8. Executive Compensation
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Questions and Answers

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

<p>True</p> Signup and view all the answers

ESG metrics are more commonly included in compensation contracts in countries where ESG reporting is already mandatory

<p>True</p> Signup and view all the answers

ESG Pay is associated with firms that have publicly issued environmental commitments

<p>True</p> Signup and view all the answers

ESG Pay is associated with firms that have smaller boards with a lower percentage of female members

<p>False</p> Signup and view all the answers

Firms linking ESG performance to executive compensation receive on average more favorable ESG scores from outside rating agencies

<p>True</p> Signup and view all the answers

The inclusion of a measure specifically related to emissions in the contract is associated with an increase in carbon emissions

<p>False</p> Signup and view all the answers

There is a positive association between ESG Pay and financial outcomes such as return on assets

<p>False</p> Signup and view all the answers

Stock and option incentives are believed to solve agency problems perfectly

<p>False</p> Signup and view all the answers

The PPE measure of incentives is related to firm performance

<p>True</p> Signup and view all the answers

Fractional ownership as a measure of incentives is problematic because firms differ in size and CEOs differ in their wealth

<p>True</p> Signup and view all the answers

Incentives should be positively related to firm performance

<p>True</p> Signup and view all the answers

Optimal incentives do not differ across firms/industries

<p>False</p> Signup and view all the answers

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

<p>True</p> Signup and view all the answers

Severance multiples for executives have increased over time, as perks represent a larger portion of total compensation.

<p>False</p> Signup and view all the answers

Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary.

<p>True</p> Signup and view all the answers

Clawback policies give companies the right to recover incentive compensation if performance was based on erroneous information.

<p>True</p> Signup and view all the answers

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.

<p>True</p> Signup and view all the answers

Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee.

<p>True</p> Signup and view all the answers

In 2018, Nokia complied with the Finnish Corporate Governance Code, except for restricted share plans lacking performance criteria.

<p>True</p> Signup and view all the answers

Various countries have the same regulations and legislation governing executive compensation, influencing compensation strategies.

<p>False</p> Signup and view all the answers

Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.

<p>True</p> Signup and view all the answers

Theories explaining CEO compensation include rent extraction, competitive pay, managerial power, management talent, technology change, and general managerial skills.

<p>True</p> Signup and view all the answers

Potential incentive problems with accounting-based and stock option incentives include manipulation of accounting results and excessive risk-taking.

<p>True</p> Signup and view all the answers

An international perspective on CEO compensation shows variations in the percentage of fixed and variable pay across different countries.

<p>True</p> Signup and view all the answers

Research has shown that executive compensation is influenced by factors such as fractional ownership, managerial talent, and technology change.

<p>True</p> Signup and view all the answers

Employers aim to attract, retain, and motivate employees but do not need to align their interests with shareholders.

<p>False</p> Signup and view all the answers

Employees are only interested in compensation and do not care about employment security or post-employment termination.

<p>False</p> Signup and view all the answers

Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.

<p>True</p> Signup and view all the answers

Compensation levels are practically determined through guesswork and without input from remuneration committees and compensation consultants.

<p>False</p> Signup and view all the answers

Short-term incentives include base salary and bonus compensation based on performance goals.

<p>True</p> Signup and view all the answers

Bonus compensation aims to motivate performance but does not align executives with the company's short-term objectives.

<p>False</p> Signup and view all the answers

Long-term incentives are only based on achievement of goals over a period exceeding one year.

<p>False</p> Signup and view all the answers

Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.

<p>True</p> Signup and view all the answers

Stock options always lead to increased risk-taking and dilution, and are always tied to the company's financial performance.

<p>False</p> Signup and view all the answers

Other compensations include only perquisites and retirement compensation, but not severance pay.

<p>False</p> Signup and view all the answers

Executive compensation is primarily based on incentive-based models

<p>True</p> Signup and view all the answers

The separation of ownership and managerial control is not the basis of the modern corporation

<p>False</p> Signup and view all the answers

The main purpose of a compensation plan is to provide the right incentives

<p>True</p> Signup and view all the answers

Fractional ownership as a measure of incentives is not problematic because firms differ in size and CEOs differ in their wealth

<p>False</p> Signup and view all the answers

Managers' temptations include shirking, hiring friends, consuming excessive perks, and taking excessive or no risks.

