CCP Variable Pay & Incentive Programs 3 — Questions and Answers
Question 1: Under IRC Section 162(m), what is the maximum deductible compensation that a publicly held corporation may pay to a 'covered employee' in a single tax year?
- $1 million (Correct answer)
- $5 million
- $10 million
- $500,000
Correct answer: $1 million
IRC Section 162(m) limits the tax deductibility of compensation paid to covered employees (typically top executives) to $1 million per year.
Question 2: A company awards performance shares that pay out based on achieving a 3-year EPS growth target. If the target is missed, no shares are awarded. This is an example of what type of equity award?
- Performance-contingent equity (Correct answer)
- Time-vested restricted stock
- Non-qualified stock options
- Stock appreciation rights (SARs)
Correct answer: Performance-contingent equity
Performance-contingent equity awards (like performance shares) deliver shares only if specific financial or operational goals are achieved.
Question 3: Which of the following represents a 'clawback' provision in an executive incentive plan?
- The company can recoup previously paid bonuses if financial results are later restated (Correct answer)
- Employees forfeit unvested awards upon voluntary resignation
- A cap prevents payouts from exceeding 200% of target
- The board can reduce the bonus pool at year-end
Correct answer: The company can recoup previously paid bonuses if financial results are later restated
A clawback allows the company to recover compensation already paid if subsequent events (like a financial restatement) reveal the award was unwarranted.
Question 4: A Rucker Plan gainsharing formula calculates payouts based on the ratio of labor costs to the value added by manufacturing. What does 'value added' represent in this context?
- Sales value of production minus the cost of materials and supplies (Correct answer)
- Total revenue minus total operating expenses
- Gross profit before depreciation
- Net income after taxes
Correct answer: Sales value of production minus the cost of materials and supplies
The Rucker Plan uses a value-added formula where production value minus material costs equals the base for calculating the labor cost ratio.
Question 5: When designing a sales incentive plan, a 'draw against commission' provision primarily serves which function?
- Provides sales reps a guaranteed advance on future commissions during ramp-up periods (Correct answer)
- Caps total commission earnings at a predetermined maximum
- Requires reps to repay all commissions if they leave within one year
- Allocates commissions equally across all team members
Correct answer: Provides sales reps a guaranteed advance on future commissions during ramp-up periods
A draw against commission gives sales employees a regular payment during periods of low sales (like onboarding), which is later offset against earned commissions.
Question 6: Which statement BEST describes the concept of 'line of sight' in incentive plan design?
- Employees must be able to see a clear connection between their individual actions and the plan's performance measures (Correct answer)
- The incentive plan must be visible to all employees on the company intranet
- Plan targets must be set using direct line management approval
- Performance data must be reviewed by line managers monthly
Correct answer: Employees must be able to see a clear connection between their individual actions and the plan's performance measures
Line of sight means employees can directly link their day-to-day behaviors and decisions to the metrics driving their incentive payout.
Question 7: A company transitions from a pure commission plan to a 'salary plus bonus' structure for its sales force. What is the PRIMARY organizational benefit of this change?
- It provides more income stability for employees and encourages a broader range of selling behaviors (Correct answer)
- It reduces total compensation expense for the organization
- It eliminates the need for performance management processes
- It qualifies employees for overtime under FLSA
Correct answer: It provides more income stability for employees and encourages a broader range of selling behaviors
Salary plus bonus plans balance security (via base pay) with motivation (via bonus), encouraging activities beyond pure transaction closing.
CCP Variable Pay & Incentive Programs 3
Under IRC Section 162(m), what is the maximum deductible compensation that a publicly held corporation may pay to a 'covered employee' in a single tax year?