-term performance. We believe that providing a meaningful portion of our executives’ total compensation package in stock options and other stock-based awards will align the incentives of our executives with the interests of our shareholders and with our long-term success. The compensation committee develops its equity award determinations based on its

judgment as to whether the complete compensation packages provided to our executives, including prior equity awards, are sufficient to retain, motivate and adequately award the executives. We generally grant options that vest over a period of three or four years beginning on the first anniversary of the grant date. We believe that this vesting schedule contributes significantly to the retention of our executive officers because they must remain employed for at least one year before they can realize any potential value from an option grant and will need to continue in our employ for a period of years in order to realize the maximum potential value.

 

Equity awards are granted generally through the Equity Plan, which was adopted by our shareholders in August 1999 and most recently amended in November 2006. The Equity Plan will terminate when no further awards may be granted and awards granted are no longer outstanding, provided that incentive options may only be granted until May 26, 2009. The plan is intended to comply with the regulations issued under Section 162(m) of the Internal Revenue Code and is administered by our compensation committee. To the extent permitted under the provisions of the Equity Plan, the compensation committee has authority to determine the selection of participants, allotment of shares, price, and other conditions of awards.

 

On January 1, 2006, we began accounting for stock-based payments, including stock option awards under the Equity Plan, in accordance with the requirements of SFAS 123(R).

 

In July 2007, the compensation committee granted options to purchase 1,200,000 shares, 600,000 shares, 300,000 shares and 600,000 shares to Dr. Frost and Messrs. Lampen, Lorber and Zeitchick, respectively. The exercise price for these options is $2.30 (a premium to the closing market price of $1.75 on the grant date) and these options vest in four equal annual installments beginning on the first anniversary of the grant date. The compensation committee engaged the services of GK Partners as consultants to help the compensation committee evaluate the stock option grants to Dr. Frost and Messrs. Lampen, Lorber and Zeitchick. Based on the opinion of GK Partners with respect to such stock option grants and on discussions with GK Partners, the compensation committee believes that the July 2007 option grants to Dr. Frost and Messrs. Lampen, Lorber and Zeitchick are reasonable and competitive with the compensation of executives and directors of similarly situated companies.

 

Other Compensation.  We maintain various employee benefit plans, including medical, dental, life and disability insurance and 401(k) plans, and these plans are available to all salaried employees. We pay all medical and dental insurance premiums for certain of our executive officers.

 

 

The compensation committee makes all final determinations with respect to executive officers’ compensation, based on an appraisal of our financial status. Our chief executive officer may make recommendations to the compensation committee relating to the compensation of executive officers, but the compensation committee has full autonomy in determining executive compensation.

 

Our compensation committee is charged with performing an annual review of our executive officers’ cash compensation and equity holdings to determine whether they provide adequate incentives and motivation to executive officers and whether they adequately compensate the executive officers relative to comparable officers in other companies.

 

Section 162(m) of the Internal Revenue Code generally disallows a public company’s tax deduction for compensation paid to the chief executive officer and the four other most highly compensated officers in excess of $1 million in any taxable year. The effect of Section 162(m) is substantially mitigated by our net operating losses, although the amount of any deduction disallowed under Section 162(m) could increase our alternative minimum tax by up to 2% of such disallowed amount. Qualifying performance-based compensation is not subject to the deduction limit if certain requirements are satisfied. In determining executive compensation, our compensation committee considers, among other factors, the possible tax consequences. Tax consequences, including tax deductibility, are subject to many factors (such as changes in the tax laws) that are beyond our control. In addition, the compensation committee believes that it is important for it to retain maximum flexibility in designing compensation programs that meet its stated objectives. For these reasons, the committee, while considering tax deductibility as one of the factors in determining compensation, does not limit compensation to those levels or types of compensation that will be deductible by us.

 

Our agreements with our executive officers have generally included compensation in the form of (i) a base salary, which was not anticipated to be the sole component of our executives total annual cash compensation, (ii) if the executive is a registered representative, brokerage commissions with respect to customer accounts for which such individuals were the designated account representatives and (iii) a grant of stock options under the Equity Plan. We have also included compensation in the form of bonuses in certain instances. Although our compensation committee reviews total compensation, the various elements of compensation are not inter-related. For instance, if options that are granted in one year become underwater due to a decrease in our stock price, the amount of compensation paid to an executive officer for the next year is not impacted. Similarly, if options become extremely valuable due to a rising stock price, the amount of compensation for the next year is not affected. A full description of the agreements we have with our executive officers is set forth below under the caption “Compensation Arrangements for Executive Officers.”

 

We believe it is important when making compensation-related decisions to be informed as to current practices of similarly situated publicly held companies in the brokerage industry. Our compensation committee seeks to stay apprised of the cash and equity compensation practices of publicly held companies in the brokerage industry through the review of such companies’ public reports and through other resources.

 

Compensation Components

 

Base Salary.  Generally, we set executive base salaries at levels comparable with those of executives in similar positions and with similar responsibilities at comparable companies. We seek to maintain base salary amounts at or near the industry norms while avoiding paying amounts in excess of what we believe is necessary to motivate executives to meet corporate goals. Base salaries are generally reviewed annually, subject to terms of employment agreements, and our compensation committee and board will seek to adjust base salary amounts to realign such salaries with industry norms after taking into account individual responsibilities, performance and experience. In September 2006, we increased the base salary of Mark Zeitchick from $200,000 to $250,000 upon his election as chief executive officer of Ladenburg Thalmann & Co.

 

Brokerage Commissions.  If the executive is a registered representative, part of the executive’s total compensation is a percentage of the brokerage commissions with respect to customer accounts for which such individuals were the designated account representatives. We believe this form of additional compensation helps incentivize our executives.

 

Equity Awards.  We also use stock options and other stock-based awards to reward long-term performance. We believe that providing a meaningful portion of our executives’ total compensation package in stock options and other stock-based awards will align the incentives of our executives with the interests of our shareholders and with our long-term success. The compensation committee and board develop their equity award determinations based on their judgments as to whether the complete compensation packages provided to our executives, including prior equity awards, are sufficient to retain, motivate and adequately award the executives.

 

Equity awards will be granted through the Equity Plan, which was adopted by our shareholders in August 1999 and most recently amended in November 2006. The Equity Plan will terminate when no further awards may be granted and awards granted are no longer outstanding, provided that incentive options may only be granted until May 26, 2009. The plan is intended to comply with the regulations issued under Section 162(m) of the Internal Revenue Code and is administered by our compensation committee. To the extent permitted under the provisions of the plan, the compensation committee has authority to determine the selection of participants, allotment of shares, price, and other conditions of awards.

 

Other Compensation.  We have established and maintain various employee benefit plans, including medical, dental, life insurance and 401(k) plans. These plans will be available to all salaried employees and will not discriminate in favor of executive officers. We also may design and utilize cash incentive bonuses for executives to focus them on achieving key operational and financial objectives within a yearly time horizon.