CCP Incentive Compensation 2

Question 1

A company wants to reduce windfall payouts during unusually high market cycles. Which plan design feature best addresses this?

Accepted Answer

Performance cap or maximum payout limit

Answer

A maximum payout cap limits incentive payouts to a defined ceiling, preventing windfalls during atypical high-performance periods.

Question 2

Under a nonqualified deferred compensation plan subject to IRC Section 409A, when must a participant make an initial deferral election?

Accepted Answer

Before the beginning of the year in which services are performed

Answer

IRC Section 409A generally requires deferral elections to be made before the start of the taxable year in which the services are rendered.

Question 3

Which metric is most commonly used in relative Total Shareholder Return (TSR) plans to determine payout?

Accepted Answer

Percentile rank vs. peer group

Answer

Relative TSR plans compare the company's shareholder return to a peer group, ranking performance at a specific percentile to determine award payouts.

Question 4

An employee receives a $10,000 cash bonus. Under FICA rules, how is this supplemental wage payment treated?

Accepted Answer

Subject to FICA taxes at the same rate as regular wages

Answer

Bonus payments are supplemental wages and are subject to FICA (Social Security and Medicare) taxes just like regular wages.

Question 5

A sales incentive plan pays reps 5% commission on revenue up to quota and 8% on revenue above quota. This structure is known as:

Accepted Answer

Accelerated commission schedule

Answer

An accelerated commission schedule increases the payout rate once a threshold (quota) is exceeded, motivating above-target performance.

(CCP) Certified Compensation Professional Practice Test