Corporate Governance Executive Compensation & Incentives 2 — Questions and Answers
Question 1: What is a 'performance share unit' (PSU)?
- An equity award where the number of shares delivered depends on achieving multi-year performance targets (Correct answer)
- A stock option with performance-based vesting over one year
- A cash bonus tied to stock price milestones
- An RSU that vests immediately upon grant
Correct answer: An equity award where the number of shares delivered depends on achieving multi-year performance targets
PSUs are long-term equity awards where the final number of shares earned depends on meeting specified multi-year financial or stock performance goals.
Question 2: What is the 'say on golden parachutes' vote required by Dodd-Frank?
- An advisory shareholder vote on change-of-control compensation arrangements disclosed in merger proxy statements (Correct answer)
- An annual shareholder vote on executive severance packages
- A mandatory binding vote required before any executive termination
- A quarterly compensation committee vote on parachute eligibility
Correct answer: An advisory shareholder vote on change-of-control compensation arrangements disclosed in merger proxy statements
Dodd-Frank requires companies to hold an advisory shareholder vote on golden parachute compensation packages disclosed in merger proxy statements.
Question 3: Which metric is most commonly used in long-term incentive plans to measure shareholder value creation?
- Return on equity (ROE)
- Total shareholder return (TSR) (Correct answer)
- Earnings per share (EPS)
- Gross profit margin
Correct answer: Total shareholder return (TSR)
Total shareholder return (TSR), which combines stock price appreciation and dividends, is the most common long-term incentive metric because it directly measures shareholder value.
Question 4: What is an 'underwater stock option'?
- A stock option whose exercise price exceeds the current market price, making it valueless to exercise (Correct answer)
- A stock option granted to executives in exchange for underwater debt
- An option that has been pledged as collateral for a margin loan
- A stock option issued when the company's stock is at its 52-week low
Correct answer: A stock option whose exercise price exceeds the current market price, making it valueless to exercise
An underwater option has an exercise price above the current stock price, so exercising it would be economically irrational because the executive would pay more than market value.
Question 5: What is the role of the Compensation Committee in executive pay governance?
- Setting and overseeing executive compensation in alignment with company strategy and shareholder interests (Correct answer)
- Approving all employee salary increases company-wide
- Managing the company's equity award pool for all employees
- Reporting executive compensation directly to the SEC
Correct answer: Setting and overseeing executive compensation in alignment with company strategy and shareholder interests
The Compensation Committee, composed of independent directors, sets executive pay strategy, approves compensation packages, and ensures pay aligns with performance.
Question 6: What is an 'independent compensation consultant'?
- A third-party advisor retained by the Compensation Committee to provide unbiased executive pay advice (Correct answer)
- An SEC-appointed expert who reviews all executive pay disclosures
- A shareholder representative who advises the board on pay levels
- An outside auditor who validates the accuracy of bonus calculations
Correct answer: A third-party advisor retained by the Compensation Committee to provide unbiased executive pay advice
An independent compensation consultant is hired by (and reports only to) the Compensation Committee to provide objective advice on executive pay design and market benchmarks.
Corporate Governance Executive Compensation & Incentives 2
What is a 'performance share unit' (PSU)?