Variable Pay & Incentive Programs Flashcards

In executive compensation, what distinguishes a 'non-qualified stock option (NQSO)' from an 'incentive stock option (ISO)'?

Answer: NQSOs create ordinary income tax at exercise; ISOs may qualify for capital gains treatment if holding requirements are met

NQSOs trigger ordinary income at exercise on the spread, while ISOs may receive favorable capital gains treatment if the employee meets ISO holding period requirements.

A company is experiencing high turnover among top performers in its annual bonus plan. Compensation analysis reveals that payouts for these employees are only marginally higher than for average performers. Which plan design element should be examined first?

Answer: The steepness of the payout curve (leverage) above target

Insufficient differentiation in payout levels between average and high performers undermines the plan's ability to retain and motivate top talent.

Which of the following performance share plan designs BEST aligns executive pay with relative company performance rather than absolute results?

Answer: Payouts are tied to the company's TSR ranking versus a peer group

Relative TSR performance compares the company's returns to peers, rewarding executives for outperforming the market regardless of macro conditions.

Under a phantom stock plan, when does an employee typically recognize taxable income?

Answer: When the phantom shares are paid out in cash

Phantom stock plans are deferred compensation arrangements where tax is recognized only when the cash payment is actually made to the employee.

An organization's incentive plan pays bonuses based on a 'balanced scorecard' approach incorporating financial, customer, process, and learning metrics. What is the PRIMARY advantage of this multi-metric design?

Answer: It prevents employees from over-focusing on one dimension at the expense of others

Multi-metric plans using a balanced scorecard ensure employees pursue a range of organizational objectives rather than gaming a single measure.

A company grants stock appreciation rights (SARs) to employees. What is the primary advantage of SARs versus stock options from the employee's perspective?

Answer: SARs require no cash outlay at exercise because the gain is paid directly in cash or shares

SARs allow employees to receive the appreciation in stock value without needing to purchase shares first, eliminating the need for exercise funds.

Which of the following BEST describes a 'target incentive opportunity' in a short-term incentive plan?

Answer: The bonus amount expressed as a percentage of base pay that an employee earns for achieving 100% of performance goals

Target incentive opportunity is the intended award at 100% goal achievement, typically expressed as a percent of base salary by role level.