Executive Compensation Governance Flashcards

The 'independence' requirement for compensation committee members under NYSE and Nasdaq listing standards means committee members must:

Answer: Have no material relationship with the company that could impair their judgment on executive pay

Listing standards require that compensation committee members be independent directors, meaning they have no material financial or personal relationship with the company that could bias their pay decisions.

Under the SEC's 'pay versus performance' (PvP) disclosure rules adopted in 2022, companies must disclose:

Answer: Compensation actually paid versus financial performance measures including TSR and net income

The 2022 SEC PvP rules require a table and narrative linking 'compensation actually paid' (a new adjusted measure) to company financial performance metrics including TSR, net income, and a company-selected measure.

A non-qualified deferred compensation (NQDC) plan subject to IRC Section 409A must specify the timing of distributions based on:

Answer: Permissible payment triggers defined at the time of deferral election, such as separation from service or a fixed date

Section 409A requires that distribution timing be fixed at the time of the deferral election, based on allowable triggers such as separation, disability, death, or a set date.

In proxy advisory firm analysis, a 'pay-for-performance misalignment' flag is most likely triggered when:

Answer: CEO pay levels are high while shareholder returns are below peers over a multi-year period

Proxy advisors flag pay-for-performance misalignment when above-median pay is paired with below-median total shareholder return relative to peers over a sustained period.

Which document formally communicates the compensation committee's rationale for executive pay decisions to shareholders?

Answer: Compensation Discussion and Analysis (CD&A) in the annual proxy statement

The CD&A is a required narrative disclosure in the proxy statement where the compensation committee explains the 'why' behind its executive pay decisions.

When designing a short-term incentive (STI) plan for executives, a 'threshold' payout level typically represents:

Answer: The minimum performance level that triggers any bonus payment, usually set below target

The threshold is the minimum performance level that must be achieved before any incentive payout occurs, set below the target to establish a floor for plan participation.

Executive compensation recoupment policies were made mandatory for all listed companies following which regulatory development?

Answer: SEC final clawback rules implementing Dodd-Frank Section 954, effective 2023

The SEC finalized Dodd-Frank Section 954 clawback rules in 2022, requiring all listed companies to adopt and disclose policies to recover incentive compensation from executives after financial restatements.