118 Questions
Shareholders are the ones who bear the risk in the agency relationship
True
Executive compensation is not based on incentive-based models
False
The separation of ownership and managerial control is the basis of the modern corporation
True
The main purpose of a compensation plan is to provide the right incentives
True
ESG metrics are more commonly included in compensation contracts in countries where ESG reporting is already mandatory
True
ESG Pay is associated with firms that have publicly issued environmental commitments
True
ESG Pay is associated with firms that have smaller boards with a lower percentage of female members
False
Firms linking ESG performance to executive compensation receive on average more favorable ESG scores from outside rating agencies
True
The inclusion of a measure specifically related to emissions in the contract is associated with an increase in carbon emissions
False
There is a positive association between ESG Pay and financial outcomes such as return on assets
False
Stock and option incentives are believed to solve agency problems perfectly
False
The PPE measure of incentives is related to firm performance
True
Fractional ownership as a measure of incentives is problematic because firms differ in size and CEOs differ in their wealth
True
Incentives should be positively related to firm performance
True
Optimal incentives do not differ across firms/industries
False
Nowadays, IFRS 2 and FAS 123(R) take into account the value of the option at grant date and amortize that value during the life of the option or vesting period
True
Severance multiples for executives have increased over time, as perks represent a larger portion of total compensation.
False
Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary.
True
Clawback policies give companies the right to recover incentive compensation if performance was based on erroneous information.
True
The CEO pay ratio requires disclosure of the median total annual compensation of all employees and the ratio of employee median to CEO total compensation.
True
Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee.
True
In 2018, Nokia complied with the Finnish Corporate Governance Code, except for restricted share plans lacking performance criteria.
True
Various countries have the same regulations and legislation governing executive compensation, influencing compensation strategies.
False
Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.
True
Theories explaining CEO compensation include rent extraction, competitive pay, managerial power, management talent, technology change, and general managerial skills.
True
Potential incentive problems with accounting-based and stock option incentives include manipulation of accounting results and excessive risk-taking.
True
An international perspective on CEO compensation shows variations in the percentage of fixed and variable pay across different countries.
True
Research has shown that executive compensation is influenced by factors such as fractional ownership, managerial talent, and technology change.
True
Employers aim to attract, retain, and motivate employees but do not need to align their interests with shareholders.
False
Employees are only interested in compensation and do not care about employment security or post-employment termination.
False
Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.
True
Compensation levels are practically determined through guesswork and without input from remuneration committees and compensation consultants.
False
Short-term incentives include base salary and bonus compensation based on performance goals.
True
Bonus compensation aims to motivate performance but does not align executives with the company's short-term objectives.
False
Long-term incentives are only based on achievement of goals over a period exceeding one year.
False
Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.
True
Stock options always lead to increased risk-taking and dilution, and are always tied to the company's financial performance.
False
Other compensations include only perquisites and retirement compensation, but not severance pay.
False
Executive compensation is primarily based on incentive-based models
True
The separation of ownership and managerial control is not the basis of the modern corporation
False
The main purpose of a compensation plan is to provide the right incentives
True
Fractional ownership as a measure of incentives is not problematic because firms differ in size and CEOs differ in their wealth
False
Managers' temptations include shirking, hiring friends, consuming excessive perks, and taking excessive or no risks.
True
Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.
True
Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.
True
Bonus compensation aims to motivate performance but does not align executives with the company's short-term objectives.
False
Long-term incentives are only based on achievement of goals over a period exceeding one year.
False
ESG Pay is associated with firms that have publicly issued environmental commitments.
True
Various countries have the same regulations and legislation governing executive compensation, influencing compensation strategies.
False
The separation of ownership and managerial control is the basis of the modern corporation.
True
Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary.
True
Incentives should be positively related to firm performance.
True
The CEO pay ratio requires disclosure of the median total annual compensation of all employees and the ratio of employee median to CEO total compensation.
True
Firms linking ESG performance to executive compensation receive on average more favorable ESG scores from outside rating agencies.
True
Severance multiples for executives have declined over time, as perks represent a diminishing portion of total compensation.
