CCP Incentive Compensation 3 — Questions and Answers
Question 1: A company grants 1,000 stock options with a 4-year graded vesting schedule (25% per year). If the employee leaves after 2.5 years, how many options are vested?
- 250
- 500 (Correct answer)
- 625
- 750
Correct answer: 500
With 25% graded vesting per year, only fully completed years count: 2 years × 250 options = 500 vested options.
Question 2: Which of the following is a key disadvantage of using earnings per share (EPS) as the sole long-term incentive metric?
- It is too difficult to calculate quarterly
- It can be improved through share buybacks without operational improvement (Correct answer)
- It ignores dividend payments to shareholders
- It is not recognized under GAAP
Correct answer: It can be improved through share buybacks without operational improvement
EPS can be artificially inflated through share repurchases, which reduce the share count without improving underlying business performance.
Question 3: Under ASC 718, which event triggers remeasurement of liability-classified share-based awards?
- Each reporting date until settlement (Correct answer)
- Only at the grant date
- Only at the vesting date
- When the stock price exceeds the exercise price
Correct answer: Each reporting date until settlement
Liability-classified awards under ASC 718 must be remeasured at fair value each reporting period until final settlement.
Question 4: A company adopts a balanced scorecard approach for its annual incentive plan. This means the plan measures performance across:
- Financial results only, weighted by business unit size
- Multiple perspectives including financial, customer, internal process, and learning (Correct answer)
- Sales volume and customer satisfaction exclusively
- CEO strategic goals applied uniformly across all employees
Correct answer: Multiple perspectives including financial, customer, internal process, and learning
The balanced scorecard framework incorporates financial, customer, internal process, and learning/growth perspectives to give a holistic performance view.
Question 5: Which of the following best describes a 'golden handcuff' arrangement?
- An employment contract prohibiting competition after termination
- Incentive pay that vests over time to retain employees (Correct answer)
- A signing bonus clawback provision
- A severance agreement tied to non-disparagement
Correct answer: Incentive pay that vests over time to retain employees
Golden handcuffs are deferred compensation or equity awards structured to vest over time, creating a financial incentive for employees to remain with the company.
Question 6: In a performance share unit (PSU) plan, what typically happens if the company's performance falls below the threshold level?
- Participants receive target award regardless
- No shares are earned and the award is forfeited (Correct answer)
- Participants receive 50% of target shares
- The performance period is extended by one year
Correct answer: No shares are earned and the award is forfeited
PSU plans typically specify a threshold performance level below which no award is earned, resulting in full forfeiture of the PSU grant.
Question 7: Which pay mix strategy is most appropriate for a sales role where results are highly controllable by the individual?
- High base salary with minimal variable pay
- Low base salary with high variable pay (aggressive leverage) (Correct answer)
- Equal split between base and variable
- 100% base salary with team-based profit sharing
Correct answer: Low base salary with high variable pay (aggressive leverage)
When individual performance is highly controllable, an aggressive leverage mix — low base, high variable — maximizes motivation and pay-for-performance alignment.
CCP Incentive Compensation 3
A company grants 1,000 stock options with a 4-year graded vesting schedule (25% per year).
If the employee leaves after 2.5 years, how many options are vested?