Executive Compensation & Benefits Flashcards

Which regulatory body requires public companies to include a 'Compensation Discussion and Analysis' (CD&A) in their proxy filings?

Answer: Securities and Exchange Commission (SEC)

The SEC's executive compensation disclosure rules (Regulation S-K, Item 402) require public companies to include a CD&A explaining the material elements of their executive compensation programs.

A 'secular trust' differs from a 'rabbi trust' primarily because a secular trust:

Answer: Protects deferred compensation assets from the claims of the employer's general creditors

Unlike a rabbi trust (where assets remain subject to creditor claims), a secular trust holds assets irrevocably for the executive, providing full security — but triggering immediate taxation upon contribution.

Under executive compensation best practices, what does 'pay mix' refer to?

Answer: The proportion of total compensation allocated among base salary, annual incentives, and long-term incentives

Pay mix describes how an executive's total target compensation is allocated across fixed (base salary) and variable (short-term and long-term incentive) components.

What is the 'walk-away' value in an executive change-in-control analysis?

Answer: The total value an executive would receive upon departure triggered by a change in control

Walk-away value quantifies the total compensation (cash severance, accelerated equity, benefits continuation, etc.) an executive would receive if terminated in connection with a change in control.

ISS (Institutional Shareholder Services) evaluates executive pay programs primarily through which analytical framework?

Answer: Pay-for-Performance (P4P) quantitative and qualitative analysis

ISS uses a Pay-for-Performance framework that measures alignment between executive compensation and shareholder returns, both on an absolute and relative basis, to formulate its say-on-pay vote recommendations.

Which of the following is a key disadvantage of stock option grants compared to full-value awards like RSUs?

Answer: Options have no retention value if the stock price falls below the exercise price (underwater)

When the stock price falls below the option's exercise price, the options become 'underwater' and have no intrinsic value, eliminating their motivational and retention effectiveness.

A 'net settlement' feature in an equity award allows the company to:

Answer: Withhold a portion of vested shares to cover the employee's tax withholding obligation

Net settlement (also called 'share withholding') lets the company retain a number of vested shares equivalent to the employee's tax liability, so the employee nets fewer shares without paying out-of-pocket taxes.