TREX Executive Compensation Governance 2 — Questions and Answers
Question 1: Under SEC rules, which executives must be included in the proxy statement's Summary Compensation Table?
- CEO, CFO, and the three other highest-paid named executive officers (Correct answer)
- All officers with base salary above $200,000
- CEO and all direct reports regardless of compensation level
- CEO, President, and all Vice Presidents
Correct answer: CEO, CFO, and the three other highest-paid named executive officers
SEC rules require disclosure for the CEO, CFO, and the three other most highly compensated executives (named executive officers, or NEOs).
Question 2: What is the primary purpose of a clawback policy in executive compensation governance?
- To increase executive retention by deferring payment
- To recover previously paid compensation in cases of financial restatement or misconduct (Correct answer)
- To reduce the company's compensation expense for accounting purposes
- To ensure executives meet minimum stock ownership thresholds
Correct answer: To recover previously paid compensation in cases of financial restatement or misconduct
Clawback policies allow companies to recoup previously paid incentive compensation when there is a financial restatement or executive misconduct.
Question 3: The Dodd-Frank Act's 'pay ratio' rule requires public companies to disclose the ratio between:
- CEO total compensation and the median total compensation of all employees (Correct answer)
- CEO base salary and average executive salary
- CEO bonus and median employee bonus
- Highest-paid executive and lowest-paid employee
Correct answer: CEO total compensation and the median total compensation of all employees
The Dodd-Frank pay ratio rule mandates disclosure of the CEO's annual total compensation compared to the median annual total compensation of all employees.
Question 4: Which type of shareholder vote on executive pay is required under Dodd-Frank and is advisory in nature?
- Say-on-pay vote (Correct answer)
- Proxy access vote
- Majority voting standard
- Cumulative voting
Correct answer: Say-on-pay vote
Say-on-pay is a non-binding advisory vote that allows shareholders to express approval or disapproval of named executive officer compensation.
Question 5: When a compensation committee retains an outside compensation consultant, what disclosure is required under SEC rules?
- Whether any conflicts of interest exist and how they are being addressed (Correct answer)
- The consultant's full fee schedule and all other clients
- The consultant's certification of independence signed by the board
- A comparison of the consultant's recommendations to three competing proposals
Correct answer: Whether any conflicts of interest exist and how they are being addressed
SEC rules require proxy disclosure of whether the compensation committee's consultant has any conflicts of interest and what steps have been taken to address them.
Question 6: What does 'peer group benchmarking' most commonly establish in executive compensation design?
- Market-competitive pay levels for setting executive compensation targets (Correct answer)
- Mandatory pay caps required by stock exchange listing standards
- The minimum wage floor for non-executive employees
- Tax deductibility limits under IRC Section 162(m)
Correct answer: Market-competitive pay levels for setting executive compensation targets
Peer group benchmarking compares the company's executive pay to similar companies to establish competitive market rates for base salary, bonus targets, and long-term incentives.
Question 7: Which committee of the board of directors typically has primary responsibility for executive compensation decisions?
- Compensation committee (also called the human capital committee) (Correct answer)
- Audit committee
- Nominating and governance committee
- Executive committee
Correct answer: Compensation committee (also called the human capital committee)
The compensation committee (sometimes renamed the human capital committee) oversees executive pay philosophy, program design, and specific pay decisions for senior executives.
TREX Executive Compensation Governance 2
Under SEC rules, which executives must be included in the proxy statement's Summary Compensation Table?