This excerpt taken from the TTWO DEFA14A filed Mar 26, 2008.
Discussion and Analysis of ZelnickMedia's Compensation
Pursuant to the original Management Agreement, Strauss Zelnick had agreed to serve as the non-executive chairman of the Company, interact with the full Board and have authority to hire and/or terminate the employment of, from time to time, the Chief Executive Officer and the Chief Financial Officer of the Company, subject to the final approval of the Compensation Committee of the Board. At the initial meeting of the Board following the Company's 2007 annual meeting of stockholders, the Board appointed Ben Feder as the Chief Executive Officer of the Company, and it was the intention of the Board and ZelnickMedia that Mr. Feder would serve in such capacity on an interim basis only while ZelnickMedia would assist the Company in identifying and recruiting a qualified individual to act as Chief Executive Officer of the Company on a full-time and permanent basis. The Board and ZelnickMedia had initially contemplated that Mr. Feder would devote only a modest portion of his business time serving as the interim Chief Executive Officer of the Company. However, while Mr. Feder continued to act as a member of the Board of Directors of Columbia Music Entertainment and to perform certain other services in his capacity as a partner of ZelnickMedia, since his election as Chief Executive Officer and director in March 2007, Mr. Feder has devoted substantially all of his business time to the Company. ZelnickMedia also provided the services of other executives, including Mr. Zelnick and Karl Slatoff. The scope of the services provided by Messrs. Zelnick, Feder and Slatoff was substantially in excess of the level of services which the Board and ZelnickMedia initially contemplated would be provided by ZelnickMedia and were greatly valued by the Company. Accordingly, the Company, acting through the Compensation Committee and the independent members of the Board, and ZelnickMedia, agreed to amend the Management Agreement to reflect the services actually being provided by ZelnickMedia and to revise the compensation payable to ZelnickMedia appropriately.
As previously disclosed in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 15, 2008, the Company entered into an amendment to the Management Agreement, as amended, with ZelnickMedia on February 14, 2008 (the "Second Amendment"), a summary of which was also provided in the proxy statement. ZelnickMedia proposed a new compensation package to the Compensation Committee and the independent members of the Board. The Compensation Committee recommended, and the independent members of the Board approved, a compensation package that contained fewer shares of restricted stock than ZelnickMedia's proposal and suggested (and ZelnickMedia agreed) that the Management Agreement be extended for an additional year to give the Company added stability. In making its determination with respect to the appropriate level of compensation payable to ZelnickMedia under the Second Amendment, on December 20, 2007 the Compensation Committee retained the services of Watson Wyatt Worldwide ("Watson Wyatt"), a global consulting firm focused on human capital and financial management consulting services, to review ZelnickMedia's compensation package relative to market reference points as well as governance and plan design considerations, including change in control provisions. Prior to this engagement, Watson Wyatt had never provided consulting services or other services to the Company or to ZelnickMedia. In connection with its review, Watson Wyatt utilized three sources as comparators. The primary source was a peer group of comparably sized companies in the
entertainment and video game sectors. This information was supplemented by an analysis of data from (i) a broader group of companies using Institutional Stockholder Services ("ISS") reports relating to share usage as a percentage of total shares outstanding and (ii) a small sample of turnaround companies.
In performing its competitive market analysis, Watson Wyatt performed a peer group analysis of total compensation paid by the following 12 companies to their five highest paid executives (the "Regular Peer Group"):
For the purpose of this comparison, the ZelnickMedia team (consisting of Mr. Zelnick as Executive Chairman, Mr. Feder as Chief Executive Officer and Mr. Slatoff as Executive Vice President), together with Lainie Goldstein, the Company's Chief Financial Officer, Seth Krauss, the Company's Executive Vice President and General Counsel and Gary Dale, the Company's Executive Vice President were considered to be equivalent to the top five executives for each Regular Peer Group.
Watson Wyatt also evaluated data on annual equity burn-rates and run-rates both for the Company's industry classification as well as the broader group of S&P Super 1500 companies, using ISS reports. Watson Wyatt also looked at a small sample of turnaround companies that it was able to identify that had hired new executives with the goal of achieving a turnaround. Since the turnaround companies were of different size, and generally larger than the Company, the comparisons to this group were based on executive grants as a percentage of shares outstanding rather than dollars of compensation. The following five companies were included in Watson Wyatt's analysis of turnaround companies (the "Turnaround Sample"):
After reviewing Watson Wyatt's competitive market analysis, the Compensation Committee approved an increase in the annual management fee to $2,500,000 (from $750,000) and an increase in the maximum annual bonus to $2,500,000 (from $750,000) under the Second Amendment, to be effective April 1, 2008, because such increases were competitive with market data. The total cash compensation for the entire management team (i.e., ZelnickMedia, the Chief Financial Officer and the Executive Vice President and General Counsel), including the cash compensation payable pursuant to the Management Agreement as amended by the Second Amendment, was just below the 75th percentile of the Regular Peer Group.
In connection with approving the Second Amendment, the Compensation Committee provided for additional grants of restricted stock to ZelnickMedia, subject to stockholder approval of Proposal 2 at the Annual Meeting. While the initial proposed compensation package contemplated only time-based restricted stock, in order to better align ZelnickMedia's interests with stockholder interests, the Compensation Committee decided instead to grant ZelnickMedia 40% time-based restricted stock and 60% performance-based restricted stock. In determining the appropriate target to benchmark performance with respect to the performance-based restricted stock, the Compensation Committee considered different metrics for measuring performance and engaged Watson Wyatt to perform a competitive market analysis and recommend a methodology for setting a relative total stockholder return goal.
After members of the Compensation Committee reviewed various indices to benchmark performance and further discussed these with the independent members of the Board, on Watson Wyatt's recommendation the Compensation Committee selected the NASDAQ Industrial Index ("Index") as the index against which performance should be measured because the Company and its peers are included in the Index and the Index is specific enough to benchmark performance while being large enough to provide stable results for total stockholder return. In addition, the Index provides a challenging benchmark for performance, especially at the upper range of total stockholder return. After considering Watson Wyatt's analysis, the Compensation Committee conditioned vesting of the performance-based restricted stock on achieving the 75th percentile of stockholder returns of all the companies in the Index, given the size of the grant and the Compensation Committee's desire that the grant only reward superior performance. In addition, the Compensation Committee limited the mandatory acceleration of vesting of the performance-based restricted stock in the event of a change in control to a portion of the award (180,000 unvested shares) if there is a change in control before March 31, 2009, but reserved the ability to recommend that the independent members of the Board provide for the vesting of additional shares of restricted stock in connection with such change in control.