Corporate Governance Executive Compensation & Incentives

Question 1

What is a 'clawback' provision in executive compensation?

Accepted Answer

A policy that requires executives to repay incentive compensation if financial results are restated

Answer

Clawback provisions allow companies to recover previously paid incentive compensation if the company restates financials or if executive misconduct is discovered.

Question 2

What is the primary purpose of equity-based executive compensation?

Accepted Answer

To align executive interests with long-term shareholder value creation

Answer

Equity-based compensation like stock options and RSUs ties executive wealth to share price performance, aligning their interests with shareholders.

Question 3

Under IRC Section 162(m), what was the original limit on deductible executive compensation?

Accepted Answer

$1 million per executive

Answer

IRC Section 162(m) originally limited the tax deductibility of compensation paid to covered executives to $1 million per year.

Question 4

What is a 'restricted stock unit' (RSU)?

Accepted Answer

A company's promise to deliver shares upon satisfaction of vesting conditions (typically service-based)

Answer

RSUs are promises to deliver shares after vesting conditions (usually time-based continued employment) are satisfied, and have value as long as the stock price is positive.

Question 5

What does the CEO pay ratio disclosure rule (SEC) require companies to report?

Accepted Answer

The ratio of CEO total compensation to the median employee's total compensation

Answer

Under Dodd-Frank's CEO pay ratio rule, public companies must disclose the ratio of CEO total annual compensation to the median annual total compensation of all employees.

Corporate Governance Practice Test

Corporate Governance Practice Test

Corporate Governance Executive Compensation & Incentives