Variable Pay & Incentive Programs Flashcards
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Read the first 7 Variable Pay & Incentive Programs flashcards as text
Under IRC Section 162(m), what is the maximum deductible compensation that a publicly held corporation may pay to a 'covered employee' in a single tax year?
Answer: $1 million
IRC Section 162(m) limits the tax deductibility of compensation paid to covered employees (typically top executives) to $1 million per year.
A company awards performance shares that pay out based on achieving a 3-year EPS growth target. If the target is missed, no shares are awarded. This is an example of what type of equity award?
Answer: Performance-contingent equity
Performance-contingent equity awards (like performance shares) deliver shares only if specific financial or operational goals are achieved.
Which of the following represents a 'clawback' provision in an executive incentive plan?
Answer: The company can recoup previously paid bonuses if financial results are later restated
A clawback allows the company to recover compensation already paid if subsequent events (like a financial restatement) reveal the award was unwarranted.
A Rucker Plan gainsharing formula calculates payouts based on the ratio of labor costs to the value added by manufacturing. What does 'value added' represent in this context?
Answer: Sales value of production minus the cost of materials and supplies
The Rucker Plan uses a value-added formula where production value minus material costs equals the base for calculating the labor cost ratio.
When designing a sales incentive plan, a 'draw against commission' provision primarily serves which function?
Answer: Provides sales reps a guaranteed advance on future commissions during ramp-up periods
A draw against commission gives sales employees a regular payment during periods of low sales (like onboarding), which is later offset against earned commissions.
Which statement BEST describes the concept of 'line of sight' in incentive plan design?
Answer: Employees must be able to see a clear connection between their individual actions and the plan's performance measures
Line of sight means employees can directly link their day-to-day behaviors and decisions to the metrics driving their incentive payout.
A company transitions from a pure commission plan to a 'salary plus bonus' structure for its sales force. What is the PRIMARY organizational benefit of this change?
Answer: It provides more income stability for employees and encourages a broader range of selling behaviors
Salary plus bonus plans balance security (via base pay) with motivation (via bonus), encouraging activities beyond pure transaction closing.