CEP Plan Administration & Communication 3

Question 1

Under IRC Section 423, an employee stock purchase plan (ESPP) must offer shares at a maximum discount of:

Accepted Answer

15% of fair market value

Answer

Section 423 qualified ESPPs may offer shares at a maximum discount of 15% off the lower of the fair market value at the beginning or end of the offering period.

Question 2

What term describes the process by which a company repurchases shares on the open market to offset dilution from equity awards?

Accepted Answer

Share buyback

Answer

A share buyback (or repurchase program) is when a company buys back its own shares on the open market, often used to offset the dilutive effect of shares issued through equity compensation plans.

Question 3

Which proxy advisory firm's voting guidelines are most commonly cited when companies design equity compensation plans?

Accepted Answer

Institutional Shareholder Services (ISS) and Glass Lewis

Answer

ISS and Glass Lewis are the two leading proxy advisory firms whose guidelines on equity compensation plans (burn rate, overhang, plan cost) heavily influence institutional shareholder voting decisions.

Question 4

A company grants PSUs where the payout depends on TSR relative to a peer group over 3 years. If the company ranks at the 75th percentile, what does a typical plan design pay out?

Accepted Answer

150% of target

Answer

Relative TSR plans typically pay 150% (or up to 200%) of target at the 75th percentile, as that level of outperformance versus peers warrants above-target payout.

Question 5

When a company undergoes a merger and an employee's unvested options are assumed by the acquirer, what typically happens to the vesting schedule?

Accepted Answer

The vesting schedule continues unchanged

Answer

When options are assumed in a merger, the vesting schedule typically continues on its original terms unless the plan or award agreement specifically provides for acceleration upon a change in control.

(CEP) Certified Equity Professional Practice Test

(CEP) Certified Equity Professional Practice Test

CEP Plan Administration & Communication 3