Executive Compensation Governance Flashcards

What is the primary risk to a company from consistently making executive pay decisions that receive below 70% shareholder support on say-on-pay votes?

Answer: Increased shareholder activism, director withhold campaigns, and reputational damage

Low say-on-pay approval rates signal shareholder dissatisfaction and can lead to campaigns to withhold votes from compensation committee members, activist interventions, and negative media attention.

Under Sarbanes-Oxley Section 304, which executives must reimburse incentive compensation if the company issues a financial restatement due to misconduct?

Answer: Only the CEO and CFO

SOX Section 304 applies narrowly to the CEO and CFO, requiring reimbursement of incentive-based compensation and stock sale profits received in the 12 months following a misleading filing.

A compensation committee is evaluating whether to include a 'modifier' in its long-term incentive plan. What does a modifier typically do?

Answer: Adjusts the final payout up or down based on an additional performance factor such as ESG metrics or relative TSR

A modifier applies a multiplier to the calculated LTI payout to reflect performance on a secondary metric, allowing the committee to fine-tune the outcome without making it the primary driver.

Which concept describes the practice of granting equity awards to executives immediately before the announcement of good news to capture the resulting stock price increase?

Answer: Spring-loading

Spring-loading occurs when a company grants options or other equity just before releasing positive material non-public information, enabling executives to benefit from the anticipated price jump.

What is the significance of the 'total direct compensation' (TDC) framework in executive pay benchmarking?

Answer: It combines base salary, target annual bonus, and the grant-date value of long-term incentives for apples-to-apples peer comparisons

TDC aggregates the three primary pay elements—base, annual incentive target, and LTI grant value—to allow consistent comparison of executive pay packages across peer companies.

When a board adopts an anti-hedging policy for executives, it prohibits executives from:

Answer: Entering into financial instruments that offset or eliminate the economic risk of owning company stock

Anti-hedging policies prevent executives from using derivatives or similar instruments to neutralize downside risk on company stock, ensuring their interests remain aligned with shareholders.

A company's 'pay philosophy' or 'compensation philosophy' statement primarily establishes:

Answer: The guiding principles and competitive positioning (e.g., 50th percentile of peers) that drive all executive pay decisions

The compensation philosophy articulates the company's strategic intent for pay—including target market positioning, pay mix preferences, and the role of performance—that guides all specific program design decisions.