Executive Compensation & Benefits Flashcards

The CEO Pay Ratio disclosure required by the Dodd-Frank Act compares the CEO's annual total compensation to:

Answer: The median annual total compensation of all employees

Dodd-Frank Section 953(b) requires public companies to disclose the ratio of CEO annual total compensation to the median annual total compensation of all employees.

In the context of executive compensation, what is a 'phantom stock' plan?

Answer: A cash-based plan that mirrors the value of company stock without delivering actual shares

Phantom stock plans pay cash equal to the appreciation (or full value) of a hypothetical number of shares, providing stock-like incentives without diluting actual equity.

Which principle guides the compensation committee when setting pay for the CEO in a scenario where the CEO also chairs the board?

Answer: Independent directors should make all compensation decisions to avoid conflicts of interest

Corporate governance best practice requires that independent directors — not the CEO — make all decisions about CEO compensation to prevent conflicts of interest.

Under IRC Section 409A, which of the following is a permissible distribution event for nonqualified deferred compensation?

Answer: Separation from service

Section 409A permits distributions only upon specific events: separation from service, disability, death, a specified time or schedule, change in control, or unforeseeable emergency.

A company benchmarks its executive pay at the 75th percentile of its peer group. This practice is best characterized as:

Answer: An above-median pay positioning strategy intended to attract high-caliber talent

Targeting the 75th percentile positions compensation above the market median (50th percentile), which can help attract and retain top executive talent but may raise shareholder concern about pay levels.

What is the primary purpose of including 'relative TSR' as a PSU performance metric compared to 'absolute TSR'?

Answer: It measures performance against market conditions, rewarding outperformance regardless of overall market direction

Relative TSR compares the company's stock return to a peer group or index, rewarding executives for outperforming competitors rather than benefiting from broad market tailwinds.

Which of the following best describes an 'evergreen provision' in an executive stock option plan?

Answer: An automatic annual replenishment of the share pool reserved for equity grants

An evergreen provision automatically adds shares to an equity plan's pool each year (often as a fixed percentage of shares outstanding), eliminating the need for repeated shareholder approval.