Corporate Governance Executive Compensation & Incentives 2

Question 1

What is a 'performance share unit' (PSU)?

Accepted Answer

An equity award where the number of shares delivered depends on achieving multi-year performance targets

Answer

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?

Accepted Answer

An advisory shareholder vote on change-of-control compensation arrangements disclosed in merger proxy statements

Answer

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?

Accepted Answer

Total shareholder return (TSR)

Answer

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'?

Accepted Answer

A stock option whose exercise price exceeds the current market price, making it valueless to exercise

Answer

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?

Accepted Answer

Setting and overseeing executive compensation in alignment with company strategy and shareholder interests

Answer

The Compensation Committee, composed of independent directors, sets executive pay strategy, approves compensation packages, and ensures pay aligns with performance.

Corporate Governance Practice Test

Corporate Governance Practice Test

Corporate Governance Executive Compensation & Incentives 2