InterDigital Inc (IDCC)

[revlis]

This was the old compensation program. The difference is that the 150% goal was increased from 225% to 300%.

Compensation Programs

We use a variety of compensation programs to both attract and retain engineers and other key employees, as well as more closely align employee compensation with Company performance. These programs include, but are not limited to, an annual bonus tied to performance goals, cash awards to inventors for filed patent applications and patent issuances, restricted stock unit (RSU) awards to non-managers and a long-term compensation program (“LTCP”), covering managers, that includes RSUs and a performance-based cash incentive component. The LTCP was originally designed to include three year cycles that overlap by one year. The first cycle under the program covered the period from April 1, 2004 through January 1, 2006 (“Cycle 1”). The second cycle originally covered the period from January 1, 2005 through January 1, 2008 (“Cycle 2”). In second quarter 2005, the Compensation Committee of our Board of Directors amended the LTCP to revise the performance-based cash award portion of Cycle 2 to cover a 3 1/2 year period from July 1, 2005 through January 1, 2009, and authorized a pro-rated interim payment, of approximately $0.9 million, related to first half 2005.

In 2005, we recognized $6.5 million and $7.6 million of compensation expense related to the performance-based cash incentive and RSUs, respectively. In 2004, we recognized $3.0 million and $4.1 million of compensation expense related to the performance-based cash incentive and RSUs, respectively. We amortize the expense associated with RSUs using an accelerated method. At December 31, 2005, accrued compensation expenses associated with the performance-based cash incentive were based on a known 102.5% payout for Cycle 1 and an estimated 100% payout for Cycle 2.

Under the program, 100% achievement of the goals set by the Compensation Committee of the Board of Directors results in a 100% payout of the performance-based cash incentive target amounts. For each 1% change above or below 100% achievement, the payout is adjusted by 2.5% with a maximum payout of 225% and a zero performance-based cash incentive pay-out for performance that falls below 80% of target results. The following table provides examples of the performance-based cash incentive payout that would be earned based on various levels of goal achievement:




Goal Achievement
Payout

less than 80%
0 %

80%
50 %

100%
100 %

120%
150 %

150% or greater
225 %

At December 31, 2005, if we had assumed that the Company’s Cycle 2 goal achievement would be either 120% or 80%, we would have recorded either $0.4 million more or less, respectively, of compensation expense in 2005. Due to the structure of the different cycles in the LTCP, we expect that 2006 expenses associated with the LTCP will be approximately one-half the level of 2005. However, the amount recorded could either increase or decrease dependent upon our future assessment of the expected attainment against pre-established performance goals.

In fourth quarter 2005, we accelerated the vesting of all stock options which were scheduled to vest on or after January 1, 2006. As a result, options to purchase approximately 0.8 million shares of our common stock, that would otherwise have vested at various times over the next six years, became fully vested. We recorded a charge of approximately $0.2 million related to the acceleration. This charge was based, in part, on our estimate that approximately 12% of the accelerated options would have been forfeited had the acceleration not occurred. The charge would have been approximately $1.6 million if we had estimated that 100% of the options would have been forfeited had the acceleration not occurred. The acceleration eliminates a non-cash charge of approximately $7.1 million that would have been recognized under SFAS 123 (R) over the next six years. We will continue to recognize expense for our remaining equity-based incentive programs.

On January 1, 2006, we granted approximately 130,000 RSUs to non-management employees. These RSUs will vest over a three year period. Based on our current headcount, we expect to record compensation expense associated with this grant of approximately $1.5 million, $0.7 million and $0.3 million in 2006, 2007 and 2008, respectively.