Replies to post #165237 on InterDigital Inc (IDCC)

[revlis]

Walt,

Read this. It is not necessary so.

About Restricted Stock Units

A Restricted Stock Unit is a grant valued in terms of company stock, but company stock is not issued at the time of the grant. After the recipient of a unit satisfies the vesting requirement, the company distributes shares, or the cash equivalent of the number of shares used to value the unit. Depending on plan rules, the participant or donor may be allowed to choose whether to settle in stock or cash.
How do Restricted Stock Unit Plans work?
Once an employee is granted Restricted Stock Units, the employee must decide whether to accept or decline the grant. If the employee accepts the grant, he may be required to pay the employer a purchase price for the grant.
After accepting a grant and providing payment (if applicable), the employee must wait until the grant vests. Vesting periods for Restricted Stock Units may be time-based (a stated period from the grant date) or performance-based (often tied to achievement of corporate goals).
When Restricted Stock Units vest, the employee receives the shares of company stock or the cash equivalent (depending on the company's plan rules) without restriction. Your company may allow or require you to defer receipt of the shares or cash equivalent (also depending on the company's plan rules) until a later date.
Income Tax Treatment
Under normal federal income tax rules, an employee receiving Restricted Stock Units is not taxed at the time of the grant. Instead, the employee is taxed at vesting (when the restrictions lapse) unless the employee chooses to defer receipt of the cash or shares. In these circumstances, the employee must pay statutory minimum taxes as determined by their employer at vesting, but payment of all other taxes can be deferred until the time of distribution, when the employee actually takes receipt of the shares or cash equivalent (depending on the company's plan rules). The amount of income subject to tax is the difference between the fair market value of the grant at the time of vesting or distribution, minus the amount paid for the grant (if any).
For grants that pay in actual shares, the employee's tax holding period begins at the time of distribution (which may or may not coincide with vesting depending on the plan rules), and the employee's tax basis is equal to the amount paid for the stock plus the amount included as ordinary compensation income. Upon a later sale of the shares, assuming the employee holds the shares as a capital asset, the employee would recognize capital gain income or loss; whether such capital gain would be a short- or long-term gain would depend on the time between the beginning of the holding period at vesting and the date of the subsequent sale. Consult your tax adviser regarding the income tax consequences to you.

[revlis]

Compensation Practices

The Committee reviews corporate performance of the prior year on an annual basis as part of its approval of the annual compensation of the Company’s executive officers and Chief Executive Officer. The Committee evaluates and rates Company performance against each of the corporate goals for the year. While achievement of corporate goals is the primary driver of annual cash compensation, individual performance is also considered. The Committee also approves corporate goals for the ensuing year. Long-term corporate performance (currently measured over a three and one-half year cycle and subsequently over three-year cycles) is used in awarding compensation to executives under the Company’s LTIP, as described below.

Since 2002, the Committee has primarily used grants of restricted stock (i.e., shares with time-based restrictions on transferability) and RSUs to provide long-term incentives to executive officers and to focus executives on shareholder value. In the Committee’s view, RSUs are also a useful retention vehicle in executive compensation, and have the added benefit of reducing share dilution in that the number of shares awarded is generally less than the number of option shares that would customarily be granted. Stock options have been



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limited to new hire grants and, until 2004, the Company’s Inventor Compensation Policy. The Inventor Compensation Policy was revised in 2004 to provide that awards to inventors be made in cash rather than options.

Base salaries for executive officers are generally set at a median level relative to companies of similar size within the telecom industry. Additional considerations include individual performance, contributions, skills and attributes. As part of its review of salaries, the Committee periodically considers survey data provided by outside compensation consultants. Additional benchmarking data has been reviewed when assessing the compensation of executives performing certain key functions for the Company which are less common to the industry peer group.

As part of its process of approving salary adjustments and bonuses of executive officers, the Committee reviews other components of executive compensation such as potential payouts under the LTIP, potential value of RSU awards upon vesting and total annual cash compensation. Tally sheets setting forth the above information were prepared for the Committee’s review and consideration.

