CCP Executive Compensation & Benefits 3 — Questions and Answers
Question 1: Which type of executive benefit provides a supplemental retirement income stream outside of qualified plan limits?
- Employee Stock Purchase Plan (ESPP)
- Supplemental Executive Retirement Plan (SERP) (Correct answer)
- Health Reimbursement Arrangement (HRA)
- Flexible Spending Account (FSA)
Correct answer: Supplemental Executive Retirement Plan (SERP)
A SERP is a nonqualified plan designed to provide retirement benefits to executives that exceed the IRS limits applicable to qualified plans like 401(k)s.
Question 2: When valuing stock options for executive compensation reporting purposes, which model is most commonly referenced under ASC 718?
- Discounted Cash Flow (DCF) model
- Black-Scholes-Merton model (Correct answer)
- Capital Asset Pricing Model (CAPM)
- Dividend Discount Model
Correct answer: Black-Scholes-Merton model
ASC 718 requires stock-based compensation to be measured at fair value, and the Black-Scholes-Merton model is the most widely used option pricing model for this purpose.
Question 3: A 'say-on-pay' vote is best described as:
- A binding shareholder vote that mandates specific executive pay levels
- An advisory shareholder vote on the executive compensation program (Correct answer)
- An SEC enforcement action on excessive executive pay
- A board resolution setting CEO compensation caps
Correct answer: An advisory shareholder vote on the executive compensation program
Mandated by the Dodd-Frank Act, say-on-pay is a non-binding (advisory) shareholder vote on the overall executive compensation program at least every three years.
Question 4: What does a 'double trigger' in a change-in-control severance agreement require?
- Two consecutive years of below-target performance before severance is paid
- Both a change in control AND a qualifying termination event before benefits are triggered (Correct answer)
- Board approval followed by shareholder ratification of severance payments
- Two separate change-in-control events within a 12-month period
Correct answer: Both a change in control AND a qualifying termination event before benefits are triggered
A double trigger requires two events: first a change in control occurs, and second the executive experiences a qualifying termination (e.g., involuntary termination or constructive dismissal).
Question 5: Which of the following best describes the role of a compensation committee's independent consultant?
- To negotiate executive employment contracts on behalf of management
- To provide objective advice to the board on executive pay design and market data (Correct answer)
- To set executive pay levels within statutory limits
- To audit the company's financial statements for compensation accuracy
Correct answer: To provide objective advice to the board on executive pay design and market data
An independent compensation consultant advises the board's compensation committee on market data, pay program design, and governance best practices without conflicting advisory roles to management.
Question 6: Performance Share Units (PSUs) differ from Restricted Stock Units (RSUs) primarily because PSUs:
- Vest solely based on continued employment over time
- Have a fixed dollar value at grant and are paid in cash
- Vest based on achieving specific performance goals over a measurement period (Correct answer)
- Are always settled in cash rather than stock
Correct answer: Vest based on achieving specific performance goals over a measurement period
PSUs require the achievement of predefined performance metrics (such as EPS growth or relative TSR) during a performance period before shares are earned, unlike RSUs which typically vest on time alone.
Question 7: What is the primary tax advantage of an IRC Section 83(b) election for restricted stock grants?
- It eliminates all federal income tax on the stock gain
- It allows the executive to pay ordinary income tax at grant on the current low value instead of at vesting (Correct answer)
- It converts all future gains from ordinary income to capital gains at vesting
- It defers taxation until the stock is sold
Correct answer: It allows the executive to pay ordinary income tax at grant on the current low value instead of at vesting
An 83(b) election lets the executive recognize ordinary income on the fair market value at grant (often low) rather than at vesting, converting subsequent appreciation to long-term capital gains.
CCP Executive Compensation & Benefits 3
Which type of executive benefit provides a supplemental retirement income stream outside of qualified plan limits?