True
Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary.
True
Clawback policies give companies the right to recover incentive compensation if performance was based on erroneous information.
True
The CEO pay ratio requires disclosure of the median total annual compensation of all employees and the ratio of employee median to CEO total compensation.
True
Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee.
True
In 2018, Nokia complied with the Finnish Corporate Governance Code, except for restricted share plans lacking performance criteria.
True
Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.
True
Theories explaining CEO compensation include rent extraction, competitive pay, managerial power, management talent, technology change, and general managerial skills.
True
Potential incentive problems with accounting-based and stock option incentives include manipulation of accounting results and excessive risk-taking.
True
An international perspective on CEO compensation shows variations in the percentage of fixed and variable pay across different countries.
True
Research has shown that executive compensation is influenced by factors such as fractional ownership, managerial talent, and technology change.
True
Various countries have different regulations and legislation governing executive compensation, influencing compensation strategies.
True
ESG Pay is associated with firms that have publicly issued environmental commitments
True
Fractional ownership as a measure of incentives is problematic because firms differ in size and CEOs differ in their wealth
True
Incentives should be positively related to firm performance
True
Stock option’s favorable tax treatment for executives is no longer taken into account by IFRS 2 and FAS 123(R)
False
The inclusion of a measure specifically related to emissions in the contract is associated with a decrease in carbon emissions
False
Short-term incentives include base salary and bonus compensation based on performance goals
True
Long-term incentives are only based on achievement of goals over a period exceeding one year
False
Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth
True
Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee
True
Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary
True
ESG metrics are more commonly included in compensation contracts in countries where ESG reporting is already mandatory
True
The separation of ownership and managerial control is the basis of the modern corporation
False
Executive pay is always perfectly aligned with firm performance due to incentive-based compensation
False
The separation of ownership and managerial control is the basis of the modern corporation
True
Incentive-based compensation completely eliminates potential managerial temptations
False
The modern public corporation form leads to efficient specialization of tasks
True
Clawback policies give companies the right to recover incentive compensation if performance was based on erroneous information.
True
Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee.
True
The CEO pay ratio requires disclosure of the median total annual compensation of all employees and the ratio of employee median to CEO total compensation.
True
Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.
True
Theories explaining CEO compensation include rent extraction, competitive pay, managerial power, management talent, technology change, and general managerial skills.
True
Stock options always lead to increased risk-taking and dilution, and are always tied to the company's financial performance.
False
Various countries have different regulations and legislation governing executive compensation, influencing compensation strategies.
True
Research has shown that executive compensation is influenced by factors such as fractional ownership, managerial talent, and technology change.
True
Bonus compensation aims to motivate performance but does not align executives with the company's short-term objectives.
False
Short-term incentives include base salary and bonus compensation based on performance goals.
True
Long-term incentives are only based on achievement of goals over a period exceeding one year.
False
An international perspective on CEO compensation shows variations in the percentage of fixed and variable pay across different countries.
True
Stock and option incentives are believed to solve agency-problem
True
Incentives should be positively related to firm performance
True
Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking
True
ESG Pay is associated with firms that have publicly issued environmental commitments
True
Fractional ownership as a measure of incentives is problematic because firms differ in size and CEOs differ in their wealth
True
Short-term incentives include base salary and bonus compensation based on performance goals
True
Nowadays, IFRS 2 and FAS 123(R) take into account the value of the option at grant date and amortize that value during the life of the option or vesting period
True
The separation of ownership and managerial control is the basis of the modern corporation
False
ESG metrics are more commonly included in compensation contracts in countries where ESG reporting is already mandatory
True
Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth
True
Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee
True
Firms linking ESG performance to executive compensation receive on average more favorable ESG scores from outside rating agencies
True
Employers are not interested in performance, retention, termination, and post-employment protection.
False
Long-term incentives are solely based on achievement of goals over a period exceeding one year.
False
Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.
True
Short-term incentives include bonus compensation, but not base salary.
False
Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.
True
Incentive-based compensation does not raise concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.
False
Stock options always align managers' goals with shareholders' goals.
