Executive Compensation Governance Flashcards

Under IRC Section 162(m), what limitation historically applied to the tax deductibility of executive compensation?

Answer: Compensation exceeding $1 million per covered employee was generally not deductible

IRC Section 162(m) limits the corporate tax deduction for compensation paid to covered employees to $1 million per year.

What is a 'golden parachute' in the context of executive compensation?

Answer: Substantial severance benefits triggered by a change in control of the company

A golden parachute refers to significant compensation benefits (severance, equity acceleration, bonuses) paid to executives when a company undergoes a change in control.

Stock ownership guidelines for executives primarily serve which governance purpose?

Answer: Aligning executive interests with long-term shareholder value by requiring meaningful equity holdings

Stock ownership guidelines require executives to hold a minimum level of company stock, ensuring their financial interests are tied to long-term shareholder outcomes.

In a 'double-trigger' change-in-control arrangement, equity vesting accelerates only when:

Answer: A change in control occurs AND the executive is terminated without cause or resigns for good reason

Double-trigger arrangements require both a change in control (first trigger) and an involuntary termination or constructive dismissal (second trigger) before acceleration occurs.

Institutional Shareholder Services (ISS) is best described as a:

Answer: Proxy advisory firm that provides voting recommendations to institutional investors

ISS is a leading proxy advisory firm whose recommendations on say-on-pay and other shareholder votes carry significant influence with institutional investors.

Which performance measure is most commonly used in long-term incentive (LTI) plans to align executives with relative shareholder value creation?

Answer: Relative total shareholder return (rTSR) compared to a peer group or index

Relative TSR measures a company's stock performance against peers, rewarding executives only when shareholders benefit more than they would in comparable investments.

What does 'realized pay' disclose that the Summary Compensation Table's grant-date fair value does not?

Answer: The actual cash and equity value executives received when shares vested and options were exercised

Realized pay captures the actual value executives pocket when equity vests or options are exercised, which may differ substantially from the accounting value disclosed at grant.