Executive Compensation

The principal elements of executive compensation are: base salary, annual bonus, and awards of RSUs and performance-based cash awards under the Company’s Long Term Compensation Program. Perquisites have not been a significant component of executive compensation.

Base Salary

It is the Committee’s practice to meet throughout the course of the year to review executive compensation, and meet at least annually to review and approve salary increases for executive officers, including the Chief Executive Officer. The Committee’s policy is generally to set and maintain competitive base salaries for each executive officer, including the Chief Executive Officer, for equivalent jobs with similarly situated employers. Additional considerations in the review of base salaries and approval of annual increases for fiscal 2005 included individual officer’s contributions and the Company’s performance during the prior fiscal year. Base salary adjustments for individual performance of executive officers other than the Chief Executive Officer in 2005 were based primarily upon recommendations from the Chief Executive Officer.

All current executive officers received a percentage increase to their salaries in 2005. The salaries paid for the past three years to Named Officers are shown in the Summary Compensation Table on page 14.

Annual Bonus

The Committee uses the Company-wide Annual Employee Bonus Plan to drive achievement toward specified goals and give employees a stake in the performance of the Company. Annual bonuses awarded under this plan to executive officers, including the Chief Executive Officer, are based on two factors: the Company’s actual results measured against its annual corporate goals, and individual performance appraisals. Each executive officer is assigned a target bonus representing a percentage of salary based on such individual’s position with the Company. The target level bonuses range from 57% of base salary for the Chief Executive Officer to 40% of base salary for other executive officers. If the Company achieves certain target business performance results and the executive achieves certain target appraisal ratings, the executive will be paid the target bonus. If actual results vary from such targets, the bonus paid may be adjusted up or down to reflect the variation. In keeping with our philosophy to align the interests of executive officers with the interests of our shareholders, 30% of an executive officer’s bonus is generally paid in shares of restricted stock. These shares are restricted as to transferability for a two-year period, but are not forfeitable. The shares have full voting power and the right to receive dividends. Due to the restriction on transferability of the shares, the Committee provides additional cash compensation in the form of a tax gross-up to cover each executive officer’s tax liability associated with the restricted stock grant.



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Corporate goals for 2005 consisted of cash flow targets, corporate development and technology development milestones, strengthening of the organization, and results in key litigation and arbitration proceedings. The Committee scored performance against the 2005 corporate goals in the aggregate at 94%. Consistent with the terms of the corporate goals established in 2005, payment of approximately 4% of the Named Officers’ 2005 annual bonus is contingent upon previously established conditions. This portion of their bonus is forfeitable if the officer’s employment terminates prior to achievement. Individual performance measures for executive officers other than the Chief Executive Officer are based partially upon recommendations from the Chief Executive Officer and partially on the Committee’s view of the individual’s performance. Annual bonuses for each Named Officer are approved following a weighing of the corporate performance score together with the Committee’s measure as to each executive’s individual performance.

Long-Term Incentives

In 2004, we initiated our Long-Term Compensation Program (the “Program”) which is comprised of (1) time-based RSU awards designed to both attract and retain qualified management and provide long-term equity compensation, and (2) an LTIP designed to reward management for long-term corporate performance. The Program operates in cycles. RSUs granted to executive officers generally vest in full, three years from date of grant. Cash awards under the LTIP portion of the Program are also generally based on three year cycles as more fully described below and under the Long-Term Incentive Plan Table at page 17. Any cash award is based upon long-term performance goals approved by the Committee at targets set as a percentage of base salary.


• Equity

In addition to receiving 30% of their 2005 bonuses in the form of restricted stock, all current executive officers including the Chief Executive Officer received awards of RSUs under the Company’s Long-Term Compensation Program. On January 1, 2005 each of the Named Officers received an RSU award under the Program based on a percentage of base salary at the time of grant, as more fully described in the Summary Compensation Table.