False
ESG metrics are rarely included in compensation contracts in countries where ESG reporting is already mandatory.
False
The inclusion of a measure specifically related to emissions in the contract is associated with a decrease in carbon emissions.
True
Various countries have the same regulations and legislation governing executive compensation, influencing compensation strategies.
False
Fractional ownership as a measure of incentives is not problematic because firms differ in size and CEOs differ in their wealth.
False
The main purpose of a compensation plan is to provide the right incentives.
True
Study Notes
Executive Compensation and Managerial Temptations
- Employers aim to attract, retain, and motivate employees in line with corporate strategy and risk profile, while aligning their interests with shareholders.
- Employers are interested in performance, retention, termination with minimal financial and legal impact, and post-employment protection.
- Employees are interested in compensation, employment security, and flexible post-employment termination.
- Managerial temptations include putting personal needs before stakeholders' needs, especially if not effectively monitored by shareholders and the board.
- Self-serving managerial actions include shirking, hiring friends, consuming excessive perks, and taking excessive or no risks.
- Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.
- Compensation levels are practically determined through benchmarking and input from remuneration committees and compensation consultants.
- Short-term incentives include base salary, which provides security and predictable income, and bonus compensation based on performance goals.
- Bonus compensation aims to motivate performance and align executives with the company's short-term objectives, with common measures such as earnings, revenue, and cash flow.
- Long-term incentives are based on achievement of goals over a period exceeding one year and may be based on stock price or business performance.
- Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.
- Stock options align managers' goals with shareholders' goals, but can lead to increased risk-taking and dilution, and are not always tied to the company's financial performance. Other compensations include perquisites, retirement compensation, and severance pay.
Executive Compensation and Corporate Governance
- Severance multiples for executives have declined over time, as perks represent a diminishing portion of total compensation.
- Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary.
- Clawback policies give companies the right to recover incentive compensation if performance was based on erroneous information.
- The CEO pay ratio requires disclosure of the median total annual compensation of all employees and the ratio of employee median to CEO total compensation.
- Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee.
- In 2018, Nokia complied with the Finnish Corporate Governance Code, except for restricted share plans lacking performance criteria.
- Various countries have different regulations and legislation governing executive compensation, influencing compensation strategies.
- Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.
- Theories explaining CEO compensation include rent extraction, competitive pay, managerial power, management talent, technology change, and general managerial skills.
- Potential incentive problems with accounting-based and stock option incentives include manipulation of accounting results and excessive risk-taking.
- An international perspective on CEO compensation shows variations in the percentage of fixed and variable pay across different countries.
- Research has shown that executive compensation is influenced by factors such as fractional ownership, managerial talent, and technology change.
Executive Compensation and Managerial Temptations
- Employers aim to attract, retain, and motivate employees in line with corporate strategy and risk profile, while aligning their interests with shareholders.
- Employers are interested in performance, retention, termination with minimal financial and legal impact, and post-employment protection.
- Employees are interested in compensation, employment security, and flexible post-employment termination.
- Managerial temptations include putting personal needs before stakeholders' needs, especially if not effectively monitored by shareholders and the board.
- Self-serving managerial actions include shirking, hiring friends, consuming excessive perks, and taking excessive or no risks.
- Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.
- Compensation levels are practically determined through benchmarking and input from remuneration committees and compensation consultants.
- Short-term incentives include base salary, which provides security and predictable income, and bonus compensation based on performance goals.
- Bonus compensation aims to motivate performance and align executives with the company's short-term objectives, with common measures such as earnings, revenue, and cash flow.
- Long-term incentives are based on achievement of goals over a period exceeding one year and may be based on stock price or business performance.
- Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.
- Stock options align managers' goals with shareholders' goals, but can lead to increased risk-taking and dilution, and are not always tied to the company's financial performance. Other compensations include perquisites, retirement compensation, and severance pay.
Test your knowledge of executive compensation and managerial temptations with this quiz. Explore topics such as performance-based incentives, stock grants, and the alignment of executive and shareholder interests. Gain insights into the complexities of compensation determination and the potential pitfalls of self-serving managerial actions.
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