<p>True</p> Signup and view all the answers

Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.

<p>True</p> Signup and view all the answers

Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.

<p>True</p> Signup and view all the answers

Bonus compensation aims to motivate performance but does not align executives with the company's short-term objectives.

<p>False</p> Signup and view all the answers

Long-term incentives are only based on achievement of goals over a period exceeding one year.

<p>False</p> Signup and view all the answers

ESG Pay is associated with firms that have publicly issued environmental commitments.

<p>True</p> Signup and view all the answers

Various countries have the same regulations and legislation governing executive compensation, influencing compensation strategies.

<p>False</p> Signup and view all the answers

The separation of ownership and managerial control is the basis of the modern corporation.

<p>True</p> Signup and view all the answers

Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary.

<p>True</p> Signup and view all the answers

Incentives should be positively related to firm performance.

<p>True</p> Signup and view all the answers

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.

<p>True</p> Signup and view all the answers

Firms linking ESG performance to executive compensation receive on average more favorable ESG scores from outside rating agencies.

<p>True</p> Signup and view all the answers

Severance multiples for executives have declined over time, as perks represent a diminishing portion of total compensation.

<p>True</p> Signup and view all the answers

Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary.

<p>True</p> Signup and view all the answers

Clawback policies give companies the right to recover incentive compensation if performance was based on erroneous information.

<p>True</p> Signup and view all the answers

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.

<p>True</p> Signup and view all the answers

Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee.

<p>True</p> Signup and view all the answers

In 2018, Nokia complied with the Finnish Corporate Governance Code, except for restricted share plans lacking performance criteria.

<p>True</p> Signup and view all the answers

Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.

<p>True</p> Signup and view all the answers

Theories explaining CEO compensation include rent extraction, competitive pay, managerial power, management talent, technology change, and general managerial skills.

<p>True</p> Signup and view all the answers

Potential incentive problems with accounting-based and stock option incentives include manipulation of accounting results and excessive risk-taking.

<p>True</p> Signup and view all the answers

An international perspective on CEO compensation shows variations in the percentage of fixed and variable pay across different countries.

<p>True</p> Signup and view all the answers

Research has shown that executive compensation is influenced by factors such as fractional ownership, managerial talent, and technology change.

<p>True</p> Signup and view all the answers

Various countries have different regulations and legislation governing executive compensation, influencing compensation strategies.

<p>True</p> Signup and view all the answers

ESG Pay is associated with firms that have publicly issued environmental commitments

<p>True</p> Signup and view all the answers

Fractional ownership as a measure of incentives is problematic because firms differ in size and CEOs differ in their wealth

<p>True</p> Signup and view all the answers

Incentives should be positively related to firm performance

<p>True</p> Signup and view all the answers

Stock option’s favorable tax treatment for executives is no longer taken into account by IFRS 2 and FAS 123(R)

<p>False</p> Signup and view all the answers

The inclusion of a measure specifically related to emissions in the contract is associated with a decrease in carbon emissions

<p>False</p> Signup and view all the answers

Short-term incentives include base salary and bonus compensation based on performance goals

<p>True</p> Signup and view all the answers

Long-term incentives are only based on achievement of goals over a period exceeding one year

<p>False</p> Signup and view all the answers

Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth

<p>True</p> Signup and view all the answers

Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee

<p>True</p> Signup and view all the answers

Share ownership guidelines require executives to hold a certain number of shares, often defined as a multiple of base salary

<p>True</p> Signup and view all the answers

ESG metrics are more commonly included in compensation contracts in countries where ESG reporting is already mandatory

<p>True</p> Signup and view all the answers

The separation of ownership and managerial control is the basis of the modern corporation

<p>False</p> Signup and view all the answers

Executive pay is always perfectly aligned with firm performance due to incentive-based compensation

<p>False</p> Signup and view all the answers

The separation of ownership and managerial control is the basis of the modern corporation

<p>True</p> Signup and view all the answers

Incentive-based compensation completely eliminates potential managerial temptations

<p>False</p> Signup and view all the answers

The modern public corporation form leads to efficient specialization of tasks

<p>True</p> Signup and view all the answers

Clawback policies give companies the right to recover incentive compensation if performance was based on erroneous information.