• Cash Awards

The LTIP, instituted in 2004, as part of our Long-Term Compensation Program, provides performance-based cash awards to the Chief Executive Officer, executive officers and other managerial level employees based on the Company’s achievement of certain performance goals established by the Committee for each program cycle. These goals are established as a percentage of base salary (as in effect at the start of each LTIP cycle) and a payout under the LTIP is based on the Company’s achievement of such goals. The payout may exceed or be less than the targeted percentage of base salary depending on the Company’s achievement of the goals, or no payout may be made if the Company fails to meet the minimum performance goals for the cycle.

The LTIP operates in overlapping cycles the first of which was completed on January 1, 2006. A payout was made shortly thereafter. The second cycle, which originally covered the period January 1, 2005 to January 1, 2008, was revised by the Committee in June 2005 to cover a three and one-half year period beginning July 1, 2005 to January 1, 2009 (“Cycle 2”). The Named Officers received a pro rata cash payment covering the period of time from January 1, 2005 to June 30, 2005 (Interim Period) as reported in the Summary Compensation Table. Subsequent cycles are intended to be overlapping three-year cycles, beginning on January 1, 2008 and recurring every other year thereafter. Information regarding targeted payouts to Named Officers under Cycle 2 is set forth on page 17.

Perquisites and other benefit programs

Selective perquisites were given to former executive officers in 2005. Dr. Briancon, who served as Chief Technology Officer of the Company until October 2005, received an allowance in connection with housing.



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Executive officers also participate in benefit programs available to employees generally such as health and dental insurance, life insurance, 401(k) matching and profit sharing, and a cash perk program which entitles employees, on an annual basis, to 3.5% of their annual salary (collectively, “Employee Benefit Programs”).

Chief Executive Officer Compensation

We follow the same basic principles described above with respect to executive officer compensation in evaluating and approving the compensation of the Chief Executive Officer. Mr. Goldberg served as Chief Executive Officer of the Company until May 2005 at which time Mr. Merritt was appointed Chief Executive Officer.

Adjustments to Mr. Goldberg’s base salary and the individual portion of his bonus for 2005 took into account individual performance and assessment by the Chairman of the Board of Directors. Consideration was given to the successes achieved by the Company during 2004. Under the terms of our Annual Employee Bonus Plan, Mr. Goldberg’s target bonus, as Chief Executive Officer, was 57% of base salary. His target awards under each of the LTIP and RSU award portion of our long-term compensation program was 120% of base salary. When the Committee revised Cycle 2 of the LTIP in June 2005, Mr. Goldberg received a pro rata portion of the payment made for the Interim Period. While use of perks has been limited at the Company, Mr. Goldberg, as Chief Executive Officer, received a car allowance and reimbursement for limited personal expenses. Mr. Goldberg also participated in the Employee Benefit Programs. In connection with his termination of employment as Chief Executive Officer, Mr. Goldberg and the Company entered into a severance agreement providing for payments consistent with his employment agreement. See “Named Officer Employment and Severance Agreements”.

In approving Mr. Merritt’s compensation when he became the Company’s Chief Executive Officer in May 2005, the Committee considered the compensation of the prior Chief Executive Officer and Mr. Merritt’s experience and knowledge of the Company’s business. His annual bonus target and target awards under each of the LTIP and RSU award portion of our Long-Term Compensation Program are the same as those applied to Mr. Goldberg; and, he was awarded a pro rata increase in the number of RSUs previously awarded to him under the then current cycles of the Long-Term Compensation Program to meet the award band applicable to the Chief Executive Officer. In connection with his promotion, Mr. Merritt was awarded 10,000 RSUs vesting over three years. Mr. Merritt does not receive a car allowance but receives compensation under the Employee Benefit Programs as described above. In December 2005, the Committee awarded Mr. Merritt a discretionary bonus of $25,000 for his performance as Chief Executive Officer.