Variable Pay & Bonus Programs Flashcards

Under IRC Section 162(m), what was the original purpose of the 'performance-based compensation' exception for public companies?

Answer: To allow unlimited deductibility of executive bonuses tied to pre-established objective goals

Section 162(m) originally allowed public companies to deduct executive compensation above $1 million if it qualified as performance-based under pre-established, objective criteria approved by shareholders.

What is 'phantom stock' in the context of variable pay for private companies?

Answer: A cash incentive that mimics equity appreciation without actual share ownership

Phantom stock is a cash-based long-term incentive that tracks notional share value, allowing private companies to offer equity-like rewards without diluting actual ownership.

Which approach to bonus plan communication is MOST effective at driving the intended performance behaviors?

Answer: Ongoing communication of performance vs. targets throughout the plan period

Continuous feedback on progress toward targets maintains motivation and allows employees to adjust behaviors before the measurement period ends.

A company uses a 'balanced scorecard' approach for its STI plan. Which combination of metric categories reflects the balanced scorecard framework?

Answer: Financial, customer, internal process, and learning & growth

Kaplan and Norton's balanced scorecard uses four perspectives: financial, customer, internal business processes, and learning & growth.

What is the main purpose of a 'dead zone' or 'flat zone' in a bonus payout curve between threshold and target?

Answer: To avoid paying bonuses for performance that just barely exceeds the minimum

A flat zone at the low end of the performance range ensures that minimal above-threshold performance does not trigger meaningful bonus payments, preserving plan cost efficiency.

Which of the following BEST describes 'goal sharing' as a type of variable pay program?

Answer: A group incentive that pays out when the work unit achieves predefined non-financial goals

Goal sharing programs reward groups for achieving specific operational or strategic goals, often non-financial, such as quality, safety, or customer service targets.

When a variable pay plan uses discretionary adjustments by management, what is the GREATEST governance risk?

Answer: Overpaying for below-target performance, undermining pay-for-performance credibility

Excessive management discretion to increase awards despite missed targets destroys the pay-for-performance link and can mislead shareholders about actual incentive plan rigor.