Variable Pay & Incentive Programs Flashcards
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Read the first 7 Variable Pay & Incentive Programs flashcards as text
A company establishes a bonus plan where the CEO has full discretion to adjust final payouts up or down based on qualitative factors after the formula calculates results. This is called a:
Answer: Discretionary modifier or overlay
A discretionary modifier allows leadership to adjust formula-calculated payouts to account for factors the formula didn't capture, such as exceptional circumstances.
Which of the following is the MOST significant risk associated with setting incentive plan targets too low ('sandbagging')?
Answer: The company overpays incentives while delivering mediocre performance outcomes
Sandbagged targets result in high payouts for performance that doesn't actually drive shareholder value, misaligning pay and performance.
An organization uses a 'multiplier' design in its bonus plan where a business unit financial metric is multiplied by an individual performance rating. If the individual modifier range is 0.5x to 1.5x, what purpose does this serve?
Answer: It differentiates individual payouts within the business unit pool based on personal contribution
The individual modifier allows the organization to fund the bonus pool at the business unit level while still rewarding individual contributors differently based on performance ratings.
Which SEC rule requires public company proxy disclosure of the compensation paid to the CEO, CFO, and the next three highest-paid named executive officers (NEOs)?
Answer: SEC Item 402 of Regulation S-K
SEC Regulation S-K Item 402 mandates the Summary Compensation Table and related executive pay disclosures in annual proxy statements.
A manufacturing plant implements a team-based gainsharing plan. Management is concerned that 'free riders' will reduce the plan's effectiveness. Which plan design feature BEST mitigates this risk?
Answer: Incorporating an individual performance modifier that adjusts each employee's share of the gain pool
An individual modifier tied to personal contribution or attendance ensures that poor performers or free riders receive a smaller share of the team's collective gain.
Under FASB ASC 718, how must companies account for the cost of equity-based compensation such as stock options and RSUs?
Answer: The fair value at grant date must be recognized as compensation expense over the vesting period
ASC 718 requires companies to measure equity awards at grant-date fair value and amortize that expense over the service (vesting) period.
A company wants to implement a long-term incentive plan that provides value even if the stock price declines, as long as the company outperforms its peers. Which LTI vehicle BEST achieves this goal?
Answer: Relative TSR performance shares
Relative TSR performance shares reward executives for outperforming peers even in a down market, since the metric is relative rank, not absolute stock price.