<p>True</p> Signup and view all the answers

Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee.

<p>True</p> Signup and view all the answers

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.

<p>True</p> Signup and view all the answers

Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.

<p>True</p> Signup and view all the answers

Theories explaining CEO compensation include rent extraction, competitive pay, managerial power, management talent, technology change, and general managerial skills.

<p>True</p> Signup and view all the answers

Stock options always lead to increased risk-taking and dilution, and are always tied to the company's financial performance.

<p>False</p> Signup and view all the answers

Various countries have different regulations and legislation governing executive compensation, influencing compensation strategies.

<p>True</p> Signup and view all the answers

Research has shown that executive compensation is influenced by factors such as fractional ownership, managerial talent, and technology change.

<p>True</p> Signup and view all the answers

Bonus compensation aims to motivate performance but does not align executives with the company's short-term objectives.

<p>False</p> Signup and view all the answers

Short-term incentives include base salary and bonus compensation based on performance goals.

<p>True</p> Signup and view all the answers

Long-term incentives are only based on achievement of goals over a period exceeding one year.

<p>False</p> Signup and view all the answers

An international perspective on CEO compensation shows variations in the percentage of fixed and variable pay across different countries.

<p>True</p> Signup and view all the answers

Stock and option incentives are believed to solve agency-problem

<p>True</p> Signup and view all the answers

Incentives should be positively related to firm performance

<p>True</p> Signup and view all the answers

Incentive-based compensation raises concerns about pay-for-performance sensitivity and the potential for excessive risk-taking

<p>True</p> Signup and view all the answers

ESG Pay is associated with firms that have publicly issued environmental commitments

<p>True</p> Signup and view all the answers

Fractional ownership as a measure of incentives is problematic because firms differ in size and CEOs differ in their wealth

<p>True</p> Signup and view all the answers

Short-term incentives include base salary and bonus compensation based on performance goals

<p>True</p> Signup and view all the answers

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

<p>True</p> Signup and view all the answers

The separation of ownership and managerial control is the basis of the modern corporation

<p>False</p> Signup and view all the answers

ESG metrics are more commonly included in compensation contracts in countries where ESG reporting is already mandatory

<p>True</p> Signup and view all the answers

Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth

<p>True</p> Signup and view all the answers

Determining executive compensation involves benchmarking and the use of compensation consultants by the compensation committee

<p>True</p> Signup and view all the answers

Firms linking ESG performance to executive compensation receive on average more favorable ESG scores from outside rating agencies

<p>True</p> Signup and view all the answers

Employers are not interested in performance, retention, termination, and post-employment protection.

<p>False</p> Signup and view all the answers

Long-term incentives are solely based on achievement of goals over a period exceeding one year.

<p>False</p> Signup and view all the answers

Stock grants, including restricted stock and performance shares, aim to align executive and shareholder interests, attract, retain, and motivate employees, and create wealth.

<p>True</p> Signup and view all the answers

Short-term incentives include bonus compensation, but not base salary.

<p>False</p> Signup and view all the answers

Compensation determination involves estimating company value creation, CEO's attributable efforts, and fair compensation percentage.

<p>True</p> Signup and view all the answers

Incentive-based compensation does not raise concerns about pay-for-performance sensitivity and the potential for excessive risk-taking.

<p>False</p> Signup and view all the answers

Stock options always align managers' goals with shareholders' goals.

<p>False</p> Signup and view all the answers

ESG metrics are rarely included in compensation contracts in countries where ESG reporting is already mandatory.

<p>False</p> Signup and view all the answers

The inclusion of a measure specifically related to emissions in the contract is associated with a decrease in carbon emissions.

<p>True</p> Signup and view all the answers

Various countries have the same regulations and legislation governing executive compensation, influencing compensation strategies.

<p>False</p> Signup and view all the answers

Fractional ownership as a measure of incentives is not problematic because firms differ in size and CEOs differ in their wealth.

<p>False</p> Signup and view all the answers

The main purpose of a compensation plan is to provide the right incentives.

<p>True</p> Signup and view all the answers

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.

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