CCP Executive Compensation & Benefits 2 — Questions and Answers
Question 1: Which IRC section governs the $1 million deductibility cap on executive compensation for publicly held corporations?
- Section 409A
- Section 162(m) (Correct answer)
- Section 280G
- Section 83(b)
Correct answer: Section 162(m)
IRC Section 162(m) limits the corporate tax deduction for compensation paid to covered employees of publicly held corporations to $1 million annually.
Question 2: A 'golden parachute' payment triggers IRC Section 280G excise taxes when it exceeds what threshold?
- 1x the executive's base salary
- 2x the executive's average annual compensation
- 3x the executive's average annual compensation (Correct answer)
- 5x the executive's total compensation
Correct answer: 3x the executive's average annual compensation
Section 280G imposes a 20% excise tax on 'excess parachute payments' — those exceeding 3x the executive's average annual W-2 compensation over the prior 5 years.
Question 3: What is the primary purpose of a rabbi trust in executive compensation?
- To provide tax-exempt investment growth for executives
- To secure deferred compensation against employer insolvency with pretax deferral treatment (Correct answer)
- To provide an irrevocable funding vehicle that gives executives secured claims
- To allow executives to defer taxes permanently
Correct answer: To secure deferred compensation against employer insolvency with pretax deferral treatment
A rabbi trust informally funds deferred compensation obligations and protects against employer bankruptcy, but assets remain subject to the claims of general creditors, preserving tax deferral.
Question 4: Under SEC rules, which proxy disclosure document must detail the compensation of Named Executive Officers (NEOs)?
- Form 10-K Annual Report
- Compensation Discussion and Analysis (CD&A) (Correct answer)
- Form 8-K Current Report
- Schedule 13D
Correct answer: Compensation Discussion and Analysis (CD&A)
The Compensation Discussion and Analysis (CD&A) section of the proxy statement is required by SEC rules to explain the rationale and details of NEO compensation.
Question 5: A nonqualified deferred compensation plan that fails to comply with IRC Section 409A requirements faces what immediate consequences for the employee?
- Plan termination and return of contributions
- Immediate income inclusion, 20% additional tax, and interest penalty (Correct answer)
- Loss of employer matching contributions only
- Mandatory plan redesign with no retroactive penalties
Correct answer: Immediate income inclusion, 20% additional tax, and interest penalty
Section 409A violations cause all deferred amounts to become immediately taxable, plus a 20% penalty tax and underpayment interest on the amounts.
Question 6: Which performance metric is most commonly used in Long-Term Incentive (LTI) plans to align executives with shareholder interests?
- Revenue growth
- Total Shareholder Return (TSR) (Correct answer)
- Employee engagement scores
- Operating cash flow margin
Correct answer: Total Shareholder Return (TSR)
Total Shareholder Return (TSR), which combines stock price appreciation and dividends, is the most widely used LTI metric because it directly mirrors the shareholder experience.
Question 7: What is a 'clawback' provision in executive compensation?
- A vesting acceleration clause triggered by a change in control
- A requirement to repay previously awarded compensation under specific conditions (Correct answer)
- A cap on annual bonus payments above a set threshold
- A provision allowing executives to defer bonus payments
Correct answer: A requirement to repay previously awarded compensation under specific conditions
A clawback provision requires executives to return previously paid compensation, typically when financial restatements or misconduct are discovered.
CCP Executive Compensation & Benefits 2
Which IRC section governs the $1 million deductibility cap on executive compensation for publicly held corporations?